SECOND DIVISION

[G.R. No. 123031. October 12, 1999.]

CEBU INTERNATIONAL FINANCE CORPORATION , petitioner, vs .

COURT OF APPEALS, VICENTE ALEGRE , respondents.

Villanueva Pacis Mondragon & Cana Law Offices for petitioner.

Marlito C. Altuna for private respondent.

SYNOPSIS

Petitioner, a quasi-banking institution engaged in money market operations, was

sued in RTC Branch 132 for collection of money by private respondent Alegre for its failure
to pay a BPI check in the amount of P514,390.94 corresponding to the amount invested by
him in the corporation plus interest. BPI dishonored and kept the check pending
investigation of several counterfeit checks drawn against petitioner's current account.
When BPI deducted the full amount of the forged checks, including that issued to Alegre,
petitioner sued in RTC Branch 147 BPI for collection. BPI, however, did not deliver to
Alegre the amount deducted from petitioner's current account. The parties then entered
into a compromise agreement to the effect that BPI will debit the amount of the check
issued to Alegre from petitioner's current account representing payment/discharge and
that BPI will have no more liability in case, petitioner is adjudged liable to Alegre.
Meanwhile in the collection suit led by private respondent against petitioner, the third
party complaint against BPI was dismissed on the ground that it is similar to its ancillary
claim led by petitioner against BPI. Judgment was thereafter rendered in favor of Alegre.
The decision was a rmed on appeal by the Court of Appeals, hence, this recourse,
petitioner claiming that the check was validly discharged under the Negotiable
Instruments Law when BPI debited the value of the check against petitioner's current
account and that the third party complaint was erroneously dismissed by the trial court. THcaDA

The Supreme Court held that deduction by BPI of the amount of the check issued to
Alegre from petitioner's current account did not operate as a discharge or payment of the
instrument as the value of the check was not delivered to the payee; that a compromise
agreement which has the effect and authority of res judicata could not bind a party who
did not sign the agreement or avail of its bene ts; and that there is identity of parties and
identity of rights asserted in both the third party complaint and petitioner's ancillary claim
in the two cases, and, therefore, any judgment that may be rendered in one case will
amount to res judicata in another.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINCTION OF OBLIGATION;

DELIVERY OF BILLS OF EXCHANGE; SHALL PRODUCE EFFECT OF PAYMENT ONLY WHEN
THEY HAVE BEEN ENCASHED; RULE APPLICABLE TO MONEY MARKET TRANSACTIONS.
— Article 1249 of the New Civil Code deals with a mode of extinction of an obligation and
expressly provides for the medium in the "payment of debts." It provides that: "The
payment of debts in money shall be made in the currency stipulated, and if it is not
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 possible to deliver such currency, then in the currency, which is legal tender in the
Philippines. The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired. In the meantime,
the action derived from the original obligation shall be held in abeyance." As held in Perez
vs. Court of Appeals, a "money market" is a market dealing in standard 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.
2. ID.; ID.; ID.; ID.; ID.; TRANSACTION IN PRESENT CASE, A LOAN. — In the case
at bar, the money market transaction between the petitioner and the private respondent is
in the nature of a loan. In a loan transaction, the obligation to pay a sum certain in money,
may be paid in money, which is the legal tender or, by the use of a check. A check is not a
legal tender, and therefore cannot constitute valid tender of payment. In the case of
Philippine Airlines, Inc. vs. Court of Appeals, this Court held: "Since a negotiable instrument
is only a substitute for money and not money, the delivery of such an instrument does not,
by itself, operate as payment (citation omitted). A check, whether a manager's check or
ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a
valid tender of payment and may be refused receipt by the obligee or creditor. Mere
delivery of checks does not discharge the obligation under a judgment. The obligation is
not extinguished and remains suspended until the payment by commercial document is
actually realized (Art. 1249, Civil Code, par. 3.)"
3. ID.; ID.; COMPROMISE; COULD NOT BIND PARTY WHO DID NOT SIGN
AGREEMENT NOR AVAIL OF ITS BENEFITS. — A compromise is a contract whereby the
parties, by making reciprocal concessions, avoid a litigation or put an end to one already
commenced. It is an agreement between two or more persons who, for preventing or
putting an end to a lawsuit, adjust their di culties by mutual consent in the manner which
they agree on, and which everyone of them prefers in the hope of gaining, balanced by the
danger of losing. The compromise agreement could not bind a party who did not sign the
compromise agreement nor avail of its bene ts. Thus, the stipulations in the compromise
agreement is unenforceable against Vicente Alegre, not a party thereto. His money could
not be the subject of an agreement between CIFC and BPI. Although Alegre's money was in
custody of the bank, the bank's possession of it was not in the concept of an owner. BPI
cannot validly appropriate the money as its own.
4. REMEDIAL LAW; ACTIONS; BANK CANNOT MOTU PROPRIO CONFISCATE
MONEY DUE PAYEE. — BPI's con scation of Alegre's money constitutes garnishment
without the parties going through a valid proceeding in court. Garnishment is an
attachment by means of which the plaintiff seeks to subject to his claim the property of
the defendant in the hands of a third person or money owed to such third person or a
garnishee to the defendant. The garnishment procedure must be upon proper order of
RTC-Makati, Branch 62, the court who had jurisdiction over the collection suit led by BPI
against Alegre.
5. CIVIL LAW; OBLIGATIONS AND CONTRACTS; TENDER OF PAYMENT;
INVOLVES POSITIVE AND UNCONDITIONAL ACT OF OBLIGOR'S OFFER OF LEGAL TENDER
AS PAYMENT TO OBLIGEE AND DEMAND THAT THE LATTER ACCEPT SAME. — Tender of
payment involves a positive and unconditional act by the obligor of offering legal tender
currency as payment to the obligee for the former's obligation and demanding that the
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 latter accept the same. Tender of payment cannot be presumed by a mere inference from
surrounding circumstances.
6. REMEDIAL LAW; ACTIONS; LITIS PENDENTIA; REQUISITES. — For litis
pendentia to be a ground for the dismissal of an action, the following requisites must
concur: (a) identity of parties or at least such as to represent the same interest in both
actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the
same acts; and (c) the identity in the two cases should be such that the judgment which
may be rendered in one would, regardless of which party is successful, amount to res
judicata in the other.
7. ID.; ID.; COMPROMISE; HAS UPON PARTIES EFFECT AND AUTHORITY OF RES
JUDICATA. — The compromise agreement between CIFC and BPI, categorically provided
that "In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising
from the alleged dishonor of BPI Check No. 513397, plaintiff (CIFC) cannot go after the
defendant (BPI); otherwise stated, the defendant shall not be liable to the plaintiff." Clearly,
this stipulation expressed that CIFC had already abandoned any further claim against BPI
with respect to the value of BPI Check No. 513397. To ask this Court to allow BPI to be a
party in the case at bar, would amount to res judicata and would violate terms of the
compromise agreement between CIFC and BPI. The general rule is that a compromise has
upon the parties the effect and authority of res judicata, with respect to the matter
de nitely stated therein, or which by implication from its terms should be deemed to have
been included therein. This holds true even if the agreement has not been judicially
approved. cSCTID

DECISION

QUISUMBING , J : p

This petition for review on certiorari assails respondent appellate court's Decision, 1
dated December 8, 1995, in CA G.R. CV No. 44085, which a rmed the ruling of the
Regional Trial Court of Makati, Branch 132. The dispositive portion of the trial court's
decision reads: cdrep

"WHEREFORE, judgment is hereby rendered ordering defendant [herein

petitioner] to pay plaintiff [herein private respondent]:
"(1) the principal sum of P514,390.94 with legal interest thereon computed
from August 6, 1991 until fully paid; and
"(2) the costs of suit.

SO ORDERED." 2

Based on the records, the following are the pertinent facts of the case:
Cebu International Finance Corporation (CIFC), a quasi-banking institution, is
engaged in money market operations.
On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, ve
hundred thousand (P500,000.00) pesos, in cash. Petitioner issued a promissory note to
mature on May 27, 1991. The note for ve hundred sixteen thousand, two hundred thirty-
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 eight pesos and sixty-seven centavos (P516,238.67) covered private respondent's
placement plus interest at twenty and a half (20.5%) percent for thirty-two (32) days.
On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for
ve hundred fourteen thousand, three hundred ninety pesos and ninety-four centavos
(P514,390.94) in favor of the private respondent as proceeds of his matured investment
plus interest. The CHECK was drawn from petitioner's current account number 0011-0803-
59, maintained with the Bank of the Philippine Islands (BPI), main branch at Makati City.
On June 17, 1991, private respondent's wife deposited the CHECK with Rizal
Commercial Banking Corp. (RCBC), in Puerto Princesa, Palawan. BPI dishonored the
CHECK with the annotation, that the "Check (is) Subject of an Investigation." BPI took
custody of the CHECK pending an investigation of several counterfeit checks drawn
against CIFC's aforestated checking account. BPI used the check to trace the perpetrators
of the forgery.
Immediately, private respondent noti ed CIFC of the dishonored CHECK and
demanded, on several occasions, that he be paid in cash. CIFC refused the request, and
instead instructed private respondent to wait for its ongoing bank reconciliation with BPI.
Thereafter, private respondent, through counsel, made a formal demand for the payment
of his money market placement. In turn, CIFC promised to replace the CHECK but required
an impossible condition that the original must first be surrendered.
On February 25, 1992, private respondent Alegre filed a complaint 3 for recovery of a
sum of money against the petitioner with the Regional Trial Court of Makati (RTC-Makati),
Branch 132.
On July 13, 1992, CIFC sought to recover its lost funds and formally led against
BPI, a separate civil action 4 for collection of a sum of money with the RTC-Makati, Branch
147. The collection suit alleged that BPI unlawfully deducted from CIFC's checking
account, counterfeit checks amounting to one million, seven hundred twenty-four
thousand, three hundred sixty-four pesos and fty-eight centavos (P1,724,364.58). The
action included the prayer to collect the amount of the CHECK paid to Vicente Alegre but
dishonored by BPI.
Meanwhile, in response to Alegre's complaint with RTC-Makati, Branch 132, CIFC
led a motion for leave of court to le a third-party complaint against BPI. BPI was
impleaded by CIFC to enforce a right, for contribution and indemnity, with respect to
Alegre's claim. CIFC asserted that the CHECK it issued in favor of Alegre was genuine, valid
and sufficiently funded.
On July 23, 1992, the trial court granted CIFC's motion. However, BPI moved to
dismiss the third-party complaint on the ground of pendency of another action with RTC-
Makati, Branch 147. Acting on the motion, the trial court dismissed the third-party
complaint on November 4, 1992, after nding that the third party complaint led by CIFC
against BPI is similar to its ancillary claim against the bank, led with RTC-Makati Branch
147. prcd

Thereafter, during the hearing by RTC-Makati, Branch 132, held on May 27, and June
22, 1993, Vito Arieta, Bank Manager of BPI, testi ed that the bank, indeed, dishonored the
CHECK, retained the original copy and forwarded only a certi ed true copy to RCBC. When
Arieta was recalled on July 20, 1993, he testi ed that on July 16, 1993, BPI encashed and
deducted the said amount from the account of CIFC, but the proceeds, as well as the
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 CHECK remained in BPI's custody. The bank's move was in accordance with the
Compromise Agreement 5 it entered with CIFC to end the litigation in RTC-Makati, Branch
147. The compromise agreement, which was submitted for the approval of the said court,
provided that:
"1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of
P1,724,364.58 plus P20,000 litigation expenses as full and nal settlement
of all of plaintiff's claims as contained in the Amended Complaint dated
September 10, 1992. The aforementioned amount shall be credited to
plaintiff's current account No. 0011-0803-59 maintained at defendant's
Main Branch upon execution of this Compromise Agreement.
"2. Thereupon, defendant shall debit the sum of P514,390.94 from the
aforesaid current account representing payment/discharge of BPI Check
No. 513397 payable to Vicente Alegre.

"3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-
515 arising from the alleged dishonor of BPI Check No. 513397, plaintiff
cannot go after the defendant: otherwise stated, the defendant shall not be
liable to the plaintiff. Plaintiff [CIFC] may however set-up the defense of
payment/discharge stipulated in par. 2 above." 6

On July 27, 1993, BPI led a separate collection suit 7 against Vicente Alegre with
the RTC-Makati, Branch 62. The complaint alleged that Vicente Alegre connived with
certain Lina A. Pena and Lita A. Anda and forged several checks of BPI's client, CIFC. The
total amount of counterfeit checks was P1,724,364.58. BPI prevented the encashment of
some checks amounting to two hundred ninety ve thousand, seven hundred seventy- ve
pesos and seven centavos (P295,775.07). BPI admitted that the CHECK, payable to
Vicente Alegre for P514,390.94, was deducted from BPI's claim, hence, the balance of the
loss incurred by BPI was nine hundred fourteen thousand, one hundred ninety-eight pesos
and fty-seven centavos (P914,198.57), plus costs of suit for twenty thousand
(P20,000.00) pesos. The records are silent on the outcome of this case.
On September 27, 1993, RTC-Makati, Branch 132, rendered judgment in favor of
Vicente Alegre.
CIFC appealed from the adverse decision of the trial court. The respondent court
affirmed the decision of the trial court.
Hence this appeal, 8 in which petitioner interposes the following assignments of
errors:
1. The Honorable Court of Appeals erred in a rming the nding of the
Honorable Trial Court holding that petitioner was not discharged from the
liability of paying the value of the subject check to private respondent after
BPI has debited the value thereof against petitioner's current account.

2. The Honorable Court of Appeals erred in applying the provisions of

paragraph 2 of Article 1249 of the Civil Code in the instant case. The
applicable law being the Negotiable Instruments Law.
3. The Honorable Court of Appeals erred in a rming the Honorable Trial
Court's ndings that the petitioner was guilty of negligence and delay in
the performance of its obligation to the private respondent.
4. The Honorable Court of Appeals erred in a rming the Honorable Trial
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 Court's decision ordering petitioner to pay legal interest and the cost of
suit.
5. The Honorable Court of Appeals erred in a rming the Honorable Trial
Court's dismissal of petitioner's third-party complaint against BPI.

These issues may be synthesized into three: LLpr

1. WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL CODE APPLIES IN

THE PRESENT CASE;
2. WHETHER OR NOT "BPI CHECK NO. 513397 " WAS VALIDLY DISCHARGED;
and

3. WHETHER OR NOT THE DISMISSAL OF THE THIRD PARTY COMPLAINT

OF PETITIONER AGAINST BPI BY REASON OF LIS PENDENS WAS
PROPER?

On the rst issue , petitioner contends that the provisions of the Negotiable
Instruments Law (NIL) are the pertinent laws to govern its money market transaction with
private respondent, and not paragraph 2 of Article 1249 of the Civil Code. Petitioner
stresses that it had already been discharged from the liability of paying the value of the
CHECK due to the following circumstances:
"1) There was "ACCEPTANCE" of the subject check by BPI, the drawee bank,
as de ned under the Negotiable Instruments Law, and therefore, BPI, the
drawee bank, became primarily liable for the payment of the check, and
consequently, the drawer, herein petitioner, was discharged from its liability
thereon;

2) Moreover, BPI, the drawee bank, has not validly DISHONORED the subject
check; and,

3) The act of BPI, the drawee bank of debiting/deducting the value of the
check from petitioner's account amounted to and/or constituted a
discharge of the drawer's (petitioner's) liability under the
instrument/subject check." 9

Petitioner cites Section 137 of the Negotiable Instruments Law, which states:
"Liability of drawee retaining or destroying bill — Where a drawee to whom
a bill is delivered for acceptance destroys the same, or refuses within twenty-four
hours after such delivery or such other period as the holder may allow, to return
the bill accepted or non-accepted to the Holder, he will be deemed to have
accepted the same."

Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable
for the payment of the CHECK. Consequently, when BPI offset the value of CHECK against
the losses from the forged checks allegedly committed by the private respondent, the
check was deemed paid.
Article 1249 of the New Civil Code deals with a mode of extinction of an obligation
and expressly provides for the medium in the "payment of debts." It provides that:
"The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency, which is
legal tender in the Philippines.
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 The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when they
have been cashed, or when through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the original obligation shall be
held in abeyance."

Considering the nature of a money market transaction, the above-quoted provision

should be applied in the present controversy. As held in Perez vs. Court of Appeals, 1 0 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.
11

In the case at bar, the money market transaction between the petitioner and the
private respondent is in the nature of a loan. The private respondent accepted the CHECK,
instead of requiring payment in money. Yet, when he presented it to RCBC for encashment,
as early as June 17, 1991, the same was dishonored by non-acceptance, with BPI's
annotation: "Check (is) subject of an investigation." These facts were testi ed to by BPI's
manager. Under these circumstances, and after the notice of dishonor, 1 2 the holder has an
immediate right of recourse against the drawer, 1 3 and consequently could immediately file
an action for the recovery of the value of the check.
In a loan transaction, the obligation to pay a sum certain in money may be paid in
money, which is the legal tender or, by the use of a check. A check is not a legal tender, and
therefore cannot constitute valid tender of payment. In the case of Philippine Airlines, Inc.
vs. Court of Appeals, 1 4 this Court held:
"Since a negotiable instrument is only a substitute for money and not
money, the delivery of such an instrument does not, by itself, operate as payment
(citation omitted). A check, whether a manager's check or ordinary check, is not
legal tender, and an offer of a check in payment of a debt is not a valid tender of
payment and may be refused receipt by the obligee or creditor. Mere delivery of
checks does not discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial document
is actually realized (Art. 1249, Civil Code, par. 3.)" 1 5

Turning now to the second issue, when the bank deducted the amount of the CHECK
from CIFC's current account, this did not ipso facto operate as a discharge or payment of
the instrument. Although the value of the CHECK was deducted from the funds of CIFC, it
was not delivered to the payee, Vicente Alegre. Instead, BPI offset the amount against the
losses it incurred from forgeries of CIFC checks, allegedly committed by Alegre. The
con scation of the value of the check was agreed upon by CIFC and BPI. The parties
intended to amicably settle the collection suit led by CIFC with the RTC-Makati, Branch
147, by entering into a compromise agreement, which reads:
xxx xxx xxx
"2. Thereupon, defendant shall debit the sum of P514,390.94 from the
aforesaid current account representing payment/discharge of BPI Check
No. 513397 payable to Vicente Alegre. cdtai

"3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-
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 515 arising from the alleged dishonor of BPI Check No. 513397, plaintiff
cannot go after the defendant; otherwise stated, the defendant shall not be
liable to the plaintiff. Plaintiff however (sic) set-up the defense of
payment/discharge stipulated in par. 2 above." 16

A compromise is a contract whereby the parties, by making reciprocal concessions,

avoid a litigation or put an end to one already commenced. 1 7 It is an agreement between
two or more persons who, for preventing or putting an end to a lawsuit, adjust their
di culties by mutual consent in the manner which they agree on, and which everyone of
them prefers in the hope of gaining, balanced by the danger of losing. 1 8 The compromise
agreement could not bind a party who did not sign the compromise agreement nor avail of
its bene ts. 1 9 Thus, the stipulations in the compromise agreement is unenforceable
against Vicente Alegre, not a party thereto. His money could not be the subject of an
agreement between CIFC and BPI. Although Alegre's money was in custody of the bank,
the bank's possession of it was not in the concept of an owner. BPI cannot validly
appropriate the money as its own. The codal admonition on this issue is clear:
"ARTICLE 1317 —

"No one may contract in the name of another without being authorized by
the latter, or unless he has by law a right to represent him.

