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G.R. No.

30831 September 2, 1929

PHILIPPINE NATIONAL BANK, plaintiff-appellee,


vs.
TAN ONG SZE, Viuda de Tan Toco, defendant-appellant.

Soriano and Nepomuceno for appellant.


Roman J. Lacson for appellee.

STATEMENT

The plaintiff is a domestic corporation with its principal office and place of business in the City of Manila. The defendant
is a Chinese citizen.

The complaint alleges that the defendant received from the plaintiff a loan of P300,000, for which she executed and
delivered to the plaintiff her certain promissory note dated May 23, 1922, a copy of which is set out and made a parts of
the complaint. That to secure its payment with interests thereon at the rate of 9 per cent per annum, the defendant
executed to the plaintiff a mortgage on certain real property in the City and Province of Iloilo, which instrument was duly
registered in the registry of deeds of that province, a copy of which is attached to, and made a part of, the complaint,
marked Exhibit A. That the mortgage provided that if the terms or conditions, the plaintiff could foreclose it, for which it
should receive the further sum of 10 per cent of the amount due and owing for and on account of attorney's fees,
expenses and costs. That the amount of defendant's debt to the plaintiff with interest until November 14, 1924, was
P357,075.80, no part of which has been paid, and the plaintiff prays for judgment against the defendant for the amount
of the debt with interest and attorney's fees, and that the property described in the mortgage be sold and the proceeds
of sale applied to the satisfaction of the debt, and for the judgment over for any deficiency which may remain, and for
costs.

For answer the defendant made a general and specific denial under oath as to the genuineness and execution of both
the note and the mortgage and of the debt.

At the first trial the lower court dismissed the complaint for and on account of the failure of the plaintiff to present the
original document, the power of attorney, upon which its action was based. From that judgment the plaintiff appealed to
this court which on December 31, 1927,1 sustained that decision of the lower court upon the legal questions involved,
but due to the importance of the case and in the interest of justice, it ordered a new trial, and remanded the case to the
lower court, with leave to the plaintiff to present the power of attorney and such other evidence as it might have and
wish to present. A second trial was then had, and the lower court rendered judgment in favor of the plaintiff and against
the defendant for the sum of P414,333.35, with interest at the rate of P66.67 a day from April 1, 1927, and for the
further sum of 5 per cent of that amount as attorney's fees, and that the defendant should pay the judgment on or
before November 18, 1928, and for failure to do so, the property described in the mortgage should be sold and the
proceeds of sale applied to the satisfaction of the judgment, and for any deficiency, the plaintiff might have judgment
over, for which execution should issue, and also for costs.

On appeal the defendant assigns the following errors:

I. The trial court erred in declaring that the power of attorney, Exhibit K, conferred upon Tan Bunco the
authority to borrow money and mortgage the defendant's properties.

II. The trial court erred in assuming that Tan Bunco has mortgaged the defendant's properties to the plaintiff,
has executed the promissory note, Exhibit B, and has received the value thereof.

III. The trial court erred in not declaring that even supposing that the mortgage, Exhibit E, and the promissory
note, Exhibit B had been executed by Tan Bunco, nevertheless, the defendant is not liable for the amount of
said note and the mortgage does not affect her properties.

IV. The trial court erred in declaring that the defendant has ratified the acts of Tan Bunco and has been
benefited by them.

V. The trial court erred in not dismissing the complaint, in sentencing the defendant to pay to the plaintiff the
amounts stated in its judgement and in ordering the foreclosure sale of the defendant's properties upon her
failure to pay said amounts in full.

JOHNS, J.:p

The defendant at all the times alleged was the owner of two parcels of land in the City and Province of Iloilo, known as
lots Nos. 279 and 572, of the Iloilo cadastral survey, evidenced by certificate of title No. 329. September 14, 1916, in
Amoy, China, she executed before the United States Vice Consul at that place the power of attorney, known in the

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record as Exhibit K, in which she made and constituted Tan Bunco as her attorney-in-fact, the material provisions of
which are as follows:

Know all men by these presents,

That I, Tan Ong Sze (Chinese characters) widow of late Tan Tek Co (Chinese characters) of Ng Chung Village in the
Tong An District, Chuancho, Perfecture, who died in H.T. 2d year 8th month 3d day (6th September, 1910) have made
ordained, constituted and appointed, and by these presents do make, ordain, constitute and appoint Tan Bunco
(Chinese characters) to be my lawful attorney of the shop Hock Bee (Chinese characters) at Iloilo, Philippine Islands, . .
. and also for me and in my name to sign, seal and execute, and as my act and deed, deliver, any lease, any other
deed for the conveying and real or personal property or other matter or thing wherein I am or may be personally
interested or concerned. And I do hereby further authorize and empower my said attorney to substitute and appoint any
other attorney or attorneys under him, for the purpose aforesaid and the same again and pleasure to revoke (and
generally for me and in my name to do, perform and execute all and every other lawful and reasonable acts and things
whatsoever as fully and effectually as I the said Tan Ong Sze (———) might or could do if personally present. And I do
hereby ratify and confirm all and whatsoever my said attorneys or attorney or his or their substitute or substitutes, or
any of them, shall lawfully do, or cause to be done, in or about the premises, by virtue of these presents. It is apparent
that a clerical error was made in the preparation of the instrument or an error was made in its translation, and in so far
as it is material to this opinion, it should read:

1 . . . and also for me and in my name to sign, seal and execute, and as my act and deed, deliver any lease,
any other deed for conveying any real or personal property or other matter or thing wherein I am or may be
personally interested or concerned;

2 . . . and also for me and my name to sign, seal and execute, and as my act and deed, deliver any lease, any
other deed for the conveying of any real or personal property or other matter or thing wherein I am or may be
personally interested or concerned.

It is very apparent that the words "for the conveying and real or personal property" should read for the conveying of real
or personal property." That is to say, the defendant executed a power of attorney to Tan Bunco in which she vested
him with the power "for me and in my name to sign, seal and execute, and as my act and deed, deliver any lease, any
other deed for conveying any real or personal property" or "any other deed for the conveying of any real or personal
property."

Plaintiff's complaint is founded upon the promissory note, known in the record as Exhibit B, which purports to have
been executed in Iloilo on May 23, 1922, by her attorney-in-fact under and by virtue of the power of attorney above
described, and the mortgage which purports to have executed to plaintiff to secure the payment of the note, known in
the record as Exhibit E.

The question is thus squarely presented whether or not under his power the attorney-in-fact had the authority to
execute the promissory note or to execute the mortgage on real property to secure its payment. It will be noted that the
language used in the power of attorney is confined and limited to the authority "to sign, seal and execute, and as my
act and deed, deliver any lease, any other deed of conveying any real or personal property," or "to sign, seal and
execute, as my act and deed, deliver any lease, any other deed for the conveying of any real or personal property."
Hence, does this power carry with it and imply the authority of the attorney- in-fact to borrow money and to execute the
promissory note to the defendant and mortgage her real property to secure its payment?

In an exhaustive opinion the lower court held that the power to convey real property carried with it the power to
mortgage, and the defendant was liable on both the note and the mortgage.

Cyclopedia of Law and Procedure, vol. 31, p. 1390, says:

(II) TO MORTGAGE OR PLEDGE. Authority to mortgage the property of a principal is rarely to be inferred. It is
not to be implied from general authority to manage, or even to sell, the principal's property.

Under which, in the notes, decisions are cited from the Supreme Courts of California, Florida, Kansas, Missouri, South
Carolina, and Texas, and it is said:

The power to sell and convey lands as a general rule carries no implied power to charge the principal with the
responsibilities and liabilities of a mortgagor. (Citing decisions from the Supreme Courts of Kansas, Michigan,
Minnesota, North Dakota, Wisconsin, and a large number of English authorities.)

And on page 1395, it is said:

(IV) TO LEND OR BORROW MONEY. Power to lend or borrow money, like most other special power of an
agent, it is not to be inferred without clear evidence of such a grant.

And on page 1396, it is said:

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. . . And when the authority is conferred whether expressly or impliedly, it must be exercised within the limits
prescribed, and burdens assumed by the agent but not authorized by the principal cannot bind the latter. . . .
No authority to borrow money is to be implied from a power to lend, nor merely from a power to act for the
principal in his business generally or in other specific matters.

And in the notes, it is said:

. . . The authority to borrow money, conferred on an agent, must be created by express terms or necessarily
implied from the nature of the agency, for authority to borrow money is one of the most dangerous powers a
principal can confer upon an agent.

Thus such power is not to be implied from the power to manage the principal's business, even though with
authority to buy goods on credit (Hayness vs. Carpenter, 86 Mo. App., 30; Bickford vs. Menier, 107 N.Y., 490;
14 N.E., 438 (reversing 36 Hun., 446); Weekes vs. A.F. Shapleigh hardware Co., 23 Tex. Civ. App., 577; 57 S.
W.., 67; Spooner vs. Thompson, 48 Vt., 259 ), or from authority to draw checks to make the payments for
property bought by the agent (Mordhurst vs. Boies, 24 Iowa, 99).

Ruling Case Law, vol. 21, p. 885, says:

An instrument empowering an attorney, among other things, 'to buy and sell real estate, and in my name to
receive and execute all necessary contracts and conveyances therefor,' does not authorize such attorney to
sell and convey lands to which, as the record shows, the principal had acquired title before execution of the
power. . . . The attorney may not mortgage the property; nor has he authority to execute an option.

The case of Hawzhurst vs. Rathgeb (51 Pacific, 846), decided by the Supreme Court of California, is square in point.
The syllabus laid down this rule:

2. The language, in a power of attorney, to sell, transfer and release two certain mortgages . . .; to endorse and
transfer the notes secured by said mortgages; to sell and transfer my claims for said notes and mortgages . . .;
and to receive payments . . . and give acquittances thereof,' — confers the power to sell and transfer the title to
the securities absolutely, or to collect them, but does not confer power to pledge them.

3. The act of an attorney in fact in pledging securities, when his authority only gave him power to sell or collect,
is void.

And the opinion says:

The effect of this language was to confer a power to sell and transfer the title to the securities absolutely, or if
not so sold, to collect them from the estate of Kunz. There is nothing in the language which by any proper
construction purports to confer a power to pledge or hypothecate the securities for any purpose, or to borrow
money thereon. The words 'sell and transfer,' as there used, are of no broader signification than the words 'sell
and convey,' used with reference to a conveyance of real estate ; and the latter, employed as the operative
words in a power to convey land, do not carry authority to mortgage or otherwise dispose of the property.

The case of Minnesota Stoneware Co. vs. McCrossen, 110 Wisconsin, 316; 84 American State Reports, p. 927, in the
syllabus says:

A POWER OF ATTORNEY TO SELL AND CONVEY real estate does not include a power to mortgage.

POWER OF ATTORNEY — INTERPRETATION. — A written instrument, not ambiguous either in its literal
sense or in the application of its language to the subject or purpose thereof, must be taken to mean what it
says.

In that case the language in the power was this:

In my name, place and stead to sell and convey any real estate and personal property which I may now own or
may hereafter acquire in the State of Wisconsin and Washington.

Construing which, the court, on page 928 of the opinion says:

The power of attorney was a mere power to sell and convey, importing authority to sell out for cash and not
power to mortgage. That is elementary: Jones on Mortgages, sec. 129; Devlin on Deeds, sec. 363a; Morris vs.
Watson, 15 Minn., 212; Colesbury vs. Dart, 61 Ga., 620; Wood vs. Goodridge, 6 Cush., 117; 52 Am. Dec., 771;
Hoyt vs. Jaques, 129 Mass., 286; Perry on Trusts, sec. 768. No departure from such general rule, worthy of
consideration, we venture to say, can be found.

And in the case of Campbell vs. Foster Home Association, 26 L. R. A.., p. 117; 163 Pa., 609, the Supreme Court of the
States says:

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1. A power to mortgage land is not included in a power of attorney to sell and convey, uncoupled with any
interest in the land or the fund.

And on page 122, among other authorities, the opinion quotes with approval the decision of Justice Cooley, in Jeffrey
vs. Hursh (49 Mich., 31) in which it is said:

J. M. Hursh had power to sell the land, but not to mortgage it. The power is not to be extended by construction.
The principal determines for himself what authority he will confirm upon his agent, and there can be no
implication from his authorizing a sale of his lands that he intends that his agent may at discretion charge him
with the responsibilities and duties of a mortgagor.

In fact the authorities are overwhelming that the power to sell and convey does not carry with it or imply the power to
borrow money or to execute a mortgage on real property.

The lower court in its opinion holds that, legally speaking, a mortgage is a conveyance and that the power to convey
carries with it the power to mortgage. The theory is not sustained by any authority. By its express terms and provisions
the instrument itself, upon which plaintiff relies, provides for the foreclosure of the mortgage, and the whole purpose
and tenor of plaintiff's complaint is to foreclose the mortgage. If in truth and in fact it was a conveyance of the legal title
to the property, there would be no reason why the plaintiff should apply to the court to foreclose it as a mortgage.

The authorities cited in the opinion of the lower court are not point, and that is specially true of 47 California, 242,2 in
which the syllabus says:

CONSTRUCTION OF POWER OF ATTORNEY. — A power of attorney in which the principal authorizes the
agent to make contracts, to settle outstanding debts, and generally to do all things that concern his interest in
any way, real and personal, to use the principal's name to release others, to bind the principal as he may deem
proper and expedient, and making the agent as his general attorney and agent, and ratifying and confirming
whatever the attorney may do by virtue of the power, authorizes the attorney to execute a lease of the
principal's real estate for a term exceeding one year, and to execute any instrument affecting the real estate of
the principal, unless, it may be, a conveyance of it.

It will be noted that this case was decided in January, 1874.

Note the marked distinction between the powers conferred in that case and in this. Yet it was there held that the agent
did not have the power to convey. The case was decided in January, 1874

The lower court also cites 46 California, 603,3 from a reading of which it will be found that the real question involved in
that case was the priority of mortgages which involved the construction of section 1215 of the Code which defines the
terms of the conveyance:

As embracing every instrument in writing by which any estate or interest in real property is created, aliened,
mortgaged or incumbered, or by which the title to any property maybe affected, except wills.

It did not involve the construction of a power of attorney, and neither of those cases are even mentioned in the decision
of that court above quoted, which was rendered January 5, 1898.

The case of Golinsky vs. Allison (46 Pacific, 295), also decided by the Supreme Court of California on October 7,1896,
is a square in point. The syllabus says:

1. A power of attorney to an agent authorizing him to 'superintend' property of his principals, and to 'preserve,
manage, sell, and dispose of' the same, and to 'manage, work, sell, and dispose of' other property, did not
confer authority on the agent to execute a promissory note in the name of his principals, or to mortgage their
property to secure the same, though the note was given in settlement of an antecedent debt contracted by the
agent in the management of the property.

And in the opinion it is said:

A power of attorney, like any other instrument, is to be construed according to the natural import of its
language; and the authority which the principal has conferred upon his agent is not to be extended by
implication beyond the natural and ordinary significance of the terms in which that authority has been given.
The attorney has only such authority as the principal has chosen to confer upon him, and one dealing with him
must ascertain at his own risk whether his acts will bind the principal. By the above letter of attorney given by
Allison and Sackett to Barron, he had the authority to 'superintend' the property of his principals, and to '
preserve, manage, sell, and dispose of the same, and also to locate mill sites, mining claims, and water rights,
and to manage, work, sell, and dispose of them.' A power to sell and convey real estate does not authorize the
attorney to mortgage it. (Jeffrey vs. Hursh, 49 Mich., 31;12 N. W. ., 898; Wood vs. Goodridge, 6 Cush., 117;
Brown vs. Rouse, 93 Cal., 237; 28 Pac., 1044.) For an exhaustive discussion of the subject, see Campbell vs.
Association (163 Pa. St., 609; 30 Atl., 222,224). 'The power is not to be extended by construction. The
principal determines for himself what authority he will confer upon his agent, and there can be no implication,

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from his authorizing a sale of his lands, that he intends that his agent may, at discretion, charged him with the
responsibilities and duties of a mortgagor.

No authority of any court has been cited and none will ever be found holding that a power "to sign, seal, and execute,
and as may act and deed, deliver, any lease, any other deed for conveying any real or personal property" or "to sign,
seal, and execute, and as my act and deed, deliver, any lease, any other deed for conveying of any real or personal
property," or any similar language, standing alone and within itself, carries with it or implies the power to borrow money
or to execute a real mortgage to secure the payment of a debt.

The trial court also found that by her actions and conduct, the defendant had ratified and approved the acts of her
agent in the execution of both the note and the mortgage. Upon that point, we have read and reread the record, and
there is no legal evidenced to sustain that finding. In fact there is nothing in the record which shows or tends to show
that the defendant ever knew of the execution or the existence of the note or the mortgage, or that she ever had any
knowledge of the transaction in question.

With all due respect to the exhaustive opinion of the lower court, we are clearly of the opinion that it is fundamentally
wrong, and that there is no legal principle upon which can be sustained, from which it follows that the judgment from
the lower court must be reversed. It is true that on the former appeal and in the interest of justice, this case was
remanded to the lower court, with leave to the plaintiff to introduced the power of attorney in question and any other
evidence which it might have to sustain its cause of action and that there should be an end to litigation. Be that as it
may, the amount involved is now about one half million pesos, and it is apparent that the Bank acted in good faith.

The judgment of the lower court is reversed and the complaint is dismissed, but for such reasons and in the interest of
justice, such dismissal is without prejudice to any legal rights or remedies, of any kind or nature, which the plaintiff may
have against the defendant, with costs in favor of the appellant. So ordered.

G.R. No. 125862 April 15, 2004

FRANCISCO CULABA and DEMETRIA CULABA, doing business under the name and style "Culaba
Store",petitioners,
vs.
COURT OF APPEALS and SAN MIGUEL CORPORATION, respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review under Rule 45 of the Revised Rules of Civil Procedure of the Decision 1 of the Court of
Appeals in CA-G.R. CV No. 19836 affirming in toto the Decision2 of the Regional Trial Court of Makati, Branch 138, in
Civil Case No. 1033 for collection of sum of money, and the Resolution3 denying the motion for reconsideration of the
said decision.

The Undisputed Facts

The spouses Francisco and Demetria Culaba were the owners and proprietors of the Culaba Store and were engaged
in the sale and distribution of San Miguel Corporation’s (SMC) beer products. SMC sold beer products on credit to the
Culaba spouses in the amount of P28,650.00, as evidenced by Temporary Credit Invoice No. 42943.4Thereafter, the
Culaba spouses made a partial payment of P3,740.00, leaving an unpaid balance of P24,910.00. As they failed to pay
despite repeated demands, SMC filed an action for collection of a sum of money against them before the RTC of
Makati, Branch 138.

The defendant-spouses denied any liability, claiming that they had already paid the plaintiff in full on four separate
occasions. To substantiate this claim, the defendants presented four (4) Temporary Charge Sales (TCS) Liquidation
Receipts, as follows:

April 19, 1983 Receipt No. 27331 for P8,0005

April 22, 1983 Receipt No. 27318 for P9,0006

April 27, 1983 Receipt No. 27339 for P4,5007

April 30, 1983 Receipt No. 27346 for P3,4108

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Defendant Francisco Culaba testified that he made the foregoing payments to an SMC supervisor who came in an
SMC van. He was then showed a list of customers’ accountabilities which included his account. The defendant, in good
faith, then paid to the said supervisor, and he was, in turn, issued genuine SMC liquidation receipts.

For its part, SMC submitted a publisher’s affidavit 9 to prove that the entire booklet of TCSL Receipts bearing Nos.
27301-27350 were reported lost by it, and that it caused the publication of the notice of loss in the July 9, 1983 issue of
the Daily Express, as follows:

NOTICE OF LOSS

OUR CUSTOMERS ARE HEREBY INFORMED THAT TEMPORARY CHARGE SALES LIQUIDATION
RECEIPTS WITH SERIAL NOS. 27301-27350 HAVE BEEN LOST.

ANY TRANSACTION, THEREFORE, ENTERED INTO WITH THE USE OF THE ABOVE RECEIPTS WILL
NOT BE HONORED.

SAN MIGUEL CORPORATION


BEER DIVISION
Makati Beer Region10

The Trial Court’s Ruling

After trial on the merits, the trial court rendered judgment in favor of SMC, and held the Culaba spouses liable on the
balance of its obligation, thus:

Wherefore, judgment is hereby rendered in favor of the plaintiff, as follows:

1. Ordering defendants to pay the amount of P24,910.00 plus legal interest of 6% per annum from April 12,
1983 until the whole amount is fully paid;

2. Ordering defendants to pay 20% of the amount due to plaintiff as and for attorney’s fees plus costs.

SO ORDERED.11

According to the trial court, it was unusual that defendant Francisco Culaba forgot the name of the collector to whom
he made the payments and that he did not require the said collector to print his name on the receipts. The court also
noted that although they were part of a single booklet, the TCS Liquidation Receipts submitted by the defendants did
not appear to have been issued in their natural sequence. Furthermore, they were part of the lost booklet receipts,
which the public was duly warned of through the Notice of Loss the plaintiff caused to be published in a daily
newspaper. This confirmed the plaintiff’s claim that the receipts presented by the defendants were spurious ones.

The Case on Appeal

On appeal, the appellants interposed the following assignment of errors:

THE TRIAL COURT ERRED IN FINDING THAT THE RECEIPTS PRESENTED BY DEFENDANTS
EVIDENCING HIS PAYMENTS TO PLAINTIFF SAN MIGUEL CORPORATION, ARE SPURIOUS.

II

THE TRIAL COURT ERRED IN CONCLUDING THAT PLAINTIFF-APPELLEE HAS SUFFICIENTLY PROVED
ITS CAUSE OF ACTION AGAINST THE DEFENDANTS.

III

THE TRIAL COURT ERRED IN ORDERING DEFENDANTS TO PAY 20% OF THE AMOUNT DUE TO
PLAINTIFF AS ATTORNEY’S FEES.12

The appellants asserted that while the trial court’s observations were true, it was the usual business practice in
previous transactions between them and SMC. The SMC previously honored receipts not bearing the salesman’s
name. According to appellant Francisco Culaba, he even lost some of the receipts, but did not encounter any
problems.

According to appellant Francisco, he could not be faulted for paying the SMC collector who came in a van and was in
uniform, and that any regular customer would, without any apprehension, transact with such an SMC employee.
Furthermore, the respective receipts issued to him at the time he paid on the four occasions mentioned had not yet

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then been declared lost. Thus, the subsequent publication in a daily newspaper declaring the booklets lost did not
affect the validity and legality of the payments made. Accordingly, by its actuations, the SMC was estopped from
questioning the legality of the payments and had no cause of action against the appellants.

Anent the issue of attorney’s fees, the order of the trial court for payment thereof is without basis. According to the
appellant, the provision for attorney’s fees is a contingent fee, already provided for in the SMC’s contract with the law
firm. To further order them to pay 20% of the amount due as attorney’s fees is double payment, tantamount to undue
enrichment and therefore improper.13

The appellee, for its part, contended that the primary issue in the case at bar revolved around the basic and
fundamental principles of agency.14 It was incumbent upon the defendants-appellants to exercise ordinary prudence
and reasonable diligence to verify and identify the extent of the alleged agent’s authority. It was their burden to
establish the true identity of the assumed agent, and this could not be established by mere representation, rumor or
general reputation. As they utterly failed in this regard, the appellants must suffer the consequences.

The Court of Appeals affirmed the decision of the trial court, thus:

In the face of the somewhat tenuous evidence presented by the appellants, we cannot fault the lower court for
giving more weight to appellee’s testimonial and documentary evidence, all of which establish with some
degree of preponderance the existence of the account sued upon.

ALL CONSIDERED, we cannot find any justification to reject the factual findings of the lower court to which we
must accord respect, for which reason, the judgment appealed from is hereby AFFIRMED in all respects.

SO ORDERED.15

Hence, the instant petition.

The petitioners pose the following issues for the Court’s resolution:

I. WHETHER OR NOT THE RESPONDENT HAD PROVEN BY PREPONDERANT EVIDENCE THAT IT HAD
PROPERLY AND TIMELY NOTIFIED PETITIONER OF LOST BOOKLET OF RECEIPTS

II. WHETHER OR NOT RESPONDENT HAD PROVEN BY PREPONDERANT EVIDENCE THAT


PETITIONER WAS REMISS IN THE PAYMENT OF HIS ACCOUNTS TO ITS AGENT.16

According to the petitioners, receiving receipts from the private respondent’s agents instead of its salesmen was a
usual occurrence, as they had been operating the store since 1979. Thus, on four occasions in April 1983, when an
agent of the respondent came to the store wearing an SMC uniform and driving an SMC van, petitioner Francisco
Culaba, without question, paid his accounts. He received the receipts without fear, as they were similar to what he
used to receive before. Furthermore, the petitioners assert that, common experience will attest that unless the attention
of the customers is called for, they would not take note of the serial number of the receipts.