"A Contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his powers, shall be
unenforceable, unless it is rati ed, expressly or impliedly, by the person on whose
behalf it has been executed, before it is revoked by the other contracting party." 20

BPI's con scation of Alegre's money constitutes garnishment without the parties
going through a valid proceeding in court. Garnishment is an attachment by means of
which the plaintiff seeks to subject to his claim the property of the defendant in the hands
of a third person or money owed to such third person or a garnishee to the defendant. 2 1
The garnishment procedure must be upon proper order of RTC-Makati, Branch 62, the
court who had jurisdiction over the collection suit led by BPI against Alegre. In effect,
CIFC has not yet tendered a valid payment of its obligation to the private respondent.
Tender of payment involves a positive and unconditional act by the obligor of offering legal
tender currency as payment to the obligee for the former's obligation and demanding that
the latter accept the same. 2 2 Tender of payment cannot be presumed by a mere inference
from surrounding circumstances.
With regard to the third issue, for litis pendentia to be a ground for the dismissal of
an action, the following requisites must concur: (a) identity of parties or at least such as to
represent the same interest in both actions; (b) identity of rights asserted and relief prayed
for, the relief being founded on the same acts; and (c) the identity in the two cases should
be such that the judgment which may be rendered in one would, regardless of which party
is successful, amount to res judicata in the other. 2 3
The trial court's ruling as adopted by the respondent court states, thus:
"A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu
International Finance Corporation vs. Bank of the Philippine Islands now pending
before Branch 147 of this Court and the Third Party Complaint in the instant case
would readily show that the parties are not only identical but also the cause of
action being asserted, which is the recovery of the value of BPI Check No. 513397
is the same. In Civil Case No. 92-1940 and in the Third Party Complaint the rights
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 asserted and relief prayed for, the reliefs being founded on the facts, are identical.
xxx xxx xxx
WHEREFORE, the motion to dismiss is granted and consequently, the Third
Party Complaint is hereby ordered dismissed on ground of lis pendens." 2 4

We agree with the observation of the respondent court that, as between the third
party claim led by the petitioner against BPI in Civil Case No. 92-515 and petitioner's
ancillary claim against the bank in Civil Case No. 92-1940, there is identity of parties as
well as identity of rights asserted, and that any judgment that may be rendered in one case
will amount to res judicata in another. LibLex

The compromise agreement between CIFC and BPI, categorically provided that "In
case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the
alleged dishonor of BPI Check No. 513397, plaintiff (CIFC) cannot go after the defendant
(BPI); otherwise stated, the defendant shall not be liable to the plaintiff." 2 5 Clearly, this
stipulation expressed that CIFC had already abandoned any further claim against BPI with
respect to the value of BPI Check No. 513397. To ask this Court to allow BPI to be a party
in the case at bar, would amount to res judicata and would violate terms of the
compromise agreement between CIFC and BPI. The general rule is that a compromise has
upon the parties the effect and authority of res judicata, with respect to the matter
de nitely stated therein, or which by implication from its terms should be deemed to have
been included therein. 2 6 This holds true even if the agreement has not been judicially
approved. 2 7
WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 44085 is AFFIRMED. Costs against petitioner.
SO ORDERED.
Mendoza and Buena, JJ., concur.
Bellosillo, J., is on official leave.

Footnotes
1. Rollo, pp. 46-52.
2. Court of Appeals Rollo, p. 65.

3. Vicente Alegre vs. Cebu International Finance, Corporation, Civil Case No. 92-515; Record,
Regional Trial Court, pp. 1-12.

4. Cebu International Finance Corporation vs. Bank of the Philippine Islands, Civil Case No.
92-1940; Court of Appeals, Rollo pp. 67-77.

5. Rollo, pp. 71-72.

6. Id. at 71.
7. Id. at 100-103; Bank of the Philippine Island, vs. Vicente A. Alegre, Civil Case No. 93-2550.
8. Id. at 7-43.
9. Id. at 143.
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 10. 127 SCRA 636 (1984).
11. Sesbreño vs. Court of Appeals, 240 SCRA 606, 614 (1995).
12. Negotiable Instruments Law, Section 89.
13. Id., Section 151.
14. 181 SCRA 557 (1990).
15. Id. at 568.
16. Supra, note 5.
17. Del Rosario vs. Madayag, 247 SCRA 767, 770 (1995)
18. Id., citing David vs. Court of. Appeals, 214 SCRA 644, 650 (1992), citing Rovero vs.
Amparo, 91 Phil. 228, 235 (1952); Arcenas vs. Cinco, 74 SCRA 118, 123 (1976).
19. Jag and Haggar Jeans and Sportswear Corp. vs. NLRC, 241 SCRA 635, 642 (1995).
20. Civil Code of the Philippines, Article 1317.
21. Manila Remnant Co., Inc. vs. CA, 231 SCRA 281, 289 (1994)
22. Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court, 191 SCRA
411, 419 (1990).
23. Ramos vs. Peralta, 203 SCRA 412, 416-417 (1991); Yu vs. CA, 232 SCRA 594, at 598
(1994).
24. Court of Appeals Rollo, p. 61.
25. Supra, note 5.
26. Del Rosario vs. Madayag, 247 SCRA 767, 771 (1995); citing Nieves vs. Court of Appeals,
198 SCRA 63, 69 (1991); World Machine Enterprises vs. Intermediate Appellate Court,
192 SCRA 459, 465 (1990).
27. Id., 771; citing Mayuga vs. Court of Appeals, 154 SCRA 309 (1987) citing Meneses vs.
De la Rosa, 77 Phil. 34 (1946); Vda. de Guilas vs. David, 23 SCRA 762 (1968);
Cochingyan vs. Cloribel, 76 SCRA 361. cdphil

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 FIRST DIVISION

[G.R. No. 26085. August 12, 1927.]

SEVERINO TOLENTINO and POTENCIANA MANIO , plaintiffs-appellants,

vs . BENITO GONZALEZ SY CHIAM , defendant-appellee.

Araneta & Zaragoza for appellants.

Eusebio Orense for appellee.

SYLLABUS

1. CONTRACTS; "PACTO DE RETRO;" MORTGAGE. — Held, That the contract

which is copied in full in the decision is a pacto de retro and not a mortgage; that at the
time of its execution and delivery the parties thereto intended to execute a pacto de
retro (a conditional sale) and not a mortgage (a loan); that the vendor became a tenant
of the purchaser and not a mortgagor.
2. ID.; ID. — It has been the uniform rule of this court, due to the severity of a
contract of pacto de retro, to declare the same to be a mortgage and not a sale
whenever the interpretation of Tolentino and Manio vs. Gonzalez Sy Chiam such a
contract justi es that conclusion. There must be something, however, in the language
of the contract or in the conduct of the parties which shows clearly and beyond doubt
that they intended the contract to be a mortgage and not a pacto de retro.
3. ID.; EVIDENCE TO VARY TERMS OF. — While it is a general rule that parol
evidence is not admissible for the purpose of varying the terms of a contract, yet when
an issue is squarely presented, that a contract does not express the intention of the
parties, the courts will, when a proper foundation is laid therefor, hear evidence for the
purpose of ascertaining the true intention of the parties. In every case in which the court
has considered a contract to be a mortgage or a loan instead of a sale with pacto de
retro, it has done so, either because the terms of such contract are ambiguous or
because the circumstances surrounding the execution or the performance of the
contract were incompatible or inconsistent with the theory that said contract was one
of purchase and sale.
4. ID.; WHEN MAY BE REFORMED. — It is a well settled rule of law that courts
of equity will reform a written contract where, owing to mutual mistake, the language
used therein did not fully or accurately express the agreement and intention of the
parties. Relief, however, by way of reformation will not be granted unless the proof of
mutual mistake be of the clearest and most satisfactory character.
5. ID.; RENTAL CONTRACTS; USURY. — A contract for the lease of property is
not a "loan." Under the Usury Law the defense of usury cannot be based thereon. The
Usury Law in this jurisdiction prohibits a certain rate of interest on "loans." A contract of
"loan" is a very different contract from that of "rent." A "loan," as that term is used in the
statute, signi es the giving of a sum of money, goods or credit to another, with a
promise to repay, but not a promise to return the same thing. In a contract of "rent ' the
owner of the property does not lose his ownership. He simply loses his control over the
property rented during the period of the contract. In a contract of rent the relation
between the contractors is that of landlord and tenant. In a contract of loan of money,
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 goods, chattels or credits, the relation between the parties is that of obligor and
obligee.
6. RENTS, CONTRACT OF; DEFINED. — A contract of "rent" may be de ned as
the compensation either in money, provisions, chattels or labor, received by the owner
of the soil or the property rented, from the occupant thereof.
7. LOAN, CONTRACT OF; DEFINED. — A contract of "loan," as that term is
used in the statute, signi es the giving of a sum of money, goods or credits to another,
with a promise to repay, but not a promise to return the same thing. It has been de ned
as an advancement of money, goods or credits upon a contract or stipulation to repay,
not to return, the thing loaned at some future day in accordance with the terms of the
contract. The moment the contract is completed, the money, goods or chattels given
cease to be the property of the former owner and become the property of the obligor
to be used according to his own will, unless the contract itself expressly provides for a
special or speci c use of the same. At all events, the money, goods or chattels, the
moment the contract is executed, cease to be the property of the former owner and
become the sole property of the obligor. A contract of "loan" differs materially and
essentially from a contract of "rent."
8. USURY; DEFINED. — Usury may be de ned as contracting for or receiving
something in excess of the amount allowed by law for the loan or forbearance of
money, goods or chattels. It is the taking of more interest for the use of money, goods
or chattels or credits than the law allows. Usury has been regarded with abhorrence
from the earliest times.

DECISION

JOHNSON , J : p

PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL

The principal questions presented by this appeal are:
(a) Is the contract in question a pacto de retro or a mortgage ?
(b ) Under a pacto de retro, when the vendor becomes a tenant of the
purchaser and agrees to pay a certain amount per month as rent, may such rent render
such a contract usurious when the amount paid as rent, computed upon the purchase
price, amounts to a higher rate of interest upon said amount than that allowed by law?
( c) May the contract in the present case be modified by parol evidence?
ANTECEDENT FACTS
Sometime prior to the 28th day of November, 1922, the appellants purchased of
the Luzon Rice Mills, Inc., a piece or parcel of land with the camarin located thereon,
situated in the municipality of Tarlac of the Province of Tarlac for the price of P25,000,
promising to pay therefor in three installments. The rst installment of P2,000 was due
on or before the 2d day of May, 1921; the second installment of P8,000 was due on or
before the 31st day of May, 1921; the balance of P15,000 at 12 per cent interest was
due and payable on or about the 30th day of November, 1922. One of the conditions of
that contract of purchase was that on failure of the purchasers (plaintiffs and
appellants) to pay the balance of said purchase price or any of the installments on the
date agreed upon, the property bought would revert to the original owner.
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 The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were
paid so far as the record shows upon the due dates. The balance of P15,000 due on
said contract of purchase was paid on or about the 1st day of December, 1922, in the
manner which will be explained below. On the date when the balance of P15,000 with
interest was paid, the vendor of said property had issued to the purchasers transfer
certi cate of title to said property, No. 528. Said transfer certi cate of title (No. 528)
was transfer certi cate of title from No. 40, which shows that said land was originally
registered in the name of the vendor on the 7th day of November, 1913.
PRESENT FACTS
On the 7th day of November, 1922, the representative of the vendor of the
property in question wrote a letter to the appellant Potenciana Manio (Exhibit A, p. 50),
notifying the latter that if the balance of said indebtedness was not paid, an action
would be brought for the purpose of recovering the property, together with damages
for non compliance with the condition of the contract of purchase. The pertinent parts
of said letter read as follows:
"Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente,
procederemos judicialmente contra Vd. para reclamar la devolucion deI camarin y
los danos y perjuicios ocasionados a la compania por su incumplimiento al
contrato.
"Somos de Vd. atentos y S. S.
"SMITH, BELL & CO., LTD.
"BY (Sgd.) F. I. HIGHAM
"Treasurer.
"General Managers
"LUZON RICE MILLS INC. "
According to Exhibits B and D, which represent the account rendered by the
vendor, there was due and payable upon said contract of purchase on the 30th day of
November, 1922, the sum P16,965.09. Upon receiving the letter of the vendor of said
property of November 7, 1922, the purchasers, the appellants herein, realizing that they
would be unable to pay the balance due, began to make an effort to borrow money with
which to pay the balance of their indebtedness on the purchase price of the property
involved. Finally an application was made to the defendant for a loan for the purpose of
satisfying their indebtedness to the vendor of said property. After some negotiations
the defendant agreed to loan the plaintiffs the sum of P17,500 upon condition that the
plaintiffs execute and deliver to him a pacto de retro of said property.
In accordance with that agreement the defendant paid to the plaintiffs by means
of a check the sum of P16,965.09. The defendant, in addition to said amount paid by
check, delivered to the plaintiffs the sum of P354.91 together with the sum of P180
which the plaintiffs paid to the attorneys for drafting said contract of pacto de retro,
making a total paid by the defendant to the plaintiffs and for the plaintiffs of P17,500
upon the execution and delivery of said contract. Said contract was dated the 28th day
of November, 1922, and is in the words and figures following:
"Sepan todos por la presente:
"Que nosotros, los conyuges Severino Tolentino y Potenciana Manio,
ambos mayores de edad, residentes en el Municipio de Calumpit, Provincia de
Bulacan, propietarios y transeuntes en esta Ciudad de Manila, de una parte, y de
otra, Benito Gonzalez Sy Chiam, mayor de edad, casado con Maria Santiago,
comerciante y vecinos de esta Ciudad de Manila.
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 "MANIFESTAMOS Y HACEMOS CONSTAR:
"Primero. Que nosotros, Severino Tolentino y Potenciana Manio, por y en
consideracion a la cantidad de diecisiete mil quinientos pesos (P17,500) moneda
lipina, que en este acto hemos recibido a nuestra entera satisfaccion de Don
Benito Gonzalez Sy Chiam, cedemos, vendemos y traspasamos a favor de dicho
Don Benito Gonzalez Sy Chiam, sus herederos y causahabientes, una nca que,
segun el Certi cado de Transferencia de Titulo No. 40 expedido por el Registrador
de Titulos de la Provincia de Tarlac a favor de 'Luzon Rice Mills Company
Limited' que al incorporarse se denomino y se denomina 'Luzon Rice Mills Inc.,' y
que esta corporacion nos ha transferido en venta absoluta, se describe como
sigue:

"Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en
el Municipio de Tarlac. Linda por el O. y N. con propiedad de Manuel Urquico; por
el E. con propiedad de la Manila Railroad Co.; y por el S. con un camino. Partiendo
de un punto marcado 1 en el plano, cuyo punto se halla al N. 41 gds. 17' E.
859.42 m. del mojon de localizacion No. 2 de la O cina de Terrenos en Tarlac; y
desde dicho punto 1 N. 81 gds. 31' O., 77 m. al punto 2; desde.este punto N. 4
gds. 22' E.; 54.70 m. al punto 3; desde este punto S. 86 gds. 17' E.; 69.25 m. al
punto 4; desde este punto S. 2 gds. 42' E., 61.48 m. al punto de partida; midiendo
una extension super cial de cuatro mil doscientos diez y seis metros cuadrados
(4,216) mas o menos. Todos los puntos nombrados se hallan marcados en el
plano y sobre el terreno los puntos 1 y 2 estan determinados por mojones de P. L.
S. de 20 x 20 x 70 centimetros y los puntos 3 y 4 por mojones del P. L. S. B. L.; la
orientacion seguida es la verdadera, siendo la declinacion magnetica de 0 gds.
45' E. y la fecha de la medicion, 1.º de febrero de 1913.
"Segundo. Que es condicion de esta venta la de que si en el plazo de cinco
(5) anos contados desde el dia l.o de diciembre de 1922, devolvemos al
expresado Don Benito Gonzalez Sy Chiam el referido precio de diecisiete mil
quinientos pesos (P17,500) queda obligado dicho Sr. Benito Gonzalez Sy Chiam
a retrovendernos la nca arriba descrita; pero si transcurre dicho plazo de cinco
años sin ejercitar el derecho de retracto que nos hemos reservado, entonces
quedara esta venta absoluta e irrevocable.
"Tercero. Que durante el expresado termino del retracto tendremos en
arrendamiento la finca arriba descrita, sujeto a condiciones siguientes:
"(a) El alquiler que nos obligamos a pagar por mensualidades
vencidas a Don Benito Gonzalez Sy Chiam y en su domicilio, sera de trescientos
setenta y cinco pesos (P375) moneda filipina, cada mes.
"(b) El amillaramiento de la nca arrendada sera por cuenta de dicho
Don Benito Gonzalez Sy Chiam, asi como tambien la prima del seguro contra
incendios, si le conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar
dicha finca.
"(c) La falta de pago del alquiler aqui estipulado por dos meses
consecutivos dara lugar a la terminacion de este arrendamiento y a la perdida del
derecho de retracto que nos hemos reservado, como si naturalmente hubiera
expirado el termino para ello, pudiendo en su virtud dicho Sr. Gonzalez Sy Chiam
tomar posesion de la finca y desahuciarnos de la misma.
"Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto
esta escritura en los precisos terminos en que la dejan otorgada los conyuges
Severino Tolentino y Potenciana Manio.
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 "En testimonio de todo lo cual, rmamos la presente de nuestra mano en
Manila, por cuadruplicado en Manila, hoy a 28 de noviemhre 1922
(Fdo.) "SEVERINO TOLENTINO
(Fda.) "POTENCIANA MANIO
(Fdo.) "BENITO GONZALEZ SY CHIAM
"Firmado en presencia de:
(Fdos.) "MOISES M. BUHAIN
"B. S. BANAAG
An examination of said contract of sale with to the rst question above, shows
clearly that it is a pacto de retro and not a mortgage. There is no pretension on the part
of the appellant that said contract, standing alone, is a mortgage. The pertinent
language of the contract is:
"Segundo. Que es condicion de esta venta la de que si en el plazo de cinco
(5) aiios contados desde el dia l.o de diciembre de 1922, devolvemos al
expresado Don Benito Gonzalez Sy Chiam el referido precio de diecisiete mil
quinientos pesos (P17,500) queda obligado dicho Sr. Benito Gonzalez Sy Chiam
a retrovendernos la finca arriba descrita; pero si transcurre dicho plazo de cinco
(5) anos sin ejercitar el derecho de retracto que nos hemos reservado, entonces
quedara esta venta absoluta e irrevocable."
Language cannot be clearer. The purpose of the contract is expressed clearly in
said quotation that there can certainly be no doubt as to the purpose of the plaintiff to
sell the property in question, reserving the right only to repurchase the same. The
intention to sell with the right to repurchase cannot be more clearly expressed.
It will be noted from a reading of said sale of pacto de retro, that the vendor,
recognizing the absolute sale of the property, entered into a contract with the
purchaser by virtue of which she became the "tenant" of the purchaser. That contract of
rent appears in said quoted document above as follows:
"Tercero. Que durante el expresado termino del retracto tendremos en
arrendamiento la finca arriba descrita, sujeto a condiciones siguientes:
"(a) El alquiler que nos obligamos a pagar por mensualidades
vencidas a Don Benito Gonzalez Sy Chiam y en su domicilio, sera de trescientos
setenta y cinco pesos (P375) moneda filipina, cada mes.
"(b) El amillaramiento de la nca arrendada sera por cuenta de dicho
Don Benito Gonzalez Sy Chiam, asi como tambien la prima del seguro contra
incendios, si le conviniera al referido ISr. Benito Gonzalez Sy Chiam asegurar
dicha finca."
From the foregoing, we are driven to the following conclusions: First, that the
contract of pacto de retro is an absolute sale of the property with the right to
repurchase and not a mortgage; and, second, that by virtue of the said contract the
vendor became the tenant of the purchaser, under the conditions mentioned in
paragraph 3 of said contract quoted above.
It has been the uniform theory of this court, due to the severity of a contract of
pacto de retro, to declare the same to be a mortgage and not a sale whenever the
interpretation of such a contract justi es that conclusion. There must be something,
however, in the language of the contract or in the conduct of the parties which shows
clearly and beyond doubt that they intended the contract to be a "mortgage" and not a
pacto de retro. (International Banking Corporation vs. Martinez, 10 Phil. 252; Padilla vs.
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 Linsangan, 19 Phil., 65; Cumagun vs. Allingay, 19 Phil., 415; Olino vs. Medina, 13 Phil.,
379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757; Villa vs.
Santiago, 38 Phil., 157.)
We are not unmindful of the fact that sales with pacto de retro are not favored,
and that the court will not construe an instrument to be one of sale with pacto de retro,
with the stringent and onerous effect which follows, unless the terms of the document
and the surrounding circumstances require it. (Manalo vs. Gueco, supra.)
While it is a general rule that parol evidence is not admissible for the purpose of
varying the terms of a contract, but when an issue is squarely presented that a contract
does not express the intention of the parties, courts will, when a proper foundation is
laid therefor, hear evidence for the purpose of ascertaining the true intention of the
parties. (Manalo vs. Gueco, supra.)
In the present case the plaintiffs allege in their complaint that the contract in,
question is a pacto de retro. They admit that they signed it. They admit that they sold
the property in question with the right to repurchase it. The terms of the contract
quoted above clearly show that the transfer of the land in question by the plaintiffs to
the defendant was a "sale" with pacto de retro, and the plaintiffs have shown no
circumstance whatever which would justify us in construing said contract to be a mere
"loan" with guaranty. In every case in which this court has construed a contract to be a
mortgage or a loan instead of a sale with pacto de retro, it has done so, either because
the terms of such contract are ambiguous or because the circumstances surrounding
the execution or the performance of the contract were incompatible or inconsistent
with the theory that said contract was one of purchase and sale. (Olino vs. Medina,
supra; Padilla vs. Linsangan, supra; Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs.
Pamintuan and De Jesus, 37 Phil., 876.)
In the case of Padilla vs. Linsangan the term employed in the contract to indicate
the nature of the conveyance of the land was "pledged" instead of "sold." In the case of
Manlagnit vs. Dy Puico, while the vendor used the terms "sale and transfer with the right
to repurchase," yet in said contract he described himself as a "debtor," the purchaser as
a "creditor" and the contract as a "mortgage." In the case of Rodriguez vs. Pamintuan
and De Jesus the person who executed the instrument, purporting on its face to be a
deed of sale of certain parcels of land, had merely acted under a power of attorney
from the owner of said land, "authorizing him to 'borrow' money in such amount and
upon such terms and conditions as he might deem proper, and to secure payment of
the loan by a mortgage." In the case of Villa vs. Santiago (38 Phil., 157), although a
contract purporting to be a deed of sale was executed, the supposed vendor remained
in possession of the land and invested the money he had obtained from the supposed
vendee in making improvements thereon, which fact justi ed the court in holding that
the transaction was a mere loan and not a sale. In the case of Cuyugan vs. Santos (39
Phil., 970), the purchaser accepted partial payments from the vendor, and such
acceptance of partial payments "is absolutely incompatible with the idea of
irrevocability of the title of ownership of the purchaser at the expiration of the term
stipulated in the original contract for the exercise of the right of repurchase."
Referring again to the right of the parties to vary the terms of a written contract,
we quote from the dissenting opinion of Chief Justice Cayetano S. Arellano in the case
of Government of the Philippine Islands vs. Philippine Sugar Estates Development Co.
(30 Phil., 27, 38), which case was appealed to the Supreme Court of the United States
and the contention of the Chief Justice in his dissenting opinion was a rmed and the
decision of the Supreme Court of the Philippine Islands was reversed. (See decision of
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 the Supreme Court of the United States, June 3, 1918.) 1 The Chief Justice said in
discussing that question:
"According to article 1282 of the Civil Code, in order to judge of the
intention of the contracting parties, consideration must chie y be paid to those
acts executed by said parties which are contemporary with and subsequent to the
contract. And according to article 1283, however general the terms of a contract
may be, they must not be held to include things and cases different from those
with regard to which the interested parties agreed to contract." The Supreme Court
of the Philippine Islands held that parol evidence was admissible in that case to
vary the terms of the contract between the Government of the Philippine Islands
and the Philippine Sugar Estates Development Co. In the course of the opinion of
the Supreme Court of the United States Mr. Justice Brandeis, speaking for the
court, said:
"It is well settled that courts of equity will reform a written contract where,
owing to mutual mistake, the language used therein did not fully or accurately
express the agreement and intention of the parties. The fact that interpretation or
construction of a contract presents a question of law and that, therefore, the
mistake was one of law is not a bar to granting relief. . . . This court is always
disposed to accept the construction which the highest court of a territory or
possession has placed upon a local statute. But that disposition may not be
yielded to where the lower court has clearly erred. Here the construction adopted
was rested upon a clearly erroneous assumption as to an established rule of
equity. . . . The burden of proof resting upon the appellant cannot be satis ed by
mere preponderance of the evidence. It is settled that relief by way of reformation
will not be granted unless the proof of mutual mistake be 'of the clearest and
most satisfactory character."'
The evidence introduced by the appellant in the present case does not meet with
that stringent requirement. There is not a word, a phrase, a sentence or a paragraph in
the entire record, which justi es this court in holding that the said contract of pacto de
retro is a mortgage and not a sale with the right to repurchase. Article 1281 of the Civil
Code provides: "If the terms of a contract are clear and leave no doubt as to the
intention of the contracting parties, the literal sense of its stipulations shall be
followed." Article 1282 provides: "In order to judge as to the intention of the contracting
parties, attention must be paid principally to their conduct at the time of making the
contract and subsequently thereto."
We cannot conclude this branch of our discussion of the question involved,
without quoting from that very well reasoned decision of the late Chief Justice Arellano,
one of the greatest jurists of his time. He said, in discussing the question whether or
not the contract, in the case of Lichauco vs. Berenguer (20 Phil., 12), was a pacto de
retro or a mortgage:
"The public instrument, Exhibit C, in part reads as follows: 'Don Macario
Berenguer declares and states that he is the proprietor in fee simple of two
parcels of fallow unappropriated crown land situated within the district of his
pueblo. The rst has an area of 73 quiñones, 8 balitas, and 8 loanes, located in
the sitio of Batasan, and its boundaries are, etc., etc. The second is in the sitio of
Panantaglay, barrio of Calumpang, has an area of 73 hectares, 22 ares, and 6
centares, and is bounded on the north, etc., etc.'
"In the executory part of the said instrument, it is stated:
" 'That under condition of right to repurchase (pacto de retro) he sells the
said properties to the aforementioned Dona Cornelia Laochangco for P4,000 and
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 upon the following conditions: First, the sale stipulated shall be for the period of
two years, counting from this date, within which time the deponent shall be
entitled to repurchase the land sold upon payment of its price; second, the lands
sold shall, during the term of the present contract, be held in lease by the
undersigned who shall pay, as rental therefor, the sum of 400 pesos per annum,
or the equivalent in sugar at the option of the vendor; third, all the fruits of the
said lands shall be deposited in the sugar depository of the vendee, situated in the
district of Quiapo of this city, and the value of which shall be applied on account
of the price of this sale; fourth, the deponent acknowledges that he has received
from the vendor the purchase price of P4,000 already paid, and in legal tender
currency of this country . . .; fth, all the taxes which may be assessed against the
lands surveyed by competent authority, shall be payable by and constitute a
charge against the vendor; sixth, if, through any unusual event, such as ood,
tempest, etc., the properties hereinbefore enumerated should be destroyed, wholly
or in part, it shall be incumbent upon the vendor to repair the damage thereto at
his own expense and to put them into a good state of cultivation, and should he
fail to do so he binds himself to give to the vendee other lands of the same area,
quality and value.'
xxx xxx xxx
"The opponent maintained, and his theory was accepted by the trial court,
that Berenguer's contract with Laochangco was not one of sale with right of
repurchase, but merely one of loan secured by those properties, and,
consequently, that the ownership of the lands in question could not have been
conveyed to Laochangco, inasmuch as it continued to be held by Berenguer, as
well as their possession, which he had not ceased to enjoy.
"Such a theory is, as argued by the appellants, erroneous. The instrument
executed by Macario Berenguer, the text of which has been transcribed in this
decision, is very clear. Berenguer's heirs may not go counter to the literal tenor of
the obligation, the exact expression of the consent of the contracting parties
contained in the instrument, Exhibit C. Not because the lands may have continued
in possession of the vendor, not because the latter may have assumed the
payment of the taxes on such properties, nor yet because the same party may
have bound himself to substitute by another any one of the properties which
might be destroyed, does the contract cease to be what it is, as set forth in detail
in the public instrument. The vendor continued in the possession of the lands, not
at the owner thereof as before their sale, but as the lessee which he became after
its consummation, by virtue of a contract executed in his favor by the vendee in
the deed itself, Exhibit C. Right of ownership is not implied by the circumstance of
the lessee's assuming the responsibility of the payment of the taxes on the
property leased, for their payment is not peculiarly incumbent upon the owner, nor
is such right implied by the obligation to substitute the thing sold for another
while in his possession under lease, since that obligation came from him and he
continues under another character in its possession— a reason why he
guarantees its integrity and obligates himself to return the thing even in a case of
force majeure. Such liability, as a general rule, is foreign to contracts of lease and,
if required, is exorbitant, but possible and lawful, if voluntarily agreed to, and such
agreement does not on this account involve any sign of ownership, nor other
meaning than the will to impose upon oneself scrupulous diligence in the care of
a thing belonging to another.
"The purchase and sale, once consummated, is a contract which by its
nature transfers the ownership and other rights in the thing sold. A pacto de retro,
or sale with right to repurchase, is nothing but a personal right stipulated between
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 the vendee and the vendor, to the end that the latter may again acquire the
ownership of the thing alienated.
"'It is true, very true indeed, that the sale with right of repurchase is
employed as a method of loan; it is like wise true that in practice many cases
occur where the consummation of a pacto de retro sale means the nancial ruin
of a person; it is also, unquestionable that in pacto de retro sales very important
interests often intervene, in the form of the price of the lease of the thing sold,
which is stipulated as an additional covenant.' (Manresa, Civil Code, p. 274.)
"But in the present case, unlike others heard by this court, there is no proof
that the sale with right of repurchase, made by Berenguer in favor of Laochangco
is rather a mortgage to secure a loan."
We come now to a discussion of the second question presented above, and that
is, stating the same in another form: May a tenant charge his landlord with a violation of
the Usury Law upon the ground that the amount of rent he pays, based upon the real
value of the property, amounts to a usurious rate of interest? When the vendor of
property under a pacto de retro rents the property and agrees to pay a rental value for
the property during the period of his right to repurchase, he thereby becomes a "tenant"
and in all respects stands in the same relation with the purchaser as a tenant under any
other contract of lease.
The appellant contends that the rental price paid during the period of the
existence of the right to repurchase, or the sum of P375 per month, based upon the
value of the property, amounted to usury. Usury, generally speaking, may be de ned as
contracting for or receiving something in excess of the amount allowed by law for the
loan or forbearance of money — the taking of more interest for the use of money than
the law allows. It seems that the taking of interest for the loan of money, at least the
taking of excessive interest has been regarded with abhorrence from the earliest times.
(Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle ages the people of
England, and especially the English Church, entertained' the opinion, then current in
Europe, that the taking of any interest for the loan of money was a detestable vice,
hateful to man and contrary to the laws of God. (3 Coke's Institute, 150; Tayler on
Usury, 44.)
Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back
upon history, we shall nd that there is scarcely any people, ancient or modern, that
have not had usury laws. . . . The Romans, through the greater part of their history, had
the deepest abhorrence of usury. . . . It will be deemed a little singular, that the same
voice against usury should have been raised in the laws of China, in the Hindu institutes
of Menu, in the Koran of Mahomet, and perhaps, we may say, in the laws of all nations
that we know of, whether Greek or Barbarian."
The collection of a rate of interest higher than that allowed by law is condemned
by the Philippine Legislature (Acts Nos. 2655, 2662 and 2992). But is it unlawful for the
owner of a property to enter into a contract with the tenant for the payment of a
speci c amount of rent for the use and occupation of said property, even though the
amount paid as "rent," based upon the value of the property, might exceed the rate of
interest allowed by law? That question has never been decided in this jurisdiction. It is
one of rst impression. No cases have been found in this jurisdiction answering that
question. Act No. 2655 is "An Act xing rates of interest upon 'loans' and declaring the
effect of receiving or taking usurious rates."
It will be noted that said statute imposes a penalty upon a "loan" or forbearance
of any money, goods, chattels or credits, etc. The central idea of said statute is to
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 prohibit a rate of interest on "loans." A contract of "loan" is a very different contract
from that of "rent". A "loan," as that term is used in the statute, signi es the giving of a
sum of money, goods or credits to another, with a promise to repay, but not a promise
to return the same thing. To "loan," in general parlance, is to deliver to another for
temporary use, on condition that the thing or its equivalent be returned; or to deliver for
temporary use on condition that an equivalent in kind shall be returned with a
compensation for its use. The word "loan," however, as used in the statute, has a
technical meaning. It never means the return of the same thing. It means the return of
an equivalent only, but never the same thing loaned. A "loan" has been properly de ned
as an advancement of money, goods or credits upon a contract or stipulation to repay,
not to return, the thing loaned at some future day in accordance with the terms of the
contract. Under the contract of "loan," as used in said statute, the moment the contract
is completed the money, goods or chattels given cease to be the property of the former
owner and becomes the property of the obligor to be used according to his own will,
unless the contract itself expressly provides for a special or speci c use of the same.
At all events, the money, goods or chattels, the moment the contract is executed, cease
to be the property of the former owner and becomes the absolute property of the
obligor.
A contract of "loan" differs materially from a contract of "rent." ln a contract of
"rent" the owner of the property does not lose his ownership. He simply loses his
control over the property rented during the period of the contract. In a contract of "loan"
the thing loaned becomes the property of the obligor. In a contract of "rent" the thing
still remains the property of the lessor. He simply loses control of the same in a limited
way during the period of the contract of "rent" or lease. In a contract of "rent" the
relation between the contractors is that of landlord and tenant. In a contract of "loan" of
money, goods, chattels or credits, the relation between the parties is that of obligor and
obligee. "Rent" may be de ned as the compensation either in money, provisions,
chattels, or labor, received by the owner of the soil from the occupant thereof. It is
de ned as the return or compensation for the possession of some corporeal
inheritance, and is a pro t issuing out of lands or tenements, in return for their use. It is
that, which is to be paid for the use of land, whether in money, labor or other thing
agreed upon. A contract of "rent" is a contract by which one of the parties delivers to
the other some nonconsumable thing, in order that the latter may use it during a certain
period and return it to the former; whereas a contract of "loan," as that word is used in
the statute, signi es the delivery of money or other consumable things upon condition
of returning an equivalent amount of the same kind or quantity, in which cases it is
called merely a "loan." In the case of a contract of "rent," under the civil law, it is called a
"commodatum."
From the foregoing it will be seen that there is a wide distinction between a
contract of "loan," as that word is used in the statute, and a contract of "rent" even
though those words are used in ordinary parlance as interchangeable terms.
The value of money, goods or credits is easily ascertained while the amount of
rent to be paid for the use and occupation of the property may depend upon a thousand
different conditions; as for example, farm lands of exactly equal productive capacity
and of the same physical value may have a different rental value, depending upon
location, prices of commodities, proximity to the market, etc. Houses may have a
different rental value due to location, conditions of business, general prosperity or
depression, adaptability to particular purposes, even though they have exactly the same
original cost. A store on the Escolta, in the center of business, constructed exactly like a
store located outside of the business center, will have a much higher rental value than
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 the other. Two places of business located in different sections of the city may be
constructed exactly on the same architectural plan and yet one, due to particular
location or adaptability to a particular business which the lessor desires to conduct,
may have a very much higher rental value than one not so located and not so well
adapted to the particular business. A very cheap building on the carnival ground may
rent for more money, due to the particular circumstances and surroundings, than a
much more valuable property located elsewhere. It will thus be seen that the rent to be
paid for the use and occupation of property is not necessarily xed upon the value of
the property. The amount of rent is xed, based upon a thousand different conditions
and may or may not have any direct reference to the value of the property rented. To
hold that "usury" can be based upon the comparative actual rental value and the actual
value of the property, is to subject every landlord to an annoyance not contemplated by
the law, and would create a very great disturbance in every business or rural
community. We cannot bring ourselves to believe that the Legislature contemplated any
such disturbance in the equilibrium of the business of the country.
In the present case the property in question was sold. It was an absolute sale
with the right only to repurchase. During the period of redemption the purchaser was
the absolute owner of the property. During the period of redemption the vendor was not
the owner of the property. During the period of redemption the vendor was a tenant of
the purchaser. During the period of redemption the relation which existed between the
vendor and the vendee was that of landlord and tenant. That relation can only be
terminated by a repurchase of the property by the vendor in accordance with the terms
of the said contract. The contract was one of rent. The contract was not a loan, as that
word is used in Act No. 2655.
As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts
have no right to make contracts for parties. They made their own contract in the
present case. There is not a word, a phrase, a sentence or para- graph, which in the
slightest way indicates that the parties to the contract in question did not intend to sell
the property in question absolutely, simply with the right to repurchase. People who
make their own beds must lie thereon.
What has been said above with reference to the right to modify contracts by
parol evidence, su ciently answers the third question presented above. The language
of the contract is explicit, clear, unambiguous and beyond question. It expresses the
exact intention of the parties at the time it was made. There is not a word, a phrase, a
sentence or paragraph found in said contract which needs explanation. The parties
thereto entered into said contract with the full understanding of its terms and should
not now be permitted to change or modify it by parol evidence.
With reference to the improvements made upon said property by the plaintiffs
during the life of the contract, Exhibit C, there is hereby reserved to the plaintiffs the
right to exercise in a separate action the right guaranteed to them under article 361 of
the Civil Code.
For all of the foregoing reasons, we are fully persuaded from the facts of the
record, in relation with the law applicable thereto, that the judgment appealed from
should be and is hereby affirmed, with costs. So ordered.
Avanceña, C. J., Street, Villamor, Romualdez, and Villa-Real. JJ.. concur.

Separate Opinions
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 MALCOLM , J., dissenting :

I regret to have to dissent from the comprehensive majority decision. I stand

squarely on the proposition that the contract executed by the parties was merely a
clever device to cover up the payment of usurious interest. The fact that the document
purports to be a true sale with right of repurchase means nothing. The fact that the
instrument includes a contract of lease on the property whereby the lessees as vendors
apparently bind themselves to pay rent at the rate of P375 per month and whereby
"Default in the payment of the rent agreed for two consecutive months will terminate
this lease and will forfeit our right of repurchase, as though the term had expired
naturally" does mean something, and taken together with the oral testimony is
indicative of a subterfuge hiding a usurious loan. (Usury Law, Act No. 2655, sec. 7, as
amended; Padilla vs. Linsangan [1911], 19 Phil., 65; U. S. vs. Tan Quingco Chua [1919],
39 Phil., 552; Russel vs. Southard [1851], 53 U. S., 139; Monagas vs. Albertucci y Alvarez
[1914], 235 U. S., 81; 10 Manresa, Codigo Civil Español, 3d ed., p. 318.) The transaction
should be considered as in the nature of an equitable mortgage. My vote is for a
modification of the judgment of the trial court.
Footnotes

1. 62 Law. ed., 1177.

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 FIRST DIVISION

[G.R. No. 90828. September 5, 2000.]

MELVIN COLINARES and LORDINO VELOSO , petitioners, vs .

HONORABLE COURT OF APPEALS, and THE PEOPLE OF THE
PHILIPPINES , respondents.

Romualdo Arnado Romualdo and Associates Law Office for petitioners.

Solicitor General for respondents.

SYNOPSIS

In 1979, petitioners Melvin Colinares and Lordino Veloso were contracted by the
Carmelite Sisters of Cagayan de Oro City to renovate the latter's convent at Camaman-an,
Cagayan de Oro City. On 30 October 1979, petitioners obtained various construction
materials from CM Builders Centre for the said project. The following day, petitioners
applied for a commercial letter of credit with the Philippine Banking Corporation (PBC),
Cagayan de Oro City Branch in favor of CM Builders Centre. PBC approved the letter of
credit to cover the full invoice value of the goods. Petitioners signed the pro-forma trust
receipt as security. The said loan was due on 29 January 1980. However, petitioners failed
to pay the whole amount on its due date. Several demand letters were sent to them.
Petitioners proposed that the terms of payment of the loan shall be modi ed. Pending
approval of the said proposal, petitioners paid some amounts. Concurrently with the
separate demand for attorney's fees by PBC's legal counsel, PBC continued to demand
payment of the balance. On 14 January 1983, petitioners were charged with violation of
P.D. No. 115 (Trust Receipts Law) in relation to Article 315 of the Revised Penal Code.
During trial, petitioners insisted that the transaction was that of an ordinary loan.
Subsequently, the trial court convicted the petitioners for the offense charged. On appeal,
the Court of Appeals a rmed the conviction of petitioners and increased the penalty
imposed. Thus, petitioners raised the issue to this Court. Pending resolution, petitioners
led a Motion to Dismiss on the ground that they had already fully paid PBC. Attached
thereto was the affidavit of desistance executed by PBC. HCSDca

This Court ruled that a thorough examination of the facts obtaining in the case at bar
revealed that the transaction intended by the parties was a simple loan, not a trust receipt
agreement. Petitioners are not importers acquiring the good for re-sale, contrary to the
express provision embodied in the trust receipt. They are contractors who obtained the
fungible goods for their construction project. At no time did title over the construction
materials pass to the bank, but directly to the petitioners from CM Builders Centre. This
impressed upon, the trust receipt in question vagueness and ambiguity, which should not
be the basis for criminal prosecution in the event of violation of its provisions. The practice
of banks of making borrowers sign trust receipts to facilitate collection of loans and place
them under the threats of criminal prosecution should they be unable to pay it, may be
unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion
which borrowers have no option but to sign lest their loan be disapproved. The resort to
this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to
misinterpretation, as had happened in this case. Eventually, PBC showed its true colors
and admitted that it was only after collection of the money, as manifested by its A davit
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 of Desistance.
Petitioners were ACQUITTED.