The petitioners contend that the private respondent advertised its warning to the public only after the damage was
done, or on July 9, 1993. Its belated notice showed its glaring lack of interest or concern for its customers’ welfare, and,
in sum, its negligence.

Anent the second issue, petitioner Francisco Culaba avers that the agent to whom the accounts were paid had all the
physical and material attributes or indications of a representative of the private respondent, leaving no doubt that he
was duly authorized by the latter. Petitioner Francisco Culaba’s testimony that "he does not necessarily check the
contents of the receipts issued to him except for the amount indicated if [the] same accurately reflects his actual
payment" is a common attitude of customers. He could, thus, not be faulted for paying the private respondent’s agent
on four occasions. Petitioner Francisco Culaba asserts that he made the payment in good faith, to an agent who issued
SMC receipts which appeared to be genuine. Thus, according to the petitioners, they had duly paid their obligation in
accordance with Articles 1240 and 1242 of the New Civil Code.

The private respondent, for its part, avers that the burden of proving payment is with the debtor, in consonance with the
express provision of Article 1233 of the New Civil Code. The petitioners miserably failed to prove the self-serving
allegation that they already paid their liability to the private respondent. Furthermore, under normal circumstances, an
obligor would not just pay a substantial amount to someone whom he saw for the first time, without even asking for the
latter’s name.

The Ruling of the Court

The petition is dismissed.

The petitioners question the findings of the Court of Appeals as to whether the payment of the petitioners’ obligation to
the private respondent was properly made, thus, extinguishing the same. This is clearly a factual issue, and beyond the
purview of the Court to delve into. This is in consonance with the well-settled rule that findings of fact of the trial court,

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especially when affirmed by the Court of Appeals, are accorded the highest degree of respect, and generally will not be
disturbed on appeal. Such findings are binding and conclusive on the Court. 17 Furthermore, it is not the Court’s function
under Rule 45 of the Rules of Court, as amended, to review, examine and evaluate or weigh the probative value of the
evidence presented.18

To reiterate, the issue being raised by the petitioners does not involve a question of law, but a question of fact, not
cognizable by this Court in a petition for review under Rule 45. The jurisdiction of the Court in such a case is limited to
reviewing only errors of law, unless the factual findings being assailed are not supported by evidence on record or the
impugned judgment is based on a misapprehension of facts.19

A careful study of the records of the case reveal that the appellate court affirmed the trial court’s factual findings as
follows:

First. Receipts Nos. 27331, 27318, 27339 and 27346 were included in the private respondent’s lost booklet, which loss
was duly advertised in a newspaper of general circulation; thus, the private respondent could not have officially issued
them to the petitioners to cover the alleged payments on the dates appearing thereon.

Second. There was something amiss in the way the receipts were issued to the petitioners, as one receipt bearing a
higher serial number was issued ahead of another receipt bearing a lower serial number, supposedly covering a later
payment. The petitioners failed to explain the apparent mix-up in these receipts, and no attempt was made in this
regard.

Third. The fact that the salesman’s name was invariably left blank in the four receipts and that the petitioners could not
even remember the name of the supposed impostor who received the said payments strongly argue against the
veracity of the petitioners’ claim.

We find no cogent reason to reverse the said findings.

The dismissal of the petition is inevitable even upon close perusal of the merits of the case.

Payment is a mode of extinguishing an obligation. 20 Article 1240 of the Civil Code provides that payment shall be made
to the person in whose favor the obligation has been constituted, or his successor-in-interest, or any person authorized
to receive it.21 In this case, the payments were purportedly made to a "supervisor" of the private respondent, who was
clad in an SMC uniform and drove an SMC van. He appeared to be authorized to accept payments as he showed a list
of customers’ accountabilities and even issued SMC liquidation receipts which looked genuine. Unfortunately for
petitioner Francisco Culaba, he did not ascertain the identity and authority of the said supervisor, nor did he ask to be
shown any identification to prove that the latter was, indeed, an SMC supervisor. The petitioners relied solely on the
man’s representation that he was collecting payments for SMC. Thus, the payments the petitioners claimed they made
were not the payments that discharged their obligation to the private respondent.

The basis of agency is representation.22 A person dealing with an agent is put upon inquiry and must discover upon his
peril the authority of the agent.23 In the instant case, the petitioners’ loss could have been avoided if they had simply
exercised due diligence in ascertaining the identity of the person to whom they allegedly made the payments. The fact
that they were parting with valuable consideration should have made them more circumspect in handling their business
transactions. Persons dealing with an assumed agent are bound at their peril to ascertain not only the fact of agency
but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to
establish it.24 The petitioners in this case failed to discharge this burden, considering that the private respondent
vehemently denied that the payments were accepted by it and were made to its authorized representative.

Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily
regulate the conduct of human affairs, would do, or the doing of something, which a prudent and reasonable man
would not do.25 In the case at bar, the most prudent thing the petitioners should have done was to ascertain the identity
and authority of the person who collected their payments. Failing this, the petitioners cannot claim that they acted in
good faith when they made such payments. Their claim therefor is negated by their negligence, and they are bound by
its consequences. Being negligent in this regard, the petitioners cannot seek relief on the basis of a supposed
agency.26

WHEREFORE, the instant petition is hereby DENIED. The assailed Decision dated April 16, 1996, and the Resolution
dated July 19, 1996 of the Court of Appeals are AFFIRMED. Costs against the petitioners.

SO ORDERED.

G.R. No. 133179 March 27, 2008

ALLIED BANKING CORPORATION, Petitioner,


vs.
LIM SIO WAN, METROPOLITAN BANK AND TRUST CO., and PRODUCERS BANK, Respondents.

DECISION

8
VELASCO, JR., J.:

To ingratiate themselves to their valued depositors, some banks at times bend over backwards that they unwittingly
expose themselves to great risks.

The Case

This Petition for Review on Certiorari under Rule 45 seeks to reverse the Court of Appeals’ (CA’s) Decision
promulgated on March 18, 19981 in CA-G.R. CV No. 46290 entitled Lim Sio Wan v. Allied Banking Corporation, et al.
The CA Decision modified the Decision dated November 15, 19932 of the Regional Trial Court (RTC), Branch 63 in
Makati City rendered in Civil Case No. 6757.

The Facts

The facts as found by the RTC and affirmed by the CA are as follows:

On November 14, 1983, respondent Lim Sio Wan deposited with petitioner Allied Banking Corporation (Allied) at its
Quintin Paredes Branch in Manila a money market placement of PhP 1,152,597.35 for a term of 31 days to mature on
December 15, 1983,3 as evidenced by Provisional Receipt No. 1356 dated November 14, 1983. 4

On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So, an officer of Allied, and instructed
the latter to pre-terminate Lim Sio Wan’s money market placement, to issue a manager’s check representing the
proceeds of the placement, and to give the check to one Deborah Dee Santos who would pick up the check. 5 Lim Sio
Wan described the appearance of Santos so that So could easily identify her. 6

Later, Santos arrived at the bank and signed the application form for a manager’s check to be issued.7 The bank
issued Manager’s Check No. 035669 for PhP 1,158,648.49, representing the proceeds of Lim Sio Wan’s money market
placement in the name of Lim Sio Wan, as payee.8 The check was cross-checked "For Payee’s Account Only" and
given to Santos.9

Thereafter, the manager’s check was deposited in the account of Filipinas Cement Corporation (FCC) at respondent
Metropolitan Bank and Trust Co. (Metrobank),10 with the forged signature of Lim Sio Wan as indorser.11

Earlier, on September 21, 1983, FCC had deposited a money market placement for PhP 2 million with respondent
Producers Bank. Santos was the money market trader assigned to handle FCC’s account. 12 Such deposit is evidenced
by Official Receipt No. 31756813 and a Letter dated September 21, 1983 of Santos addressed to Angie Lazo of FCC,
acknowledging receipt of the placement.14 The placement matured on October 25, 1983 and was rolled-over until
December 5, 1983 as evidenced by a Letter dated October 25, 1983.15 When the placement matured, FCC demanded
the payment of the proceeds of the placement.16 On December 5, 1983, the same date that So received the phone call
instructing her to pre-terminate Lim Sio Wan’s placement, the manager’s check in the name of Lim Sio Wan was
deposited in the account of FCC, purportedly representing the proceeds of FCC’s money market placement with
Producers Bank.17 In other words, the Allied check was deposited with Metrobank in the account of FCC as Producers
Bank’s payment of its obligation to FCC.

To clear the check and in compliance with the requirements of the Philippine Clearing House Corporation (PCHC)
Rules and Regulations, Metrobank stamped a guaranty on the check, which reads: "All prior endorsements and/or lack
of endorsement guaranteed."18

The check was sent to Allied through the PCHC. Upon the presentment of the check, Allied funded the check even
without checking the authenticity of Lim Sio Wan’s purported indorsement. Thus, the amount on the face of the check
was credited to the account of FCC.19

On December 9, 1983, Lim Sio Wan deposited with Allied a second money market placement to mature on January 9,
1984.20

On December 14, 1983, upon the maturity date of the first money market placement, Lim Sio Wan went to Allied to
withdraw it.21 She was then informed that the placement had been pre-terminated upon her instructions. She denied
giving any instructions and receiving the proceeds thereof. She desisted from further complaints when she was
assured by the bank’s manager that her money would be recovered.22

When Lim Sio Wan’s second placement matured on January 9, 1984, So called Lim Sio Wan to ask for the latter’s
instructions on the second placement. Lim Sio Wan instructed So to roll-over the placement for another 30 days.23On
January 24, 1984, Lim Sio Wan, realizing that the promise that her money would be recovered would not materialize,
sent a demand letter to Allied asking for the payment of the first placement. 24 Allied refused to pay Lim Sio Wan,
claiming that the latter had authorized the pre-termination of the placement and its subsequent release to Santos. 25

Consequently, Lim Sio Wan filed with the RTC a Complaint dated February 13, 198426 docketed as Civil Case No.
6757 against Allied to recover the proceeds of her first money market placement. Sometime in February 1984, she
withdrew her second placement from Allied.

9
Allied filed a third party complaint27 against Metrobank and Santos. In turn, Metrobank filed a fourth party
complaint28 against FCC. FCC for its part filed a fifth party complaint29 against Producers Bank. Summonses were duly
served upon all the parties except for Santos, who was no longer connected with Producers Bank. 30

On May 15, 1984, or more than six (6) months after funding the check, Allied informed Metrobank that the signature on
the check was forged.31 Thus, Metrobank withheld the amount represented by the check from FCC. Later on,
Metrobank agreed to release the amount to FCC after the latter executed an Undertaking, promising to indemnify
Metrobank in case it was made to reimburse the amount.32

Lim Sio Wan thereafter filed an amended complaint to include Metrobank as a party-defendant, along with Allied.33The
RTC admitted the amended complaint despite the opposition of Metrobank. 34 Consequently, Allied’s third party
complaint against Metrobank was converted into a cross-claim and the latter’s fourth party complaint against FCC was
converted into a third party complaint.35

After trial, the RTC issued its Decision, holding as follows:

WHEREFORE, judgment is hereby rendered as follows:

1. Ordering defendant Allied Banking Corporation to pay plaintiff the amount of P1,158,648.49 plus 12%
interest per annum from March 16, 1984 until fully paid;

2. Ordering defendant Allied Bank to pay plaintiff the amount of P100,000.00 by way of moral damages;

3. Ordering defendant Allied Bank to pay plaintiff the amount of P173,792.20 by way of attorney’s fees; and,

4. Ordering defendant Allied Bank to pay the costs of suit.

Defendant Allied Bank’s cross-claim against defendant Metrobank is DISMISSED.

Likewise defendant Metrobank’s third-party complaint as against Filipinas Cement Corporation is DISMISSED.

Filipinas Cement Corporation’s fourth-party complaint against Producer’s Bank is also DISMISSED.

SO ORDERED.36

The Decision of the Court of Appeals

Allied appealed to the CA, which in turn issued the assailed Decision on March 18, 1998, modifying the RTC Decision,
as follows:

WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is rendered ordering and
sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%) percent and defendant-appellee
Metropolitan Bank and Trust Company forty (40%) of the amount of P1,158,648.49 plus 12% interest per annum from
March 16, 1984 until fully paid. The moral damages, attorney’s fees and costs of suit adjudged shall likewise be paid by
defendant-appellant Allied Banking Corporation and defendant-appellee Metropolitan Bank and Trust Company in the
same proportion of 60-40. Except as thus modified, the decision appealed from is AFFIRMED.

SO ORDERED.37

Hence, Allied filed the instant petition.

The Issues

Allied raises the following issues for our consideration:

The Honorable Court of Appeals erred in holding that Lim Sio Wan did not authorize [Allied] to pre-terminate the initial
placement and to deliver the check to Deborah Santos.

The Honorable Court of Appeals erred in absolving Producers Bank of any liability for the reimbursement of amount
adjudged demandable.

The Honorable Court of Appeals erred in holding [Allied] liable to the extent of 60% of amount adjudged demandable in
clear disregard to the ultimate liability of Metrobank as guarantor of all endorsement on the check, it being the
collecting bank.38

The petition is partly meritorious.

A Question of Fact
10
Allied questions the finding of both the trial and appellate courts that Allied was not authorized to release the proceeds
of Lim Sio Wan’s money market placement to Santos. Allied clearly raises a question of fact. When the CA affirms the
findings of fact of the RTC, the factual findings of both courts are binding on this Court.39

We also agree with the CA when it said that it could not disturb the trial court’s findings on the credibility of witness So
inasmuch as it was the trial court that heard the witness and had the opportunity to observe closely her deportment and
manner of testifying. Unless the trial court had plainly overlooked facts of substance or value, which, if considered,
might affect the result of the case,40 we find it best to defer to the trial court on matters pertaining to credibility of
witnesses.

Additionally, this Court has held that the matter of negligence is also a factual question.41 Thus, the finding of the RTC,
affirmed by the CA, that the respective parties were negligent in the exercise of their obligations is also conclusive
upon this Court.

The Liability of the Parties

As to the liability of the parties, we find that Allied is liable to Lim Sio Wan. Fundamental and familiar is the doctrine that
the relationship between a bank and a client is one of debtor-creditor.

Articles 1953 and 1980 of the Civil Code provide:

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same kind and quality.

Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loan.

Thus, we have ruled in a line of cases that a bank deposit is in the nature of a simple loan or mutuum.42 More
succinctly, in Citibank, N.A. (Formerly First National City Bank) v. Sabeniano, this Court ruled that a money market
placement is a simple loan or mutuum.43 Further, we defined a money market in Cebu International Finance
Corporation v. Court of Appeals, as follows:

[A] money market is a market dealing in standardized short-term credit instruments (involving large amounts) where
lenders and borrowers do not deal directly with each other but through a middle man or dealer in open market. In a
money market transaction, the investor is a lender who loans his money to a borrower through a middleman or dealer.

In the case at bar, the money market transaction between the petitioner and the private respondent is in the nature of a
loan.44

Lim Sio Wan, as creditor of the bank for her money market placement, is entitled to payment upon her request, or upon
maturity of the placement, or until the bank is released from its obligation as debtor. Until any such event, the obligation
of Allied to Lim Sio Wan remains unextinguished.

Art. 1231 of the Civil Code enumerates the instances when obligations are considered extinguished, thus:

Art. 1231. Obligations are extinguished:

(1) By payment or performance;

(2) By the loss of the thing due;

(3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor;

(5) By compensation;

(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this Code. (Emphasis supplied.)

From the factual findings of the trial and appellate courts that Lim Sio Wan did not authorize the release of her money
market placement to Santos and the bank had been negligent in so doing, there is no question that the obligation of
Allied to pay Lim Sio Wan had not been extinguished. Art. 1240 of the Code states that "payment shall be made to the
person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to
receive it." As commented by Arturo Tolentino:

11
Payment made by the debtor to a wrong party does not extinguish the obligation as to the creditor, if there is no fault or
negligence which can be imputed to the latter. Even when the debtor acted in utmost good faith and by mistake as to
the person of his creditor, or through error induced by the fraud of a third person, the payment to one who is not in fact
his creditor, or authorized to receive such payment, is void, except as provided in Article 1241. Such payment does not
prejudice the creditor, and accrual of interest is not suspended by it. 45 (Emphasis supplied.)

Since there was no effective payment of Lim Sio Wan’s money market placement, the bank still has an obligation to
pay her at six percent (6%) interest from March 16, 1984 until the payment thereof.

We cannot, however, say outright that Allied is solely liable to Lim Sio Wan.

Allied claims that Metrobank is the proximate cause of the loss of Lim Sio Wan’s money. It points out that Metrobank
guaranteed all prior indorsements inscribed on the manager’s check, and without Metrobank’s guarantee, the present
controversy would never have occurred. According to Allied:

Failure on the part of the collecting bank to ensure that the proceeds of the check is paid to the proper party is, aside
from being an efficient intervening cause, also the last negligent act, x x x contributory to the injury caused in the
present case, which thereby leads to the conclusion that it is the collecting bank, Metrobank that is the proximate cause
of the alleged loss of the plaintiff in the instant case.46

We are not persuaded.

Proximate cause is "that cause, which, in natural and continuous sequence, unbroken by any efficient intervening
cause, produces the injury and without which the result would not have occurred." 47 Thus, there is an efficient
supervening event if the event breaks the sequence leading from the cause to the ultimate result. To determine the
proximate cause of a controversy, the question that needs to be asked is: If the event did not happen, would the injury
have resulted? If the answer is NO, then the event is the proximate cause.

In the instant case, Allied avers that even if it had not issued the check payment, the money represented by the check
would still be lost because of Metrobank’s negligence in indorsing the check without verifying the genuineness of the
indorsement thereon.

Section 66 in relation to Sec. 65 of the Negotiable Instruments Law provides:

Section 66. Liability of general indorser.—Every indorser who indorses without qualification, warrants to all subsequent
holders in due course;

a) The matters and things mentioned in subdivisions (a), (b) and (c) of the next preceding section; and

b) That the instrument is at the time of his indorsement valid and subsisting;

And in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be
according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.

Section 65. Warranty where negotiation by delivery, so forth.—Every person negotiating an instrument by delivery or by
a qualified indorsement, warrants:

a) That the instrument is genuine and in all respects what it purports to be;

b) That he has a good title of it;

c) That all prior parties had capacity to contract;

d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate
transferee.

The provisions of subdivision (c) of this section do not apply to persons negotiating public or corporation securities,
other than bills and notes. (Emphasis supplied.)

The warranty "that the instrument is genuine and in all respects what it purports to be" covers all the defects in the
instrument affecting the validity thereof, including a forged indorsement. Thus, the last indorser will be liable for the
amount indicated in the negotiable instrument even if a previous indorsement was forged. We held in a line of cases
that "a collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank
guarantees all prior indorsements, including the forged indorsement itself, and ultimately should be held liable
therefor."48

12
However, this general rule is subject to exceptions. One such exception is when the issuance of the check itself was
attended with negligence. Thus, in the cases cited above where the collecting bank is generally held liable, in two of
the cases where the checks were negligently issued, this Court held the institution issuing the check just as liable as or
more liable than the collecting bank.

In isolated cases where the checks were deposited in an account other than that of the payees on the strength of
forged indorsements, we held the collecting bank solely liable for the whole amount of the checks involved for having
indorsed the same. In Republic Bank v. Ebrada,49 the check was properly issued by the Bureau of Treasury. While in
Banco de Oro Savings and Mortgage Bank (Banco de Oro) v. Equitable Banking Corporation, 50 Banco de Oro
admittedly issued the checks in the name of the correct payees. And in Traders Royal Bank v. Radio Philippines
Network, Inc.,51 the checks were issued at the request of Radio Philippines Network, Inc. from Traders Royal
Bank.1avvphi1

However, in Bank of the Philippine Islands v. Court of Appeals, we said that the drawee bank is liable for 60% of the
amount on the face of the negotiable instrument and the collecting bank is liable for 40%. We also noted the relative
negligence exhibited by two banks, to wit:

Both banks were negligent in the selection and supervision of their employees resulting in the encashment of the
forged checks by an impostor. Both banks were not able to overcome the presumption of negligence in the selection
and supervision of their employees. It was the gross negligence of the employees of both banks which resulted in the
fraud and the subsequent loss. While it is true that petitioner BPI’s negligence may have been the proximate cause of
the loss, respondent CBC’s negligence contributed equally to the success of the impostor in encashing the proceeds of
the forged checks. Under these circumstances, we apply Article 2179 of the Civil Code to the effect that while
respondent CBC may recover its losses, such losses are subject to mitigation by the courts. (See Phoenix Construction
Inc. v. Intermediate Appellate Courts, 148 SCRA 353 [1987]).

Considering the comparative negligence of the two (2) banks, we rule that the demands of substantial justice are
satisfied by allocating the loss of P2,413,215.16 and the costs of the arbitration proceeding in the amount of P7,250.00
and the cost of litigation on a 60-40 ratio.52

Similarly, we ruled in Associated Bank v. Court of Appeals that the issuing institution and the collecting bank should
equally share the liability for the loss of amount represented by the checks concerned due to the negligence of both
parties:

The Court finds as reasonable, the proportionate sharing of fifty percent-fifty percent (50%-50%). Due to the negligence
of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired
hospital cashier to receive the checks for the payee hospital for a period close to three years and in not properly
ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition to the hospital’s
real cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for
fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from
PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its
warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness
of all prior indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also
remiss in its duty to ascertain the genuineness of the payee’s indorsement.53

A reading of the facts of the two immediately preceding cases would reveal that the reason why the bank or institution
which issued the check was held partially liable for the amount of the check was because of the negligence of these
parties which resulted in the issuance of the checks.

In the instant case, the trial court correctly found Allied negligent in issuing the manager’s check and in transmitting it to
Santos without even a written authorization.54 In fact, Allied did not even ask for the certificate evidencing the money
market placement or call up Lim Sio Wan at her residence or office to confirm her instructions. Both actions could have
prevented the whole fraudulent transaction from unfolding. Allied’s negligence must be considered as the proximate
cause of the resulting loss.

To reiterate, had Allied exercised the diligence due from a financial institution, the check would not have been issued
and no loss of funds would have resulted. In fact, there would have been no issuance of indorsement had there been
no check in the first place.

The liability of Allied, however, is concurrent with that of Metrobank as the last indorser of the check. When Metrobank
indorsed the check in compliance with the PCHC Rules and Regulations 55 without verifying the authenticity of Lim Sio
Wan’s indorsement and when it accepted the check despite the fact that it was cross-checked payable to payee’s
account only,56 its negligent and cavalier indorsement contributed to the easier release of Lim Sio Wan’s money and
perpetuation of the fraud. Given the relative participation of Allied and Metrobank to the instant case, both banks
cannot be adjudged as equally liable. Hence, the 60:40 ratio of the liabilities of Allied and Metrobank, as ruled by the
CA, must be upheld.

13
FCC, having no participation in the negotiation of the check and in the forgery of Lim Sio Wan’s indorsement, can raise
the real defense of forgery as against both banks.57

As to Producers Bank, Allied Bank’s argument that Producers Bank must be held liable as employer of Santos under
Art. 2180 of the Civil Code is erroneous. Art. 2180 pertains to the vicarious liability of an employer for quasi-delicts that
an employee has committed. Such provision of law does not apply to civil liability arising from delict.

One also cannot apply the principle of subsidiary liability in Art. 103 of the Revised Penal Code in the instant case.
Such liability on the part of the employer for the civil aspect of the criminal act of the employee is based on the
conviction of the employee for a crime. Here, there has been no conviction for any crime.

As to the claim that there was unjust enrichment on the part of Producers Bank, the same is correct. Allied correctly
claims in its petition that Producers Bank should reimburse Allied for whatever judgment that may be rendered against
it pursuant to Art. 22 of the Civil Code, which provides: "Every person who through an act of performance by another,
or any other means, acquires or comes into possession of something at the expense of the latter without just cause or
legal ground, shall return the same to him."1avvphi1

The above provision of law was clarified in Reyes v. Lim, where we ruled that "[t]here is unjust enrichment when a
person unjustly retains a benefit to the loss of another, or when a person retains money or property of another against
the fundamental principles of justice, equity and good conscience."58

In Tamio v. Ticson, we further clarified the principle of unjust enrichment, thus: "Under Article 22 of the Civil Code,
there is unjust enrichment when (1) a person is unjustly benefited, and (2) such benefit is derived at the expense of or
with damages to another."59

In the instant case, Lim Sio Wan’s money market placement in Allied Bank was pre-terminated and withdrawn without
her consent. Moreover, the proceeds of the placement were deposited in Producers Bank’s account in Metrobank
without any justification. In other words, there is no reason that the proceeds of Lim Sio Wans’ placement should be
deposited in FCC’s account purportedly as payment for FCC’s money market placement and interest in Producers
Bank.lavvphil With such payment, Producers Bank’s indebtedness to FCC was extinguished, thereby benefitting the
former. Clearly, Producers Bank was unjustly enriched at the expense of Lim Sio Wan. Based on the facts and
circumstances of the case, Producers Bank should reimburse Allied and Metrobank for the amounts the two latter
banks are ordered to pay Lim Sio Wan.