SYLLABUS

1. REMEDIAL LAW; CRIMINAL PROCEDURE; NEW TRIAL; GRANT THEREOF IS

DISCRETIONARY UPON THE JUDGE; GROUNDS. — The grant or denial of a motion for new
trial rests upon the discretion of the judge. New trial may be granted if: (1) errors of law or
irregularities have been committed during the trial prejudicial to the substantial rights of
the accused; or (2) new and material evidence has been discovered which the accused
could not with reasonable diligence have discovered and produced at the trial, and which, if
introduced and admitted, would probably change the judgment.
2. ID.; ID.; ID.; NEWLY DISCOVERED EVIDENCE; REQUISITES. — For newly
discovered evidence to be a ground for new trial, such evidence must be (1) discovered
after trial; (2) could not have been discovered and produced at the trial even with the
exercise of reasonable diligence; and (3) material, not merely cumulative, corroborative, or
impeaching, and of such weight that, if admitted, would probably change the judgment. It
is essential that the offering party exercised reasonable diligence in seeking to locate the
evidence before or during trial but nonetheless failed to secure it.HIaSDc

3. ID.; ID.; ID.; A FORGOTTEN EVIDENCE IS NOT A NEWLY DISCOVERED

EVIDENCE; CASE AT BAR. — We nd no indication in the pleadings that the Disclosure
Statement is a newly discovered evidence. Petitioners could not have been unaware that
the two-page document exists. The Disclosure Statement itself states, "NOTICE TO
BORROWER: YOU ARE ENTITLED TO A COPY OF THIS PAPER WHICH YOU SHALL SIGN."
Assuming Petitioners' copy was then unavailable, they could have compelled its
production in court, which they never did. Petitioners have miserably failed to establish the
second requisite of the rule on newly discovered evidence. Petitioners themselves
admitted that "they searched again their voluminous records, meticulously and patiently,
until they discovered this new and material evidence" only upon learning of the Court of
Appeals' decision and after they were "shocked by the penalty imposed." Clearly, the
alleged newly discovered evidence is mere forgotten evidence that jurisprudence excludes
as a ground for new trial.
4. MERCANTILE LAW; PRESIDENTIAL DECREE NO. 115 (TRUST RECEIPTS LAW);
TRUST RECEIPT TRANSACTION; DEFINED. — Section 4, P.D. No. 115, the Trust Receipts
Law, de nes a trust receipt transaction as any transaction by and between a person
referred to as the entruster, and another person referred to as the entrustee, whereby the
entruster who owns or holds absolute title or security interest over certain speci ed
goods, documents or instruments, releases the same to the possession of the entrustee
upon the latter's execution and delivery to the entruster of a signed document called a
"trust receipt" wherein the entrustee binds himself to hold the designated goods,
documents or instruments with the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions speci ed in the trust
receipt. DTcASE

5. ID.; ID.; ID.; TWO POSSIBLE SITUATIONS. — There are two possible situations
in a trust receipt transaction. The rst is covered by the provision which refers to money
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 received under the obligation involving the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision which refers to merchandise
received under the obligation to "return" it (devolvera) to the owner.HDaACI

6. ID.; ID.; ID.; FAILURE TO TURN OVER PROCEEDS OF SALE OR RETURN

UNDISPOSED GOODS CONSTITUTES ESTAFA. — Failure of the entrustee to turn over the
proceeds of the sale of the goods, covered by the trust receipt to the entruster or to return
said goods if they were not disposed of in accordance with the terms of the trust receipt
shall be punishable as estafa under Article 315 (1) of the Revised Penal Code, without need
of proving intent to defraud.
7. ID.; ID.; ID.; TRANSACTION IN CASE AT BAR, A SIMPLE LOAN NOT A TRUST
RECEIPT AGREEMENT. — A thorough examination of the facts obtaining in the case at bar
reveals that the transaction intended by the parties was a simple loan, not a trust receipt
agreement. Petitioners received the merchandise from CM Builders Centre on October
1979. On that day, ownership over the merchandise was already transferred to Petitioners
who were to use the materials for their construction project. It was only a day later, 31
October 1979, that they went to the bank to apply for a loan to pay for the merchandise. cSEAHa

8. ID.; ID.; ID.; TRUST RECEIPTS PARTAKE OF THE NATURE OF A CONDITIONAL

SALE. — This situation belies what normally obtains in a pure trust receipt transaction
where goods are owned by the bank and only released to the importer in trust subsequent
to the grant of the loan. The bank acquires a "security interest" in the goods as holder of a
security title for the advances it had made to the entrustee. The ownership of the
merchandise continues to be vested in the person who had advanced payment until he has
been paid in full, or if the merchandise has already been sold, the proceeds of the sale
should be turned over to him by the importer or by his representative or successor in
interest. To secure that the bank shall be paid, it takes full title to the goods at the very
beginning and continues to hold that title as his indispensable security until the goods are
sold and the vendee is called upon to pay for them; hence, the importer has never owned
the goods and is not able to deliver possession. In a certain manner, trust receipts partake
of the nature of a conditional sale where the importer becomes absolute owner of the
imported merchandise as soon as he has paid its price.
9. ID.; ID.; ID.; PURPOSE AND NATURE. — Trust receipt transactions are intended
to aid in nancing importers and retail dealers who do not have su cient funds or
resources to nance the importation or purchase of merchandise, and who may not be
able to acquire credit except through utilization, as collateral, of the merchandise imported
or purchased. The antecedent acts in a trust receipt transaction consist of the application
and approval of the letter of credit, the making of the marginal deposit and the effective
importation of goods through the efforts of the importer.
10. ID.; ID.; ID.; PETITIONERS NOT BEING IMPORTERS ARE NOT COVERED BY
THE LAW. — Also noteworthy is the fact that Petitioners are not importers acquiring the
goods for re-sale, contrary to the express provision embodied in the trust receipt. They are
contractors who obtained the fungible goods for their construction project. At no time did
title over the construction materials pass to the bank, but directly to the Petitioners from
CM Builders Centre. This impresses upon the trust receipt in question vagueness and
ambiguity, which should not be the basis for criminal prosecution in the event of violation
of its provisions. AHDTIE

11. ID.; ID.; ID.; FACT THAT THE GOODS WERE DELIVERED PREVIOUS TO THE
EXECUTION OF THE LETTER OF CREDIT AND TRUST RECEIPT SHOWS THAT THE
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 TRANSACTION WAS INDEED A LOAN. — PBC attempted to cover up the true delivery date
of the merchandise, yet the trial court took notice even though it failed to attach any
signi cance to such fact in the judgment. Despite the Court of Appeals' contrary view that
the goods were delivered to Petitioners previous to the execution of the letter of credit and
trust receipt, we nd that the records of the case speak volubly and this fact remains
uncontroverted. It is not uncommon for us to peruse through the transcript of the
stenographic notes of the proceedings to be satis ed that the records of the case do
support the conclusions of the trial court.
12. ID.; ID.; DISHONESTY AND ABUSE OF CONFIDENCE IN THE HANDLING OF
MONEY OR GOODS TO THE PREJUDICE OF ANOTHER, NOT PRESENT IN CASE AT BAR. —
The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes
the dishonesty and abuse of confidence in the handling of money or goods to the prejudice
of another regardless of whether the latter is the owner. Here, it is crystal clear that on the
part of Petitioners there was neither dishonesty nor abuse of con dence in the handling of
money to the prejudice of PBC. Petitioners continually endeavored to meet their
obligations, as shown by several receipts issued by PBC acknowledging payment of the
loan.
13. ID.; ID.; PRACTICE OF BANKS REQUIRING BORROWERS TO SIGN TRUST
RECEIPTS UNDER THREAT OF CRIMINAL PROSECUTION SHOULD THEY BE UNABLE TO
PAY THEIR LOANS, REPREHENSIBLE AS THEY ARE CONTRACTS OF ADHESION. — The
practice of banks of making borrowers sign trust receipts to facilitate collection of loans
and place them under the threats of criminal prosecution should they be unable to pay it
may be unjust and inequitable, if not reprehensible. Such agreements are contracts of
adhesion which borrowers have no option but to sign lest their loan be disapproved. The
resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is
prone to misinterpretation, as had happened in this case. Eventually, PBC showed its true
colors and admitted that it was only after collection of the money, as manifested by its
Affidavit of Resistance. DSETac

14. REMEDIAL LAW; EVIDENCE; TESTIMONY OF WITNESSES; LOAN

TRANSACTION ENTERED INTO BY PETITIONERS, NOT REFUTED. — Petitioners Veloso's
claim that they were made to believe that the transaction was a loan was also not denied
by PBC. . . PBC could have presented its former bank manager, Cayo Garcia Tuiza, who
contracted with Petitioners, to refute Veloso's testimony, yet it only presented credit
investigator Grego Mutia. Nowhere from Mutia's testimony can it be gleaned that PBC
represented to Petitioners that the transaction they were entering into was not a pure loan
but had trust receipt implications.
15. CRIMINAL LAW; ESTAFA; INTENT TO DEFRAUD AND MISAPPROPRIATE THE
MONEY FOR PERSONAL USE, NOT ESTABLISHED IN CASE AT BAR. — The Information
charges Petitioners with intent to defraud and misappropriating the money for their
personal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a
state of mind was not proved to be present in Petitioners' situation. Petitioners employed
no arti ce in dealing with PBC and never did they evade payment of their obligation nor
attempt to abscond. Instead, Petitioners sought favorable terms precisely to meet their
obligation.

DECISION

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 DAVIDE, JR., C. J. : p

In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were

contracted for a consideration of P40,000 by the Carmelite Sisters of Cagayan de Oro City
to renovate the latter's convent at Camaman-an, Cagayan de Oro City.
On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical board
2'x4'x1/2", 300 SF tanguile wood tiles 12"x12", 260 SF Marcelo economy tiles and 2 gallons
UMYLIN cement adhesive from CM Builders Centre for the construction project. 1 The
following day, 31 October 1979, Petitioners applied for a commercial letter of credit 2 with
the Philippine Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of
CM Builders Centre. PBC approved the letter of credit 3 for P22,389.80 to cover the full
invoice value of the goods. Petitioners signed a pro-forma trust receipt 4 as security. The
loan was due on 29 January 1980.
On 31 October 1979, PBC debited P6,720 from Petitioners' marginal deposit as
partial payment of the loan. 5
On 7 May 1980, PBC wrote 6 to Petitioners demanding that the amount be paid
within seven days from notice. Instead of complying with PBC's demand, Veloso
confessed that they lost P19,195.83 in the Carmelite Monastery Project and requested for
a grace period of until 15 June 1980 to settle the account. 7
PBC sent a new demand letter 8 to Petitioners on 16 October 1980 and informed
them that their outstanding balance as of 17 November 1979 was P20,824.40 exclusive of
attorney's fees of 25%. 9 ITSC ED

On 2 December 1980, Petitioners proposed 1 0 that the terms of payment of the loan
be modi ed as follows: P2,000 on or before 3 December 1980, and P1,000 per month
starting 31 January 1980 until the account is fully paid. Pending approval of the proposal,
Petitioners paid P1,000 to PBC on 4 December 1980, 1 1 and thereafter P500 on 11
February 1981, 1 2 16 March 1981, 1 3 and 20 April 1981. 1 4 Concurrently with the separate
demand for attorney's fees by PBC's legal counsel, PBC continued to demand payment of
the balance. 1 5
On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115
(Trust Receipts Law) in relation to Article 315 of the Revised Penal Code in an Information
which was led with Branch 18, Regional Trial Court of Cagayan de Oro City. The
accusatory portion of the Information reads:
That on or about October 31, 1979, in the City of Cagayan de Oro,
Philippines, and within the jurisdiction of this Honorable Court, the above-named
accused entered into a trust receipt agreement with the Philippine Banking
Corporation at Cagayan de Oro City wherein the accused, as entrustee, received
from the entruster the following goods to wit:
Solatone Acoustical board

Tanguile Wood Tiles

Marcelo Cement Tiles

Umylin Cement Adhesive

with a total value of P22,389.80, with the obligation on the part of the accused-entrustee
to hold the aforesaid items in trust for the entruster and/or to sell on cash basis or otherwise
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 dispose of the said items and to turn over to the entruster the proceeds of the sale of said goods
or if there be no sale to return said items to the entruster on or before January 29, 1980 but that
the said accused after receipt of the goods, with intent to defraud and cause damage to the
entruster, conspiring, confederating together and mutually helping one another, did then and
there wilfully, unlawfully and feloniously fail and refuse to remit the proceeds of the sale of the
goods to the entruster despite repeated demands but instead converted, misappropriated and
misapplied the proceeds to their own personal use, bene t and gain, to the damage and prejudice
of the Philippine Banking Corporation, in the aforesaid sum of P22,389.80, Philippine Currency.

Contrary to PD 115 in relation to Article 315 of the Revised Penal Code. 1 6

The case was docketed as Criminal Case No. 1390.

During trial, petitioner Veloso insisted that the transaction was a "clean loan" as per
verbal guarantee of Cayo Garcia Tuiza, PBC's former manager. He and petitioner Colinares
signed the documents without reading the ne print, only learning of the trust receipt
implication much later. When he brought this to the attention of PBC, Mr. Tuiza assured
him that the trust receipt was a mere formality. 1 7
On 7 July 1986, the trial court promulgated its decision 1 8 convicting Petitioners of
estafa for violating P.D. No. 115 in relation to Article 315 of the Revised Penal Code and
sentencing each of them to suffer imprisonment of two years and one day of prision
correccional as minimum to six years and one day of prision mayor as maximum, and to
solidarily indemnify PBC the amount of P20,824.44, with legal interest from 29 January
1980, 12% penalty charge per annum, 25% of the sums due as attorney's fees, and costs.
The trial court considered the transaction between PBC and Petitioners as a trust
receipt transaction under Section 4, P.D. No. 115. It considered Petitioners' use of the
goods in their Carmelite monastery project an act of "disposing" as contemplated under
Section 13, P.D. No. 115, and treated the charge invoice 1 9 for goods issued by CM
Builders Centre as a "document" within the meaning of Section 3 thereof. It concluded that
the failure of Petitioners to turn over the amount they owed to PBC constituted estafa.
Petitioners appealed from the judgment to the Court of Appeals which was
docketed as CA-G.R. CR No. 05408. Petitioners asserted therein that the trial court erred in
ruling that they violated the Trust Receipt Law, and in holding them criminally liable
therefor. In the alternative, they contend that at most they can only be made civilly liable for
payment of the loan.
In its decision 2 0 6 March 1989, the Court of Appeals modi ed the judgment of the
trial court by increasing the penalty to six years and one day of prision mayor as minimum
to fourteen years eight months and one day of reclusion temporal as maximum. It held that
the documentary evidence of the prosecution prevails over Veloso's testimony, discredited
Petitioners' claim that the documents they signed were in blank, and disbelieved that they
were coerced into signing them. SIcTAC

On 25 March 1989, Petitioners led a Motion for New Trial/Reconsideration 2 1

alleging that the "Disclosure Statement on Loan/Credit Transaction" 2 2 (hereafter
Disclosure Statement) signed by them and Tuiza was suppressed by PBC during the trial.
That document would have proved that the transaction was indeed a loan as it bears a 14%
interest as opposed to the trust receipt which does not at all bear any interest. Petitioners
further maintained that when PBC allowed them to pay in installment, the agreement was
novated and a creditor-debtor relationship was created.

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 In its resolution 2 3 of 16 October 1989 the Court of Appeals denied the Motion for
New Trial/Reconsideration because the alleged newly discovered evidence was actually
forgotten evidence already in existence during the trial, and would not alter the result of the
case.
Hence, Petitioners led with us the petition in this case on 16 November 1989. They
raised the following issues:
1. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL ON
THE GROUND OF NEWLY DISCOVERED EVIDENCE, NAMELY,
"DISCLOSURE ON LOAN/CREDIT TRANSACTION," WHICH IF
INTRODUCED AND ADMITTED, WOULD CHANGE THE JUDGMENT,
DOES NOT CONSTITUTE A DENIAL OF DUE PROCESS.
2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR NOT
THE ACCUSED WERE PROPERLY CHARGED, TRIED AND CONVICTED
FOR VIOLATION OF SEC. 13, PD NO. 115 IN RELATION TO ARTICLE
315 PARAGRAPH (I) (B) NOTWITHSTANDING THE NOVATION OF
THE SO-CALLED TRUST RECEIPT CONVERTING THE TRUSTOR-
TRUSTEE RELATIONSHIP TO CREDITOR-DEBTOR SITUATION.
In its Comment of 22 January 1990, the O ce of the Solicitor General urged us to
deny the petition for lack of merit.
On 28 February 1990 Petitioners led a Motion to Dismiss the case on the ground
that they had already fully paid PBC on 2 February 1990 the amount of P70,000 for the
balance of the loan, including interest and other charges, as evidenced by the different
receipts issued by PBC, 2 4 and that the PBC executed an Affidavit of desistance. 2 5
We required the Solicitor General to comment on the Motion to Dismiss.
In its Comment of 30 July 1990, the Solicitor General opined that payment of the
loan was akin to a voluntary surrender or plea of guilty which merely serves to mitigate
Petitioners' culpability, but does not in any way extinguish their criminal liability.
In the Resolution of 13 August 1990, we gave due course to the Petition and
required the parties to file their respective memoranda.
The parties subsequently filed their respective memoranda.
It was only on 18 May 1999 when this case was assigned to the ponente. Thereafter,
we required the parties to move in the premises and for Petitioners to manifest if they are
still interested in the further prosecution of this case and inform us of their present
whereabouts and whether their bail bonds are still valid.
Petitioners submitted their Compliance.
The core issues raised in the petition are the denial by the Court of Appeals of
Petitioners' Motion for New Trial and the true nature of the contract between Petitioners
and the PBC. As to the latter, Petitioners assert that it was an ordinary loan, not a trust
receipt agreement under the Trust Receipts Law. TAEcCS

The grant or denial of a motion for new trial rests upon the discretion of the judge.
New trial may be granted if: (1) errors of law or irregularities have been committed during
the trial prejudicial to the substantial rights of the accused; or (2) new and material
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 evidence has been discovered which the accused could not with reasonable diligence have
discovered and produced at the trial, and which, if introduced and admitted, would
probably change the judgment. 2 6
For newly discovered evidence to be a ground for new trial, such evidence must be
(1) discovered after trial; (2) could not have been discovered and produced at the trial even
with the exercise of reasonable diligence; and (3) material, not merely cumulative,
corroborative, or impeaching, and of such weight that, if admitted, would probably change
the judgment. 2 7 It is essential that the offering party exercised reasonable diligence in
seeking to locate the evidence before or during trial but nonetheless failed to secure it. 2 8
We nd no indication in the pleadings that the Disclosure Statement is a newly
discovered evidence.
Petitioners could not have been unaware that the two-page document exists. The
Disclosure Statement itself states, "NOTICE TO BORROWER: YOU ARE ENTITLED TO A
COPY OF THIS PAPER WHICH YOU SHALL SIGN." 2 9 Assuming Petitioners' copy was then
unavailable, they could have compelled its production in court, 3 0 which they never did.
Petitioners have miserably failed to establish the second requisite of the rule on newly
discovered evidence.
Petitioners themselves admitted that "they searched again their voluminous records,
meticulously and patiently, until they discovered this new and material evidence" only upon
learning of the Court of Appeals' decision and after they were "shocked by the penalty
imposed." 3 1 Clearly, the alleged newly discovered evidence is mere forgotten evidence
that jurisprudence excludes as a ground for new trial. 3 2
However, the second issue should be resolved in favor of Petitioners.
Section 4, P.D. No. 115, the Trust Receipts Law, de nes a trust receipt transaction
as any transaction by and between a person referred to as the entruster, and another
person referred to as the entrustee, whereby the entruster who owns or holds absolute
title or security interest over certain speci ed goods, documents or instruments, releases
the same to the possession of the entrustee upon the latter's execution and delivery to the
entruster of a signed document called a "trust receipt" wherein the entrustee binds himself
to hold the designated goods, documents or instruments with the obligation to turn over
to the entruster the proceeds thereof to the extent of the amount owing to the entruster or
as appears in the trust receipt or the goods, documents or instruments themselves if they
are unsold or not otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt.
There are two possible situations in a trust receipt transaction. The rst is covered
by the provision which refers to money received under the obligation involving the duty to
deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the
provision which refers to merchandise received under the obligation to "return" it
(devolvera) to the owner. 3 3
Failure of the entrustee to turn over the proceeds of the sale of the goods, covered
by the trust receipt to the entruster or to return said goods if they were not disposed of in
accordance with the terms of the trust receipt shall be punishable as estafa under Article
315 (1) of the Revised Penal Code, 3 4 without need of proving intent to defraud.
A thorough examination of the facts obtaining in the case at bar reveals that the
transaction intended by the parties was a simple loan, not a trust receipt agreement.
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 Petitioners received the merchandise from CM Builders Centre on 30 October 1979.
On that day, ownership over the merchandise was already transferred to Petitioners who
were to use the materials for their construction project. It was only a day later, 31 October
1979, that they went to the bank to apply for a loan to pay for the merchandise.
This situation belies what normally obtains in a pure trust receipt transaction where
goods are owned by the bank and only released to the importer in trust subsequent to the
grant of the loan. The bank acquires a "security interest" in the goods as holder of a
security title for the advances it had made to the entrustee. 3 5 The ownership of the
merchandise continues to be vested in the person who had advanced payment until he has
been paid in full, or if the merchandise has already been sold, the proceeds of the sale
should be turned over to him by the importer or by his representative or successor-in-
interest. 3 6 To secure that the bank shall be paid, it takes full title to the goods at the very
beginning and continues to hold that title as his indispensable security until the goods are
sold and the vendee is called upon to pay for them; hence, the importer has never owned
the goods and is not able to deliver possession. 3 7 In a certain manner, trust receipts
partake of the nature of a conditional sale where the importer becomes absolute owner of
the imported merchandise as soon as he has paid its price. 3 8 aSTA HD

Trust receipt transactions are intended to aid in nancing importers and retail
dealers who do not have su cient funds or resources to nance the importation or
purchase of merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased. 3 9
The antecedent acts in a trust receipt transaction consist of the application and
approval of the letter of credit, the making of the marginal deposit and the effective
importation of goods through the efforts of the importer. 4 0
PBC attempted to cover up the true delivery date of the merchandise, yet the trial
court took notice even though it failed to attach any signi cance to such fact in the
judgment. Despite the Court of Appeals' contrary view that the goods were delivered to
Petitioners previous to the execution of the letter of credit and trust receipt, we nd that
the records of the case speak volubly and this fact remains uncontroverted. It is not
uncommon for us to peruse through the transcript of the stenographic notes of the
proceedings to be satis ed that the records of the case do support the conclusions of the
trial court. 4 1 After such perusal Grego Mutia, PBC's credit investigator, admitted thus:
ATTY. CABANLET: (continuing)
Q Do you know if the goods subject matter of this letter of credit and trust
receipt agreement were received by the accused?
A Yes, sir.
Q Do you have evidence to show that these goods subject matter of this letter
of credit and trust receipt were delivered to the accused?
A Yes, sir.
Q I am showing to you this charge invoice, are you referring to this
document?
A Yes, sir.
xxx xxx xxx
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 Q What is the date of the charge invoice?
A October 31, 1979.
COURT:
Make it of record as appearing in Exhibit D, the zero in 30 has been
superimposed with numeral 1. 4 2

During the cross and re-direct examinations he also impliedly admitted that the
transaction was indeed a loan. Thus:
Q In short the amount stated in your Exhibit C, the trust receipt was a loan to
the accused you admit that?