It cannot be validly claimed that FCC, and not Producers Bank, should be considered as having been unjustly
enriched. It must be remembered that FCC’s money market placement with Producers Bank was already due and
demandable; thus, Producers Bank’s payment thereof was justified. FCC was entitled to such payment. As earlier
stated, the fact that the indorsement on the check was forged cannot be raised against FCC which was not a part in
any stage of the negotiation of the check. FCC was not unjustly enriched.

From the facts of the instant case, we see that Santos could be the architect of the entire controversy. Unfortunately,
since summons had not been served on Santos, the courts have not acquired jurisdiction over her. 60 We, therefore,
cannot ascribe to her liability in the instant case.

Clearly, Producers Bank must be held liable to Allied and Metrobank for the amount of the check plus 12% interest per
annum, moral damages, attorney’s fees, and costs of suit which Allied and Metrobank are adjudged to pay Lim Sio
Wan based on a proportion of 60:40.

WHEREFORE, the petition is PARTLY GRANTED. The March 18, 1998 CA Decision in CA-G.R. CV No. 46290 and
the November 15, 1993 RTC Decision in Civil Case No. 6757 are AFFIRMED with MODIFICATION.

Thus, the CA Decision is AFFIRMED, the fallo of which is reproduced, as follows:

WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is rendered ordering and
sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%) percent and defendant-appellee
Metropolitan Bank and Trust Company forty (40%) of the amount of P1,158,648.49 plus 12% interest per annum from
March 16, 1984 until fully paid. The moral damages, attorney’s fees and costs of suit adjudged shall likewise be paid by
defendant-appellant Allied Banking Corporation and defendant-appellee Metropolitan Bank and Trust Company in the
same proportion of 60-40. Except as thus modified, the decision appealed from is AFFIRMED.

SO ORDERED.

Additionally and by way of MODIFICATION, Producers Bank is hereby ordered to pay Allied and Metrobank the
aforementioned amounts. The liabilities of the parties are concurrent and independent of each other.

SO ORDERED.

G.R. No. 172825 October 11, 2012

14
SPOUSES MINIANO B. DELA CRUZ and LETA L. DELA CRUZ, Petitioners,
vs.
ANA MARIE CONCEPCION, Respondent.

DECISION

PERALTA, J.:

Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court filed by petitioners spouses Miniano
B. Dela Cruz and Leta L. Dela Cruz against respondent Ana Marie Concepcion are the Court of Appeals (CA)
Decision1 dated March 31, 2005 and Resolution2 dated May 24, 2006 in CA-G.R. CV No. 83030.

The facts of the case are as follows:

On March 25, 1996, petitioners (as vendors) entered into a Contract to Sell3 with respondent (as vendee) involving a
house and lot in Cypress St., Phase I, Town and Country Executive Village, Antipolo City for a consideration of
P2,000,000.00 subject to the following terms and conditions:

a) That an earnest money of P100,000.00 shall be paid immediately;

b) That a full down payment of Four Hundred Thousand Pesos (P400,000.00) shall be paid on February 29,
1996;

c) That Five Hundred Thousand Pesos (P500,000.00) shall be paid on or before May 5, 1996; and

d) That the balance of One Million Pesos (P1,000,000.00) shall be paid on installment with interest of Eighteen
Percent (18%) per annum or One and a half percent (1-1/2 %) interest per month, based on the diminishing
balance, compounded monthly, effective May 6, 1996. The interest shall continue to run until the whole
obligation shall have been fully paid. The whole One Million Pesos shall be paid within three years from May 6,
1996;

e) That the agreed monthly amortization of Fifty Thousand Pesos (P50,000.00), principal and interest included,
must be paid to the Vendors, without need of prior demand, on or before May 6, 1996, and every month
thereafter. Failure to pay the monthly amortization on time, a penalty equal to Five Percent (5%) of the amount
due shall be imposed, until the account is updated. In addition, a penalty of One Hundred Pesos per day shall
be imposed until the account is updated;

f) That after receipt of the full payment, the Vendors shall execute the necessary Absolute Deed of Sale
covering the house and lot mentioned above x x x 4

Respondent made the following payments, to wit: (1) P500,000.00 by way of downpayment; (2) P500,000.00 on May
30, 1996; (3) P500,000.00 paid on January 22, 1997; and (4) P500,000.00 bounced check dated June 30, 1997 which
was subsequently replaced by another check of the same amount, dated July 7, 1997. Respondent was, therefore,
able to pay a total of P2,000,000.00.5

Before respondent issued the P500,000.00 replacement check, she told petitioners that based on the computation of
her accountant as of July 6, 1997, her unpaid obligation which includes interests and penalties was only
P200,000.00.6 Petitioners agreed with respondent and said "if P200,000.00 is the correct balance, it is okay with us." 7

Meanwhile, the title to the property was transferred to respondent. Petitioners later reminded respondent to pay
P209,000.00 within three months.8 They claimed that the said amount remained unpaid, despite the transfer of the title
to the property to respondent. Several months later, petitioners made further demands stating the supposed correct
computation of respondent’s liabilities.9 Despite repeated demands, petitioners failed to collect the amounts they
claimed from respondent. Hence, the Complaint for Sum of Money With Damages 10 filed with the Regional Trial Court
(RTC)11 of Antipolo, Rizal. The case was docketed as Civil Case No. 98-4716.

In her Answer with Compulsory Counterclaim,12 respondent claimed that her unpaid obligation to petitioners is only
P200,000.00 as earlier confirmed by petitioners and not P487,384.15 as later alleged in the complaint. Respondent
thus prayed for the dismissal of the complaint. By way of counterclaim, respondent prayed for the payment of moral
damages and attorney’s fees. During the presentation of the parties’ evidence, in addition to documents showing the
statement of her paid obligations, respondent presented a receipt purportedly indicating payment of the remaining
balance of P200,000.00 to Adoracion Losloso (Losloso) who allegedly received the same on behalf of petitioners. 13

On March 8, 2004, the RTC rendered a Decision14 in favor of respondent, the dispositive portion of which reads:

WHEREFORE, premises considered, this case is hereby DISMISSED. The plaintiff is hereby ordered to pay the
defendant’s counterclaim, amounting to wit:

a) P300,000 as moral damages; and


15
b) P100,000 plus P2,000 per court appearance as attorney’s fees.

SO ORDERED.15

The RTC noted that the evidence formally offered by petitioners have not actually been marked as none of the
markings were recorded. Thus, it found no basis to grant their claims, especially since the amount claimed in the
complaint is different from that testified to. The court, on the other hand, granted respondent’s counterclaim. 16

On appeal, the CA affirmed the decision with modification by deleting the award of moral damages and attorney’s fees
in favor of respondent.17 It agreed with the RTC that the evidence presented by petitioners cannot be given credence in
determining the correct liability of respondent.18 Considering that the purchase price had been fully paid by respondent
ahead of the scheduled date agreed upon by the parties, petitioners were not awarded the excessive penalties and
interests.19 The CA thus maintained that respondent’s liability is limited to P200,000.00 as claimed by respondent and
originally admitted by petitioners.20 This amount, however, had already been paid by respondent and received by
petitioners’ representative.21 Finally, the CA pointed out that the RTC did not explain in its decision why moral damages
and attorney’s fees were awarded. Considering also that bad faith cannot be attributed to petitioners when they
instituted the collection suit, the CA deleted the grant of their counterclaims. 22

Aggrieved, petitioners come before the Court in this petition for review on certiorari under Rule 45 of the Rules of Court
raising the following errors:

I.

"THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT ON THE GROUND THAT PLAINTIFF
FAILED TO FORMALLY OFFER THEIR EVIDENCE AS DEFENDANT JUDICIALLY ADMITTED IN HER
ANSWER WITH COMPULS[O]RY COUNTERCLAIM HER OUTSTANDING OBLIGATION STILL DUE TO
PLAINTIFFS AND NEED NO PROOF.

II.

THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT FOR ALLEGED FAILURE OF PLAINTIFFS
TO PRESENT COMPUTATION OF THE AMOUNT BEING CLAIMED AS DEFENDANT JUDICIALLY
ADMITTED HAVING RECEIVED THE DEMAND LETTER DATED OCTOBER 22, 1997 WITH
COMPUTATION OF THE BALANCE DUE.

III.

THE TRIAL COURT ERRED IN DISMISSING THE COMPLAINT ON THE GROUND THAT THE DEFENDANT
FULLY PAID THE CLAIMS OF PLAINTIFFS BASED ON THE ALLEGED RECEIPT OF PAYMENT BY
ADORACION LOSLOSO FROM ANA MARIE CONCEPCION MAGLASANG WHICH HAS NOTHING TO DO
WITH THE JUDICIALLY ADMITTED OBLIGATION OF APPELLEE."23

Invoking the rule on judicial admission, petitioners insist that respondent admitted in her Answer with Compulsory
Counterclaim that she had paid only a total amount of P2 million and that her unpaid obligation amounts to
P200,000.00.24 They thus maintain that the RTC and the CA erred in concluding that said amount had already been
paid by respondent. Petitioners add that respondent’s total liability as shown in the latter’s statement of account was
erroneously computed for failure to compound the monthly interest agreed upon.25 Petitioners also claim that the RTC
and the CA erred in giving credence to the receipt presented by respondent to show that her unpaid obligation had
already been paid having been allegedly given to a person who was not armed with authority to receive payment. 26

The petition is without merit.

It is undisputed that the parties entered into a contract to sell a house and lot for a total consideration of P2 million.
Considering that the property was payable in installment, they likewise agreed on the payment of interest as well as
penalty in case of default. It is likewise settled that respondent was able to pay the total purchase price of P2 million
ahead of the agreed term. Afterwhich, they agreed on the remaining balance by way of interest and penalties which is
P200,000.00. Considering that the term of payment was not strictly followed and the purchase price had already been
fully paid by respondent, the latter presented to petitioners her computation of her liabilities for interests and penalties
which was agreed to by petitioners. Petitioners also manifested their conformity to the statement of account prepared
by respondent.

In paragraph (9) of petitioners’ Complaint, they stated that:

9) That the Plaintiffs answered the Defendant as follows: "if P200,000 is the correct balance, it is okay with us." x x x. 27

But in paragraph (17) thereof, petitioners claimed that defendant’s outstanding liability as of November 6, 1997 was
P487,384.15.28 Different amounts, however, were claimed in their demand letter and in their testimony in court.

16
With the foregoing factual antecedents, petitioners cannot be permitted to assert a different computation of the correct
amount of respondent’s liability.

It is noteworthy that in answer to petitioners’ claim of her purported unpaid obligation, respondent admitted in her
Answer with Compulsory Counterclaim that she paid a total amount of P2 million representing the purchase price of the
subject house and lot. She then manifested to petitioners and conformed to by respondent that her only balance was
P200,000.00. Nowhere in her Answer did she allege the defense of payment. However, during the presentation of her
evidence, respondent submitted a receipt to prove that she had already paid the remaining balance. Both the RTC and
the CA concluded that respondent had already paid the remaining balance of P200,000.00. Petitioners now assail this,
insisting that the court should have maintained the judicial admissions of respondent in her Answer with Compulsory
Counterclaim, especially as to their agreed stipulations on interests and penalties as well as the existence of
outstanding obligations.

It is, thus, necessary to discuss the effect of failure of respondent to plead payment of its obligations.

Section 1, Rule 9 of the Rules of Court states that "defenses and objections not pleaded either in a motion to dismiss
or in the answer are deemed waived." Hence, respondent should have been barred from raising the defense of
payment of the unpaid P200,000.00. However, Section 5, Rule 10 of the Rules of Court allows the amendment to
conform to or authorize presentation of evidence, to wit:

Section 5. Amendment to conform to or authorize presentation of evidence. – When issues not raised by the pleadings
are tried with the express or implied consent of the parties, they shall be treated in all respects as if they had been
raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the
evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure
to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it
is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so with
liberality if the presentation of the merits of the action and the ends of substantial justice will be subserved thereby. The
court may grant a continuance to enable the amendment to be made.

The foregoing provision envisions two scenarios, namely, when evidence is introduced in an issue not alleged in the
pleadings and no objection was interjected; and when evidence is offered on an issue not alleged in the pleadings but
this time an objection was raised.29 When the issue is tried without the objection of the parties, it should be treated in all
respects as if it had been raised in the pleadings.30 On the other hand, when there is an objection, the evidence may
be admitted where its admission will not prejudice him.31

Thus, while respondent judicially admitted in her Answer that she only paid P2 million and that she still owed petitioners
P200,000.00, respondent claimed later and, in fact, submitted an evidence to show that she already paid the whole
amount of her unpaid obligation. It is noteworthy that when respondent presented the evidence of payment, petitioners
did not object thereto. When the receipt was formally offered as evidence, petitioners did not manifest their objection to
the admissibility of said document on the ground that payment was not an issue. Apparently, petitioners only denied
receipt of said payment and assailed the authority of Losloso to receive payment. Since there was an implied consent
on the part of petitioners to try the issue of payment, even if no motion was filed and no amendment of the pleading
has been ordered,32 the RTC cannot be faulted for admitting respondent’s testimonial and documentary evidence to
prove payment.33

As stressed by the Court in Royal Cargo Corporation v. DFS Sports Unlimited, Inc., 34

The failure of a party to amend a pleading to conform to the evidence adduced during trial does not preclude
adjudication by the court on the basis of such evidence which may embody new issues not raised in the pleadings. x x
x Although, the pleading may not have been amended to conform to the evidence submitted during trial, judgment may
nonetheless be rendered, not simply on the basis of the issues alleged but also on the issues discussed and the
assertions of fact proved in the course of the trial. The court may treat the pleading as if it had been amended to
conform to the evidence, although it had not been actually amended. x x x Clearly, a court may rule and render
judgment on the basis of the evidence before it even though the relevant pleading had not been previously amended,
so long as no surprise or prejudice is thereby caused to the adverse party. Put a little differently, so long as the basic
requirements of fair play had been met, as where the litigants were given full opportunity to support their respective
contentions and to object to or refute each other's evidence, the court may validly treat the pleadings as if they had
been amended to conform to the evidence and proceed to adjudicate on the basis of all the evidence before it.
(Emphasis supplied)35

To be sure, petitioners were given ample opportunity to refute the fact of and present evidence to prove payment.

With the evidence presented by the contending parties, the more important question to resolve is whether or not
respondent’s obligation had already been extinguished by payment.

We rule in the affirmative as aptly held by the RTC and the CA.

Respondent’s obligation consists of payment of a sum of money. In order to extinguish said obligation, payment should
be made to the proper person as set forth in Article 1240 of the Civil Code, to wit:

17
Article 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor
in interest, or any person authorized to receive it. (Emphasis supplied)

The Court explained in Cambroon v. City of Butuan,36 cited in Republic v. De Guzman,37 to whom payment should be
made in order to extinguish an obligation:

Payment made by the debtor to the person of the creditor or to one authorized by him or by the law to receive it
extinguishes the obligation. When payment is made to the wrong party, however, the obligation is not extinguished as
to the creditor who is without fault or negligence even if the debtor acted in utmost good faith and by mistake as to the
person of the creditor or through error induced by fraud of a third person.

In general, a payment in order to be effective to discharge an obligation, must be made to the proper person. Thus,
payment must be made to the obligee himself or to an agent having authority, express or implied, to receive the
particular payment. Payment made to one having apparent authority to receive the money will, as a rule, be treated as
though actual authority had been given for its receipt. Likewise, if payment is made to one who by law is authorized to
act for the creditor, it will work a discharge. The receipt of money due on a judgment by an officer authorized by law to
accept it will, therefore, satisfy the debt.38

Admittedly, payment of the remaining balance of P200,000.00 was not made to the creditors themselves. Rather, it
was allegedly made to a certain Losloso. Respondent claims that Losloso was the authorized agent of petitioners, but
the latter dispute it.

Losloso’s authority to receive payment was embodied in petitioners’ Letter 39 addressed to respondent, dated August 7,
1997, where they informed respondent of the amounts they advanced for the payment of the 1997 real estate taxes. In
said letter, petitioners reminded respondent of her remaining balance, together with the amount of taxes paid. Taking
into consideration the busy schedule of respondent, petitioners advised the latter to leave the payment to a certain
"Dori" who admittedly is Losloso, or to her trusted helper. This is an express authority given to Losloso to receive
payment.

Moreover, as correctly held by the CA:

Furthermore, that Adoracion Losloso was indeed an agent of the appellant spouses is borne out by the following
admissions of plaintiff-appellant Atty. Miniano dela Cruz, to wit:

Q: You would agree with me that you have authorized this Doiry Losloso to receive payment of whatever balance is
due you coming from Ana Marie Concepcion, that is correct?

A: In one or two times but not total authority, sir.

Q: Yes, but you have authorized her to receive payment?

A: One or two times, yes x x x. (TSN, June 28, 1999, pp. 16-17)40

Thus, as shown in the receipt signed by petitioners’ agent and pursuant to the authority granted by petitioners to
Losloso, payment made to the latter is deemed payment to petitioners. We find no reason to depart from the RTC and
the CA conclusion that payment had already been made and that it extinguished respondent's obligations.

WHEREFORE, premises considered, the petition is DENIED for lack of merit. The Court of Appeals Decision dated
March 31, 2005 and Resolution dated May 24, 2006 in CA-G.R. CV No. 83030, are AFFIRMED.

SO ORDERED.

G.R. No. 178537 February 11, 2008

SPS. RAFAEL P. ESTANISLAO AND ZENAIDA ESTANISLAO, petitioners,


vs.
EAST WEST BANKING CORPORATION, respondent.

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review of the Decision1 of the Court of Appeals dated April 13, 2007 in CA-G.R. CV No. 87114
which reversed and set aside the Decision of the Regional Trial Court of Antipolo City, Branch 73 in Civil Case No. 00-
5731. The appellate court entered a new judgment ordering petitioners spouses Estanislao to pay respondent East
West Banking Corporation P4,275,919.65 plus interest and attorney’s fees. Also assailed is the Resolution 2dated June
25, 2007 denying the motion for reconsideration.

18
The facts are as follows:

On July 24, 1997, petitioners obtained a loan from the respondent in the amount of P3,925,000.00 evidenced by a
promissory note and secured by two deeds of chattel mortgage dated July 10, 1997: one covering two dump trucks and
a bulldozer to secure the loan amount of P2,375,000.00, and another covering bulldozer and a wheel loader to secure
the loan amount of P1,550,000.00. Petitioners defaulted in the amortizations and the entire obligation became due and
demandable.

On April 10, 2000, respondent bank filed a suit for replevin with damages, praying that the equipment covered by the
first deed of chattel mortgage be seized and delivered to it. In the alternative, respondent prayed that petitioners be
ordered to pay the outstanding principal amount of P3,846,127.73 with 19.5% interest per annum reckoned from
judicial demand until fully paid, exemplary damages of P50,000.00, attorney’s fees equivalent to 20% of the total
amount due, other expenses and costs of suit.

The case was filed in the Regional Trial Court of Antipolo and raffled to Branch 73 thereof.

Subsequently, respondent moved for suspension of the proceedings on account of an earnest attempt to arrive at an
amicable settlement of the case. The trial court suspended the proceedings, and during the course of negotiations, a
deed of assignment3 dated August 16, 2000 was drafted by the respondent, which provides in part, that:

x x x the ASSIGNOR is indebted to the ASSIGNEE in the aggregate sum of SEVEN MILLION THREE
HUNDRED FIVE THOUSAND FOUR HUNDRED FIFTY NINE PESOS and FIFTY TWO CENTAVOS
(P7,305,459.52), Philippine currency, inclusive of accrued interests and penalties as of August 16, 2000,
and in full payment thereof, the ASSIGNOR does hereby ASSIGN, TRANSFER and CONVEY unto the
ASSIGNEE those motor vehicles, with all their tools and accessories, more particularly described as follows:

Make : Isuzu Dump Truck

xxx

Make : Isuzu Dump Truck

xxx

Make : x x x Caterpillar Bulldozer x x x

That the ASSIGNEE hereby accepts the assignment in full payment of the above-mentioned debt x x x.
(Emphasis supplied)

Petitioners affixed their signatures on the deed of assignment. However, for some unknown reason, respondent bank’s
duly authorized representative failed to sign the deed.

On October 6, 2000 and March 8, 2001, respectively, petitioners completed the delivery of the heavy equipment
mentioned in the deed of assignment – two dump trucks and a bulldozer – to respondent, which accepted the same
without protest or objection.

However, on June 20, 2001, respondent filed a manifestation and motion to admit an amended complaint for the
seizure and delivery of two more heavy equipment – the bulldozer and wheel loader – which are covered under the
second deed of chattel mortgage. Respondent claimed that its representative inadvertently failed to include the second
deed of chattel mortgage among the documents forwarded to its counsel when the original complaint was being
drafted. Respondent likewise claimed that petitioners were given a chance to submit a refinancing scheme that would
allow them to keep the remaining two heavy equipment, but they failed to come up with such a scheme despite
repeated promises to do so.

Respondent’s amended complaint for replevin alleged that petitioners’ outstanding indebtedness as of June 14, 2001
stood at P4,275,919.61 which is more or less equal to the aggregate value of the additional units of heavy equipment
sought to be recovered. It also prayed that, in the event the two heavy equipment could not be replevied, petitioners be
ordered to pay the outstanding sum of P3,846,127.73 with 19.5% interest per annum reckoned from January 24, 1998,
compound interest, exemplary damages of P50,000.00, attorney’s fees equivalent to 20% of the total amount due,
other expenses and costs of suit.

Petitioners sought to dismiss the amended complaint. They alleged that their previous payments on loan amortizations,
the execution of the deed of assignment on August 16, 2000, and respondent’s acceptance of the three units of heavy
equipment, had the effect of full payment or satisfaction of their total outstanding obligation which is a bar on
respondent bank from recovering any more amounts from them. By way of counterclaim, petitioners sought the award
of nominal damages in the amount of P500,000.00, moral damages in the amount of P500,000.00, exemplary
damages in the amount of P500,000.00, attorney’s fees, litigation expenses, interest and costs.

19
On March 14, 2006, the trial court dismissed the amended complaint for lack of merit. It held that the deed of
assignment and the petitioners’ delivery of the heavy equipment effectively extinguished petitioners’ total loan
obligation. It also held that respondent was estopped from further collecting from the petitioners when it accepted,
without any protest, delivery of the three units of heavy equipment as full and complete satisfaction of the petitioners’
total loan obligation. Respondent likewise failed to timely rectify its alleged mistake in the original complaint and deed
of assignment, taking almost a year to act.

Respondent bank appealed to the Court of Appeals, which reversed the trial court’s decision, the dispositive portion of
which reads:

WHEREFORE, premises considered, the present appeal is hereby GRANTED. The Decision dated March 14,
2006 of the Regional Trial Court of Antipolo City, Branch 73 in Civil Case No. 00-5731 is hereby REVERSED
and SET ASIDE. A new judgment is hereby entered ordering the defendants-appellees to pay, jointly and
severally, plaintiff-appellant East West Banking Corporation the sum of FOUR MILLION TWO HUNDRED
SEVENTY FIVE THOUSAND NINE HUNDRED NINETEEN and 69/100 (P4,275,919.69) per Statement of
Account as of June 14, 2001 (Exh. "E", Records, p.328) with interest at 12% per annum from June 15, 2001
until full payment thereof. Defendants-appellees are likewise ordered to pay the plaintiff-appellant attorney’s
fees in the sum equivalent to ten per cent (10%) of the total amount due.

No pronouncement as to costs.

SO ORDERED.4

The reversal of the lower court’s decision hinges on: (1) the appellate court’s finding that the deed of assignment
cannot bind the respondent because it did not sign the same. The appellate court ruled that the assignment contract
was never perfected although it was prepared and drafted by the respondent; (2) respondent was not estopped by its
own declarations in the deed of assignment, because such declarations were the result of "ignorance founded upon an
innocent mistake" and "plain oversight" on the part of respondent’s staff in the bank’s loan operations department, who
failed to forward the complete documents pertaining to petitioners’ account to the bank’s legal department, such that
when the original complaint for replevin was prepared, the second deed of chattel mortgage covering two other pieces
of heavy equipment was inadvertently excluded; (3) petitioners are aware that there were five pieces of heavy
equipment under chattel mortgage for an outstanding balance of over P7 million; and (4) the appellate court held that
even after the delivery of the heavy equipment covered by the deed of assignment, the petitioners continued to
negotiate with the respondent on a possible refinancing scheme that will enable them to retain the two other units of
heavy equipment still in their possession and which are the subject of the second deed of chattel mortgage.