A Because in the bank the loan is considered part of the loan.

xxx xxx xxx
RE-DIRECT BY ATTY. CABANLET:
ATTY. CABANLET (to the witness)
Q What do you understand by loan when you were asked?

A Loan is a promise of a borrower from the value received. The borrower will
pay the bank on a certain specified date with interest. 4 3

Such statement is akin to an admission against interest binding upon PBC.

Petitioner Veloso's claim that they were made to believe that the transaction was a
loan was also not denied by PBC. He declared:
Q Testimony was given here that was covered by trust receipt. In short it was
a special kind of loan. What can you say as to that?
A I don't think that would be a trust receipt because we were made to
understand by the manager who encouraged us to avail of their facilities
that they will be granting us a loan. 4 4
aETA HD

PBC could have presented its former bank manager, Cayo Garcia Tuiza, who
contracted with Petitioners, to refute Veloso's testimony, yet it only presented credit
investigator Grego Mutia. Nowhere from Mutia's testimony can it be gleaned that PBC
represented to Petitioners that the transaction they were entering into was not a pure
loan but had trust receipt implications.
The Trust Receipts Law does not seek to enforce payment of the loan, rather it
punishes the dishonesty and abuse of con dence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the owner. 4 5 Here, it is crystal clear
that on the part of Petitioners there was neither dishonesty nor abuse of con dence in the
handling of money to the prejudice of PBC. Petitioners continually endeavored to meet
their obligations, as shown by several receipts issued by PBC acknowledging payment of
the loan.
The Information charges Petitioners with intent to defraud and misappropriating the
money for their personal use. The mala prohibita nature of the alleged offense
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 notwithstanding, intent as a state of mind was not proved to be present in Petitioners'
situation. Petitioners employed no arti ce in dealing with PBC and never did they evade
payment of their obligation nor attempt to abscond. Instead, Petitioners sought favorable
terms precisely to meet their obligation.
Also noteworthy is the fact that Petitioners are not importers acquiring the goods
for re-sale, contrary to the express provision embodied in the trust receipt. They are
contractors who obtained the fungible goods for their construction project. At no time did
title over the construction materials pass to the bank, but directly to the Petitioners from
CM Builders Centre. This impresses upon the trust receipt in question vagueness and
ambiguity, which should not be the basis for criminal prosecution in the event of violation
of its provisions. 4 6
The practice of banks of making borrowers sign trust receipts to facilitate
collection of loans and place them under the threats of criminal prosecution should they
be unable to pay it may be unjust and inequitable, if not reprehensible. Such agreements
are contracts of adhesion which borrowers have no option but to sign lest their loan be
disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy
of banks, and is prone to misinterpretation, as had happened in this case. Eventually, PBC
showed its true colors and admitted that it was only after collection of the money, as
manifested by its Affidavit of Desistance.
WHEREFORE, the challenged Decision of 6 March 1989 and the Resolution of 16
October 1989 of the Court of Appeals in CA-G.R. No. 05408 are REVERSED and SET ASIDE.
Petitioners are hereby ACQUITTED of the crime charged, i.e., for violation of P.D. No. 115 in
relation to Article 315 of the Revised Penal Code.
No costs.
SO ORDERED.
Kapunan and Pardo, JJ., concur.
Puno, J., took no part.
Ynares-Santiago, J., is on leave.

Footnotes

1. Exhibit "D," Original Record (OR), 115.

2. Exhibit "A," Id., 112.

3. Exhibit "B," OR, 113.

4. Exhibit "C," Id., 114.

5. Exhibit "8-C," Id., 181.

6. Exhibit "4,"Id., 160.

7. Exhibits "3, 1," Id., 153.

8. Exhibit "E," Id., 116.

9. Exhibit "5," Id., 161.

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 10. Exhibit "F," Id., 117.

11. Exhibit "7," Id., 167.

12. Exhibit "7-A," Id., 168.

13. Exhibit "7-B," Id., 169.

14. Exhibit "7-C," Id., 170.

15. Exhibit "G," Id., 118.

16. OR, 33.

17. TSN, 21 May 1986, 21-22, 30.

18. Per Judge Senen C. Peñaranda, Rollo, 12-17.

19. Exhibit "D," supra note 1.

20. Annex "A" of Petition, Rollo, 3-10. Per Imperial, J., J., with the concurrence of Puno, R
and Francisco, C., JJ.

21. Rollo, 27-39.

22. Id., 177-178.
23. Id., 45.
24. Rollo, 127.
25. Id., 128.
26. Section 2, Rule 121, Revised Rules of Criminal Procedure.
27. See People v. Excija, 258 SCRA 424, 443 [1996]; People v. Tirona, 300 SCRA 431, 440
[1998]; Villanueva v. People, G.R. No. 135098, 12 April 2000, 7.

28. Tumang v. Court of Appeals, et al., 172 SCRA 328, 334 [1989]. See Garrido v. CA, et al.,
236 SCRA 450, 456 [1994].
29. Rollo, 178.
30. People v. Ducay, et al., 225 SCRA 1 [1993].
31. Motion for New Trial/Reconsideration; Rollo, 28.
32. People v. Hernando, et al., 108 SCRA 121 [1981]; People v. Ducay, supra note 30; People
v. Penones, 200 SCRA 624 [1991].
33. People v. Cuevo, 104 SCRA 312, 318 [1981].
34. Section 13, P.D. No. 115.

35. Vintola v. IBAA, 150 SCRA 578, 583 [1987].

36. Prudential Bank v. NLRC, 251 SCRA 421 [1995], quoting National Bank v. Vda. de Hijos
de Angel Jose, 63 Phil. 814, 821 [1936].
37. People v. Yu Chai Ho, 53 Phil. 874 [1928], quoting In re: Dunlap Carpet Co., 207 Fed.
726.

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 38. Prudential Bank v. NLRC, supra note 36.
39. Ceferina Samo v. People, 115 Phil. 346, 349-350 [1962], citing 53 Am Jur. 961. See also
Prudential Bank v. NLRC, supra note 36.
40. Sia v. People, 121 SCRA 655 [1983].
41. People v. Vergara, et al., 270 SCRA 624 [1997].
42. TSN, 18 December 1986, 10-11.
43. Id., 21-22.
44. TSN, 21 May 1986, 3-4.

45. People v. Nitafan, et al., 207 SCRA 726 [1992].

46. Sia v. People, supra note 40.

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 EN BANC

[G.R. No. L-20240. December 31, 1965.]

REPUBLIC OF THE PHILIPPINES , plaintiff-appellee, vs. JOSE

GRIJALDO , defendant-appellant.

Solicitor General for plaintiff-appellee.

Isabelo P. Samson for defendants-appellant.

SYLLABUS

1. OBLIGATIONS AND CONTRACTS; CROP LOANS OBTAINED FROM THE

BANK OF TAIWAN, LTD.; RIGHT OF PHILIPPINE GOVERNMENT TO COLLECT THE
LOANS. — In 1943, appellant obtained crop loans from the Bank of Taiwan, Ltd.,
Bacolod City Branch evidenced by promissory notes. To secure payment of the loans,
appellant executed a chattel mortgage over the standing crops on his land. After the
war, the Republic of the Philippines brought the present action to collect from appellant
the unpaid account Held: It is true that the Bank of Taiwan, Ltd. was the original creditor
and the transaction between the appellant and the Bank of Taiwan was a private
contract of loans. However, pursuant to the Trading with the Enemy Act, as amended,
and Executive Order No. 9095 of the United States; and under Vesting Order No. P-4,
dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity which was
declared to be under the jurisdiction of the enemy country (Japan), were vested in the
United States Government. Pursuant, further, to the Philippine Property Act of 1946 and
Transfer Agreement dated July 20, 1954 and June 15, 1957, between the United States
Government and the Republic of the Philippines, the assets of the Bank of Taiwan, Ltd.,
were transferred to and vested in the Republic of the Philippines. The successive
transfers of the rights over the loans in question from the Bank of Taiwan, Ltd. to the
United States Government, and from the United States Government to the government
of the Republic of the Philippines, made the Republic of the Philippines the successor
of the rights, title and interest in said loans, thereby creating a privity of contract
between the appellee and the appellant.
2. ID.; ID,; ID.; DESTRUCTION OF CROP THROUGH ENEMY ACTION; EFFECT
ON THE OBLIGATION. — Appellant maintains, in support of his contention that the
appellee has no cause of action, that because the loans were secured by a chattel
mortgage on the standing crops on the land owned by him and those crops were lost
or destroyed through enemy action his obligation to pay the loans was thereby
extinguished. Held: This argument is untenable. The obligation of the appellant under
the promissory notes was not to deliver a determinate thing; namely, the crops to be
harvested from his land, but to pay a generic thing - the amount of money representing
the total sum of his loans, with interest. The chattel mortgage on the crops simply
stood as a security for the ful llment of appellant's obligation covered by the
promissory notes, and the loss of the crops did not extinguish his obligation to pay,
because the account could still be paid from other sources aside from the mortgaged
crops.
3. ID.; ID.; ID.; PRESCRIPTION OF ACTIONS; PRESCRIPTION DOES NOT RUN
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 AGAINST THE GOVERNMENT. — The complaint in the present case was brought by the
Republic of the Philippines not as a nominal party but in the exercise of its sovereign
functions, to protect the interests of the State over a public property. This Court has
held that the statute of limitations does not run against the right of action of the
Government of the Philippines (Government of the Philippine Islands vs. Monte de
Piedad, etc., 35 Phil. 738-751).
4. ID.; ID.; ID.; ID.; EFFECT OF MORATORIUM LAWS. — Moreover, the running
of the period of prescription of the action to collect the loan from the appellant was
interrupted by the moratorium laws (Executive Order No. 25, dated November 18, 1944;
Executive Order No. 32, dated March 10, 1945; and Republic Act No. 342 approved on
July 26, 1948). Computed accordingly, the prescriptive period was suspended for 8
years and 6 months. Hence, appellee's action had not yet prescribed.
5. ID.; ID.; ID.; PAYMENT IN JAPANESE WAR NOTES; APPLICATION OF
BALLANTYNE SCALE OF VALUE. — Contracts stipulating for payments presumably in
Japanese war notes may be enforced after the liberation to the extent of the just
obligation of the contracting parties and, as said notes have become worthless, in
order that justice may be done and the party entitled to be paid can recover their actual
value in Philippine Currency, what the debtor or defendant bank should return or pay is
the value of the Japanese military notes in relation to the peso in Philippine Currency
obtaining on the date when and at the place where the obligation was incurred unless
the parties had agreed otherwise. (Hilado vs. De la Costa, L-150, April 30, 1950, 46 Off.
Gaz. 5472.)

DECISION

ZALDIVAR , J : p

In the year 1943 appellant Jose Grijaldo obtained ve loans from the branch
o ce of the Bank of Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with
interest at the rate of 6% per annum, compounded quarterly. These loans are evidenced
by ve promissory notes executed by the appellant in favor of the Bank of Taiwan, Ltd.,
as follows: On June 1, 1943, P600.00; on June 3, 1943, P159.11; on June 18, 1943,
P22.86; on August 9, 1943, P300.00; on August 13, 1943, P200.00, all notes without
due dates, but because the loans were crop loans it was considered that the loans were
due one year after they were incurred. To secure the payment of the loans the appellant
executed a chattel mortgage on the standing crops on his land, Lot No. 1494 known as
Hacienda Campugas in Hinigaran, Negros Occidental.
By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the
authority provided for in the Trading with the Enemy Act, as amended, the assets in the
Philippines of the Bank of Taiwan, Ltd. were vested in the Government of the United
States. Pursuant to the Philippine Property Act of 1946 of the United States, these
assets, including the loans in question, were subsequently transferred to the Republic
of the Philippines by the Government of the United States under Transfer Agreement
dated July 20, 1954. These assets were among the properties that were placed under
the administration of the Board of Liquidators created under Executive Order No. 372,
dated November 24, 1950, and in accordance with Republic Act Nos. 8 and 477 and
other pertinent laws.
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 On September 29, 1954 the appellee, Republic of the Philippines, represented by
the Chairman of the Board of Liquidators, made a written extra-judicial demand upon
the appellant for the payment of the account in question. The record shows that the
appellant had actually received the written demand for payment, but he failed to pay.
The aggregate amount due as principal of the ve loans in question, computed
under the Ballantyne scale of values as of the time that the loans were incurred in 1943,
was P889.64; and the interest due thereon at the rate of 6% per annum compounded
quarterly, computed as of December 31, 1959 was P1,457.39; so that the total account
as of December 31, 1959 was P2,377.23.
On January 17, 1961 the appellee led a complaint in the Justice of the Peace
Court of Hinigaran, Negros Occidental, to collect from the appellant the unpaid account
in question. The Justice of the Peace of Hinigaran, after hearing, dismissed the case on
the ground that the action had prescribed. The appellee appealed to the Court of First
Instance of Negros Occidental and on March 26, 1962 the court a quo rendered a
decision ordering the appellant to pay the appellee the sum of P2,377.23 as of
December 31, 1959, plus interest at the rate of 6% per annum compounded quarterly
from the date of the ling of the complaint until full payment was made. The appellant
was also ordered to pay the sum equivalent to 10% of the amount due as attorney's
fees and the costs.
The appellant appealed directly to this Court. During the pendency of this appeal
the appellant Jose Grijaldo died. Upon motion by the Solicitor General this Court, in a
resolution of May 13, 1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben
Lagtapon and Anita L. Aguilar, who are the legal heirs of Jose Grijaldo, to appear and be
substituted as appellants in accordance with Section 17 of Rule 3 of the Rules of Court.
In the present appeal the appellant contends: (1) that the appellee has no cause
of action against the appellant; (2) that if the appellee has cause of action at all, that
action had prescribed; and (3) that the lower court erred in ordering the appellant to
pay the amount of P2,377.23.
In discussing his rst point of contention, the appellant maintains that the
appellee has no privity of contract with the appellant. It is claimed that the transaction
involved in this case was a private transaction between the Taiwan Bank, Ltd. and the
appellant, so that the appellee, Republic of the Philippines, could not legally bring action
against the appellant for the enforcement of the obligation involved in said transaction.
This contention has no merit. It is true that the Bank of Taiwan, Ltd. was the original
creditor and the transaction between the appellant and the Bank of Taiwan was a
private contract of loan. However, pursuant to the Trading with the Enemy Act, as
amended, and Executive Order No. 9095 of the United States; and under Vesting Order
No. P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity
which was declared to be under the jurisdiction of the enemy country (Japan), were
vested in the United States Government. Pursuant, further, to the Philippine Property
Act of 1946 and Transfer Agreements dated July 20, 1954 and June 1957, between the
United States Government and the Republic of the Philippines, the assets of the Bank of
Taiwan, Ltd. were transferred to and vested in the Republic of the Philippines. The
successive transfers of the rights over the loans in question from the Bank of Taiwan,
Ltd. to the United States Government, and from the United States Government to the
government of the Republic of the Philippines, made the Republic of the Philippines the
successor of the rights, title and interests in said loans, thereby creating a privity of
contract between the appellee and the appellant. In de ning the word "privy" this Court,
in a case, said:
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 "The word `privy' denotes the idea of succession . . . hence, an
assignee of a credit, and one subrogated to it, etc. will be privies; in short, he
who, by succession is placed in the position of one of those who contracted
the juridical relation and executed the private document and appears to be
substituting him in his personal rights and obligation is a privy" (Alpuerto vs.
Perez, 38 Phil. 785, 790).

The United States of America acting as a belligerent sovereign power seized the assets of
the Bank of Taiwan, Ltd. which belonged to an enemy country. The confiscation of the
assets of the Bank of Taiwan, Ltd. being an involuntary act of war, and sanctioned by
international law, the United States succeeded to the rights and interests of said Bank of
Taiwan, Ltd. over the assets of said bank. As successor in interest in, and transferee of, the
property rights of the United States of America over the loans in question, the Republic of
the Philippines had thereby become a privy to the original contracts of loan between the
Bank of Taiwan, Ltd. and the appellant. It follows, therefore, that the Republic of the
Philippines has a legal right to bring the present action against the appellant Jose Grijaldo.
The appellant likewise maintains, in support of his contention that the appellee
has no cause of action, that because the loans were secured by a chattel mortgage on
the standing crops on a land owned by him and those crops were lost or destroyed
through enemy action his obligation to pay the loans was thereby extinguished. This
argument is untenable. The terms of the promissory notes and the chattel mortgage
that the appellant executed in favor of the Bank of Taiwan, Ltd. do not support the claim
of appellant. The obligation of the appellant under the ve promissory notes was not to
deliver a determinate thing; namely, the crops to be harvested from his land, or the
value of the crops that would be harvested from his land. Rather, his obligation was to
pay a generic thing the amount of money representing the total sum of the ve loans,
with interest. The transaction between the appellant and the Bank of Taiwan, Ltd. was a
series of ve contracts of simple loan of sums of money. "By a contract of (simple)
loan, one of the parties delivers to another . . . money or other consumable thing upon
the condition that the same amount of the same kind and quality shall be paid." (Article
1933, Civil Code.) The obligation of the appellant under the ve promissory notes
evidencing the loans in question is to pay the value thereof; that is, to deliver a sum of
money — a clear case of an obligation to deliver a generic thing. Article 1263 of the Civil
Code provides:
"In an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation."