Petitioners argue that: a) the appellate court erred in ordering the payment of the principal obligation in a replevin suit
which it erroneously treated as a collection case; b) the deed of assignment is binding between the parties although it
was not signed by the respondent, constituting as it did an offer which they validly accepted; and c) the respondent is
estopped from collecting or foreclosing on the second deed of chattel mortgage.

On the other hand, respondent argues that: a) the deed of assignment produced no legal effect between the parties for
failure of the respondent to sign the same; b) the deed was founded on a mistake on its part because it honestly
believed that only one chattel mortgage had been constituted to secure the petitioners’ obligation; c) the non-inclusion
of the second deed of chattel mortgage in the original complaint was a case of "plain oversight" on the part of the loan
operations unit of respondent bank, which failed to forward to the legal department the complete documents pertaining
to the petitioners’ loan account; d) the continued negotiations in August 2001 between the parties, after delivery of the
three units of heavy equipment, proves that petitioners acknowledged their continuing obligations to respondent under
the second deed of mortgage; and, e) the deed of assignment did not have the effect of novating the original loan
obligation.

The issue for resolution is: Did the deed of assignment – which expressly provides that the transfer and conveyance to
respondent of the three units of heavy equipment, and its acceptance thereof, shall be in full payment of the
petitioners’ total outstanding obligation to the latter – operate to extinguish petitioners’ debt to respondent, such that
the replevin suit could no longer prosper?

We find merit in the petition.

The appellate court erroneously denominated the replevin suit as a collection case. A reading of the original and
amended complaints show that what the respondent initiated was a pure replevin suit, and not a collection case.
Recovery of the heavy equipment was the principal aim of the suit; payment of the total obligation was merely an
alternative prayer which respondent sought in the event manual delivery of the heavy equipment could no longer be
made.

Replevin, broadly understood, is both a form of principal remedy and a provisional relief. It may refer either to the
action itself, i.e., to regain the possession of personal chattels being wrongfully detained from the plaintiff by another, or
to the provisional remedy that would allow the plaintiff to retain the thing during the pendency of the action and hold
it pendente lite.5

20
The deed of assignment was a perfected agreement which extinguished petitioners’ total outstanding obligation to the
respondent. The deed explicitly provides that the assignor (petitioners), "in full payment" of its obligation in the
amount of P7,305,459.52, shall deliver the three units of heavy equipment to the assignee (respondent),
which"accepts the assignment in full payment of the above-mentioned debt." This could only mean that should
petitioners complete the delivery of the three units of heavy equipment covered by the deed, respondent’s credit would
have been satisfied in full, and petitioners’ aggregate indebtedness of P7,305,459.52 would then be considered to
have been paid in full as well.

The nature of the assignment was a dation in payment, whereby property is alienated to the creditor in satisfaction of a
debt in money. Such transaction is governed by the law on sales. 6 Even if we were to consider the agreement as a
compromise agreement, there was no need for respondent’s signature on the same, because with the delivery of the
heavy equipment which the latter accepted, the agreement was consummated. Respondent’s approval may be inferred
from its unqualified acceptance of the heavy equipment.

Consent to contracts is manifested by the meeting of the offer and the acceptance of the thing and the cause which are
to constitute the contract; the offer must be certain and the acceptance absolute.7 The acceptance of an offer must be
made known to the offeror, and unless the offeror knows of the acceptance, there is no meeting of the minds of the
parties, no real concurrence of offer and acceptance.8 Upon due acceptance, the contract is perfected, and from that
moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good faith, usage and law. 9

With its years of banking experience, resources and manpower, respondent bank is presumed to be familiar with the
implications of entering into the deed of assignment, whose terms are categorical and left nothing for interpretation.
The alleged non-inclusion in the deed of certain units of heavy equipment due to inadvertence, plain oversight or
mistake, is tantamount to inexcusable manifest negligence, which should not invalidate the juridical tie that was
created.10 Respondent is presumed to have maintained a high level of meticulousness in its dealings with petitioners.
The business of a bank is affected with public interest; thus, it makes a sworn profession of diligence and
meticulousness in giving irreproachable service.11

Besides, respondent’s protestations of mistake and plain oversight are self-serving. The evidence show that from
August 16, 2000 (date of the deed of assignment) up to March 8, 2001 (the date of delivery of the last unit of heavy
equipment covered under the deed), respondent did not raise any objections nor make any move to question,
invalidate or rescind the deed of assignment. It was not until June 20, 2001 that respondent raised the issue of its
alleged mistake by filing an amended complaint for replevin involving different chattels, although founded on the same
principal obligation.

The legal presumption is always on the validity of contracts.12 In order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally considered.13 When respondent accepted delivery of
all three units of heavy equipment under the deed of assignment, there could be no doubt that it intended to be bound
under the agreement.

Since the agreement was consummated by the delivery on March 8, 2001 of the last unit of heavy equipment under the
deed, petitioners are deemed to have been released from all their obligations to respondent.

Since there is no more credit to collect, no principal obligation to speak of, then there is no more second deed of chattel
mortgage that may subsist. A chattel mortgage cannot exist as an independent contract since its consideration is the
same as that of the principal contract. Being a mere accessory contract, its validity would depend on the validity of the
loan secured by it.14 This being so, the amended complaint for replevin should be dismissed, because the chattel
mortgage agreement upon which it is based had been rendered ineffectual.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals dated April 13, 2007 in CA-G.R. CV
No. 87114 and its Resolution dated June 25, 2007 are hereby SET ASIDE. The March 14, 2006 decision of the
Regional Trial Court of Antipolo, Branch 73, which dismisses Civil Case No. 00-5731, is hereby REINSTATED.

SO ORDERED.

G.R. No. 172592 July 9, 2008

SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG, Petitioners,


vs.
ROBAN LENDING CORPORATION, Respondent.

AUSTRIA-MARTINEZ,*

DECISION

CARPIO MORALES, J.:

21
On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-
Ong obtained several loans from Roban Lending Corporation (respondent) in the total amount ofP4,000,000.00. These
loans were secured by a real estate mortgage on petitioners’ parcels of land located in Binauganan, Tarlac City and
covered by TCT No. 297840.1

On February 12, 2001, petitioners and respondent executed an Amendment to Amended Real Estate
Mortgage2consolidating their loans inclusive of charges thereon which totaled P5,916,117.50. On even date, the
parties executed a Dacion in Payment Agreement3 wherein petitioners assigned the properties covered by TCT No.
297840 to respondent in settlement of their total obligation, and a Memorandum of Agreement 4 reading:

That the FIRST PARTY [Roban Lending Corporation] and the SECOND PARTY [the petitioners] agreed to consolidate
and restructure all aforementioned loans, which have been all past due and delinquent since April 19, 2000, and
outstanding obligations totaling P5,916,117.50. The SECOND PARTY hereby sign [sic] another promissory note in the
amount of P5,916,117.50 (a copy of which is hereto attached and forms xxx an integral part of this document), with a
promise to pay the FIRST PARTY in full within one year from the date of the consolidation and restructuring, otherwise
the SECOND PARTY agree to have their "DACION IN PAYMENT" agreement, which they have executed and signed
today in favor of the FIRST PARTY be enforced[.]5

In April 2002 (the day is illegible), petitioners filed a Complaint,6 docketed as Civil Case No. 9322, before the Regional
Trial Court (RTC) of Tarlac City, for declaration of mortgage contract as abandoned, annulment of deeds, illegal
exaction, unjust enrichment, accounting, and damages, alleging that the Memorandum of Agreement and the Dacion in
Payment executed are void for being pactum commissorium.7

Petitioners alleged that the loans extended to them from July 14, 1999 to March 20, 2000 were founded on several
uniform promissory notes, which provided for 3.5% monthly interest rates, 5% penalty per month on the total amount
due and demandable, and a further sum of 25% attorney’s fees thereon,8 and in addition, respondent exacted certain
sums denominated as "EVAT/AR."9 Petitioners decried these additional charges as "illegal, iniquitous, unconscionable,
and revolting to the conscience as they hardly allow any borrower any chance of survival in case of default."10

Petitioners further alleged that they had previously made payments on their loan accounts, but because of the illegal
exactions thereon, the total balance appears not to have moved at all, hence, accounting was in order. 11

Petitioners thus prayed for judgment:

a) Declaring the Real Estate Mortgage Contract and its amendments x x x as null and void and without legal
force and effect for having been renounced, abandoned, and given up;

b) Declaring the "Memorandum of Agreement" xxx and "Dacion in Payment" x x x as null and void for
beingpactum commissorium;

c) Declaring the interests, penalties, Evat [sic] and attorney’s fees assessed and loaded into the loan accounts
of the plaintiffs with defendant as unjust, iniquitous, unconscionable and illegal and therefore, stricken out or
set aside;

d) Ordering an accounting on plaintiffs’ loan accounts to determine the true and correct balances on their
obligation against legal charges only; and

e) Ordering defendant to [pay] to the plaintiffs: --

e.1 Moral damages in an amount not less than P100,000.00 and exemplary damages of P50,000.00;

e.2 Attorney’s fees in the amount of P50,000.00 plus P1,000.00 appearance fee per hearing; and

e.3 The cost of suit.12

as well as other just and equitable reliefs.

In its Answer with Counterclaim,13 respondent maintained the legality of its transactions with petitioners, alleging that:

xxxx

If the voluntary execution of the Memorandum of Agreement and Dacion in Payment Agreement novated the Real
Estate Mortgage then the allegation of Pactum Commissorium has no more legal leg to stand on;

The Dacion in Payment Agreement is lawful and valid as it is recognized x x x under Art. 1245 of the Civil Code as a
special form of payment whereby the debtor-Plaintiffs alienates their property to the creditor-Defendant in satisfaction
of their monetary obligation;

22
The accumulated interest and other charges which were computed for more than two (2) years would stand reasonable
and valid taking into consideration [that] the principal loan is P4,000,000 and if indeed it became beyond the Plaintiffs’
capacity to pay then the fault is attributed to them and not the Defendant[.]14

After pre-trial, the initial hearing of the case, originally set on December 11, 2002, was reset several times due to,
among other things, the parties’ efforts to settle the case amicably. 151avvphi1

During the scheduled initial hearing of May 7, 2003, the RTC issued the following order:

Considering that the plaintiff Wilfredo Ong is not around on the ground that he is in Manila and he is attending to a very
sick relative, without objection on the part of the defendant’s counsel, the initial hearing of this case is reset to June 18,
2003 at 10:00 o’clock in the morning.

Just in case [plaintiff’s counsel] Atty. Concepcion cannot present his witness in the person of Mr. Wilfredo Ong in the
next scheduled hearing, the counsel manifested that he will submit the case for summary judgment.16(Underscoring
supplied)

It appears that the June 18, 2003 setting was eventually rescheduled to February 11, 2004 at which both counsels
were present17 and the RTC issued the following order:

The counsel[s] agreed to reset this case on April 14, 2004, at 10:00 o’clock in the morning. However, the counsels are
directed to be ready with their memorand[a] together with all the exhibits or evidence needed to support their
respective positions which should be the basis for the judgment on the pleadings if the parties fail to settle the case in
the next scheduled setting.

x x x x18 (Underscoring supplied)

At the scheduled April 14, 2004 hearing, both counsels appeared but only the counsel of respondent filed a
memorandum.19

By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the basis of the pleadings that there was
no pactum commissorium, dismissed the complaint.20

On appeal,21 the Court of Appeals22 noted that

x x x [W]hile the trial court in its decision stated that it was rendering judgment on the pleadings, x x x what it actually
rendered was a summary judgment. A judgment on the pleadings is proper when the answer fails to tender an issue, or
otherwise admits the material allegations of the adverse party’s pleading. However, a judgment on the pleadings would
not have been proper in this case as the answer tendered an issue, i.e. the validity of the MOA and DPA. On the other
hand, a summary judgment may be rendered by the court if the pleadings, supporting affidavits, and other documents
show that, except as to the amount of damages, there is no genuine issue as to any material fact.23

Nevertheless, finding the error in nomenclature "to be mere semantics with no bearing on the merits of the case", 24the
Court of Appeals upheld the RTC decision that there was no pactum commissorium.25

Their Motion for Reconsideration26 having been denied,27 petitioners filed the instant Petition for Review on
Certiorari,28 faulting the Court of Appeals for having committed a clear and reversible error

I. . . . WHEN IT FAILED AND REFUSED TO APPLY PROCEDURAL REQUISITES WHICH WOULD


WARRANT THE SETTING ASIDE OF THE SUMMARY JUDGMENT IN VIOLATION OF APPELLANTS’
RIGHT TO DUE PROCESS;

II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN THIS CASE IS NECESSARY BECAUSE THE
FACTS ARE VERY MUCH IN DISPUTE;

III. . . . WHEN IT FAILED AND REFUSED TO HOLD THAT THE MEMORANDUM OF AGREEMENT (MOA)
AND THE DACION EN PAGO AGREEMENT (DPA) WERE DESIGNED TO CIRCUMVENT THE LAW
AGAINST PACTUM COMMISSORIUM; and

IV. . . . WHEN IT FAILED TO CONSIDER THAT THE MEMORANDUM OF AGREEMENT (MOA) AND THE
DACION EN PAGO (DPA) ARE NULL AND VOID FOR BEING CONTRARY TO LAW AND PUBLIC POLICY. 29

The petition is meritorious.

Both parties admit the execution and contents of the Memorandum of Agreement and Dacion in Payment. They differ,
however, on whether both contracts constitute pactum commissorium or dacion en pago.

23
This Court finds that the Memorandum of Agreement and Dacion in Payment constitute pactum commissorium, which
is prohibited under Article 2088 of the Civil Code which provides:

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to
the contrary is null and void."

The elements of pactum commissorium, which enables the mortgagee to acquire ownership of the mortgaged property
without the need of any foreclosure proceedings,30 are: (1) there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor
of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.31

In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no provisions for foreclosure
proceedings nor redemption. Under the Memorandum of Agreement, the failure by the petitioners to pay their debt
within the one-year period gives respondent the right to enforce the Dacion in Payment transferring to it ownership of
the properties covered by TCT No. 297840. Respondent, in effect, automatically acquires ownership of the properties
upon petitioners’ failure to pay their debt within the stipulated period.

Respondent argues that the law recognizes dacion en pago as a special form of payment whereby the debtor alienates
property to the creditor in satisfaction of a monetary obligation. 32 This does not persuade. In a true dacion en pago, the
assignment of the property extinguishes the monetary debt.33 In the case at bar, the alienation of the properties was by
way of security, and not by way of satisfying the debt.34 The Dacion in Payment did not extinguish petitioners’
obligation to respondent. On the contrary, under the Memorandum of Agreement executed on the same day as the
Dacion in Payment, petitioners had to execute a promissory note for P5,916,117.50 which they were to pay within one
year.35

Respondent cites Solid Homes, Inc. v. Court of Appeals36 where this Court upheld a Memorandum of
Agreement/Dacion en Pago.37 That case did not involve the issue of pactum commissorium.38

That the questioned contracts were freely and voluntarily executed by petitioners and respondent is of no
moment,pactum commissorium being void for being prohibited by law.39

Respecting the charges on the loans, courts may reduce interest rates, penalty charges, and attorney’s fees if they are
iniquitous or unconscionable.40

This Court, based on existing jurisprudence,41 finds the monthly interest rate of 3.5%, or 42% per annum
unconscionable and thus reduces it to 12% per annum. This Court finds too the penalty fee at the monthly rate of 5%
(60% per annum) of the total amount due and demandable – principal plus interest, with interest not paid when due
added to and becoming part of the principal and likewise bearing interest at the same rate, compounded monthly 42 –
unconscionable and reduces it to a yearly rate of 12% of the amount due, to be computed from the time of
demand.43 This Court finds the attorney’s fees of 25% of the principal, interests and interests thereon, and the penalty
fees unconscionable, and thus reduces the attorney’s fees to 25% of the principal amount only. 44

The prayer for accounting in petitioners’ complaint requires presentation of evidence, they claiming to have made
partial payments on their loans, vis a vis respondent’s denial thereof.45 A remand of the case is thus in order.

Prescinding from the above disquisition, the trial court and the Court of Appeals erred in holding that a summary
judgment is proper. A summary judgment is permitted only if there is no genuine issue as to any material fact and a
moving party is entitled to a judgment as a matter of law.46 A summary judgment is proper if, while the pleadings on
their face appear to raise issues, the affidavits, depositions, and admissions presented by the moving party show that
such issues are not genuine.47 A genuine issue, as opposed to a fictitious or contrived one, is an issue of fact that
requires the presentation of evidence.48 As mentioned above, petitioners’ prayer for accounting requires the
presentation of evidence on the issue of partial payment.

But neither is a judgment on the pleadings proper. A judgment on the pleadings may be rendered only when an answer
fails to tender an issue or otherwise admits the material allegations of the adverse party’s pleadings. 49 In the case at
bar, respondent’s Answer with Counterclaim disputed petitioners’ claims that the Memorandum of Agreement and
Dation in Payment are illegal and that the extra charges on the loans are unconscionable. 50Respondent disputed too
petitioners’ allegation of bad faith.51

WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET ASIDE. The Memorandum of
Agreement and the Dacion in Payment executed by petitioner- spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong
and respondent Roban Lending Corporation on February 12, 2001 are declared NULL AND VOID for beingpactum
commissorium.

In line with the foregoing findings, the following terms of the loan contracts between the parties are MODIFIED as
follows:

1. The monthly interest rate of 3.5%, or 42% per annum, is reduced to 12% per annum;

24
2. The monthly penalty fee of 5% of the total amount due and demandable is reduced to 12% per annum, to be
computed from the time of demand; and

3. The attorney’s fees are reduced to 25% of the principal amount only.

Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of receiving evidence on petitioners’
prayer for accounting.

SO ORDERED.

G.R. No. 181232 October 23, 2009

JOSEPH TYPINGCO, Petitioner,


vs.
LINA WONG LIM, JERRY SYCHINGHO, JACKSON SYCHINGHO, JOHNSON SYCHINGHO, and FAR EAST BANK
AND TRUST COMPANY, Respondents.

DECISION

CARPIO MORALES, J.:

Sometime between December 1996 and February 1997, respondents-spouses Lina Wong Lim (Lina) and Johnson
Sychingho (Johnson) borrowed from petitioner Joseph Typingco (Typingco) the sum of US$600,000 which was later
restructured, payable on or before December 31, 1997, under a promissory note executed by the spouses and co-
signed by their children-co-respondents Jerry Sychingho (Jerry) and Jackson Sychingho (Jackson) as sureties. 1

Following their default in payment, Lina, Jerry, and Jackson conveyed on January 29, 1998 to Typingco via dacion en
pago their house and lot in Greenhills, San Juan (subject property), covered by Transfer Certificate of Title (TCT) No.
6259-R (the title) of the Register of Deeds of San Juan, in the name of Lina and her sons, after first paying respondent
Far East Bank and Trust Company (FEBTC) the balance of a promissory note to clear the title of a Real Estate
Mortgage annotated thereon in favor of FEBTC.2

Typingco’s repeated demands for the delivery of the owner’s duplicate copy of the title, the last of which was by letter
of March 2, 1998,3 having remained unheeded, he filed a complaint for specific performance and recovery of the title
against respondents4 Sychinghos and FEBTC before the Quezon City Regional Trial Court (RTC).

Respondents Sychinghos averred in the main that it was FEBTC that was unlawfully withholding delivery of the owner’s
duplicate copy of the title despite full payment of the mortgage loan 5 with it.

FEBTC, which was absorbed after a merger by Bank of the Philippine Islands (BPI), contended that spouses Lina and
Johnson had unsettled obligations as sureties for JSY International Philippines, Inc. and J&J Brothers Corporation
under Comprehensive Surety Agreements which they had executed authorizing FEBTC to retain and proceed against
their properties in its possession; that the Real Estate Mortgage annotated on the title was a continuing security for
their present and future obligations; and that Typingco was not a buyer in good faith, he having failed to conduct further
inquiry on the status of the subject property given that the mortgage in its favor was annotated on the title. 6

At the pre-trial, the parties clarified that the subject matter of the case was only 1/3 inchoate portion of the subject
property7 or that pertaining to Lina as co-owner (as the 2/3 belongs to her sons Jerry and Jackson), she being a
signatory to the Real Estate Mortgage, along with her sons, as well as to the Comprehensive Surety Agreements,
along with her husband, both documents in favor of FEBTC.

By Decision of March 14, 2003,8 Branch 82 of the Quezon City RTC dismissed the complaint, holding that Typingco
was bound by the Real Estate Mortgage in favor of FEBTC not only because the same was duly annotated on the title,
but also because he failed to verify the status of the subject property despite his awareness of the said mortgage.

Typingco’s Motion for Reconsideration having been denied by Order dated May 23, 2003, 9 he appealed10 to the Court
of Appeals. The appellate court dismissed Typingco’s appeal by Decision of September 13, 2007,11 it sustaining for the
most part the position of BPI.

Typingco’s Motion for Reconsideration having been denied by Resolution dated January 10, 2008,12 he (hereafter
petitioner) filed the present Petition for Review on Certiorari.

Petitioner argues that the copy of the Real Estate Mortgage submitted by BPI (Exhibit "10") is inadmissible, the witness
who identified it having no personal knowledge of its existence and due execution, hence, should not be considered
annotated on the title; and that there was no evidence that respondents Sychinghos had other unpaid obligations with
FEBTC for which the title should continue to stand as security.13

25
By Manifestation of June 12, 2008, individual respondents informed the Court of Johnson’s passing during the
proceedings in the trial court and their waiving of the filing of a Comment to the present petition, given that their
position before the trial and appellate courts14 is now also petitioner’s.

BPI, on the other hand, maintains its position before the trial court, adding that the due execution and authenticity of
Exhibit "10," a notarized instrument, need not be proved unlike that of a private writing.15

The petition is impressed with merit.

Dacion en pago is the delivery and transmission of ownership of another thing by the debtor to the creditor as an
accepted equivalent of performance of an obligation. It partakes of the nature of a contract of sale, where the thing
offered by the debtor is the object of the contract, while the debt is the consideration or purchase price.16

The pivotal issue is thus whether respondent Sychinghos had the right to sell or convey title to the subject property at
the time of the dacion en pago. The Court finds in the affirmative.

There having been no previous foreclosure of the Real Estate Mortgage on the subject property, respondent
Sychinghos’ ownership thereof remained intact. Indeed, a mortgage does not affect the ownership of the property as it
is nothing more than a lien thereon serving as security for a debt. The mortgagee does not acquire title to the
mortgaged real estate unless he purchases it at a public auction, and it is not redeemed within the period provided for
by the Rules of Court.17 This applies a fortiori to the present case where only 1/3, not the
whole, of the subjectproperty was actually encumbered to FEBTC.1avvph!1

With respect to whatever amount Lina and her sons may still owe BPI (then FEBTC), the Court finds that this is not a
concern of petitioner as he is not a party to the loan documents covering it. Since petitioner agreed to the full
extinguishment of respondents spouses’ then outstanding obligation in view of the unconditional conveyance to him of
the subject property,18 there is a perfected and enforceable dacion en pago. He should thus enjoy full entitlement to the
subject property.

The question of whether the subject property stands as a continuing security for any outstanding obligations of Lina
and her sons to BPI (then FEBTC) should not detain the Court any further. Surrender of the certificate of title will not
impair any existing mortgage on the subject property. It is an elementary principle in civil law that a real estate
mortgage subsists notwithstanding changes in ownership, and all subsequent purchasers of the property must respect
the mortgage.19

Finally, while the remedy of petitioner is to file a petition in court, following Presidential Decree No. 1529, to compel
then FEBTC (now BPI) to surrender the owner’s duplicate copy of the title to the Register of Deeds of San Juan to
facilitate the issuance of a new title in his name,20 the Court deems his action for specific performance
and recoveryof the title as substantial compliance with the prescribed procedure. To require him to institute a new
action seeking essentially the same relief would be to encourage endless litigations and multiplicity of suits – an end
abhorrent to the proper administration of justice.

WHEREFORE, the challenged Decision of the Court of Appeals is REVERSED and SET ASIDE. Bank of the Philippine
Islands, to which Far East Bank and Trust Company was merged, is ordered to surrender the owner’s duplicate copy of
TCT No. 6259-R to the Register of Deeds of San Juan, Metro Manila in order to process the issuance of a new title
over the subject property in the name of petitioner, Joseph Typingco.

SO ORDERED.

G.R. No. 190375 February 8, 2012

TAN SHUY, Petitioner,


vs.
Spouses GUILLERMO MAULAWIN and PARING CARIÑO-MAULAWIN, Respondents.

DECISION

SERENO, J.:

Before the Court is a Petition for Review on Certiorari filed under Rule 45 of the Rules of Court, assailing the 31 July
2009 Decision and 13 November 2009 Resolution of the Court of Appeals (CA). 1

Facts

Petitioner Tan Shuy is engaged in the business of buying copra and corn in the Fourth District of Quezon Province.
According to Vicente Tan (Vicente), son of petitioner, whenever they would buy copra or corn from crop sellers, they
would prepare and issue a pesada in their favor. A pesada is a document containing details of the transaction,
including the date of sale, the weight of the crop delivered, the trucking cost, and the net price of the crop. He then

26
explained that when a pesada contained the annotation "pd" on the total amount of the purchase price, it meant that
the crop delivered had already been paid for by petitioner. 2

Guillermo Maulawin (Guillermo), respondent in this case, is a farmer-businessman engaged in the buying and selling of
copra and corn. On 10 July 1997, Tan Shuy extended a loan to Guillermo in the amount of P 420,000. In consideration
thereof, Guillermo obligated himself to pay the loan and to sell lucad or copra to petitioner. Below is a reproduction of
the contract:3

No2567 Lopez, Quezon July 10, 1997

Tinanggap ko kay G. TAN SHUY ang halagang …………………………………………………………….


(P420,000.00) salaping Filipino. Inaako ko na isusulit sa kanya ang aking LUCAD at babayaran ko ang
nasabing halaga. Kung hindi ako makasulit ng LUCAD o makabayad bago sumapit ang …………………….,
19 …… maaari niya akong ibigay sa may kapangyarihan. Kung ang pagsisingilan ay makakarating sa
Juzgado ay sinasagutan ko ang lahat ng kaniyang gugol.

P………………………................ [Sgd. by respondent]


…………………………………….
Lagda

Most of the transactions involving Tan Shuy and Guillermo were coursed through Elena Tan, daughter of petitioner.
She served as cashier in the business of Tan Shuy, who primarily prepared and issued the pesada. In case of her
absence, Vicente would issue the pesada. He also helped his father in buying copra and granting loans to customers
(copra sellers). According to Vicente, part of their agreement with Guillermo was that they would put the annotation
"sulong" on the pesada when partial payment for the loan was made.

Petitioner alleged that despite repeated demands, Guillermo remitted only P 23,000 in August 1998 and P 5,500 in
October 1998, or a total of P 28,500.4 He claimed that respondent had an outstanding balance of P 391,500. Thus,
convinced that Guillermo no longer had the intention to pay the loan, petitioner brought the controversy to the Lupon
Tagapamayapa. When no settlement was reached, petitioner filed a Complaint before the Regional Trial Court (RTC).

Respondent Guillermo countered that he had already paid the subject loan in full. According to him, he continuously
delivered and sold copra to petitioner from April 1998 to April 1999. Respondent said they had an oral arrangement
that the net proceeds thereof shall be applied as installment payments for the loan. He alleged that his deliveries
amounted to P 420,537.68 worth of copra. To bolster his claim, he presented copies of pesadas issued by Elena and
Vicente. He pointed out that the pesadas did not contain the notation "pd," which meant that actual payment of the net
proceeds from copra deliveries was not given to him, but was instead applied as loan payment. He averred that Tan
Shuy filed a case against him, because petitioner got mad at him for selling copra to other copra buyers.

On 27 July 2007, the trial court issued a Decision, ruling that the net proceeds from Guillermo’s copra deliveries –
represented in the pesadas, which did not bear the notation "pd" – should be applied as installment payments for the
loan. It gave weight and credence to the pesadas, as their due execution and authenticity was established by Elena
and Vicente, children of petitioner.5 However, the court did not credit the net proceeds from 12 pesadas, as they were
deliveries for corn and not copra. According to the RTC, Guillermo himself testified that it was the net proceeds from
the copra deliveries that were to be applied as installment payments for the loan. Thus, it ruled that the total amount
of P 41,585.25, which corresponded to the net proceeds from corn deliveries, should be deducted from the amount
of P 420,537.68 claimed by Guillermo to be the total value of his copra deliveries. Accordingly, the trial court found that
respondent had not made a full payment for the loan, as the total creditable copra deliveries merely amounted
to P 378,952.43, leaving a balance of P 41,047.57 in his loan.6

On 31 July 2009, the CA issued its assailed Decision, which affirmed the finding of the trial court. According to the
appellate court, petitioner could have easily belied the existence of the pesadas and the purpose for which they were
offered in evidence by presenting his daughter Elena as witness; however, he failed to do so. Thus, it gave credence to
the testimony of respondent Guillermo in that the net proceeds from the copra deliveries were applied as installment
payments for the loan.7 On 13 November 2009, the CA issued its assailed Resolution, which denied the Motion for
Reconsideration of petitioner.

Petitioner now assails before this Court the aforementioned Decision and Resolution of the CA and presents the
following issues:

Issues

1. Whether the pesadas require authentication before they can be admitted in evidence, and

2. Whether the delivery of copra amounted to installment payments for the loan obtained by respondents from
petitioner.

27
Discussion

As regards the first issue, petitioner asserts that the pesadas should not have been admitted in evidence, since they
were private documents that were not duly authenticated.8 He further contends that the pesadas were fabricated in
order to show that the goods delivered were copra and not corn. Finally, he argues that five of the pesadas mentioned
in the Formal Offer of Evidence of respondent were not actually offered. 9

With regard to the second issue, petitioner argues that respondent undertook two separate obligations – (1) to pay for
the loan in cash and (2) to sell the latter’s lucad or copra. Since their written agreement did not specifically provide for
the application of the net proceeds from the deliveries of copra for the loan, petitioner contends that he cannot be
compelled to accept copra as payment for the loan. He emphasizes that the pesadas did not specifically indicate that
the net proceeds from the copra deliveries were to be used as installment payments for the loan. He also claims that
respondent’s copra deliveries were duly paid for in cash, and that the pesadas were in fact documentary receipts for
those payments.

We reiterate our ruling in a line of cases that the jurisdiction of this Court, in cases brought before it from the CA, is
limited to reviewing or revising errors of law.10 Factual findings of courts, when adopted and confirmed by the CA, are
final and conclusive on this Court except if unsupported by the evidence on record. 11 There is a question of fact when
doubt arises as to the truth or falsehood of facts; or when there is a need to calibrate the whole evidence, considering
mainly the credibility of the witnesses and the probative weight thereof, the existence and relevancy of specific
surrounding circumstances, as well as their relation to one another and to the whole, and the probability of the
situation.12

Here, a finding of fact is required in the ascertainment of the due execution and authenticity of the pesadas, as well as
the determination of the true intention behind the parties’ oral agreement on the application of the net proceeds from
the copra deliveries as installment payments for the loan.13 This function was already exercised by the trial court and
affirmed by the CA. Below is a reproduction of the relevant portion of the trial court’s Decision:

x x x The defendant further averred that if in the receipts or "pesadas" issued by the plaintiff to those who delivered
copras to them there is a notation "pd" on the total amount of purchase price of the copras, it means that said amount
was actually paid or given by the plaintiff or his daughter Elena Tan Shuy to the seller of the copras. To prove his
averments the defendant presented as evidence two (2) receipts or pesadas issued by the plaintiff to a certain "Cariño"
(Exhibits "1" and "2" – defendant) showing the notation "pd" on the total amount of the purchase price for the copras.
Such claim of the defendant was further bolstered by the testimony of Apolinario Cariño which affirmed that he also sell
copras to the plaintiff Tan Shuy. He also added that he incurred indebtedness to the plaintiff and whenever he
delivered copras the amount of the copras sold were applied as payments to his loan. The witness also pointed out that
the plaintiff did not give any official receipts to those who transact business with him (plaintiff). This Court gave weight
and credence to the documents receipts (pesadas) (Exhibits "3" to "64") offered as evidence by the defendant which
does not bear the notation "pd" or paid on the total amount of the purchase price of copras appearing therein. Although
said "pesadas" were private instrument their execution and authenticity were established by the plaintiff’s daughter
Elena Tan and sometimes by plaintiff’s son Vicente Tan. x x x. 14 (Emphasis supplied)

In affirming the finding of the RTC, the CA reasoned thus:

In his last assigned error, plaintiff-appellant herein impugns the conclusion arrived at by the trial court, particularly with
respect to the giving of evidentiary value to Exhs. "3" to "64" by the latter in order to prove the claim of defendant-
appellee Guillermo that he had fully paid the subject loan already.

The foregoing deserves scant consideration.

Here, plaintiff-appellant could have easily belied the existence of Exhs. "3" to "64", the pesadas or receipts, and the
purposes for which they were offered in evidence by simply presenting his daughter, Elena Tan Shuy, but no effort to
do so was actually done by the former given that scenario.15 (Emphasis supplied)

We found no clear showing that the trial court and the CA committed reversible errors of law in giving credence and
according weight to the pesadas presented by respondents. According to Rule 132, Section 20 of the Rules of Court,
there are two ways of proving the due execution and authenticity of a private document, to wit:

SEC. 20. Proof of private document. – Before any private document offered as authentic is received in evidence, its
due execution and authenticity must be proved either:

(a) By anyone who saw the document executed or written; or

(b) By evidence of the genuineness of the signature or handwriting of the maker.

Any other private document need only be identified as that which it is claimed to be. (21a)

As reproduced above, the trial court found that the due execution and authenticity of the pesadas were "established by
the plaintiff’s daughter Elena Tan and sometimes by plaintiff’s son Vicente Tan."16 The RTC said:

28
On cross-examination, [Vicente] reiterated that he and her [sic] sister Elena Tan who acted as their cashier are helping
their father in their business of buying copras and mais. That witness agreed that in the business of buying copra and
mais of their father, if a seller is selling copra, a pesada is being issued by his sister. The pesada that she is preparing
consists of the date when the copra is being sold to the seller. Being familiar with the penmanship of Elena Tan, the
witness was shown a sample of the pesada issued by his sister Elena Tan. x x x

xxx xxx xxx

x x x. He clarified that in the "pesada" (Exh. "1") prepared by Elena and also in Exh "2", there appears on the lower
right hand portion of the said pesadas the letter "pd", the meaning of which is to the effect that the seller of the copra
has already been paid during that day. He also confirmed the penmanship and handwriting of his sister Ate Elena who
acted as a cashier in the pesada being shown to him. He was even made to compare the xerox copies of the pesadas
with the original copies presented to him and affirmed that they are faithful reproduction of the originals.17(Emphasis
supplied)

In any event, petitioner is already estopped from questioning the due execution and authenticity of the
pesadas.1âwphi1 As found by the CA, Tan Shuy "could have easily belied the existence of x x x the pesadas or
receipts, and the purposes for which they were offered in evidence by simply presenting his daughter, Elena Tan Shuy,
but no effort to do so was actually done by the former given that scenario." The pesadas having been admitted in
evidence, with petitioner failing to timely object thereto, these documents are already deemed sufficient proof of the
facts contained therein.18 We hereby uphold the factual findings of the RTC, as affirmed by the CA, in that the pesadas
served as proof that the net proceeds from the copra deliveries were used as installment payments for the debts of
respondents.19

Indeed, pursuant to Article 1232 of the Civil Code, an obligation is extinguished by payment or performance. There is
payment when there is delivery of money or performance of an obligation.20 Article 1245 of the Civil Code provides for
a special mode of payment called dation in payment (dación en pago). There is dation in payment when property is
alienated to the creditor in satisfaction of a debt in money. 21 Here, the debtor delivers and transmits to the creditor the
former’s ownership over a thing as an accepted equivalent of the payment or performance of an outstanding debt. 22 In
such cases, Article 1245 provides that the law on sales shall apply, since the undertaking really partakes – in one
sense – of the nature of sale; that is, the creditor is really buying the thing or property of the debtor, the payment for
which is to be charged against the debtor’s obligation.23 Dation in payment extinguishes the obligation to the extent of
the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by
agreement – express or implied, or by their silence – consider the thing as equivalent to the obligation, in which case
the obligation is totally extinguished.24

The trial court found thus:

x x x [T]he preponderance of evidence is on the side of the defendant. x x x The defendant explained that for the
receipts (pesadas) from April 1998 to April 1999 he only gets the payments for trucking while the total amount which
represent the total purchase price for the copras that he delivered to the plaintiff were all given to Elena Tan Shuy as
installments for the loan he owed to plaintiff. The defendant further averred that if in the receipts or "pesadas" issued by
the plaintiff to those who delivered copras to them there is a notation "pd" on the total amount of purchase price of the
copras, it means that said amount was actually paid or given by the plaintiff or his daughter Elena Tan Shuy to the
seller of the copras. To prove his averments the defendant presented as evidence two (2) receipts or pesadas issued
by the plaintiff to a certain "Cariño" (Exhibits "1" and "2" – defendant) showing the notation "pd" on the total amount of
the purchase price for the copras. Such claim of the defendant was further bolstered by the testimony of Apolinario
Cariño which affirmed that he also sell [sic] copras to the plaintiff Tan Shuy. He also added that he incurred
indebtedness to the plaintiff and whenever he delivered copras the amount of the copras sold were applied as
payments to his loan. The witness also pointed out that the plaintiff did not give any official receipts to those who
transact business with him (plaintiff). x x x

Be that it may, this Court cannot however subscribe to the averments of the defendant that he has fully paid the
amount of his loan to the plaintiff from the proceeds of the copras he delivered to the plaintiff as shown in the
"pesadas" (Exhibits "3" to "64"). Defendant claimed that based on the said "pesadas" he has paid the total amount of
P420,537.68 to the plaintiff. However, this Court keenly noted that some of the "pesadas" offered in evidence by the
defendant were not for copras that he delivered to the plaintiff but for "mais" (corn). The said pesadas for mais or corn
were the following, to wit:

xxx xxx xxx

To the mind of this Court the aforestated amount (P41,585.25) which the above listed pesadas show as payment for
mais or corn delivered by the defendant to the plaintiff cannot be claimed by the defendant to have been applied also
as payment to his loan with the plaintiff because he does not testify on such fact. He even stressed during his
testimony that it was the proceeds from the copras that he delivered to the plaintiff which will be applied as payments to
his loan. x x x Thus, equity dictates that the total amount of P41,585.25 which corresponds to the payment for "mais"
(corn) delivered by the plaintiff shall be deducted from the total amount of P420,537.68 which according to the
defendant based on the pesadas (Exhibits "3" to "64") that he presented as evidence, is the total amount of the
payment that he made for his loan to the plaintiff. x x x

xxx xxx xxx


29
Clearly from the foregoing, since the total amount of defendant’s loan to the plaintiff is P420,000.00 and the evidence
on record shows that the actual amount of payment made by the defendant from the proceeds of the copras he
delivered to the plaintiff is P378,952.43, the defendant is still indebted to the plaintiff in the amount of P41,047.53 (sic)
(P420,000.00-P378,952.43).25 (Emphasis supplied)

In affirming this finding of fact by the trial court, the CA cited the above-quoted portion of the RTC’s Decision and stated
the following:

In fact, as borne by the records on hand, herein defendant-appellee Guillermo was able to describe and spell out the
contents of Exhs. "3" to "64" which were then prepared by Elena Tan Shuy or sometimes by witness Vicente Tan.
Herein defendant-appellee Guillermo professed that since the release of the subject loan was subject to the condition
that he shall sell his copras to the plaintiff-appellant, the former did not already receive any money for the copras he
delivered to the latter starting April 1998 to April 1999. Hence, this Court can only express its approval to the apt
observation of the trial court on this matter[.]

xxx xxx xxx

Notwithstanding the above, however, this Court fully agrees with the pronouncement of the trial court that not all
amounts indicated in Exhs. "3" to "64" should be applied as payments to the subject loan since several of which clearly
indicated "mais" deliveries on the part of defendant-appellee Guillermo instead of "copras"[.]26 (Emphasis supplied)

The subsequent arrangement between Tan Shuy and Guillermo can thus be considered as one in the nature of dation
in payment. There was partial payment every time Guillermo delivered copra to petitioner, chose not to collect the net
proceeds of his copra deliveries, and instead applied the collectible as installment payments for his loan from Tan
Shuy. We therefore uphold the findings of the trial court, as affirmed by the CA, that the net proceeds from Guillermo’s
copra deliveries amounted to P 378,952.43. With this partial payment, respondent remains liable for the balance
totaling P 41,047.57.27

WHEREFORE the Petition is DENIED. The 31 July 2009 Decision and 13 November 2009 Resolution of the Court of
Appeals in CA-G.R. CV No. 90070 are hereby AFFIRMED.

SO ORDERED.

G.R. No. 171545 December 19, 2007

EQUITABLE PCI BANK,* AIMEE YU and BEJAN LIONEL APAS, Petitioners,


vs.
NG SHEUNG NGOR** doing business under the name and style "KEN MARKETING," KEN APPLIANCE
DIVISION, INC. and BENJAMIN E. GO, Respondents.

DECISION

CORONA, J.:

This petition for review on certiorari1 seeks to set aside the decision2 of the Court of Appeals (CA) in CA-G.R. SP No.
83112 and its resolution3 denying reconsideration.

On October 7, 2001, respondents Ng Sheung Ngor,4 Ken Appliance Division, Inc. and Benjamin E. Go filed an action
for annulment and/or reformation of documents and contracts 5 against petitioner Equitable PCI Bank (Equitable) and its
employees, Aimee Yu and Bejan Lionel Apas, in the Regional Trial Court (RTC), Branch 16 of Cebu
City.6 They claimed that Equitable induced them to avail of its peso and dollar credit facilities by offering low interest
rates7 so they accepted Equitable's proposal and signed the bank's pre-printed promissory notes on various dates
beginning 1996. They, however, were unaware that the documents contained identical escalation clauses granting
Equitable authority to increase interest rates without their consent.8

Equitable, in its answer, asserted that respondents knowingly accepted all the terms and conditions contained in the
promissory notes.9 In fact, they continuously availed of and benefited from Equitable's credit facilities for five years. 10

After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone, Equitable restructured
respondents' loans amounting to US$228,200 and P1,000,000.11 The trial court, however, invalidated the escalation
clause contained therein because it violated the principle of mutuality of contracts. 12 Nevertheless, it took judicial notice
of the steep depreciation of the peso during the intervening period 13 and declared the existence of extraordinary
deflation.14 Consequently, the RTC ordered the use of the 1996 dollar exchange rate in computing respondents' dollar-
denominated loans.15 Lastly, because the business reputation of respondents was (allegedly) severely damaged when
Equitable froze their accounts,16 the trial court awarded moral and exemplary damages to them.17

The dispositive portion of the February 5, 2004 RTC decision18 provided:

WHEREFORE, premises considered, judgment is hereby rendered:


30
A) Ordering [Equitable] to reinstate and return the amount of [respondents'] deposit placed on hold status;

B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion [p]esos as moral damages;

C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion [p]esos as exemplary damages;

D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents], jointly and severally, the sum
of [t]wo [m]illion [p]esos as moral and exemplary damages;

E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally, to pay [respondents'] attorney's
fees in the sum of P300,000; litigation expenses in the sum of P50,000 and the cost of suit;

F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the unpaid principal obligation for
the peso loan as well as the unpaid obligation for the dollar denominated loan;

G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable] interest as follows:

1) 12% per annum for the peso loans;

2) 8% per annum for the dollar loans. The basis for the payment of the dollar obligation is the
conversion rate of P26.50 per dollar availed of at the time of incurring of the obligation in accordance
with Article 1250 of the Civil Code of the Philippines;

H) Dismissing [Equitable's] counterclaim except the payment of the aforestated unpaid principal loan
obligations and interest.

SO ORDERED.19

Equitable and respondents filed their respective notices of appeal. 20

In the March 1, 2004 order of the RTC, both notices were denied due course because Equitable and respondents
"failed to submit proof that they paid their respective appeal fees."21

WHEREFORE, premises considered, the appeal interposed by defendants from the Decision in the above-entitled
case is DENIED due course. As of February 27, 2004, the Decision dated February 5, 2004, is considered final
and executory in so far as [Equitable, Aimee Yu and Bejan Lionel Apas] are concerned.22 (emphasis supplied)

Equitable moved for the reconsideration of the March 1, 2004 order of the RTC 23 on the ground that it did in fact pay
the appeal fees. Respondents, on the other hand, prayed for the issuance of a writ of execution.24

On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for reconsideration for lack of
merit25 and ordered the issuance of a writ of execution in favor of respondents. 26 According to the RTC, because
respondents did not move for the reconsideration of the previous order (denying due course to the parties’ notices of
appeal),27 the February 5, 2004 decision became final and executory as to both parties and a writ of execution against
Equitable was in order.28

A writ of execution was thereafter issued29 and three real properties of Equitable were levied upon.30

On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004 order. 31 It, however, withdrew
that petition on March 30, 200432 and instead filed a petition for certiorari with an application for an injunction in the CA
to enjoin the implementation and execution of the March 24, 2004 omnibus order. 33

On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary injunction was
correspondingly issued.34

Notwithstanding the writ of injunction, the properties of Equitable previously levied upon were sold in a public auction
on July 1, 2004. Respondents were the highest bidders and certificates of sale were issued to them. 35

On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the sheriffs who conducted the
sale in contempt for proceeding with the auction despite the injunction order of the CA. 36

On October 28, 2005, the CA dismissed the petition for certiorari.37 It found Equitable guilty of forum shopping because
the bank filed its petition for certiorari in the CA several hours before withdrawing its petition for relief in the
RTC.38 Moreover, Equitable failed to disclose, both in the statement of material dates and certificate of non-forum
shopping (attached to its petition for certiorari in the CA), that it had a pending petition for relief in the RTC. 39

Equitable moved for reconsideration40 but it was denied.41 Thus, this petition.

31
Equitable asserts that it was not guilty of forum shopping because the petition for relief was withdrawn on the same
day the petition for certiorari was filed.42 It likewise avers that its petition for certiorari was meritorious because the RTC
committed grave abuse of discretion in issuing the March 24, 2004 omnibus order which was based on an erroneous
assumption. The March 1, 2004 order denying its notice of appeal for non payment of appeal fees was erroneous
because it had in fact paid the required fees.43 Thus, the RTC, by issuing its March 24, 2004 omnibus order, effectively
prevented Equitable from appealing the patently wrong February 5, 2004 decision.44

This petition is meritorious.

Equitable Was Not Guilty Of Forum shopping

Forum shopping exists when two or more actions involving the same transactions, essential facts and circumstances
are filed and those actions raise identical issues, subject matter and causes of action.45 The test is whether, in two or
more pending cases, there is identity of parties, rights or causes of actions and reliefs.46

Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have identical causes of action.
The petition for relief from the denial of its notice of appeal was based on the RTC’s judgment or final order preventing
it from taking an appeal by "fraud, accident, mistake or excusable negligence." 47 On the other hand, its petition for
certiorari in the CA, a special civil action, sought to correct the grave abuse of discretion amounting to lack of
jurisdiction committed by the RTC.48

In a petition for relief, the judgment or final order is rendered by a court with competent jurisdiction. In a petition for
certiorari, the order is rendered by a court without or in excess of its jurisdiction.

Moreover, Equitable substantially complied with the rule on non-forum shopping when it moved to withdraw its petition
for relief in the RTC on the same day (in fact just four hours and forty minutes after) it filed the petition for certiorari in
the CA. Even if Equitable failed to disclose that it had a pending petition for relief in the RTC, it rectified what was
doubtlessly a careless oversight by withdrawing the petition for relief just a few hours after it filed its petition for
certiorari in the CA ― a clear indication that it had no intention of maintaining the two actions at the same time.

The Trial Court Committed Grave Abuse of Discretion In Issuing Its March 1, 2004 and March 24, 2004 Orders

Section 1, Rule 65 of the Rules of Court provides:

Section 1. Petition for Certiorari. When any tribunal, board or officer exercising judicial or quasi-judicial function
has acted without or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or
excess of jurisdiction, and there is no appeal, nor any plain, speedy or adequate remedy in the ordinary course
of law, a person aggrieved thereby may file a verified petition in the proper court, alleging the facts with certainty and
praying that judgment be rendered annulling or modifying the proceedings of such tribunal, board or officer, and
granting such incidental reliefs as law and justice may require.

The petition shall be accompanied by a certified true copy of the judgment, order or resolution subject thereof, copies
of all pleadings and documents relevant and pertinent thereto, and a sworn certificate of non-forum shopping as
provided in the third paragraph of Section 3, Rule 46.

There are two substantial requirements in a petition for certiorari. These are:

1. that the tribunal, board or officer exercising judicial or quasi-judicial functions acted without or in excess of
his or its jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction; and

2. that there is no appeal or any plain, speedy and adequate remedy in the ordinary course of law.

For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must show that the public
respondent patently and grossly abused his discretion and that abuse amounted to an evasion of positive duty or a
virtual refusal to perform a duty enjoined by law or to act at all in contemplation of law, as where the power was
exercised in an arbitrary and despotic manner by reason of passion or hostility.49

The March 1, 2004 order denied due course to the notices of appeal of both Equitable and respondents. However, it
declared that the February 5, 2004 decision was final and executory only with respect to Equitable.50 As expected,
the March 24, 2004 omnibus order denied Equitable's motion for reconsideration and granted respondents' motion for
the issuance of a writ of execution.51

The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to prevent Equitable, et al. from
appealing the February 5, 2004 decision. Not only that. The execution of the decision was undertaken with indecent
haste, effectively obviating or defeating Equitable's right to avail of possible legal remedies. No matter how we look at
it, the RTC committed grave abuse of discretion in rendering those orders.