The chattel mortgage on the crops growing on appellant's land simply stood as a
security for the ful llment of appellant's obligation covered by the ve promissory
notes, and the loss of the crops did not extinguish his obligation to pay, because the
account could still be paid from other sources aside from the mortgaged crops.
In his second point of contention, the appellant maintains that the action of the
appellee had prescribed. The appellant points out that the loans became due on June 1,
1944; and when the complaint was led on January 17, 1961 a period of more than 16
years had already elapsed — far beyond the period of ten years when an action based
on a written contract should be brought to court.
This contention of the appellant has no merit. Firstly, it should be considered that
the complaint in the present case was brought by the Republic of the Philippines not as
a nominal party but in the exercise of its sovereign functions, to protect the interests of
the State over a public property. Under paragraph 4 of Article 1108 of the Civil Code
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 prescription, both acquisitive and extinctive, does not run against the State. This Court
has held that the statute of limitations does not run against the right of action of the
Government of the Philippines (Government of the Philippine Islands vs. Monte de
Piedad, etc. 35 Phil. 738-751). Secondly, the running of the period of prescription of the
action to collect the loan from the appellant was interrupted by the moratorium laws
(Executive Order No. 25, dated November 18, 1944; Executive Order No. 32, dated
March 10, 1945; and Republic Act No. 342, approved on July 26, 1948). The loan in
question, as evidenced by the ve promissory notes, were incurred in the year 1943, or
during the period of Japanese occupation of the Philippines. This case is squarely
covered by Executive Order No. 25, which became effective on November 18, 1944,
providing for the suspension of payments of debts incurred after December 31, 1941.
The period of prescription was, therefore, suspended beginning November 18, 1944.
This Court, in the case of Rutter vs. Esteban (L-3708, May 18, 1953; 93 Phil. 68),
declared on May 18, 1953 that the Moratorium Laws, R.A. No. 342 and Executive Order
Nos. 25 and 32, are unconstitutional; but in that case this Court ruled that the
moratorium laws had suspended the prescriptive period until May 18, 1953. This ruling
was categorically reiterated in the decision in the case of Manila Motors vs. Flores, L-
9396, August 16, 1956. It follows, therefore, that the prescriptive period in the case
now before Us was suspended from November 18, 1944, when Executive Order No. 25
took effect, until May 18, 1953 when R.A. 342 along with Executive Order Nos. 25 and
32 were declared unconstitutional by this Court. Computed accordingly, the
prescriptive period was suspended for 8 years and 6 months. By the appellant's own
admission, the cause of action on the ve promissory notes in question arose on June
1, 1944. The complaint in the present case was led on January 17, 1961, or after a
period of 16 years 6 months and 16 days when the cause of action arose. If the
prescriptive period was not interrupted by the moratorium laws, the action would have
prescribed already; but, as We have stated, the prescriptive period was suspended by
the moratorium laws for a period of 8 years and 6 months. If we deduct the period of
suspension (8 years and 6 months) from the period that elapsed from the time the
cause of action arose to the time when the complaint was led (16 years, 6 months and
16 days) there remains a period of 8 years and 16 days. In other words, the prescriptive
period run for only 8 years and 16 days. There still remained a period of one year, 11
months and 14 days of the prescriptive period when the complaint was filed.
In his third point of contention the appellant maintains that the lower court erred
in ordering him to pay the amount of P2,377.23. It is claimed by the appellant that it
was an error on the part of the lower court to apply the Ballantyne Scale of values in
evaluating the Japanese war notes as of June 1943 when the loans were incurred,
because what should be done is to evaluate the loans on the basis of the Ballantyne
scale as of the time the loans became due, and that was in June 1944. This contention
of the appellant is also without merit.
The decision of the court a quo ordered the appellant to pay the sum of
P2,377.23 as of December 31, 1959, plus interest at the rate of 6% per annum
compounded quarterly from the date of the ling of the complaint, The sum total of the
ve loans obtained by the appellant from the Bank of Taiwan, Ltd. was P1,281.97 in
Japanese war notes. Computed under the Ballantyne Scale of values as of June 1943,
this sum of P1,281.97 in Japanese war notes in June 1943 is equivalent to P889.64 in
genuine Philippine Currency. It is this amount of P889.64 in genuine Philippine Currency
which was considered the aggregate amount due as principal of the ve loans, and the
amount of P2,377.23 as of December 31, 1959 was arrived at after computing the
interest on the principal sum of P889.64 compounded quarterly from the time the
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 obligations were incurred in 1943.
It is the stand of the appellee that the Ballantyne scale of value should be applied
as of the time the obligation was incurred, and that was in June 1943. This stand of the
appellee was upheld by the lower court; and the decision of the lower court is
supported by the ruling of this Court in the case of Hilado vs. De la Costa (83 Phil. 471;
46 O. G., 5472), which states:
". . . Contracts stipulating for payments presumably in Japanese war
notes may be enforced in our Courts after the liberation to the extent of the
just obligation of the contracting parties and, as said notes have become
worthless, in order that justice may be done and the party entitled to be paid
can recover their actual value in Philippine Currency, what the debtor or
defendant bank should return or pay is the value of the Japanese military
notes in relation to the peso in Philippine Currency obtaining on the date
when and at the place where the obligation was incurred unless the parties
had agreed otherwise. . . ." (italics supplied)
IN VIEW OF THE VIEW FOREGOING, the decision appealed from is a rmed, with
costs against the appellant. Inasmuch as the appellant Jose Grijaldo died during the
pendency of this appeal, his estate must answer in the execution of the judgment in the
present case.
Bengzon, C.J., Concepcion, Barrera, Regala, Bautista Angelo, Reyes, J.B.L., Dizon,
Makalintal and Bengzon, J.P., JJ., concur.

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 FIRST DIVISION

[G.R. No. 43579. June 14, 1938.]

JOSUE SONCUYA , plaintiff-appellant, vs. JUAN AZARRAGA ET AL. ,

defendants-appellants.

Gervacio Diaz, Joaquin Azarraga, Sumulomg, Lavidez & Sumulomg, and Laurel, Del
Rosario & Sabido for defendants and appellants.
Josue Soncuyu in his own behalf.

SYLLABUS

1. DEBTOR AND CREDITOR; LOAN; ANTICHRESIS OR "PACTO COMISORIO";

ASSIGNMENT IN PAYMENT OF A DEBT; SALE WITH RIGHT OF REPURCHASE;
NOVATION. — When plaintiff extended the time within which defendants A, in general,
and J. A., in particular, could pay his credits against them, subject to the condition that
they pay him interest at 12 per cent per annum, and thereafter granting them another
extension of time under the same conditions as to interest, what perhaps could have
been considered as an antichresis or pacto comisorio as to the former (not an
assignment in payment of a debt, or a sale with a right of repurchase, because there is
nothing in the document to indicate that such was the intention of the defendants A, or,
at least, that they bound themselves to deliver the land in question to the plaintiff, the
latter to pay them the value thereof, and because there was what may be considered as
the resolutory condition of ve years), and what may be considered as a sale with the
right of repurchase in the case of J. A., were converted into simple loans by the decisive
circumstance that the plaintiff chose to collect thereafter, and the defendants agreed
to pay him, 12 per cent annual interest.
2. ID.; ID.; COLLECTION OF INTEREST. — It is only in contracts of loan, with or
without guaranty, that interest may be demanded (articles 1108, 1740, 1755, 1868,
1876, and 1881 of the Civil Code). As a matter of fact, the contract embodied in Exhibit
A was novated by Exhibits 5 and M, and plaintiff desired to have it novated for the third
time by means of Exhibit 2. It does not appear of record, however, that the defendants
A ever assented to the latter novation. Perhaps their refusal to agree ,to the same was
due to the fact that plaintiff wanted to raise their old obligation (P3,000 or P2,700 of all
the brothers, plus P4,000 which J. A. alone owed, which two accounts both plaintiff and
defendants considered as amounting to P7,000, exclusive of the annual interest of 12
per cent) to a round sum of P12,000. From all this it may easily be inferred that the
obligation which defendants had imposed upon themselves by means of Exhibit A had
ceased to exist and became a simple loan with security, if so desired, of the lands in
question, but without prejudice to third parties by reason of the failure to inscribe in the
registry of property either Exhibit A or the deed of assignment Exhibit C, executed by L.
A. in favor of the plaintiff.
3. ID.; ID.; ID. — The plaintiff never considered the contract entered into by
him with J. A. as, strictly speaking, a sale with the right of repurchase. And if he had ever
considered it as such, it is, nevertheless, true that he novated it on February 16, 1926,
considering it from that time on as a simple loan, inasmuch as on that date he began to
charge said defendant 12 per cent annual interest with the latter's assent and
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 conformity.
4. ID.; ID.; ASSIGNMENT IN PAYMENT, OF A DEBT; PURCHASE WITH "PACTO
DE RETRO"; RIGHT OF DOMINION TO BE ENJOYED IN SUCH CASES. — The contention
of defendants that plaintiff did not and could never receive the lands in question as an
assignment in payment of a debt and much less did he acquire them by purchase with
pacto de retro, is well taken. At no time did plaintiff claim any rights of dominion over
the lands since he did not even intimate to the defendants, either directly or indirectly,
that by reason of their failure to pay him his credit within the time provided therefor, he
became the absolute owner thereof. Moreover, notwithstanding the fact that all the
extensions he had given defendants had expired, he did not, even only for tax
declaration purposes, declare the lands as his property.
5. ID.; ID.; NEGLIGENCE OF CREDITOR. — If plaintiff never became the owner
of the lands in question, he can neither claim payment of the value of the same nor ask
to be indemni ed for the deprivation of their possession. And he has no reason to
complain that his lien, if his right over said lands could be termed as such, was not
annotated in the certi cate of title which defendants A had obtained, or that the latter
did not ask that it be stated therein that the lands to which it refers are charged with his
credit against them; inasmuch as he was himself negligent in that he did not ask the
court, while the registration case relating to said lands was bring heard, for the
annotation of what he considered necessary to protect his rights, and in not seeking the
revision or modi cation of the decree of registration within the period of one year
provided for that purpose.