With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary course of law, we hold that
there was none. The RTC denied due course to its notice of appeal in the March 1, 2004 order. It affirmed that denial in

32
the March 24, 2004 omnibus order. Hence, there was no way Equitable could have possibly appealed the February 5,
2004 decision.52

Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was not a plain, speedy and
adequate remedy in the ordinary course of law.53 A petition for relief under Rule 38 is an equitable remedy allowed only
in exceptional circumstances or where there is no other available or adequate remedy. 54

Thus, we grant Equitable's petition for certiorari and consequently give due course to its appeal.

Equitable Raised Pure Questions of Law in Its Petition For Review

The jurisdiction of this Court in Rule 45 petitions is limited to questions of law. 55 There is a question of law "when the
doubt or controversy concerns the correct application of law or jurisprudence to a certain set of facts; or when the issue
does not call for the probative value of the evidence presented, the truth or falsehood of facts being admitted." 56

Equitable does not assail the factual findings of the trial court. Its arguments essentially focus on the nullity of the
RTC’s February 5, 2004 decision. Equitable points out that that decision was patently erroneous, specially the
exorbitant award of damages, as it was inconsistent with existing law and jurisprudence. 57

The Promissory Notes Were Valid

The RTC upheld the validity of the promissory notes despite respondents’ assertion that those documents were
contracts of adhesion.

A contract of adhesion is a contract whereby almost all of its provisions are drafted by one party. 58 The participation of
the other party is limited to affixing his signature or his "adhesion" to the contract. 59 For this reason, contracts of
adhesion are strictly construed against the party who drafted it. 60

It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on the contrary, as
binding as ordinary contracts. A party is in reality free to accept or reject it. A contract of adhesion becomes void only
when the dominant party takes advantage of the weakness of the other party, completely depriving the latter of the
opportunity to bargain on equal footing.61

That was not the case here. As the trial court noted, if the terms and conditions offered by Equitable had been truly
prejudicial to respondents, they would have walked out and negotiated with another bank at the first available instance.
But they did not. Instead, they continuously availed of Equitable's credit facilities for five long years.

While the RTC categorically found that respondents had outstanding dollar- and peso-denominated loans with
Equitable, it, however, failed to ascertain the total amount due (principal, interest and penalties, if any) as of July 9,
2001. The trial court did not explain how it arrived at the amounts of US$228,200 and P1,000,000.62 In Metro Manila
Transit Corporation v. D.M. Consunji,63 we reiterated that this Court is not a trier of facts and it shall pass upon them
only for compelling reasons which unfortunately are not present in this case. 64 Hence, we ordered the partial remand of
the case for the sole purpose of determining the amount of actual damages.65

Escalation Clause Violated The Principle Of Mutuality Of Contracts

Escalation clauses are not void per se. However, one "which grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the
agreement" is void. Clauses of that nature violate the principle of mutuality of contracts. 66 Article 130867 of the Civil
Code holds that a contract must bind both contracting parties; its validity or compliance cannot be left to the will of one
of them.68

For this reason, we have consistently held that a valid escalation clause provides:

1. that the rate of interest will only be increased if the applicable maximum rate of interest is increased by law or by the
Monetary Board; and

2. that the stipulated rate of interest will be reduced if the applicable maximum rate of interest is reduced by law or by
the Monetary Board (de-escalation clause).69

The RTC found that Equitable's promissory notes uniformly stated:

If subject promissory note is extended, the interest for subsequent extensions shall be at such rate as shall be
determined by the bank.70

Equitable dictated the interest rates if the term (or period for repayment) of the loan was extended. Respondents had
no choice but to accept them. This was a violation of Article 1308 of the Civil Code. Furthermore, the assailed
escalation clause did not contain the necessary provisions for validity, that is, it neither provided that the rate of interest

33
would be increased only if allowed by law or the Monetary Board, nor allowed de-escalation. For these reasons, the
escalation clause was void.

With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National Bank 71 we held that,
because the escalation clause was annulled, the principal amount of the loan was subject to the original or stipulated
rate of interest. Upon maturity, the amount due was subject to legal interest at the rate of 12% per annum. 72

Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their dollar-denominated loans
and 20% p.a. for their peso-denominated loans from January 10, 2001 to July 9, 2001. Thereafter, Equitable was
entitled to legal interest of 12% p.a. on all amounts due.

There Was No Extraordinary Deflation

Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency (that is, beyond
the common fluctuation in the value of currency) and such decrease could not be reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of the obligation. Extraordinary deflation, on the other
hand, involves an inverse situation.73

Article 1250 of the Civil Code provides:

Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should intervene, the value of the
currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement
to the contrary.

For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be proven:

1. that there was an official declaration of extraordinary inflation or deflation from the Bangko Sentral ng
Pilipinas (BSP);74

2. that the obligation was contractual in nature;75 and

3. that the parties expressly agreed to consider the effects of the extraordinary inflation or deflation. 76

Despite the devaluation of the peso, the BSP never declared a situation of extraordinary inflation. Moreover, although
the obligation in this instance arose out of a contract, the parties did not agree to recognize the effects of extraordinary
inflation (or deflation).77 The RTC never mentioned that there was a such stipulation either in the promissory note or
loan agreement. Therefore, respondents should pay their dollar-denominated loans at the exchange rate fixed by the
BSP on the date of maturity.78

The Award Of Moral And Exemplary Damages Lacked Basis

Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered, not to
impose a penalty to the wrongdoer.79 To be entitled to moral damages, a claimant must prove:

1. That he or she suffered besmirched reputation, or physical, mental or psychological suffering sustained by
the claimant;

2. That the defendant committed a wrongful act or omission;

3. That the wrongful act or omission was the proximate cause of the damages the claimant sustained;

4. The case is predicated on any of the instances expressed or envisioned by Article 2219 80 and 222081 . 82

In culpa contractual or breach of contract, moral damages are recoverable only if the defendant acted fraudulently or in
bad faith or in wanton disregard of his contractual obligations. 83 The breach must be wanton, reckless, malicious or in
bad faith, and oppressive or abusive.84

The RTC found that respondents did not pay Equitable the interest due on February 9, 2001 (or any month thereafter
prior to the maturity of the loan)85 or the amount due (principal plus interest) due on July 9, 2001. 86Consequently,
Equitable applied respondents' deposits to their loans upon maturity.

The relationship between a bank and its depositor is that of creditor and debtor. 87 For this reason, a bank has the right
to set-off the deposits in its hands for the payment of a depositor's indebtedness. 88

Respondents indeed defaulted on their obligation. For this reason, Equitable had the option to exercise its legal right to
set-off or compensation. However, the RTC mistakenly (or, as it now appears, deliberately) concluded that Equitable
acted "fraudulently or in bad faith or in wanton disregard" of its contractual obligations despite the absence of proof.

34
The undeniable fact was that, whatever damage respondents sustained was purely the consequence of their failure
to pay their loans. There was therefore absolutely no basis for the award of moral damages to them.

Neither was there reason to award exemplary damages. Since respondents were not entitled to moral damages,
neither should they be awarded exemplary damages.89 And if respondents were not entitled to moral and exemplary
damages, neither could they be awarded attorney's fees and litigation expenses. 90

ACCORDINGLY, the petition is hereby GRANTED.

The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in CA-G.R. SP No. 83112 are
hereby REVERSED and SET ASIDE.

The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil Case No. CEB-26983 is
hereby ANNULLED for being rendered with grave abuse of discretion amounting to lack or excess of jurisdiction. All
proceedings undertaken pursuant thereto are likewise declared null and void.

The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB-26983 is
herebySET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas is therefore given
due course.1avvphi1

The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB-26983 is
accordingly SET ASIDE. New judgment is hereby entered:

1. ordering respondents Ng Sheung Ngor, doing business under the name and style of "Ken Marketing," Ken
Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank the principal amount of their
dollar- and peso-denominated loans;

2. ordering respondents Ng Sheung Ngor, doing business under the name and style of "Ken Marketing," Ken
Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank interest at:

a) 12.66% p.a. with respect to their dollar-denominated loans from January 10, 2001 to July 9, 2001;

b) 20% p.a. with respect to their peso-denominated loans from January 10, 2001 to July 9, 2001;91

c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,92 the total amount due on July
9, 2001 shall earn legal interest at 12% p.a. from the time petitioner Equitable PCI Bank demanded
payment, whether judicially or extra-judicially; and

d) after this Decision becomes final and executory, the applicable rate shall be 12% p.a. until full
satisfaction;

3. all other claims and counterclaims are dismissed.

As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact amounts due on the
respective dollar-denominated and peso-denominated loans, as of July 9, 2001, of respondents Ng Sheung Ngor,
doing business under the name and style of "Ken Marketing," Ken Appliance Division and Benjamin E. Go.

SO ORDERED.

G.R. No. 150806 January 28, 2008

EUFEMIA ALMEDA and ROMEL ALMEDA, petitioners,


vs.
BATHALA MARKETING INDUSTRIES, INC., respondent.

DECISION

NACHURA, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, of the Decision1 of the Court of Appeals
(CA), dated September 3, 2001, in CA-G.R. CV No. 67784, and its Resolution2 dated November 19, 2001. The
assailed Decision affirmed with modification the Decision3 of the Regional Trial Court (RTC), Makati City, Branch 136,
dated May 9, 2000 in Civil Case No. 98-411.

Sometime in May 1997, respondent Bathala Marketing Industries, Inc., as lessee, represented by its president Ramon
H. Garcia, renewed its Contract of Lease4 with Ponciano L. Almeda (Ponciano), as lessor, husband of petitioner
Eufemia and father of petitioner Romel Almeda. Under the said contract, Ponciano agreed to lease a portion of the
Almeda Compound, located at 2208 Pasong Tamo Street, Makati City, consisting of 7,348.25 square meters, for a

35
monthly rental of P1,107,348.69, for a term of four (4) years from May 1, 1997 unless sooner terminated as provided in
the contract.5 The contract of lease contained the following pertinent provisions which gave rise to the instant case:

SIXTH - It is expressly understood by the parties hereto that the rental rate stipulated is based on the present
rate of assessment on the property, and that in case the assessment should hereafter be increased or any new
tax, charge or burden be imposed by authorities on the lot and building where the leased premises are located,
LESSEE shall pay, when the rental herein provided becomes due, the additional rental or charge
corresponding to the portion hereby leased; provided, however, that in the event that the present assessment
or tax on said property should be reduced, LESSEE shall be entitled to reduction in the stipulated rental,
likewise in proportion to the portion leased by him;

SEVENTH - In case an extraordinary inflation or devaluation of Philippine Currency should supervene, the
value of Philippine peso at the time of the establishment of the obligation shall be the basis of payment; 6

During the effectivity of the contract, Ponciano died. Thereafter, respondent dealt with petitioners. In a letter 7 dated
December 29, 1997, petitioners advised respondent that the former shall assess and collect Value Added Tax (VAT)
on its monthly rentals. In response, respondent contended that VAT may not be imposed as the rentals fixed in the
contract of lease were supposed to include the VAT therein, considering that their contract was executed on May 1,
1997 when the VAT law had long been in effect.8

On January 26, 1998, respondent received another letter from petitioners informing the former that its monthly rental
should be increased by 73% pursuant to condition No. 7 of the contract and Article 1250 of the Civil Code. Respondent
opposed petitioners' demand and insisted that there was no extraordinary inflation to warrant the application of Article
1250 in light of the pronouncement of this Court in various cases. 9

Respondent refused to pay the VAT and adjusted rentals as demanded by petitioners but continued to pay the
stipulated amount set forth in their contract.

On February 18, 1998, respondent instituted an action for declaratory relief for purposes of determining the correct
interpretation of condition Nos. 6 and 7 of the lease contract to prevent damage and prejudice.10 The case was
docketed as Civil Case No. 98-411 before the RTC of Makati.

On March 10, 1998, petitioners in turn filed an action for ejectment, rescission and damages against respondent for
failure of the latter to vacate the premises after the demand made by the former. 11 Before respondent could file an
answer, petitioners filed a Notice of Dismissal.12 They subsequently refiled the complaint before the Metropolitan Trial
Court of Makati; the case was raffled to Branch 139 and was docketed as Civil Case No. 53596.

Petitioners later moved for the dismissal of the declaratory relief case for being an improper remedy considering that
respondent was already in breach of the obligation and that the case would not end the litigation and settle the rights of
the parties. The trial court, however, was not persuaded, and consequently, denied the motion.

After trial on the merits, on May 9, 2000, the RTC ruled in favor of respondent and against petitioners. The pertinent
portion of the decision reads:

WHEREFORE, premises considered, this Court renders judgment on the case as follows:

1) declaring that plaintiff is not liable for the payment of Value-Added Tax (VAT) of 10% of the rent for [the] use
of the leased premises;

2) declaring that plaintiff is not liable for the payment of any rental adjustment, there being no [extraordinary]
inflation or devaluation, as provided in the Seventh Condition of the lease contract, to justify the same;

3) holding defendants liable to plaintiff for the total amount of P1,119,102.19, said amount representing
payments erroneously made by plaintiff as VAT charges and rental adjustment for the months of January,
February and March, 1999; and

4) holding defendants liable to plaintiff for the amount of P1,107,348.69, said amount representing the balance
of plaintiff's rental deposit still with defendants.

SO ORDERED.13

The trial court denied petitioners their right to pass on to respondent the burden of paying the VAT since it was not a
new tax that would call for the application of the sixth clause of the contract. The court, likewise, denied their right to
collect the demanded increase in rental, there being no extraordinary inflation or devaluation as provided for in the
seventh clause of the contract. Because of the payment made by respondent of the rental adjustment demanded by
petitioners, the court ordered the restitution by the latter to the former of the amounts paid, notwithstanding the well-
established rule that in an action for declaratory relief, other than a declaration of rights and obligations, affirmative
reliefs are not sought by or awarded to the parties.

36
Petitioners elevated the aforesaid case to the Court of Appeals which affirmed with modification the RTC decision. The
fallo reads:

WHEREFORE, premises considered, the present appeal is DISMISSED and the appealed decision in Civil
Case No. 98-411 is hereby AFFIRMED with MODIFICATION in that the order for the return of the balance of
the rental deposits and of the amounts representing the 10% VAT and rental adjustment, is hereby DELETED.

No pronouncement as to costs.

SO ORDERED.14

The appellate court agreed with the conclusions of law and the application of the decisional rules on the matter made
by the RTC. However, it found that the trial court exceeded its jurisdiction in granting affirmative relief to the
respondent, particularly the restitution of its excess payment.

Petitioners now come before this Court raising the following issues:

I.

WHETHER OR NOT ARTICLE 1250 OF THE NEW CIVIL CODE IS APPLICABLE TO THE CASE AT BAR.

II.

WHETHER OR NOT THE DOCTRINE ENUNCIATED IN FILIPINO PIPE AND FOUNDRY CORP. VS.
NAWASA CASE, 161 SCRA 32 AND COMPANION CASES ARE (sic) APPLICABLE IN THE CASE AT BAR.

III.

WHETHER OR NOT IN NOT APPLYING THE DOCTRINE IN THE CASE OF DEL ROSARIO VS. THE SHELL
COMPANY OF THE PHILIPPINES, 164 SCRA 562, THE HONORABLE COURT OF APPEALS SERIOUSLY
ERRED ON A QUESTION OF LAW.

IV.

WHETHER OR NOT THE FINDING OF THE HONORABLE COURT OF APPEALS THAT RESPONDENT IS
NOT LIABLE TO PAY THE 10% VALUE ADDED TAX IS IN ACCORDANCE WITH THE MANDATE OF RA
7716.

V.

WHETHER OR NOT DECLARATORY RELIEF IS PROPER SINCE PLAINTIFF-APPELLEE WAS IN BREACH


WHEN THE PETITION FOR DECLARATORY RELIEF WAS FILED BEFORE THE TRIAL COURT.

In fine, the issues for our resolution are as follows: 1) whether the action for declaratory relief is proper; 2) whether
respondent is liable to pay 10% VAT pursuant to Republic Act (RA) 7716; and 3) whether the amount of rentals due the
petitioners should be adjusted by reason of extraordinary inflation or devaluation.

Declaratory relief is defined as an action by any person interested in a deed, will, contract or other written instrument,
executive order or resolution, to determine any question of construction or validity arising from the instrument,
executive order or regulation, or statute, and for a declaration of his rights and duties thereunder. The only issue that
may be raised in such a petition is the question of construction or validity of provisions in an instrument or statute.
Corollary is the general rule that such an action must be justified, as no other adequate relief or remedy is available
under the circumstances. 15

Decisional law enumerates the requisites of an action for declaratory relief, as follows: 1) the subject matter of the
controversy must be a deed, will, contract or other written instrument, statute, executive order or regulation, or
ordinance; 2) the terms of said documents and the validity thereof are doubtful and require judicial construction; 3)
there must have been no breach of the documents in question; 4) there must be an actual justiciable controversy or the
"ripening seeds" of one between persons whose interests are adverse; 5) the issue must be ripe for judicial
determination; and 6) adequate relief is not available through other means or other forms of action or proceeding. 16

It is beyond cavil that the foregoing requisites are present in the instant case, except that petitioners insist that
respondent was already in breach of the contract when the petition was filed.

We do not agree.

After petitioners demanded payment of adjusted rentals and in the months that followed, respondent complied with the
terms and conditions set forth in their contract of lease by paying the rentals stipulated therein. Respondent religiously

37
fulfilled its obligations to petitioners even during the pendency of the present suit. There is no showing that respondent
committed an act constituting a breach of the subject contract of lease. Thus, respondent is not barred from instituting
before the trial court the petition for declaratory relief.

Petitioners claim that the instant petition is not proper because a separate action for rescission, ejectment and
damages had been commenced before another court; thus, the construction of the subject contractual provisions
should be ventilated in the same forum.

We are not convinced.

It is true that in Panganiban v. Pilipinas Shell Petroleum Corporation17 we held that the petition for declaratory relief
should be dismissed in view of the pendency of a separate action for unlawful detainer. However, we cannot apply the
same ruling to the instant case. In Panganiban, the unlawful detainer case had already been resolved by the trial court
before the dismissal of the declaratory relief case; and it was petitioner in that case who insisted that the action for
declaratory relief be preferred over the action for unlawful detainer. Conversely, in the case at bench, the trial court had
not yet resolved the rescission/ejectment case during the pendency of the declaratory relief petition. In fact, the trial
court, where the rescission case was on appeal, itself initiated the suspension of the proceedings pending the
resolution of the action for declaratory relief.

We are not unmindful of the doctrine enunciated in Teodoro, Jr. v. Mirasol18 where the declaratory relief action was
dismissed because the issue therein could be threshed out in the unlawful detainer suit. Yet, again, in that case, there
was already a breach of contract at the time of the filing of the declaratory relief petition. This dissimilar factual milieu
proscribes the Court from applying Teodoro to the instant case.

Given all these attendant circumstances, the Court is disposed to entertain the instant declaratory relief action instead
of dismissing it, notwithstanding the pendency of the ejectment/rescission case before the trial court. The resolution of
the present petition would write finis to the parties' dispute, as it would settle once and for all the question of the proper
interpretation of the two contractual stipulations subject of this controversy.

Now, on the substantive law issues.

Petitioners repeatedly made a demand on respondent for the payment of VAT and for rental adjustment allegedly
brought about by extraordinary inflation or devaluation. Both the trial court and the appellate court found no merit in
petitioners' claim. We see no reason to depart from such findings.

As to the liability of respondent for the payment of VAT, we cite with approval the ratiocination of the appellate court,
viz.:

Clearly, the person primarily liable for the payment of VAT is the lessor who may choose to pass it on to the
lessee or absorb the same. Beginning January 1, 1996, the lease of real property in the ordinary course of
business, whether for commercial or residential use, when the gross annual receipts exceed P500,000.00, is
subject to 10% VAT. Notwithstanding the mandatory payment of the 10% VAT by the lessor, the actual shifting
of the said tax burden upon the lessee is clearly optional on the part of the lessor, under the terms of the
statute. The word "may" in the statute, generally speaking, denotes that it is directory in nature. It is generally
permissive only and operates to confer discretion. In this case, despite the applicability of the rule under Sec.
99 of the NIRC, as amended by R.A. 7716, granting the lessor the option to pass on to the lessee the 10%
VAT, to existing contracts of lease as of January 1, 1996, the original lessor, Ponciano L. Almeda did not
charge the lessee-appellee the 10% VAT nor provided for its additional imposition when they renewed the
contract of lease in May 1997. More significantly, said lessor did not actually collect a 10% VAT on the monthly
rental due from the lessee-appellee after the execution of the May 1997 contract of lease. The inevitable
implication is that the lessor intended not to avail of the option granted him by law to shift the 10% VAT upon
the lessee-appellee. x x x.19

In short, petitioners are estopped from shifting to respondent the burden of paying the VAT.

Petitioners' reliance on the sixth condition of the contract is, likewise, unavailing. This provision clearly states that
respondent can only be held liable for new taxes imposed after the effectivity of the contract of lease, that is, after May
1997, and only if they pertain to the lot and the building where the leased premises are located. Considering that RA
7716 took effect in 1994, the VAT cannot be considered as a "new tax" in May 1997, as to fall within the coverage of
the sixth stipulation.

Neither can petitioners legitimately demand rental adjustment because of extraordinary inflation or devaluation.

Petitioners contend that Article 1250 of the Civil Code does not apply to this case because the contract stipulation
speaks of extraordinary inflation or devaluation while the Code speaks of extraordinary inflation or deflation. They insist
that the doctrine pronounced in Del Rosario v. The Shell Company, Phils. Limited20 should apply.

Essential to contract construction is the ascertainment of the intention of the contracting parties, and such
determination must take into account the contemporaneous and subsequent acts of the parties. This intention, once
ascertained, is deemed an integral part of the contract. 21
38
While, indeed, condition No. 7 of the contract speaks of "extraordinary inflation or devaluation" as compared to Article
1250's "extraordinary inflation or deflation," we find that when the parties used the term "devaluation," they really did
not intend to depart from Article 1250 of the Civil Code. Condition No. 7 of the contract should, thus, be read in
harmony with the Civil Code provision.

That this is the intention of the parties is evident from petitioners' letter 22 dated January 26, 1998, where, in demanding
rental adjustment ostensibly based on condition No. 7, petitioners made explicit reference to Article 1250 of the Civil
Code, even quoting the law verbatim. Thus, the application of Del Rosario is not warranted. Rather, jurisprudential
rules on the application of Article 1250 should be considered.

Article 1250 of the Civil Code states:

In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an
agreement to the contrary.

Inflation has been defined as the sharp increase of money or credit, or both, without a corresponding increase in
business transaction. There is inflation when there is an increase in the volume of money and credit relative to
available goods, resulting in a substantial and continuing rise in the general price level. 23 In a number of cases, this
Court had provided a discourse on what constitutes extraordinary inflation, thus:

[E]xtraordinary inflation exists when there is a decrease or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation in the value of said currency, and such increase
or decrease could not have been reasonably foreseen or was manifestly beyond the contemplation of the
parties at the time of the establishment of the obligation.24

The factual circumstances obtaining in the present case do not make out a case of extraordinary inflation or
devaluation as would justify the application of Article 1250 of the Civil Code. We would like to stress that the erosion of
the value of the Philippine peso in the past three or four decades, starting in the mid-sixties, is characteristic of most
currencies. And while the Court may take judicial notice of the decline in the purchasing power of the Philippine
currency in that span of time, such downward trend of the peso cannot be considered as the extraordinary
phenomenon contemplated by Article 1250 of the Civil Code. Furthermore, absent an official pronouncement or
declaration by competent authorities of the existence of extraordinary inflation during a given period, the effects of
extraordinary inflation are not to be applied. 25

WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No.
67784, dated September 3, 2001, and its Resolution dated November 19, 2001, are AFFIRMED.

SO ORDERED.

G.R. No. 176246 February 13, 2009

PREMIERE DEVELOPMENT BANK, Petitioner,


vs.
CENTRAL SURETY & INSURANCE COMPANY, INC., Respondent.

DECISION

NACHURA, J.:

Before us is a petition for review on certiorari assailing the Court of Appeals (CA) Decision 1 in CA-G.R. CV No. 85930,
which reversed and set aside the decision of the Regional Trial Court (RTC), Branch 132, Makati City in Civil Case No.
0051306.2

On August 20, 1999, respondent Central Surety & Insurance Company (Central Surety) obtained an industrial loan
of P6,000,000.00 from petitioner Premiere Development Bank (Premiere Bank) with a maturity date of August 14,
2000. This P6,000,000.00 loan, evidenced by Promissory Note (PN) No. 714-Y,3 stipulates payment of 17% interest
per annum payable monthly in arrears and the principal payable on due date. In addition, PN No. 714-Y provides for a
penalty charge of 24% interest per annum based on the unpaid amortization/installment or the entire unpaid balance of
the loan. In all, should Central Surety fail to pay, it would be liable to Premiere Bank for: (1) unpaid interest up to
maturity date; (2) unpaid penalties up to maturity date; and (3) unpaid balance of the principal.

To secure payment of the P6,000,000.00 loan, Central Surety executed in favor of Premiere Bank a Deed of
Assignment with Pledge4 covering Central Surety’s Membership Fee Certificate No. 217 representing its proprietary
share in Wack Wack Golf and Country Club Incorporated (Wack Wack Membership). In both PN No. 714-Y and Deed
of Assignment, Constancio T. Castañeda, Jr. and Engracio T. Castañeda, president and vice-president of Central
Surety, respectively, represented Central Surety and solidarily bound themselves to the payment of the obligation.

39
Parenthetically, Central Surety had another commercial loan with Premiere Bank in the amount of P40,898,000.00
maturing on October 10, 2001. This loan was, likewise, evidenced by a PN numbered 376-X5 and secured by a real
estate mortgage over Condominium Certificate of Title No. 8804, Makati City. PN No. 376-X was availed of through a
renewal of Central Surety’s prior loan, then covered by PN No. 367-Z.6 As with the P6,000,000.00 loan and the
constituted pledge over the Wack Wack Membership, the P40,898,000.00 loan with real estate mortgage was
transacted by Constancio and Engracio Castañeda on behalf of Central Surety.

It appears that on August 22, 2000, Premiere Bank sent a letter to Central Surety demanding payment of
theP6,000,000.00 loan, to wit:

August 22, 2000

CENTRAL SURETY AND INSURANCE CO.


2nd Floor Universalre Bldg.
No. 106 Paseo de Roxas, Legaspi Village
Makati City

Attention: Mr. Constancio T. Castaneda, Jr.


President

Mr. Engracio T. Castaneda


Vice President

-------------------------------------------------

Gentlemen:

This has reference to your overdue loan of P6.0 Million.

We regret to inform you that despite efforts to restructure the same, you have failed up to this time, to submit the
required documents and come up with equity necessary to implement the restructuring scheme.

In view thereof, we regret that unless the above loan is settled on or before five (5) days from the date hereof, we shall
exercise our option to have the Stock Certificate No. 217 with Serial No. 1793 duly issued by Wack Wack Golf and
Country Club, Inc. transferred in the name of Premiere Development Bank in accordance with the terms and conditions
of the Deed of Assignment with Pledge executed in favor of Premiere Development Bank.

We shall appreciate your prompt compliance.

Very truly yours,

(sgd.)
IGNACIO R. NEBRIDA, JR.
Senior Asst. Vice President/
Business Development Group - Head7

Posthaste, Central Surety responded and sent the following letter dated August 24, 2000:

24 August 2000

Mr. Ignacio R. Nebrida, Jr.


Senior Asst. Vice President/
Business Development Group – Head
Premiere Bank
EDSA cor. Magallanes Avenue
Makati City

Sir:

With reference to this 6.0 Million loan account, we have informed Ms. Evangeline Veloira that we are intending to settle
the account by the end of September. As of 14 August 2000 we made payment to your bank as per receipt attached.

As you may know, present conditions have been difficult for the insurance industry whose performance is so closely
linked to the nation’s economic prosperity; and we are now asking for some consideration and leeway on your very stiff
and immediate demands.

Kindly extend to us your favorable approval.

40
Very truly yours,

(sgd.)
ENGRACIO T. CASTANEDA
Vice-President8

Accordingly, by September 20, 2000, Central Surety issued Bank of Commerce (BC) Check No. 08114 9 dated
September 22, 2000 in the amount of P6,000,000.00 and payable to Premiere Bank. The check was received by
Premiere Bank’s Senior Account Manager, Evangeline Veloira, with the notation "full payment of loan-Wack Wack," as
reflected in Central Surety’s Disbursement Voucher.10 However, for undisclosed reasons, Premiere Bank returned BC
Check No. 08114 to Central Surety, and in its letter dated September 28, 2000, demanded from the latter, not just
payment of the P6,000,000.00 loan, but also the P40,898,000.00 loan which was originally covered by PN No. 367-
Z.11 In the same letter, Premiere Bank threatened foreclosure of the loans’ respective securities, the pledge and real
estate mortgage, should Central Surety fail to pay these within ten days from date, thus:

28 September 2000

CENTRAL SURETY & INSURANCE CO.


By: Constancio T. Castañeda Jr. – President
Engracio T. Castañeda – Vice President
2nd Floor Universalre Bldg. No. 106
Paseo de Roxas, Legaspi Village, Makati City

RE: YOUR COMMERCIAL LOAN OF P40,898,000.00 &


P6,000,000.00 WITH PREMIERE DEVELOPMENT BANK
UNDER ACCOUNT NOS. COM-367-Z AND COM 714-Y

**************************************************

Dear Sirs:

We write on behalf of our client, Premiere Development Bank, in connection with your above-captioned loan account.

While our client has given you all the concessions, facilities and opportunities to service your loans, we regret to inform
you that you have failed to settle the same despite their past due status.

In view of the foregoing and to protect the interest of our client, please be advised that unless the outstanding balances
of your loan accounts as of date plus interest, penalties and other fees and charges are paid in full or necessary
arrangements acceptable to our client is made by you within ten (10) days from date hereof, we shall be constrained
much to our regret, to file foreclosure proceedings against the collateral of the loan mortgaged to the Bank or pursue
such action necessary in the premises.

We trust, therefore, that you will give this matter your preferential attention.

Very truly yours,

(sgd.)
PACITA M. ARAOS12
(italics supplied)

The very next day, on September 29, 2000, Central Surety, through its counsel, wrote Premiere Bank and re-tendered
payment of the check:

29 September 2000

PREMIERE BANK
EDSA cor. Magallanes Avenue
Makati City

Attention: Mr. Ignacio R. Nebrida, Jr.


Senior Asst. Vice President/
Business Development Group – Head

Re : Promissory Note No. 714-Y

Sir:

41
This is further to our client’s letter to you dated 24 August 2000, informing you that it would settle its account by the end
of September 2000.

Please be advised that on 20 September 2000 our client delivered to your bank BC cheque no. 08114 payable to
Premiere Bank in the amount of SIX MILLION PESOS (P6,000,000.00), which was received by your Senior Account
Manager, Ms. Evangeline Veloira. However, for unexplained reasons the cheque was returned to us.

We are again tendering to you the said cheque of SIX MILLION PESOS (P6,000,000.00), in payment of PN#714-Y.
Please accept the cheque and issue the corresponding receipt thereof. Should you again refuse to accept this cheque,
then I shall advise my client to deposit it in court for proper disposition.

Thank you.

Very truly yours,

(sgd.)
EPIFANIO E. CUA
Counsel for Central Surety & Insurance Company13
(italics supplied)

On even date, a separate letter with another BC Check No. 08115 in the amount of P2,600,000.00 was also tendered
to Premiere Bank as payment for the Spouses Engracio and Lourdes Castañeda’s (Spouses Castañeda’s) personal
loan covered by PN No. 717-X and secured by Manila Polo Club, Inc. membership shares.

On October 13, 2000, Premiere Bank responded and signified acceptance of Central Surety’s checks under the
following application of payments:

13 October 2000

ATTY. EPIFANIO E. CUA


2/F Universalre Condominium
106 Paseo de Roxas
Legaspi Village, Makati City

Dear Atty. Cua:

Thank you for your two (2) letters both dated 29 September 2000 on behalf of your clients with the enclosed check nos.
0008114 and 0008115 for the total of P8,600,000.00.

As previously relayed to your client, Premiere Bank cannot accept the two (2) checks as full settlement of the obligation
under Account Nos. PN #714-Y and PN # 717-X, as the amount is insufficient.

In accordance with the terms and conditions of the Promissory Notes executed by your clients in favor of Premiere
Development Bank, we have applied the two (2) checks to the due obligations of your clients as follows:

1) Account No.: COM 235-Z14 P1,044,939.45

2) Account No.: IND 717-X P1,459,693.15

3) Account No.: COM 367-Z15 P4,476,200.18

4) Account No.: COM 714-Y P1,619,187.22

TOTAL P8,600,000.00

We are enclosing Xerox copy each of four (4) official receipts covering the above payments. The originals are with us
which your clients or their duly authorized representative may pick-up anytime during office hours.

We shall appreciate the settlement in full of the accounts of your client or necessary arrangements for settlement
thereof be made as soon as possible to put the accounts on up to-date status.

Thank you.

Very truly yours,

(sgd.)
MS. ELSA M. SAPAPO
Manager
42
Loans Accounting and
Control Department16

Significantly, the P8,600,000.00 check payments were not applied in full to Central Surety’s P6,000,000.00 loan under
PN No. 714-Y and the Spouses Castañeda’s personal loan of P2,600,000.00 under PN No. 717-X. Premiere Bank also
applied proceeds thereof to a commercial loan under PN No. 235-Z taken out by Casent Realty and Development
Corporation (Casent Realty),17 and to Central Surety’s loan originally covered by PN No. 367-Z, renewed under PN No.
376-X, maturing on October 20, 2001.

Strongly objecting to Premiere Bank’s application of payments, Central Surety’s counsel wrote Premiere Bank and
reiterated Central Surety’s demand for the application of the check payments to the loans covered by PN Nos. 714-X
and 714-Y. Additionally, Central Surety asked that the Wack Wack Membership pledge, the security for
theP6,000,000.00 loan, should be released.

In the final exchange of correspondence, Premiere Bank, through its SAVP/Acting Head-LGC, Atty. Pacita Araos,
responded and refused to accede to Central Surety’s demand. Premiere Bank insisted that the PN covering
theP6,000,000.00 loan granted Premiere Bank sole discretion respecting: (1) debts to which payments should be
applied in cases of several obligations by an obligor and/or debtor; and (2) the initial application of payments to other
costs, advances, expenses, and past due interest stipulated thereunder.

As a result, Central Surety filed a complaint for damages and release of security collateral, specifically praying that the
court render judgment: (1) declaring Central Surety’s P6,000,000.00 loan covered by PN No. 714-Y as fully paid; (2)
ordering Premiere Bank to release to Central Surety its membership certificate of shares in Wack Wack; (3) ordering
Premiere Bank to pay Central Surety compensatory and actual damages, exemplary damages, attorney’s fees, and
expenses of litigation; and (4) directing Premiere Bank to pay the cost of suit.

On July 12, 2005, the RTC rendered a decision dismissing Central Surety’s complaint and ordering it to pay Premiere
Bank P100,000.00 as attorney’s fees. The RTC ruled that the stipulation in the PN granting Premiere Bank sole
discretion in the application of payments, although it partook of a contract of adhesion, was valid. It disposed of the
case, to wit:

Now that the issue as to the validity of the stipulation is settled, [Premiere Bank] was right in contending that it had the
right to apply [Central Surety’s] payment to the most onerous obligation or to the one it sees fit to be paid first from
among the several obligations. The application of the payment to the other two loans of Central Surety namely, account
nos. COM 367-Z and IND 714-Y was within [Premiere Bank’s] valid exercise of its right according the
stipulation.lawphil.net However, [Premiere Bank] erred in applying the payment to the loan of Casent Realty and to the
personal obligation of Mr. Engracio Castañeda despite their connection with one another. Therefore, [Premiere Bank]
cannot apply the payment tendered by Central Surety to the other two entities capriciously and expressly violating the
law and pertinent Central Bank rules and regulations. Hence, the application of the payment to the loan of Casent
Realty (Account No. COM 236-Z) and to the loan of Mr. Engracio Castañeda (Account No. IND 717-X) is void and must
be annulled.

As to the issue of whether or not [Central Surety] is entitled to the release of Membership Fee Certificate in the Wack
Wack Golf and Country Club, considering now that [Central Surety] cannot compel [Premiere Bank] to release the
subject collateral.

With regard to the issue of damages and attorney’s fees, the court finds no basis to grant [Premiere Bank’s] prayer for
moral and exemplary damages but deems it just and equitable to award in its favor attorney’s fees in the sum of Php
100,000.00.

WHEREFORE, judgment is hereby rendered dismissing the complaint and ordering [Central Surety] to pay [Premiere
Bank] Php 100,000.00 as attorney’s fees.18 (emphasis supplied)

On appeal by Central Surety, the CA reversed and set aside the trial court’s ruling. The appellate court held that with
Premiere Bank’s letter dated August 22, 2000 specifically demanding payment of Central Surety’s P6,000,000.00 loan,
it was deemed to have waived the stipulation in PN No. 714-Y granting it the right to solely determine application of
payments, and was, consequently, estopped from enforcing the same. In this regard, with the holding of full settlement
of Central Surety’s P6,000,000.00 loan under PN No. 714-Y, the CA ordered the release of the Wack Wack
Membership pledged to Premiere Bank.

Hence, this recourse by Premiere Bank positing the following issues:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE AND PALPABLE
ERROR WHEN IT APPLIED THE PRINCIPLE OF WAIVER AND ESTOPPEL IN THE PRESENT CASE INSOFAR AS
THE DEMAND LETTER SENT TO [CENTRAL SURETY] IS CONCERNED NULLIFYING THE APPLICATION OF
PAYMENTS EXERCISED BY [PREMIERE BANK]

WHETHER OR NOT THE FINDING OF WAIVER AND ESTOPPEL BY THE HONORABLE COURT OF APPEALS
COULD PREVAIL OVER THE CLEAR AND UNMISTAKABLE STATUTORY AND CONTRACTUAL RIGHT OF
[PREMIERE BANK] TO EXERCISE APPLICATION OF PAYMENT AS WARRANTED BY THE PROMISSORY NOTE
43
EVEN ASSUMING EX GRATIA THAT THE 6 MILLION SHOULD BE APPLIED TO THE SUBJECT LOAN OF
RESPONDENT, WHETHER OR NOT THE SUBJECT WACK-WACK SHARES COULD BE RELEASE[D] DESPITE
THE CROSS DEFAULT AND CROSS GUARANTEE PROVISIONS OF THE DEED OF ASSIGNMENT WITH PLEDGE
AND RELEVANT REAL ESTATE MORTGAGE CONTRACTS EXECUTED BY [CENTRAL SURETY], CASENT
REALTY AND SPS. CASTAÑEDA.

WHETHER OR NOT THERE IS A VALID TENDER OF PAYMENT AND CONSIGNATION OF THE SUBJECT TWO
CHECK PAYMENTS BY [CENTRAL SURETY].

WHETHER OR NOT, AS CORRECTLY FOUND BY THE COURT A QUO [CENTRAL SURETY] IS ESTOPPED FROM
CONTESTING THE STIPULATIONS OR PROVISIONS OF THE PROMISSORY NOTES AUTHORIZING [PREMIERE
BANK] TO MAKE SUCH APPLICATION OF PAYMENTS

WHETHER OR NOT AS CORRECTLY FOUND BY THE LOWER COURT [PREMIERE BANK] IS ENTITLED TO AN
AWARD OF DAMAGES AS OCCASIONED BY THE MALICIOUS FILING OF THIS SUIT.19

At the outset, we qualify that this case deals only with the extinguishment of Central Surety’s P6,000,000.00 loan
secured by the Wack Wack Membership pledge. We do not dispose herein the matter of the P2,600,000.00 loan
covered by PN No. 717-X subject of BC Check No. 08115.

We note that both lower courts were one in annulling Premiere Bank’s application of payments to the loans of Casent
Realty and the Spouses Castañeda under PN Nos. 235-Z and 717-X, respectively, thus:

It bears stressing that the parties to PN No. 714-Y secured by Wack Wack membership certificate are only Central
Surety, as debtor and [Premiere Bank], as creditor. Thus, when the questioned stipulation speaks of "several
obligations", it only refers to the obligations of [Central Surety] and nobody else.

[I]t is plain that [Central Surety] has only two loan obligations, namely: 1.) Account No. 714-Y – secured by Wack Wack
membership certificate; and 2.) Account No. 367-Z – secured by Condominium Certificate of Title. The two loans are
secured by separate and different collaterals. The collateral for Account No. 714-Y, which is the Wack Wack
membership certificate answers only for that account and nothing else. The collateral for Account No. 367-Z, which is
the Condominium Certificate of Title, is answerable only for the said account.

The fact that the loan obligations of [Central Surety] are secured by separate and distinct collateral simply shows that
each collateral secures only a particular loan obligation and does not cover loans including future loans or
advancements.

As regards the loan covered by Account No. 235-Z, this was obtained by Casent Realty, not by [Central Surety].
Although Mr. Engracio Castañeda is the vice-president of [Central Surety], and president of Casent Realty, it does not
follow that the two corporations are one and the same. Both are invested by law with a personality separate and
distinct from each other.

Thus, [Central Surety] cannot be held liable for the obligation of Casent Realty, absent evidence showing that the latter
is being used to defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to confuse
the legitimate issues, or when it is merely an adjunct, a business conduit or an alter ego of [Central Surety] or of
another corporation; or used as a cloak to cover for fraud or illegality, or to work injustice, or where necessary to
achieve equity or for the protection of creditors.1avvphi1

Likewise, [Central Surety] cannot be held accountable for the loan obligation of spouses Castañeda under Account No.
IND 717-X. Settled is the rule that a corporation is invested by law with a personality separate and distinct from those
of the persons composing it. The corporate debt or credit is not the debt or credit of the stockholder nor is the
stockholder’s debt or credit that of the corporation.

The mere fact that a person is a president of the corporation does not render the property he owns or possesses the
property of the corporation, since that president, as an individual, and the corporation are separate entities. 20

In fact, Premiere Bank did not appeal or question the RTC’s ruling specifically annulling the application of
theP6,000,000.00 check payment to the respective loans of Casent Realty and the Spouses Castañeda. Undoubtedly,
Premiere Bank cannot be allowed, through this petition, to surreptitiously include the validity of its application of
payments concerning the loans to Casent Realty and the Spouses Castañeda.

Thus, we sift through the issues posited by Premiere Bank and restate the same, to wit:

1. Whether Premiere Bank waived its right of application of payments on the loans of Central Surety.

2. In the alternative, whether the P6,000,000.00 loan of Central Surety was extinguished by the encashment of
BC Check No. 08114.

3. Corollarily, whether the release of the Wack Wack Membership pledge is in order.

44
The Petition is meritorious.

We shall take the first and the second issues in tandem.

Creditor given right to apply payments

At the hub of the controversy is the statutory provision on application of payments, specifically Article 1252 of the Civil
Code, viz.:

Article 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time
of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the
application of payment is made by the party for whose benefit the term has been constituted, application shall not be
made as to debts which are not yet due.

If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot
complain of the same, unless there is a cause for invalidating the contract.

The debtor’s right to apply payment is not mandatory. This is clear from the use of the word "may" rather than the word
"shall" in the provision which reads: "He who has various debts of the same kind in favor of one and the same
creditor, may declare at the time of making the payment, to which of the same must be applied."

Indeed, the debtor’s right to apply payment has been considered merely directory, and not mandatory, 21 following this
Court’s earlier pronouncement that "the ordinary acceptation of the terms ‘may’ and ‘shall’ may be resorted to as
guides in ascertaining the mandatory or directory character of statutory provisions."22

Article 1252 gives the right to the debtor to choose to which of several obligations to apply a particular payment that he
tenders to the creditor. But likewise granted in the same provision is the right of the creditor to apply such payment in
case the debtor fails to direct its application. This is obvious in Art. 1252, par. 2, viz.: "If the debtor accepts from the
creditor a receipt in which an application of payment is made, the former cannot complain of the same." It is the
directory nature of this right and the subsidiary right of the creditor to apply payments when the debtor does not elect to
do so that make this right, like any other right, waivable.

Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals or good customs, or
prejudicial to a third person with a right recognized by law. 23

A debtor, in making a voluntary payment, may at the time of payment direct an application of it to whatever account he
chooses, unless he has assigned or waived that right. If the debtor does not do so, the right passes to the creditor, who
may make such application as he chooses. But if neither party has exercised its option, the court will apply the
payment according to the justice and equity of the case, taking into consideration all its circumstances. 24

Verily, the debtor’s right to apply payment can be waived and even granted to the creditor if the debtor so agrees. 25This
was explained by former Senator Arturo M. Tolentino, an acknowledged expert on the Civil Code, thus:

The following are some limitations on the right of the debtor to apply his payment:

xxxx

5) when there is an agreement as to the debts which are to be paid first, the debtor cannot vary this agreement. 26

Relevantly, in a Decision of the Supreme Court of Kansas in a case with parallel facts, it was held that:

The debtor requested Planters apply the payments to the 1981 loan rather than to the 1978 loan. Planters refused.
Planters notes it was expressly provided in the security agreement on the 1981 loan that Planters had a legal right to
direct application of payments in its sole discretion. Appellees do not refute this. Hence, the debtors had no right by
agreement to direct the payments. This also precludes the application of the U.S. Rule, which applies only in absence
of a statute or specific agreement. Thus the trial court erred. Planters was entitled to apply the Hi-Plains payments as it
saw fit.27

In the case at bench, the records show that Premiere Bank and Central Surety entered into several contracts of loan,
securities by way of pledges, and suretyship agreements. In at least two (2) promissory notes between the parties,
Promissory Note No. 714-Y and Promissory Note No. 376-X, Central Surety expressly agreed to grant Premiere Bank
the authority to apply any and all of Central Surety’s payments, thus:

In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere Bank] to apply without
notice and in any manner it sees fit, any or all of my/our deposits and payments to any of my/our obligations whether
due or not. Any such application of deposits or payments shall be conclusive and binding upon us.

45
This proviso is representative of all the other Promissory Notes involved in this case. It is in the exercise of this express
authority under the Promissory Notes, and following Bangko Sentral ng Pilipinas Regulations, that Premiere Bank
applied payments made by Central Surety, as it deemed fit, to the several debts of the latter.

All debts were due; There was no


waiver on the part of petitioner

Undoubtedly, at the time of conflict between the parties material to this case, Promissory Note No. 714-Y dated August
20, 1999, in the amount of P6,000,000.00 and secured by the pledge of the Wack Wack Membership, was past the due
and demand stage. By its terms, Premiere Bank was entitled to declare said Note and all sums payable thereunder
immediately due and payable, without need of "presentment, demand, protest or notice of any kind." The subsequent
demand made by Premiere Bank was, therefore, merely a superfluity, which cannot be equated with a waiver of the
right to demand payment of all the matured obligations of Central Surety to Premiere Bank.

Moreover, this Court may take judicial notice that the standard practice in commercial transactions to send demand
letters has become part and parcel of every collection effort, especially in light of the legal requirement that demand is
a prerequisite before default may set in, subject to certain well-known exceptions, including the situation where the law
or the obligations expressly declare it unnecessary.28

Neither can it be said that Premiere Bank waived its right to apply payments when it specifically demanded payment of
the P6,000,000.00 loan under Promissory Note No. 714-Y. It is an elementary rule that the existence of a waiver must
be positively demonstrated since a waiver by implication is not normally countenanced. The norm is that a waiver must
not only be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness of the relevant
circumstances and likely consequences. There must be persuasive evidence to show an actual intention to relinquish
the right. Mere silence on the part of the holder of the right should not be construed as a surrender thereof; the courts
must indulge every reasonable presumption against the existence and validity of such waiver. 29

Besides, in this case, any inference of a waiver of Premiere Bank’s, as creditor, right to apply payments is eschewed
by the express provision of the Promissory Note that: "no failure on the part of [Premiere Bank] to exercise, and no
delay in exercising any right hereunder, shall operate as a waiver thereof."

Thus, we find it unnecessary to rule on the applicability of the equitable principle of waiver that the Court of Appeals
ascribed to the demand made by Premiere Bank upon Central Surety to pay the amount of P6,000,000.00, in the face
of both the express provisions of the law and the agreements entered into by the parties. After all, a diligent creditor
should not needlessly be interfered with in the prosecution of his legal remedies. 30

When Central Surety directed the application of its payment to a specific debt, it knew it had another debt with
Premiere Bank, that covered by Promissory Note 367-Z, which had been renewed under Promissory Note 376-X, in the
amount of P40.898 Million. Central Surety is aware that Promissory Note 367-Z (or 376-X) contains the same provision
as in Promissory Note No 714-Y which grants the Premiere Bank authority to apply payments made by Central Surety,
viz.:

In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere Bank] to apply without
notice and in any manner it sees fit, any or all of my/our deposits and payments to any of my/our obligations whether
due or not. Any such application of deposits or payments shall be conclusive and binding upon us. 31

Obviously, Central Surety is also cognizant that Promissory Note 367-Z contains the proviso that:

the bank shall be entitled to declare this Note and all sums payable hereunder to be immediately due and payable,
without need of presentment, demand, protest or notice of nay kind, all of which I/We hereby expressly waive, upon
occurrence of any of the following events: x x x (ii) My/Our failure to pay any amortization or installment due hereunder;
(iii) My/Our failure to pay money due under any other document or agreement evidencing obligations for borrowed
money x x x.32

by virtue of which, it follows that the obligation under Promissory Note 367-Z had become past due and demandable,
with further notice expressly waived, when Central Surety defaulted on its obligations under Promissory Note No. 714-
Y.