DECISION

DIAZ , J : p

This case is now before us on appeal from the Court of First Instance of Capiz.
After trial, the plaintiff led a second amended complaint, which the lower court at rst
refused to consider, but later on admitted after it was convinced that the allowance
thereof was proper in order to make the allegations conform to the established facts.
This was done without the defendants interposing any exception, notwithstanding that
they had previously opposed the admission of the amendment. They did not afterwards
and do not now, in their brief on appeal, question the aforesaid amendment.
It appears from the allegations of the complaint thus amended that the plaintiff
has four causes of action. Under the rst cause he seeks to recover from the
defendants the sum of P118,635.68 as damages, which he alleges to have been caused
by the defendants in fraudulently depriving him of the possession of four parcels of
land with a total area of 296 hectares, 58 ares and 92 centares, which they, with
knowledge that said real properties belonged to him exclusively, registered in their
names in the registry of property and mortgaged in favor of "Hijos de I. de la Rama" to
pay a certain obligation which they had contracted with the Panay Municipal Cadastre.
Under the second cause, plaintiff seeks to recover P6,080 as the supposed value of the
heads of cattle belonging to him, which the tenants of the defendants had slaughtered.
Under the third cause, he seeks payment of the sum of P5,575 as the supposed value
of 1,115 coconut trees which he had planted on the four parcels of land in question.
Under the fourth and last cause of action, plaintiff prays that the defendants surnamed
Azarraga, with the exception of Joaquin Azarraga, be ordered to make up to 123
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 hectares, 13 ares and 99 centares the land which the latter had sold to him, because
plaintiff did not take possession of the land, except a portion thereof, having an area of
72 hectares, 83 ares and 5 centares. In other words, the defendants should deliver to
the plaintiff an additional 50 hectares, 30 ares and 94 centares inasmuch as the
participation of said Joaquin Azarraga in the estate left to him and his brothers, his co-
defendants herein, by their common grandfather, Juan Azarraga y Galvez, which Joaquin
Azarraga sold to plaintiff, had that area according to the deed of partition, executed by
all of them, and the plan of said estate which was subsequently drawn up.
In their answer of February 26, 1931, the defendants Azarraga interposed a
general denial of each and all the allegations of the plaintiff's complaint, excepting
those relating to their personal circumstances. They, in turn, alleged the following
special defenses: First, that the complaint does not allege facts constituting causes of
action,; second, that the plaintiff and his predecessor in interest were negligent in failing
to inscribe in the o ce of the register of deeds the supposed encumbrances in their
favor over the lands in question, granting that said encumbrances had ever existed;
third, that the plaintiff knew and was personally informed that the lands aforesaid
would be surveyed at their instance and inscribed in their names as their own property,
but that he did nothing to defend or protect his rights either during the pendency of the
proceedings for the registration of the lands in question or during the period prescribed
by law after the issuance of a decree and title, within which the validity of the same may
be assailed; fourth, that at the time of ling their application for registration as well as
of the issuance of the decree ordering the inscription in their names in the registry of
property of the lands in question, they were the sole owners of the same, and that
admitting for the sake of argument the theory of the plaintiff that he had a right to said
lands, it was nothing more than an expectation that he would be someday their owner;
fth, that the plaintiff had no right to apply for or obtain from the court a writ of
preliminary injunction, wherefore, that obtained was illegal; and sixth, that the right of
action of the plaintiff, if any, had prescribed.
The defendants Azarraga further alleged the following counterclaims:
(a) That plaintiff is liable to them in damages in the sum of P100,000
because while the contract which the defendants had entered into with Leodegario
Azarraga was still in force, the plaintiff took possession of their lands not covered by
the said contract; that he set loose therein his cattle, utilizing the same as grazing
ground in a negligent manner and without taking the necessary steps to avoid damages
to their plantations; that notwithstanding repeated requests, the plaintiff refused to
fence the lands in which he had set loose his animals, thereby causing damages and
destruction to their plantations; that the animals belonging to the plaintiff not only
destroyed and damaged the coconut, palay and corn plantations existing already on the
lands before said animals were brought thereto, but also destroyed their farms and
plantations on their enclosed lands; that all this was due to the neglect and
carelessness of the plaintiff; that by reason of his refusal to enclose the lands
converted into grazing grounds, the defendants were unable to derive any bene ts from
their lands or to sell or rent them to those who desired to do so.
(b ) That the plaintiff is further liable and should be sentenced to pay them in
damages the sum of P15,000 for having caused the annotation in the corresponding
registry book of the o ce of the register of deeds of the Province of Capiz of a notice
of lis pendens not only with regard to the 150 hectares, 48 ares and 50 centares which
he claims in his complaint, but also with regard to the whole area of 246 hectares, 27
ares and 98 centares, described in the original certi cate of title No. 9785 issued in the
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 name of the defendants; that as a result of this act of the plaintiff, they could not enter
into any transactions over that unquestioned portion of the land to which said title
relates.
( c) That the plaintiff is likewise liable and the defendants pray that he should
be sentenced to pay them the sum of P30,000 also in damages, for having sought and
secured the issuance of an order of preliminary attachment of their properties
described in certificates of title Nos. 9804 and 10361.
(d ) That the plaintiff is liable and should be sentenced to pay them in
damages the sum of P10,000 for having asked and secured from the court on February
7, 1931 a writ of preliminary injunction in the same case, thereby preventing the
defendants from exercising acts of ownership not only on the four parcels in question,
but also on all the other lands belonging to them.
( e) That in case it is adjudged that the lands in controversy had been
improperly inscribed by the defendants in their names in the registry of property, they
pray that the plaintiff be ordered to reimburse them in the sum of P5,000 which
represent the taxes paid by them on said lands, plus interest from the dates said taxes
were paid;
( f) The defendants lastly pray that upon the dissolution of the writ of
preliminary injunction issued against them on the date above-stated and the
cancellation of the annotation of said writ in the corresponding book of the office of the
register of deeds of Capiz, the plaintiff be sentenced to pay the costs of the suit.
"Hijos de I. de la Rama" and Panay Municipal Cadastre were included in the
complaint only for the purpose of enjoining the former from increasing to P25,000
the credit it had extended to the defendants Azarraga, who had already obtained
P16,000 on a mortgage of the lands in question executed by them in its favor; and
of restraining the latter from collecting from said loan of P25,000, extended by
"Hijos de I. de la Rama" to the defendants, the credit which it claims to have
against them under a contract whereby they abound themselves to provide it with
funds to carry on the enterprise for which it has been organized.
"Hijos de I. de la Rama" showed very little interest in the case, for,
according to the lower court, it merely filed an answer with a general denial.
Panay Municipal Cadastre, in its answer, denied all the allegations of the
complaint in so far as it might be affected thereby, and alleged as special defense that
the plaintiff had no right to ask for, and much less obtain, a writ of preliminary injunction
against it. It further alleged as a counterclaim that the said plaintiff has become liable
to it in damages in the sum of P15,000, plus P5,000 every month, beginning February 7,
1931, because the plaintiff prevented it from receiving from the defendants Azarraga or
from "Hijos de I. de la Rama" the sums which they had bound themselves to deliver
under a contract which they had executed on September 20, 1929. After trial, the court
rendered judgment as follows:
"Wherefore, the defendants Juan, Jose, Salvador, Joaquin, Emilio, Luis,
Rosario, Julio, all surnamed Azarraga, are hereby sentenced to pay the plaintiff,
jointly and severally, the sum of P24,627.98, with legal interest from November
10, 1926, as damages because they fraudulently deprived the plaintiff of his
lands in Bay-ang, and likewise to pay the plaintiff, jointly and severally, the sum of
P5,575 with legal interest from November 10, 1926, representing the value of
1,115 coconut trees as improvements on said lands, and, with the exception of
Joaquin Azarraga, to pay the plaintiff, jointly and severally, the sum of P5,030.94
with interest at the legal rate from November 10, 1926 for eviction and warranty.
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 "In case the defendants Azarraga have no unencumbered properties or can
not redeem the mortgage over their properties, with which to satisfy the indemnity
for damages, the payment of said indemnity shall be charged against the bond of
the sureties, who secured the lifting of the attachment on the properties of the
defendants.
"The writ of preliminary injunction issued in this case on February 7, 1931
against the defendants Azarraga, Hijos de I. de la Rama and Panay Municipal
Cadastre is hereby made nal, with the exception of that portion which enjoins
Hijos de I. de la Rama from delivering to the defendants surnamed Azarraga and
Panay Municipal Cadastre more than the sum of P16,000, which had already
been delivered, and which likewise enjoins the latter from demanding from said
entity more than the above-mentioned sum of P16,000, which portion is hereby
declared dissolved.
"The plaintiff is absolved from the counterclaims interposed by the
defendants Azarraga and by the Panay Municipal Cadastre. The defendants
Azarraga shall pay the costs."
From the foregoing judgment the defendants as well as the plaintiff appealed,
and in their respective briefs they assign the following errors:
ASSIGNMENTS OF ERROR OF THE DEFENDANTS.
"I. The trial court erred in holding that the true nature of the stipulation
between Attorney Leodegario Azarraga and the heirs of Don Juan Azarraga y
Galvez as contained in the plan of partition Exhibit 'A' is one of cession of
property in payment of a debt known in Spanish law as 'dacion en pago.'
"II. The trial court erred in not holding that the stipulation between
Attorney Leodegario Azarraga and the heirs of the deceased Juan Azarraga y
Galvez to the effect that the lands were to become the property of Attorney
Leodegario Azarraga in case the defendants failed to pay his fees within ve
years and that during this period the said attorney had the usufruct and
possession of the lands, as contained in Exhibit 'A', is one of pacto comisorio,
which is prohibited by article 1884 of the Civil Code.
"III. The trial court erred in nding that the three parcels of land in
question, lots Nos. 81, 82, and 83, were sold by Attorney Leodegario Azarraga to
the plaintiff herein.
"IV. The trial court erred in not holding that the right established by
Attorney Leodegario Azarraga by virtue of Exhibit 'A' and transferred to the
plaintiff is at most an attorney's lien over the properties in question and that the
action of the plaintiff as transferee of this lien should be to compel the
defendants to recognize it as a lien.
"V. The trial court erred in holding that the defendants procured the
registration of the lands in question by fraudulent means.
"VI. The trial court erred in not holding that the plaintiff, having no real
right over the lands in question, the omission of his name from the application is
not fraudulent and not fatal to the registration of the lands.
"VII. The trial court erred in not holding that the plaintiff, being a mere
usufructuary of the lands in question for a limited period of time by grace of the
owners, was not entitled to be mentioned in the application for registration and to be
notified personally of its proceedings.
"VIII. The trial court erred in not holding that the plaintiff had been
negligent in not asking for the review of the decree within one year, and in not
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 holding that the plaintiff purposely allowed the one-year period, within which he
could petition for review of the decree, to elapse in order that he might have a
cause of action for damages against the defendants.
"IX. The trial court erred in permitting the plaintiff to prove the market
value of the lands in question although there was absolutely no allegation to that
effect in the complaint notwithstanding the objection thereto and the exception
taken by the defendants.
"X. The trial court erred in not holding that Joaquin Azarraga has not
intervened in the registration of the lands in question, he being only a coowner pro
indiviso and as such has not been guilty of fraud in connection with the
registration of the lands.
"XI. The trial court erred in not holding that the plaintiff had no real
right over the land referred to in Exhibit 'E' in view of the fact that the said
document had not been registered.
"XII. The trial court erred in holding that the land referred to in Exhibit
'E' contains an area of 164 hectares instead of 63 hectares only.
"XIII. The trial court erred in nding that the total area of lots 81, 82,
and 83, which are the subject matter of the 'pactum commissorium' between
Attorney Leodegario Azarraga and the defendants, is 243 hectares instead of 87
hectares only.
"XIV. The trial court erred in sentencing the defendants to pay to the
plaintiff the sum of P35,233.92 and in not absolving them from the complaint.
"XV. The trial court erred in disallowing all the five counterclaims of the
defendants amounting to P58,000."
ASSIGNMENTS OF ERROR OF THE PLAINTIFF
"(a) he lower court erred in not nding that the market value of the
lands in litigation in 1926 was P118,635.68;
"(b) he lower court erred in not sentencing the defendants to pay the
plaintiff the sum of P6,080 as indemnity for the wrongful slaughter of his
animals; and
"(c) he lower court erred in not sentencing the defendants to pay the
plaintiff, jointly and severally, the sum of P130,290.68 as indemnity, plus legal
interest from November 10, 1926."
The salient facts established at the trial which may serve as a basis for an
intelligent discussion of the questions raised by the parties and for a proper decision of
the same, may be briefly stated as follows:
By reason of the proceedings had in case No. 11489 of the Court of First
Instance of Manila, entitled "Testate Estate of the Deceased Juan Azarraga y Galvez",
the defendants surnamed Azarraga became indebted to Attorney Leodegario Azarraga,
who represented them in said case, for attorney's fees, which on October 21, 1919 the
court, which took cognizance of the case, fixed at P3,000 (Exhibit B).
The defendants Azarraga had previously agreed among themselves to pay
Attorney Leodegario Azarraga attorney's fees in the manner set out in Exhibit A, which
they executed on January 20, 1919 and approved by the court on August 29, of the
same year. (Exhibit C.) The pertinent part of the aforesaid Exhibit A reads as follows:
"The parties also agree that the parcels of land located in Bay-ang, New
Washington, Capiz, P. I., which are enumerated in the inventory of this partition as
Nos. 81, 82 and 83, are specially mortgaged and subject to the payment of the
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 fees of said attorney of the testate estate, which fees shall be xed by the court,
and said attorney may hold said lands under no obligation to pay any rent until
his fees shall have been fully paid: Provided, however, that if, at the end of the
period of ve years from the date of the approval of this project of partition, said
parties shall not have been able to pay in full the fees of said attorney, then said
parcels of land, Nos. 81, 82 and 83, located in Bay-ang, shall be de nitely
adjudicated to said attorney, Mr. Leodegario Azarraga, as his property, in payment
of his fees, and all sums which he may have received from time to time from the
interested parties in these testate proceedings, within the said period, shall be
returned to said parties: Provided, further, that in case said interested parties in
the testate proceedings shall be able to pay in full the fees of the attorney for the
testate estate before the expiration of said period of ve years, then said parcels
of land situated in Bay-ang shall continue in the possession of said attorney for
an additional period of three years from the date of the last payment in the event
that said attorney may have kept livestock in said lands."
About nine months after the court approved Exhibit A, or to be exact, on June 9,
1920, which was long before the expiration of the period of ve years within which the
defendants Azarraga were bound to pay Attorney Leodegario Azarraga his fees, which
had been xed at P3,000, said attorney decided to sell and did sell to the plaintiff his
credit against the defendants for the sum of P2,500 with all the rights inherent therein
in accordance with the agreements and stipulations appearing in said document
(Exhibit C). One of said agreements was that Attorney Leodegario Azarraga would take
possession of the said parcels of land and, occupy the same, if he so desired, without
paying any rent or annuity, until his fees shall have been fully paid. Said parcels were
identical with lots Nos. 81, 82 and 83 described in paragraph II of the plaintiff's second
amended complaint.
When the plaintiff became the creditor of the defendants Azarraga by virtue of
the sale and cession which Attorney Azarraga had made in his favor of the rights which
said attorney had under Exhibit A, he .Allowed the defendants an extension of a few
years over the ve years within which they would have to pay him his credit, or up to
February 16, 1926, but with the express condition that they would pay him interest at
the rate of 12 per cent per annum, from August 30, 1924 (Exhibit 5). This term was later
extended to April 26, 1926 on the request of the defendants, but also with the condition
that they would pay the plaintiff the same interest of 12 per cent. (Exhibits L and M.)
The plaintiff granted another extension to expire on October 31, 1928, but subject to
the condition that instead of seven thousand and odd pesos, which undoubtedly
referred to the interest of 12 per cent per annum charged the defendants, they should
pay him P12,000 (Exhibit 2). In said two amounts of P7,000 and P12,000 the sum of
P4,000 which the plaintiff had given to the defendant Joaquin Azarraga and which will
be dealt with further in detail, was included.
Aside from the above transactions between the plaintiff and the defendants
Azarraga, one of the latter, Joaquin Azarraga, executed in favor of the former, the deed
known as Exhibit E of the record and dated October 14, 1922, by which he sold to the
plaintiff, for the sum of P4,000, his portion of the inheritance in the testate estate of the
late Juan Azarraga y Galvez, consisting of an undivided tract of land containing an
estimated area of 63 hectares and located in Bay-ang Chico, New Washington, Capiz. It
is further stated therein that the period of redemption would be ve years to be
counted from February 16, 1921, which was later extended to April 26, 1926. In
granting him this extension, the plaintiff imposed on Joaquin Azarraga the condition
that he should pay him interest at the rate of 12 per cent from the expiration of the rst
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 term (Exhibit M; par. III of the second amended complaint of plaintiff; and page 5 of the
brief of the plaintiff as appellant). A second extension was further granted, but under
the condition that he should, together with his brothers, pay the plaintiff instead of
seven thousand and odd pesos, representing the interest referred to in the preceding
paragraph, in which the P3,000 mentioned in Exhibit A were included, P12,000 (Exhibit
2). The deed referred to was never annotated or inscribed in any register in the o ce of
the register of deeds of said province.
By virtue of the transfer made to him by Joaquin Azarraga and also of the terms
and conditions enumerated in said Exhibit A, the plaintiff took possession of practically
the whole land of the defendants Azarraga, located in Bay-ang, placing therein livestock
from the month of August, 1920 and in the same year built sheepfolds therein, besides
erecting some wire fences. When the plaintiff took possession of part of the land in
question in August, 1920 and another part thereof in February, 1922, after the execution
in his favor of the deed of transfer, which is a clari cation of Exhibit E, he found fruit-
bearing and young coconut trees, the latter being more numerous. In 1925, 1926 and
1927, Joaquin Azarraga, either by himself or his laborers, planted therein hundreds of
coconut trees of which but a few hundreds, as was the case with the old ones,
remained on account of the long droughts or of destructive animals or other causes.
There is nothing de nite in the record to show the exact number of animals which the
plaintiff had brought to Bay-ang or the cause of the death of some of them. It seems
that some had been wounded, by whom it is not known, much less is it known whether
they were wounded by men of the defendants Azarraga. The plaintiff himself has not
spoken with certainty; his statements on this point are mere conjectures
uncorroborated by anybody or anything (transcript of stenographic notes, pages 145-
147). There have been also no exact accounts as to whether the animals of the plaintiff
were those which destroyed the coconut trees planted on the land by Joaquin Azarraga
during the years 1925, 1926 and 1927 above-mentioned, or were the animals of other
persons.
Sometime in May, 1928, the plaintiff went to the house of the defendant Joaquin
Azarraga to collect not only his credit against all the defendants Azarraga, but also the
special credit which, according to him, he had against Joaquin Azarraga. And on
October 9, 1928, he addressed a letter to each and every one of the defendants
including Joaquin Azarraga whom he expressly mentioned therein, and, among other
things, told them that:
"Last May, Messrs. Salvador and Joaquin came to an agreement with me
whereby they were to redeem the land in Bay-ang for seven thousand and odd
pesos last September, and in default thereof to transfer in my name the Torrens
title of the portion belonging to me; but until now neither of these has been done.
"For this reason and in view of the fact that you have not stated in the
Torrens title of the land in Bay-ang when you applied for the same, the two
encumbrances thereon in my favor, I am compelled by this omission, which is a
clear disregard of my rights, to seek redress therefor in the courts, if you refuse the
same to me. Therefore, if you desire to redeem the land, you may do so for the
sum of twelve thousand pesos (P12,000) until the 31st of this month of October;
but should you not wish to redeem it, then in order to avoid the inconvenience of a
law suit, I would request that on the same day or prior thereto that you shall have
at least submitted to the court your motion praying for an order approving the
segregation and transfer of the portion of said land which belongs to me, together
with the corresponding plan, namely, that corresponding to the land which shall
be in my name in the Torrens title. In the understanding that if said date, October
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 31st, arrives, and you have not done anything either one way or the other, then
through your own fault, I would be compelled to resort to the courts to ask
protection of my rights before I lose them, urging the court to order you to pay me
by reason of such fraudulent omission a sum more than double the amount
above- mentioned." (Exhibit 2.)
The land in Bay-ang to which the above-transcribed letter refers is the same land
made up by the four parcels mentioned in paragraph II of the second amended
complaint of the plaintiff, as parcels 81, 82, 83 and that having an area of 63 hectares.
Between the date of the execution of the document Exhibit A [January 20, 1919)
and the date of said letter; Exhibit 2 (October 9, 1928), the defendants secured the
inscription in the registry of property and the issuance in their favor of the
corresponding certi cate of title of the lands described in original certi cate of title
Nos. 9785, by virtue of the decree of registration of October 27, 1925 (Exhibit Q). Of
this fact the plaintiff had full knowledge by reason of the letter dated July 9, 1924,
which was sent to him by the defendant Juan Azarraga, wherein the latter, besides
asking for an extension of three years, informed him (plaintiff) of the registration
proceedings which were then going on. (Exhibit 1.) The plaintiff did not then nor
thereafter take any step to oppose the same, or to ask at least for the revision of the
decree of registration, which was issued later, within the period of one year prescribed
by law. To this letter, the plaintiff replied on the 30th of the same month and year,
stating, among other things:
"Now that I am somewhat relieved from the pressure of work, I am writing
to inform you that, although I need cash to meet my pressing nancial
obligations, your requests have compelled me to grant you, as administrator of
the undivided properties of the Azarraga brothers, an extension of the term for the
payment of the credit which encumbers the land in Bay-ang, and, consequently, of
the redemption of the same, up to February 16, 1926. Said land and its
encumbrances are described in the deed of sale of the said credit with all the
rights inherent therein, executed by Mr. Leodegario Azarraga in favor of the
undersigned on July 9, 1920.
"As the granting of this extension is causing me a real sacri ce and a great
nancial strain, in justice and equity, I also ask from you, as administrator of the
undivided properties of the Azarraga brothers, the lucrum cessans so that from
August 30, 1924 the aforesaid credit of P3,000 shall earn 12 per cent annual
interest.
"This letter will serve you as evidence of the granting of the extension of
the term for redemption of the said land in Bay-ang, and, therefore, there is no
necessity for executing another document to that effect." (Exhibit 5.).
At the time of the ling of the original complaint, plaintiff simultaneously asked
for and obtained on February 7, 1931, upon posting a bond in the amount of P2,000, a
writ of preliminary injunction against the defendants (Exh. 15), and in the time caused
the annotation in the o ce of the register of deeds of the Province of Capiz of a notice
of lis pendens not only with regard to the portion having an area of 150 hectares, 48
ares and 50 centares of the lands of the defendants Azarraga, but also with regard to
the whole area of 246 hectares, 27 ares and 98 centares described in original
certificate of title No. 9785.
The plaintiff also secured from the Court of First Instance a preliminary
attachment of the properties of the defendants, described in certi cates of title Nos.
9804 and 10351, on February 5, 1929 (Exhibit R); and the same was annotated in the
registry of property in the same month. Seven months after, or on September 9, of said
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 year, the aforementioned attachment was lifted by order of September 7, 1929 (Exhibit
X) upon the ling of a bond required by the court in the sum of P12,500 by the
interested parties. Said bond having been led by the defendants, the court, on the
same day, ordered the cancellation of the notice of lis pendens annotated in the o ce
of the register of deeds and the inscription of all the necessary annotations. (Exhibit Y.)
As clearly proven as the foregoing are the facts that the defendant "Hijos de I. de
la Rama" entered into a contract with its co-defendants Azarraga for the purpose of
granting them a credit of P25,000, having delivered to them on different occasions
after the execution by said defendants of a deed of mortgage Exhibit 16 in its favor on
September 20, 1929, as part of the aforementioned sum, the total amount of P16,000.
The Azarragas needed said amount for carrying on the business for which the
defendant Panay Municipal Cadastre, Inc., had been organized, as set forth in said
Exhibit 16 and clarified in Exhibit 17.
By virtue of the writ of injunction issued by the lower court on February 7, 1931,
enjoining the defendants Azarraga and the Panay Municipal Cadastre from obtaining
from their co-defendant "Hijos de I. de la Rama" another loan, aside from the P16,000
which they had previously obtained (Exhibit 14), said defendant "Hijos de I. de la Rama"
did not extend the credit, which it had opened to its co- defendants, to P25,000 as
required by the contracts Exhibits 16 and 17 above-referred to. In connection with the
issuance of the writ of preliminary injunction, the following facts must be mentioned:
After the plaintiff commenced the present case against the defendants Azarraga on
January 28, 1929 by means of his original complaint, he instituted another action
against them, which was civil case No. 2643, for the purpose of obtaining a writ of
injunction to prevent them from securing the aforementioned loan of P25,000 from
"Hijos de I. de la Rama". This latter case reached this court on certiorari led on March
22, 1930. As its sole object was the issuance of a writ of preliminary injunction, this
court, reiterating once more the ruling that said remedy is purely subsidiary available
only in aid of the right sought to be enforced in the action wherein the same is issued,
and that a separate action to secure the same does not lie as it would permit of
multiplicity of suits with the consequent needless expenses (Panay Municipal Cadastre
vs. Garduño and Soncuya, 55 Phil., 574, 578), granted the certiorari prayed for on
January 22, 1931, thus setting aside the writ of preliminary injunction issued by the
court of Capiz on October 21, 1929, hence, it was in being for not more than one year,
three months and one day.
The writ of preliminary injunction subsequently issued on February 7, 1931, has
remained in force up to the present, as the lower court declared in its judgment that it
shall be nal with respect to the P9,000 still owing from "Hijos de I. de la Rama" on
account of the loan which it had agreed to extend to the other defendants.
The works for which the Panay Municipal Cadastre had been organized were
begun in October, 1929. According to the testimony of Gaspar Ferraren, for all the work
which they intended to undertake, they needed a capital of not more than P40,000 to
make a gross pro t of P100,000. Of this estimated capital they invested the P16,000,
obtained from "Hijos de I. de la Rama", which immediately yielded a return of P6,000. He
also stated that the Panay Municipal Cadastre completed half of its works with only the
capital obtained from "Hijos de I. de la Rama" (P16,000), plus its rst pro t of P6,000
and that it made a pro t of P24,277.15, meaning thereby that with the aforementioned
P16,000 it obtained P30,277.15, or a net profit of P14,277.15.
Another fact which has been clearly established by the testimony of the plaintiff
himself is that he decided to sell all the animals which he had placed on the land in
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 question because he became discouraged by the destruction of said animals by the
tenants of the defendants Azarraga. This fact, however, has been established not by
competent evidence, but by hearsay testimony, which was of course timely objected to;
and, although he testi ed in the same breath that he had still some cattle there, he
could not state their exact number, but limited himself to saying "I cannot tell whether
there were fifty of them." (Transcript, page 14.)
In his subsequent dealings with the defendants Azarraga, including Joaquin
Azarraga, as in his pleadings and testimony, the plaintiff, in referring to the amount of
P2,700 or P3,000, the value of the credit which he had purchased from Attorney
Leodegario Azarraga, and to that of P4,000 which he gave to Joaquin Azarraga on the
date and under the circumstances stated in Exhibit E, he alluded to, and considered
them as his "credit". Thus, on page 176 of the transcript of the stenographic notes, he
said: ". . .land mortgaged to me . . .;" and on pages 192 and 194 of said transcript, he
also said: "Now I am not collecting the credit; I am collecting the damages. Although
they may have sold that property to me for P1, if its commercial value has increased
after they have deprived me of the same, I should collect from them such value;" and ". .
. I want to say again that what I am collecting now is not the credit which I have against
them, but the damages they have caused me by depriving me of the property."
The facts of the case being as above set out, the questions raised by the parties
in their respective assignments of error, should now be considered. In fact, the most
important or those discussed in the rst fourteen errors attributed by the defendants
to the lower court, and in the rst and last errors, which plaintiff, in turn, assigned, may
be reduced to the following:
I. Was the contract entered into by the Azarraga brothers, the defendants
herein, with Attorney Leodegario Azarraga from whom the plaintiff derived his right, a
sale with pacto de retro, or an assignment in payment of a debt, or was it an antichresis
partaking of the nature of what was anciently known as pacto comisorio, or a
mortgage, or was it merely a loan with real estate security?
II. Was the contract executed by the defendant Joaquin Azarraga, on the one
hand, and the plaintiff, on the other, embodied in Exhibit E, a sale with pacto de retro or
simply a loan with real estate security?
The rst question offers no di culty if account is taken of the established facts
and the conduct of the interested parties after the expiration of the term of ve years
xed in Exhibit A. When the plaintiff extended the period to February 16, 1926 within
which the defendants Azarraga could pay him his credit, but imposed on them the
condition that they pay him 12 per cent annual interest from August 30, 1924 on the
principal of P3,000 (Exh. 5) and gave them another extension up to April 26, 1926,
under the same conditions as regard interest (Exh. M), what perhaps could have been
considered as an antichresis or pacto comisorio — not an assignment in payment of a
debt, or a sale with pacto de retro because there is nothing in Exhibit A to indicate that
such was the intention of the defendants Azarraga or, at least, that they bound
themselves to deliver the land in question to the plaintiff and that the latter should pay
them the value thereof; and because there was what may be considered the resolutory
condition of ve years — was converted into a simple loan by the decisive circumstance
that plaintiff chose to collect thereafter, and the obligors agreed to pay him, 12 per cent
annual interest. It is only in contracts of loan, with or without guaranty, that interest may
be demanded (articles 1108, 1740, 1755, 1868, 1876, and 1881 of the Civil Code). As a
matter of fact, the contract embodied in Exhibit A was novated by Exhibits 5 and M, and
the plaintiff wanted to have it novated for the third time by means of Exhibit 2. It does
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 not appear of record, however, that the defendants Azarraga ever assented to the latter
novation. Perhaps, their refusal to agree to the same was due to the fact that the
plaintiff wanted to raise their old obligation (P3,000 or P2,700 of all the Azarraga
brothers, plus P4,000 which Joaquin Azarraga alone owed, which two accounts both
the plaintiff and the defendants considered as amounting to P7,000, exclusive of the
annual interest of 12 per cent) to the round sum of P12,000. From all this it may easily
be inferred that the obligation which the defendants had imposed upon themselves by
Exhibit A had ceased to exist and became a simple loan with security, if so desired, of
the lands in question, but without prejudice to third parties as neither Exhibit A nor the
deed of assignment Exhibit C, executed by Leodegario Azarraga in favor of the plaintiff,
was inscribed in the registry of deeds.
There is also no di culty in disposing of the second question, considering the
various novations which, as has been said, had taken place and had been extended not
only to the Azarraga brothers with respect to their obligation of P3,000 or P2,700, but
also to the defendant Joaquin Azarraga as regard his personal debt of P4,000. We
must not lose sight of the fact that the plaintiff never considered the contract entered
into by him with Joaquin Azarraga as, strictly speaking, a sale with pacto de retro. And if
he had ever considered it as such, it is, nevertheless, true that he novated it on February
16, 1926, considering it from that time on as a simple loan, inasmuch as on that date he
began to charge the said defendant 12 per cent annual interest with the latter's assent
and conformity. This clearly appears in Exhibit M which must be considered together
with paragraphs 7 and 8 of Exhibit E, as the plaintiff himself does in his brief (brief for
the plaintiff as appellant, pages 4 and 5), because the term of ve years to which said
Exhibit E refers and which should have expired on February 16, 1926 was extended by
the said plaintiff, by Exhibit M, up to April 26, 1926 under the aforementioned condition
that he should be paid 12 per cent annual interest.
Consequently, the contention of the defendants that the plaintiff did not and
could never receive the lands in question as an assignment in payment of a debt, and
much less did he acquire them by purchase with pacto de retro, is well taken. It must
also be noted that at no time did the plaintiff claim any rights of dominion over the
lands since he did not even intimate to the defendants, either directly or indirectly, that
for their failure to pay him his credit within the time provided therefor, he became the
absolute owner thereof. Notwithstanding the fact that all the extensions he had given
defendants had expired, he did not, even only for tax declaration purposes, declare the
lands as his property. Having reached this conclusion, it is needless to state that the
plaintiff has no right to the various sums which he seeks in his complaint and to which
he refers in the rst and last errors assigned by him. If, as has been shown, he never
became the owner of the lands in question, he can neither claim payment of the value of
the same nor ask to be indemnified for the deprivation of their possession. The plaintiff,
moreover, has no reason to complain that his lien, if his right over said lands could be
termed as such, was not annotated in the certi cate of title which the defendants
Azarraga had obtained, or that the latter did not ask that it be stated therein that the
lands to which it refers are charged with his credit against them; inasmuch as he was
himself negligent in that he did not ask the court, while the registration case relating to
said lands was being heard, for the annotation of what he considered necessary to
protect his rights, and in not seeking the revision or modi cation of the decree of
registration within the period of one year provided for that purpose.
As to the fteenth error attributed to the lower court by the defendants Azarraga,
we hold that, in view of the established facts above-related, they have failed to show
satisfactorily that they have any right under all or any of their several counterclaims. If
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 the coconut trees planted by Joaquin Azarraga on a portion of the land in question were
indeed lost or destroyed, it was due more to his own negligence than to that of the
plaintiff; for he well knew on planting them in 1925, 1926 and 1927 that the plaintiff
maintained therein, with his (Joaquin Azarraga's) approval, livestock which might
destroy them, and he did not take the necessary precautions against such occurrence.
This is, of course, upon the supposition that his coconut plantations died by reason of
the devastation caused by the animals of the plaintiff. The preponderance of the
evidence, however, has shown that they died on account of the drought alone.
We likewise hold that the issuance of the writs of preliminary injunction and
attachment at the instance of the plaintiff did not prejudice the defendants, inasmuch
as there is no competent evidence of record to the contrary. On the other hand, there is
evidence to show that from the loan which the defendants Azarraga had obtained from
"Hijos de I. de la Rama" they derived a net pro t of P14,277.15 within the short period
of one year and a few months.
There is no support for the contention of the defendants that they suffered
damages by reason of the preliminary attachment ordered by the lower court because
they were unable to sell one of their houses to the Calibo Institute for the price agreed
upon by them and said entity. The record shows that they lost nothing because the
Calibo Institute is at present occupying a portion of said house and they may, if they so
desire, sell it even now to the occupant. It does not appear, on the other hand, that the
latter desisted from buying it on finding a better building.
As to the second error assigned by the plaintiff, it su ces to recall that the
established facts do not show that the tenants of the defendants were responsible for
the killing and wounding of the animals belonging to him or that said tenants acted
upon the instigation of the defendants. Consequently, the plaintiff's claim to this effect
is entirely without merit.
In view of all the foregoing and in resume, we hold that the plaintiff alone has the
right (1) to recover from the defendants Azarraga, by virtue of the assignment and sale
made to him by Attorney Leodegario Azarraga of the latter's credit P2,700 against the
said defendants, the aforesaid sum plus interest at the rate of 12 per cent per annum
from August 30, 1924; (2) to recover from the defendant Joaquin Azarraga, in
particular, the sum of P4,000 plus interest at the rate of 12 per cent per annum from
April 26, 1926. We also hold that the defendants are not entitled to anything under their
counterclaims.
Wherefore, reversing the appealed judgment,
(a) All the defendants are hereby sentenced to pay jointly the sum of P2,700
to the plaintiff, with 12 per cent annual interest from August 30, 1924 until said sum is
fully paid; and
(b ) The defendant Joaquin Azarraga is sentenced to pay the plaintiff the sum
of P4,000 plus interest at the rate of 12 per cent per annum from April 26, 1926, until
fully paid.
The plaintiff absolved from defendants' counterclaims and the writ of preliminary
injunction issued by the lower court on February 7, 1931, is hereby dissolved. There is
no special pronouncement as to costs. So ordered.
Avanceña, C. J., Villa-Real, Abad Santos, Imperial and Concepcion, JJ., concur.