Mendoza v. Court of Appeals33 forecloses any doubt that an acceleration clause is valid and produces legal effects. In
fact, in Selegna Management and Development Corporation v. United Coconut Planters Bank, 34 we held that:

Considering that the contract is the law between the parties, respondent is justified in invoking the acceleration clause
declaring the entire obligation immediately due and payable. That clause obliged petitioners to pay the entire loan on
January 29, 1999, the date fixed by respondent.

It is worth noting that after the delayed payment of P6,000,000.00 was tendered by Central Surety, Premiere Bank
returned the amount as insufficient, ostensibly because there was, at least, another account that was likewise due.
Obviously, in its demand of 28 September 2000, petitioner sought payment, not just of the P6,000,000.00, but of all
these past due accounts. There is extant testimony to support this claim, as the transcript of stenographic notes on the
testimony of Atty. Araos reveals:
46
Atty. Opinion: Q. But you accepted this payment of Six Million (P6,000,000.00) later on when together with this was
paid another check for 1.8 Million?

Witness: A. We accepted.

Atty. Opinion: Q. And you applied this to four (4) other accounts three (3) other accounts or to four (4) accounts
mentioned in Exhibit "J." Is that correct?

Atty. Tagalog: We can stipulate on that. Your Honor.

Court: This was stipulated?

Atty. Tagalog: Yes, Your Honor. In fact, there is already stipulation that we confirm that those are the applications of
payments made by the defendant Bank on those loan accounts.

Atty. Opinion: Q. Were these accounts due already when you made this application, distribution of payments?

Witness: A. Yes sir.35

Conversely, in its evidence-in-chief, Central Surety did not present any witness to testify on the payment of its
obligations. In fact, the record shows that after marking its evidence, Central Surety proceeded to offer its evidence
immediately. Only on the rebuttal stage did Central Surety present a witness; but even then, no evidence was adduced
of payment of any other obligation. In this light, the Court is constrained to rule that all obligations of Central Surety to
Premiere Bank were due; and thus, the application of payments was warranted.

Being in receipt of amounts tendered by Central Surety, which were insufficient to cover its more onerous obligations,
Premiere Bank cannot be faulted for exercising the authority granted to it under the Promissory Notes, and applying
payment to the obligations as it deemed fit. Subject to the caveat that our ruling herein shall be limited only to the
transactions entered into by the parties to this case, the Court will not disturb the finding of the lower court that
Premiere Bank rightly applied the payments that Central Surety had tendered. Corollary thereto, and upon the second
issue, the tender of the amount of P6,000,000.00 by Central Surety, and the encashment of BC Check No. 08114 did
not totally extinguish the debt covered by PN No. 714-Y.

Release of the pledged

Wack Wack Membership

Contract of Adhesion

To the extent that the subject promissory notes were prepared by the Premiere Bank and presented to Central Surety
for signature, these agreements were, indeed, contracts of adhesion. But contracts of adhesion are not invalid per se.
Contracts of adhesion, where one party imposes a ready-made form of contract on the other, are not entirely
prohibited. The one who adheres to the contract is, in reality, free to reject it entirely; if he adheres, he gives his
consent.

In interpreting such contracts, however, courts are expected to observe greater vigilance in order to shield the unwary
or weaker party from deceptive schemes contained in ready-made covenants.36 Thus, Article 24 of the Civil Code
pertinently states:

In all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral
dependence, ignorance, indigence, mental weakness, tender age or other handicap, the courts must be vigilant for his
protection.

But in this case, Central Surety does not appear so weak as to be placed at a distinct disadvantage vis-à-vis the bank.
As found by the lower court:

Considering that [Central Surety] is a known business entity, the [Premiere Bank] was right in assuming that the
[Central Surety] could not have been cheated or misled in agreeing thereto, it could have negotiated with the bank on a
more favorable term considering that it has already established a certain reputation with the [Premiere Bank] as
evidenced by its numerous transactions. It is therefore absurd that an established company such as the [Central
Surety] has no knowledge of the law regarding bank practice in loan transactions.

The Dragnet Clause.

The factual circumstances of this case showing the chain of transactions and long-standing relationship between
Premiere Bank and Central Surety militate against the latter’s prayer in its complaint for the release of the Wack Wack
Membership, the security attached to Promissory Note 714-Y.

47
A tally of the facts shows the following transactions between Premiere Bank and Central Surety:

Date Instrument Amount Stipulation


covered

August 20, 1999 PN 714-Y P6M

August 29, 1999 Deed of P 15 M As security for PN 714-Y and/or such


Assignment with Promissory Note/s which the ASSIGNOR
Pledge / PLEDGOR shall hereafter execute in
favor of the ASSIGNEE/PLEDGEE

From these transactions and the proviso in the Deed of Assignment with Pledge, it is clear that the security, which
peculiarly specified an amount at P15,000,000.00 (notably greater than the amount of the promissory note it secured),
was intended to guarantee not just the obligation under PN 714-Y, but also future advances. Thus, the said deed is
explicit:

As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the
amount of FIFTEEN MILLION PESOS (15,000,000.00) Philippine Currency in accordance with the Promissory Note
attached hereto and made an integral part hereof as Annex "A" and/or such Promissory Note/s which the
ASSIGNOR/PLEDGOR shall hereafter execute in favor of the ASSIGNEE/PLEDGEE, the ASSIGNOR/PLEDGOR
hereby transfers, assigns, conveys, endorses, encumbers and delivers by way of first pledge unto the
ASSIGNEE/PLEDGEE, its successors and assigns, that certain Membership fee Certificate Share in Wack Wack Golf
and Country Club Incorporate covered by Stock Certificate No. 217 with Serial No. 1793 duly issue by Wack Wack Golf
and Country Club Incorporated on August 27, 1996 in the name of the ASSIGNOR." (Emphasis made in the Petition.)

Then, a Continuing Guaranty/Comprehensive Surety Agreement was later executed by Central Surety as follows:

Date Instrument Amount Stipulation

Notarized, Sept. 22, Continuing P40,898,000.00 In consideration of the loan and/or any
1999 Guaranty/Comprehensive credit accommodation which you
Surety Agreement (petitioner) have extended and/or will
extend to Central Surety and Insurance Co

And on October 10, 2000, Promissory Note 376-X was entered into, a renewal of the prior Promissory Note 367-Z, in
the amount of P40,898,000.00. In all, the transactions that transpired between Premiere Bank and Central Surety
manifest themselves, thusly:

Date Amount
Instrument Stipulation
covered

August 20, 1999 PN 714-Y P6M

August 29, 1999 Deed of Assignment with P 15 M As security for PN 714-Y and/or such
Pledge Note/s which the ASSIGNOR / PLED
hereafter execute in favor of the
ASSIGNEE/PLEDGEE

Notarized, Continuing P40,898,000.00 In consideration of the loan and/or an


Sept. 22, 1999 Guaranty/Comprehensive accommodation which you (petitioner
Surety Agreement extended and/or will extend to Centra
Insurance Co.

October 10, 2000 Promissory Note 376-X (PN P40,898,000.00


367-Z)

48
From the foregoing, it is more than apparent that when, on August 29, 1999, the parties executed the Deed of
Assignment with Pledge (of the Wack Wack Membership), to serve as security for an obligation in the amount
ofP15,000,000.00 (when the actual loan covered by PN No. 714-Y was only P6,000,000.00), the intent of the parties
was for the Wack Wack Membership to serve as security also for future advancements. The subsequent loan was
nothing more than a fulfillment of the intention of the parties. Of course, because the subsequent loan was for a much
greater amount (P40,898,000.00), it became necessary to put up another security, in addition to the Wack Wack
Membership. Thus, the subsequent surety agreement and the specific security for PN No. 367-X were, like the Wack
Wack Membership, meant to secure the ballooning debt of the Central Surety.

The above-quoted provision in the Deed of Assignment, also known as the "dragnet clause" in American jurisprudence,
would subsume all debts of respondent of past and future origins. It is a valid and legal undertaking, and the amounts
specified as consideration in the contracts do not limit the amount for which the pledge or mortgage stands as security,
if from the four corners of the instrument, the intent to secure future and other indebtedness can be gathered. A pledge
or mortgage given to secure future advancements is a continuing security and is not discharged by the repayment of
the amount named in the mortgage until the full amount of all advancements shall have been paid.37

Our ruling in Prudential Bank v. Alviar38 is instructive:

A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which is specifically
phrased to subsume all debts of past or future origins. Such clauses are "carefully scrutinized and strictly construed."
Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be
known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each
new transaction. A "dragnet clause" operates as a convenience and accommodation to the borrowers as it makes
available additional funds without their having to execute additional security documents, thereby saving time, travel,
loan closing costs, costs of extra legal services, recording fees, et cetera. Indeed, it has been settled in a long line of
decisions that mortgages given to secure future advancements are valid and legal contracts, and the amounts named
as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and other indebtedness can be gathered.

The "blanket mortgage clause" in the instant case states:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee
by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to
secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed
at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may
extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the
Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or
assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended
hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed
thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .

xxxx

In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN
BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his foreign currency savings account, while PN
BD#76/C-430, executed by respondents for Donalco Trading, Inc., was secured by "Clean-Phase out TOD CA 3923"
and eventually by a deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed
of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various heavy and transportation
equipment. The matter of PN BD#76/C-430 has already been discussed. Thus, the critical issue is whether the "blanket
mortgage" clause applies even to subsequent advancements for which other securities were intended, or particularly,
to PN BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. One school advocates that a
"dragnet clause" so worded as to be broad enough to cover all other debts in addition to the one specifically secured
will be construed to cover a different debt, although such other debt is secured by another mortgage. The contrary
thinking maintains that a mortgage with such a clause will not secure a note that expresses on its face that it is
otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting the security specified
therein, such deficiency being an indebtedness within the meaning of the mortgage, in the absence of a special
contract excluding it from the arrangement.

The latter school represents the better position. The parties having conformed to the "blanket mortgage clause" or
"dragnet clause," it is reasonable to conclude that they also agreed to an implied understanding that subsequent loans
need not be secured by other securities, as the subsequent loans will be secured by the first mortgage. In other words,
the sufficiency of the first security is a corollary component of the "dragnet clause." But of course, there is no
prohibition, as in the mortgage contract in issue, against contractually requiring other securities for the subsequent
loans. Thus, when the mortgagor takes another loan for which another security was given it could not be inferred that
such loan was made in reliance solely on the original security with the "dragnet clause," but rather, on the new security
given. This is the "reliance on the security test."

49
Hence, based on the "reliance on the security test," the California court in the cited case made an inquiry whether the
second loan was made in reliance on the original security containing a "dragnet clause." Accordingly, finding a different
security was taken for the second loan no intent that the parties relied on the security of the first loan could be inferred,
so it was held. The rationale involved, the court said, was that the "dragnet clause" in the first security instrument
constituted a continuing offer by the borrower to secure further loans under the security of the first security instrument,
and that when the lender accepted a different security he did not accept the offer.

In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the mortgagor to the bank to
provide the security of the mortgage for advances of and when they were made. Thus, it was concluded that the "offer"
was not accepted by the bank when a subsequent advance was made because (1) the second note was secured by a
chattel mortgage on certain vehicles, and the clause therein stated that the note was secured by such chattel
mortgage; (2) there was no reference in the second note or chattel mortgage indicating a connection between the real
estate mortgage and the advance; (3) the mortgagor signed the real estate mortgage by her name alone, whereas the
second note and chattel mortgage were signed by the mortgagor doing business under an assumed name; and (4)
there was no allegation by the bank, and apparently no proof, that it relied on the security of the real estate mortgage in
making the advance.

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary intention, a
mortgage containing a "dragnet clause" will not be extended to cover future advances unless the document evidencing
the subsequent advance refers to the mortgage as providing security therefor.

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of non-
payment of all the three promissory notes. While the existence and validity of the "dragnet clause" cannot be denied,
there is a need to respect the existence of the other security given for PN BD#76/C-345. The foreclosure of the
mortgaged property should only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not
covered by the security for the second promissory note. As held in one case, where deeds absolute in form were
executed to secure any and all kinds of indebtedness that might subsequently become due, a balance due on a note,
after exhausting the special security given for the payment of such note, was in the absence of a special agreement to
the contrary, within the protection of the mortgage, notwithstanding the giving of the special security. This is recognition
that while the "dragnet clause" subsists, the security specifically executed for subsequent loans must first be exhausted
before the mortgaged property can be resorted to.

The security clause involved in the case at bar shows that, by its terms:

As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the
amount of FIFTEEN MILLION PESOS (15,000,000.00) Philippine Currency in accordance with the Promissory Note
attached hereto and made an integral part hereof as Annex "A" and/or such Promissory Note/s which the
ASSIGNOR/PLEDGOR shall hereafter execute in favor of the ASSIGNEE/PLEDGEE, the ASSIGNOR/ PLEDGOR
hereby transfers, assigns, conveys, endorses, encumbers and delivers by way of first pledge unto the
ASSIGNEE/PLEDGEE, its successors and assigns, that certain Membership fee Certificate Share in Wack Wack Golf
and Country Club Incorporated covered by Stock Certificate No. 217 with Serial No. 1793 duly issue by Wack Wack
Golf and Country Club Incorporated on August 27, 1996 in the name of the ASSIGNOR."

it is comparable with the security clause in the case of Prudential, viz.:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee
by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to
secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed
at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may
extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the
Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or
assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended
hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed
thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .

and there is no substantive difference between the terms utilized in both clauses securing future advances.

To recall, the critical issue resolved in Prudential was whether the "blanket mortgage" clause applies even to
subsequent advancements for which other securities were intended. We then declared that the special security for
subsequent loans must first be exhausted in a situation where the creditor desires to foreclose on the "subsequent"
loans that are due. However, the "dragnet clause" allows the creditor to hold on to the first security in case of deficiency
after foreclosure on the special security for the subsequent loans.

In Prudential, we disallowed the petitioner’s attempt at multiple foreclosures, as it foreclosed on all of the mortgaged
properties serving as individual securities for each of the three loans. This Court then laid down the rule, thus:

where deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently
become due, a balance due on a note, after exhausting the special security given for the payment of such note, was, in
the absence of a special agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of

50
the special security. This is recognition that while the "dragnet clause" subsists, the security specifically executed for
subsequent loans must first be exhausted before the mortgaged property can be resorted to.

However, this does not prevent the creditor from foreclosing on the security for the first loan if that loan is past due,
because there is nothing in law that prohibits the exercise of that right. Hence, in the case at bench, Premiere Bank has
the right to foreclose on the Wack Wack Membership, the security corresponding to the first promissory note, with the
deed of assignment that originated the "dragnet clause." This conforms to the doctrine in Prudential, as, in fact,
acknowledged in the decision’s penultimate paragraph, viz.:

Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that respondents have
not yet paid the P250,000.00 and gave no credence to their claim that they paid the said amount when they paid
petitioner P2,000,000.00. Thus, the mortgaged property could still be properly subjected to foreclosure proceedings for
the unpaid P250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129, security for PN
BD#76/c-345, has been exhausted, subject of course to defenses which are available to respondents.

In any event, even without this Court’s prescription in Prudential, the release of the Wack Wack Membership as the
pledged security for Promissory Note 714-Y cannot yet be done as sought by Central Surety. The chain of contracts
concluded between Premiere Bank and Central Surety reveals that the Wack Wack Membership, which stood as
security for Promissory Note 714-Y, and which also stands as security for subsequent debts of Central Surety, is a
security in the form of a pledge. Its return to Central Surety upon the pretext that Central Surety is entitled to pay only
the obligation in Promissory Note No. 714-Y, will result in the extinguishment of the pledge, even with respect to the
subsequent obligations, because Article 2110 of the Civil Code provides:

(I)f the thing pledged is returned by the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary is
void.

This is contrary to the express agreement of the parties, something which Central Surety wants this Court to undo. We
reiterate that, as a rule, courts cannot intervene to save parties from disadvantageous provisions of their contracts if
they consented to the same freely and voluntarily.39

Attorney’s Fees

The final issue is the propriety of attorney’s fees. The trial court based its award on the supposed malice of Central
Surety in instituting this case against Premiere Bank. We find no malice on the part of Central Surety; indeed, we are
convinced that Central Surety filed the case in the lower court in good faith, upon the honest belief that it had the
prerogative to choose to which loan its payments should be applied.

Malicious prosecution, both in criminal and civil cases, requires the presence of two elements, to wit: (a) malice and (b)
absence of probable cause. Moreover, there must be proof that the prosecution was prompted by a sinister design to
vex and humiliate a person; and that it was initiated deliberately, knowing that the charge was false and baseless.
Hence, the mere filing of what turns out to be an unsuccessful suit does not render a person liable for malicious
prosecution, for the law could not have meant to impose a penalty on the right to litigate. 40 Malice must be proved with
clear and convincing evidence, which we find wanting in this case.

WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision of the Court of Appeals in CA-
G.R. CV No. 85930 dated July 31, 2006, as well as its Resolution dated January 4, 2007, are REVERSED and SET
ASIDE. The Decision of the Regional Trial Court of Makati City, Branch 132, in Civil Case No. 00-1536, dated July 12,
2005, is REINSTATED with the MODIFICATION that the award of attorney’s fees to petitioner is DELETED. No
pronouncement as to costs.

SO ORDERED.

G.R. No. 116805 June 22, 2000

MARIO S. ESPINA, petitioner,


vs.
THE COURT OF APPEALS and RENE G. DIAZ, respondents.

PARDO, J.:

The case before the Court is an appeal from a decision of the Court of Appeals 1 reversing that of the Regional Trial
Court, Antipolo, Rizal, 2 affirming in all respects the decision of the Municipal Trial Court, Antipolo, Rizal, 3 ordering
respondent Rene G. Diaz to vacate the condominium unit owned by petitioner and to pay back current rentals,
attorney's fees and costs.1âwphi1.nêt

The facts, as found by the Court of Appeals, are as follows:

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Mario S. Espina is the registered owner of a Condominium Unit No. 403, Victoria Valley Condominium, Valley
Golf Subdivision, Antipolo, Rizal. Such ownership is evidenced by Condominium Certificate of Title No. N-10
(p. 31, Rollo).

On November 29, 1991, Mario S. Espina, the private respondent as seller, and Rene G. Diaz, the petitioner as
buyer, executed a Provisional Deed of Sale, whereby the former sold to the latter the aforesaid condominium
unit for the amount of P100,000.00 to be paid upon the execution of the contract and the balance to be paid
through PCI Bank postdated checks as follows:

1. P400,000.00

Check No. 301245


January 15, 1992

2. P200,000.00

Check No. 301246


February 1, 1992

3. P200,000.00

Check No. 301247


February 22, 1992

4. P200,000.00

Check No. 301248


March 14, 1992

5. P200,000.00

Check No. 301249


April 4, 1992

6. P200,000.00

Check No. 301250


April 25, 1992

(pp. 59-61, Rollo).

Subsequently, in a letter dated January 22, 1992, petitioner informed private respondent that his checking
account with PCI Bank has been closed and a new checking account with the same drawee bank is opened for
practical purposes. The letter further stated that the postdated checks issued will be replaced with new ones in
the same drawee bank (p. 63, Rollo).

On January 25, 1992, petitioner through Ms. Socorro Diaz, wife of petitioner, paid private respondent Mario
Espina P200,000.00, acknowledged by him as partial payment for the condominium unit subject of this
controversy (p. 64, Rollo).

On July 26, 1992, private respondent sent petitioner a "Notice of Cancellation" of the Provisional Deed of Sale
(p. 48, Rollo).

However, despite the Notice of Cancellation from private respondent, the latter accepted payment from
petitioner per Metrobank Check No. 395694 dated and encashed on October 28, 1992 in the amount of
P100,000.00 (p. 64, Rollo).

On February 24, 1993, private respondent filed a complaint docketed as Civil Case No. 2104 for Unlawful
Detainer against petitioner before the Municipal Trial Court of Antipolo, Branch 1.

On November 12, 1993, the trial court rendered its decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing consideration, judgment is hereby rendered ordering the
defendant and all persons claiming rights under him to vacate unit 403 of the Victoria Golf Valley
Condominium, Valley Golf Subdivision, Antipolo, Rizal; to pay the total arrears of P126,000.00,
covering the period July 1991 up to the filing (sic) complaint, and to pay P7,000.00 every month
thereafter as rentals unit (sic) he vacates the premises; to pay the amount of P5,000.00 as and
attorney's fees; the amount of P300.00 per appearance, and costs of suit.

52
However, the plaintiff may refund to the defendant the balance from (sic) P400,000.00 after deducting
all the total obligations of the defendant as specified in the decision from receipt of said decision.

SO ORDERED. (Decision, Annex "B"; p. 27, Rollo).

From the said decision, petitioner appealed to the Regional Trial Court Branch 71, Antipolo, Rizal. On April 29,
1994, said appellate court affirmed in all respects the decision of the trial court. 4

On June 14, 1994, petitioner filed with the Court of Appeals a petition for review.

On July 20, 1994, the Court of Appeals promulgated its decision reversing the appealed decision and dismissing the
complaint for unlawful detainer with costs against petitioner Espina.

On August 8, 1994, petitioner filed a motion for reconsideration of the decision of the Court of Appeals. 5

On August 19, 1994, the Court of Appeals denied the motion. 6

Hence, this appeal via petition for review on certiorari. 7

The basic issue raised is whether the Court of Appeals erred in ruling that the provisional deed of sale novated the
existing contract of lease and that petitioner had no cause of action for ejectment against respondent Diaz.

We resolve the issue in favor of petitioner.

According to respondent Diaz, the provisional deed of sale that was subsequently executed by the parties novated the
original existing contract of lease. The contention cannot be sustained. Respondent originally occupied the
condominium unit in question in 1987 as a lessee. 8 While he occupied the premises as lessee, petitioner agreed to sell
the condominium unit to respondent by installments. 9 The agreement to sell was provisional as the consideration was
payable in installments.

The question is, did the provisional deed of sale novate the existing lease contract? The answer is no. The novation
must be clearly proved since its existence is not presumed. 10 "In this light, novation is never presumed; it must be
proven as a fact either by express stipulation of the parties or by implication derived from an irreconcilable
incompatibility between old and new obligations or contracts." 11 Novation takes place only if the parties expressly so
provide, otherwise, the original contract remains in force. In other words, the parties to a contract must expressly agree
that they are abrogating their old contract in favor of a new one. 12 Where there is no clear agreement to create a new
contract in place of the existing one, novation cannot be presumed to take place, unless the terms of the new contract
are fully incompatible with the former agreement on every point. 13 Thus, a deed of cession of the right to repurchase a
piece of land does not supersede a contract of lease over the same property. 14 In the provisional deed of sale in this
case, after the initial down payment, respondent's checks in payment of six installments all bounced and were
dishonored upon presentment for the reason that the bank account was closed. 15 Consequently, on July 26, 1992,
petitioner terminated the provisional deed of sale by a notarial notice of cancellation. 16 Nonetheless, respondent Diaz
continued to occupy the premises, as lessee, but failed to pay the rentals due. On October 28, 1992, respondent made
a payment of P100,000.00 that may be applied either to the back rentals or for the purchase of the condominium unit.
On February 13, 1993, petitioner gave respondent a notice to vacate the premises and to pay his back
rentals. 17 Failing to do so, respondent's possession became unlawful and his eviction was proper. Hence, on February
24, 1993, petitioner filed with the Municipal Trial Court, Antipolo, Rizal, Branch 01 an action for unlawful detainer
against respondent Diaz. 18

Now respondent contends that the petitioner's subsequent acceptance of such payment effectively withdrew the
cancellation of the provisional sale. We do not agree. Unless the application of payment is expressly indicated, the
payment shall be applied to the obligation most onerous to the debtor. 19 In this case, the unpaid rentals constituted the
more onerous obligation of the respondent to petitioner. As the payment did not fully settle the unpaid rentals,
petitioner's cause of action for ejectment survives. Thus, the Court of Appeals erred in ruling that the payment was
"additional payment" for the purchase of the property.

WHEREFORE, the Court GRANTS the petition for review on certiorari, and REVERSES the decision of the Court of
Appeals. 20 Consequently, the Court REVIVES the decision of the Regional Trial Court, Antipolo, Rizal, Branch
71,21 affirming in toto the decision of the Municipal Trial Court, Antipolo, Rizal, Branch 01. 22

No costs.

SO ORDERED.1âwphi1.nêt

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