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 THIRD DIVISION

[G.R. No. 90676. June 19, 1991.]

STATE INVESTMENT HOUSE, INC. , petitioner, vs. THE HONORABLE

COURT OF APPEALS, HON. JUDGE PERLITA J. TRIA TIRONA,
Presiding Judge of the Regional Trial Court of Quezon City, Branch
CII, and SPS. RAFAEL and REFUGIO AQUINO , respondents.

Padilla Law Office for petitioner.

Rodolfo T. Galing and Chaves, Hechanova & Lim Law O ces for private
respondents.

SYLLABUS

1. REMEDIAL LAW; CIVIL PROCEDURE; JUDGMENT; FINAL AND EXECUTORY

JUDGMENT MAY BE CLARIFIED UNDER CERTAIN CIRCUMSTANCES. — We begin by
noting that the trial court has asserted authority to issue the clari catory order in
respect of the decision of Judge Fortun, even though that judgment had become nal
and executory. In Reinsurance Company of the Orient, Inc. v. Court of Appeals , this
Court had occasion to deal with the applicable doctrine to some extent: ". . . [E]ven a
judgment which has become nal and executory may be clari ed under certain
circumstances. The dispositive portion of the judgment may, for instance, contain an
error clearly clerical in nature (perhaps best illustrated by an error in arithmetical
computation) or an ambiguity arising from inadvertent omission, which error may be
recti ed or ambiguity clari ed and the omission supplied by reference primarily to the
body of the decision itself. Supplementary reference to the pleadings previously led in
the case may also be resorted to by way of corroboration of the existence of the error
or of the ambiguity in the dispositive part of the judgment. In Locsin, et al. v. Paredes, et
al., this Court allowed a judgment which had become nal and executory to be clari ed
by supplying a word which had been inadvertently omitted and which, when supplied, in
effect changed the literal import of the original phraseology: . . . `Under the juridical rule
that the judgment should be in accordance with the allegations, the evidence and the
conclusions of fact and law, the dispositive part of the judgment under consideration
should have ordered that the debt be paid `severally' and in omitting the word or adverb
`severally' inadvertently, said judgment became ambiguous. This ambiguity may be
clari ed at any time after the decision is rendered and even after it had become nal
(34 Corpus Juris, 235, 326). This respondent judge did not, therefore, exceed his
jurisdiction in clarifying the dispositive part of the judgment by supplying the omission.'
2. ID.; ID.; ID.; ID.; CASE AT BAR. — Judge Fortun evidently meant to act
favorably on the motion for reconsideration of the respondent Aquino spouses and in
effect accepted respondent spouses' argument that they had not incurred mora
considering that their failure to pay PN No. IF-82-0904-AA on time had been due to
petitioner State's unjusti ed refusal to release the shares pledged to it. It is not,
however, clear to what precise extent Judge Fortun meant to grant the motion for
reconsideration. The promissory note in Account No. IF-82-0904-AA had three (3)
components: (a) principal of the loan in the amount of P110,000.00; (b) regular interest
in the amount of seventeen percent (17%) per annum; and (c) additional or penalty
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 interest in case of non-payment at maturity, at the rate of two percent (2%) per month
or twenty-four percent (24%) per annum. In the dispositive part of his resolution, Judge
Fortun did not specify which of these components of the loan he was ordering
respondent spouses to pay and which component or components he was in effect
deleting. We cannot assume that Judge Fortun meant to grant the relief prayed for by
respondent spouses in all its parts. For one thing, respondent spouses in their motion
for reconsideration asked for "at least P50,000.00" for moral damages and "at least
P50,000.00" for exemplary damages, as well as P20,000.00 by way of attorney's fees
and litigation expenses. Judge Fortun granted respondent spouses only P10,000.00 as
moral damages and P5,000.00 as exemplary damages, plus P6,000.00 as attorney's
fees and costs. For another, respondent spouses asked Judge Fortun to order the
release of the shares pledged "upon payment of [respondent spouses'] loan under
Code No. 82-0904-AA without interest, as plaintiffs were not in delay in accordance
with Article 69 of the New Civil Code . . . ." In other words, respondent spouses did not
themselves become very clear what they were asking Judge Fortun to grant them; they
did not apparently distinguish between regular interest or "monetary interest" in the
amount of seventeen percent (17%) per annum and penalty charges or "compensatory
interest" in the amount of two percent (2%) per month or twenty-four percent (24%) per
annum. It thus appears that the Fortun decision was ambiguous in the sense that it was
cryptic. We believe that in these circumstances, we must assume that Judge Fortun
meant to decide in accordance with law, that we cannot fairly assume that Judge
Fortun was grossly ignorant of the law, or that he intended to grant the respondent
spouses relief to which they were not entitled under law. Thus, the ultimate question
which arises is: if respondent Aquino spouses were not in delay, what should they have
been held liable for in accordance with law?
3. CIVIL LAW; DAMAGES; ACTUAL OR COMPENSATORY DAMAGES;
PAYMENT OF A SUM OF MONEY; LIMITED LIABILITY OF A PARTY NOT GUILTY OF
DELAY. — We believe and so hold that since respondent Aquino spouses were held not
to have been in delay, they were properly liable only for: (a) the principal of the loan or
P110,000.00; and (b) regular or monetary interest in the amount of seventeen percent
(17%) per annum. They were not liable for penalty or compensatory interest, xed by
the promissory note in Account No. IF-82-0904-AA at two percent (2%) per month of
twenty-four (24%) per annum.
4. ID.; ID.; ID.; ID.; LIABILITY IN CASE OF DELAY. — It must be stressed in this
connection that under Article 2209 of the Civil Code the appropriate measure for
damages in case of delay in discharging an obligation consisting of the payment of a
sum of money, is the payment of penalty interest at the rate agreed upon; and in the
absence of a stipulation of a particular rate of penalty interest, then the payment of
additional interest at a rate equal to the regular monetary interest; and if no regular
interest had been agreed upon, then payment of legal interest or six percent (6%) per
annum.
5. ID.; OBLIGATIONS; TENDER OF PAYMENT AND CONSIGNATION; REGULAR
INTEREST CONTINUES TO ACCRUE UNTIL ACTUAL PAYMENT IS EFFECTED;
CONSIGNATION IS NECESSARY TO RELEASE DEBTOR FROM OBLIGATION.— The fact
that the respondent Aquino spouses were not in default did not mean that they, as a
matter of law, were relieved from the payment not only of penalty or compensatory
interest at the rate of twenty-four percent (24%) per annum but also of regular or
monetary interest of seventeen percent (17%) per annum. The regular or monetary
interest continued to accrue under the terms of the relevant promissory note until
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 actual payment is effected. The payment of regular interest constitutes the price or
cost of the use of money and thus, until the principal sum due is returned to the
creditor, regular interest continues to accrue since the debtor continues to use such
principal amount. The relevant rule is set out in Article 1256 of the Civil Code. Where the
creditor unjustly refuses to accept payment, the debtor desirous of being released
from his obligation must comply with two (2) conditions: (a) tender of payment; and (b)
consignation of the sum due. Tender of payment must be accompanied or followed by
consignation in order that the effects of payment may be produced. Thus, in Llamas v.
Abaya, the Supreme Court stressed that a written tender of payment alone, without
consignation in court of the sum due, does not suspend the accruing of regular or
monetary interest.
6. ID.; ID.; ID.; ID.; ID.; RATIONALE. — For the respondent spouses to continue
in possession of the principal of the loan amounting to P110,000.00 and to continue to
use the same after maturity of the loan without payment of regular or monetary
interest, would constitute unjust enrichment on the part of the respondent spouses at
the expense of petitioner State even though the spouses had not been guilty of mora. It
is precisely this unjust enrichment which Article 1256 of the Civil Code prevents by
requiring, in addition to tender of payment, the consignation of the amount due in court
which amount would thereafter be deposited by the Clerk of Court in a bank and earn
interest to which the creditor would be entitled.

DECISION

FELICIANO , J : p

On 5 April 1982, respondent spouses Rafael and Refugio Aquino pledged certain
shares of stock to petitioner State Investment House, Inc. ("State") in order to secure a
loan of P120,000.00 designated as Account No. IF 82-0631-AA. Prior to the execution
of the pledge, respondent spouses, as an accommodation to and together with the
spouses Jose and Marcelina Aquino, signed an agreement (Account No. IF-82-1375-
AA) with petitioner State for the latter's purchase of receivables amounting to
P375,000.00. When Account No. IF-82-0631-AA fell due, respondent spouses paid the
same partly with their own funds and partly from the proceeds of another loan which
they obtained also from petitioner State designated as Account No. IF-82-0904-AA.
This new loan was secured by the same pledge agreement executed in relation to
Account No. IF-820631-AA. When the new loan matured, State demanded payment.
Respondents expressed willingness to pay, requesting that upon payment, the shares
of stock pledged be released. Petitioner State denied the request on the ground that
the loan which it had extended to the spouses Jose and Marcelina Aquino (Account No.
IF-82-1379-AA) had remained unpaid.
On 29 June 1984, Atty. Rolando Salonga sent to respondent spouses a Notice of
Notarial Sale stating that upon request of State and by virtue of the pledge agreement,
he would sell at public auction the shares of stock pledged to State. This prompted
respondents to le a case before the Regional Trial Court of Quezon City alleging that
the intended foreclosure sale was illegal because from the time the obligation under
Account No. IF-82-0904-AA became due, they had been able and willing to pay the
same, but petitioner had insisted that respondents pay even the loan account of Jose
and Marcelina Aquino which had not been secured by the pledge. It was further alleged
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 that their failure to pay their loan (Account No. IF-82-0904-AA) was excused because
the petitioner State itself had prevented the satisfaction of the obligation.
The trial court, in a decision dated 14 December 1984 rendered by Judge
Willelmo Fortun, initially dismissed the complaint. Respondent spouses led a motion
for reconsideration praying for a new decision ordering petitioner State to release the
shares upon payment of respondents' loan "without interest," as the latter had not been
in delay in the performance of their obligation. State countered that the pledge
executed by respondent spouses also covered the loan extended to Jose and
Marcelina Aquino, which too should be paid before the shares may be released.
Acting on the motion for reconsideration, Judge Fortun set aside his original
decision and rendered a new judgment dated 29 January 1985, ordering State to
immediately release the pledge and to deliver to respondents the share of stock "upon
payment of the loan under Code No. 82-0904-AA."
On appeal, the Court of Appeals a rmed in toto the new decision of the trial
court, holding that the loan extended to Jose and Marcelina Aquino, having been
executed prior to the pledge was not covered by the pledge which secured only loans
executed subsequently. Thus, upon payment of the loan under Code No. IF-0904-AA, the
shares of stock should be released. The decisions of the Court of Appeals and of
Judge Fortun became final and executory.
Upon remand of the records of the case to the trial court for execution, there
developed disagreement over the amount which respondent spouses Rafael and
Refugio Aquino should pay to secure the release of the shares of stock — petitioner
State contending that respondents should also pay interest and respondents arguing
they should not. Respondent spouses then led a motion with the trial court to clarify
the Fortun decision praying that an order issue clarifying the phrase "upon payment of
plaintiffs' loan" to mean upon payment of plaintiff loan in the principal amount of
P100,000.00 alone, "without interest, penalties and other charges."
On 17 February 1989, the trial court, speaking this time through Judge Perlita
Tria Tirona, rendered a decision purporting to clarify the decision of Judge Fortun and
ruling that petitioner State shall release respondents' shares of stock upon payment by
respondents of the principal of the loan as set forth in PN No. 82-0904-AA in the
amount of P100,000.00, without interest, penalties and other charges.
Petitioner State appealed Judge Tirona's decision to the Court of Appeals; the
appeal was dismissed. The Court of Appeals agreed with Judge Tirona that no interest
need be paid and added that the clari catory (Tirona) decision of the trial court merely
restated what had been provided for in the earlier (Fortun) decision; that the Tirona
decision did not go beyond what had been adjudged in the earlier decision. The motion
for reconsideration filed by petitioner was accordingly denied.
Hence, this Petition for Review contending that no manifest ambiguity existed in
the decision penned by Judge Fortun; that the trial court through Judge Tirona, erred in
clarifying the decision of Judge Fortun; and that the amendment sought to be
introduced in the Fortun decision by respondents may not be made as the same was
substantial in nature and the Fortun decision had become final.
We begin by noting that the trial court has asserted authority to issue the
clari catory order in respect of the decision of Judge Fortun, even though that
judgment had become nal and executory. In Reinsurance Company of the Orient, Inc. v.
Court of Appeals, 1 this Court had occasion to deal with the applicable doctrine to
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 some extent:
"[E]ven a judgment which has become nal and executory may be
clari ed under certain circumstances. The dispositive portion of the judgment
may, for instance, contain an error clearly clerical in nature (perhaps best
illustrated by an error in arithmetical computation) or an ambiguity arising from
inadvertent omission, which error may be recti ed or ambiguity clari ed and the
omission supplied by reference primarily to the body of the decision itself.
Supplementary reference to the pleadings previously led in the case may also
be resorted to by way of corroboration of the existence of the error or of the
ambiguity in the dispositive part of the judgment. In Locsin et al. v. Paredes, et
al., this Court allowed a judgment which had become nal and executory to be
clari ed by supplying a word which had been inadvertently omitted and which,
when supplied, in effect changed the literal import of the original phraseology:
'. . . it clearly appears from the allegations of the complaint, the
promissory note reproduced therein and made a part thereof, the prayer
and the conclusions of fact and of law contained in the decision of the
respondent judge, that the obligation contracted by the petitioners is joint
and several and that the parties as well as the trial judge so understood it.
Under the juridical rule that the judgment should be in accordance with the
allegations, the evidence and the conclusions of fact and law, the
dispositive part of the judgment under consideration should have ordered
that the debt be paid 'severally' and in omitting the word or adverb
'severally' inadvertently, said judgment became ambiguous. This
ambiguity may be clari ed at any time after the decision is rendered and
even after it had become final (34 Corpus Juris, 235, 326). This respondent
judge did not, therefore, exceed his jurisdiction in clarifying the dispositive
part of the judgment by supplying the omission.' (Emphasis supplied)
In Filipino Legion Corporation vs. Court of Appeals, et al., the applicable principle
was set out in the following terms:
'[W]here there is ambiguity caused by an omission or mistake in the
dispositive portion of a decision, the court may clarify such ambiguity by
an amendment even after the judgment had become nal, and for this
purpose it may resort to the pleadings led by the parties, the court's
ndings of facts and conclusions of law as expressed in the body of the
decision.' (Emphasis supplied)

In Republic Surety and Insurance Company, Inc. v. Intermediate Appellate Court ,

the Court, in applying the above doctrine, said:

'. . . We clarify, in other words, what we did a rm. What is involved

here is not what is ordinarily regarded as a clerical error in the dispositive
part of the decision of the Court of First Instance, . . . . At the same time,
what is involved here is not a correction of an erroneous judgment or
dispositive portion of a judgment. What we believe is involved here is in the
nature of an inadvertent omission on the part of the Court of First Instance
(which should have been noticed by private respondents' counsel who had
prepared the complaint), of what might be described as a logical follow-
through of something set forth both in the body of the decision and in the
dispositive portion thereof; the inevitable follow-through, or translation into,
operational or behavioral terms, of the annulment of the Deed of Sale with
Assumption of Mortgage, from which petitioners' title or claim of title
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 embodied in TCT 133153 ows. (Emphasis supplied)'" 2 (Emphasis in the
original; citations omitted).

The question we must resolve is thus whether or not there is an ambiguity or

clerical error or inadvertent omission in the dispositive portion of the decision of Judge
Fortun which may be legitimately clari ed by referring to the body of the decision and
perhaps even the pleadings led before him. The decision of Judge Fortun disposing of
the motion for reconsideration led by respondent spouses Rafael and Refugio Aquino
consisted basically of quoting practically the whole motion for reconsideration. In its
dispositive portion, Judge Fortun's decision stated: LLphil

"WHEREFORE, plaintiff's 'Motion for Reconsideration' dated January 3,

1985, is granted and the decision of this Court dated December 14, 1984 is
hereby revoked and set aside and another judgment is hereby rendered in favor
of plaintiffs as follows:
(1) Ordering defendants to immediately release the pledge on, and to
deliver to plaintiffs, the shares of stocks enumerated and described in
paragraph 4 of plaintiffs' complaint dated July 17, 1984, upon payment of
plaintiffs loan under Code No. 82-0904-AA to defendants;
(2) Ordering defendant State Investment House, Inc. to pay to
plaintiffs P10,000.00 as moral damages, P5,000.00 as exemplary damages,
P6,000.00 as attorney's fees, plus costs,
(3) Dismissing defendants' counterclaim, for lack of merit and
making the preliminary injunction permanent.
SO ORDERED." 3
Judge Fortun evidently meant to act favorably on the motion for reconsideration
of the respondent Aquino spouses and in effect accepted respondent spouses'
argument that they had not incurred mora considering that their failure to pay PN No.
IF82-0904-AA on time had been due to petitioner State's unjusti ed refusal to release
the shares pledged to it. It is not, however, clear to what precise extent Judge Fortun
meant to grant the motion for reconsideration. The promissory note in Account No. IF-
82-0904-AA had three (3) components: (a) principal of the loan in the amount of
P110,000.00; (b) regular interest in the amount of seventeen percent (17%) per annum;
and (c) additional or penalty interest in case of non-payment at maturity, at the rate of
two percent (2%) per month or twenty-four percent (24%) per annum. In the dispositive
part of his resolution, Judge Fortun did not specify which of these components of the
loan he was ordering respondent spouses to pay and which component or components
he was in effect deleting. We cannot assume that Judge Fortun meant to grant the relief
prayed for by respondent spouses in all its parts. For one thing, respondent spouses in
their motion for reconsideration asked for "at least P50,000.00" for moral damages and
"at least P50,000.00" for exemplary damages, as well as P20,000.00 by way of
attorney's fees and litigation expenses. Judge Fortun granted respondent spouses only
P10,000.00 as moral damages and P5,000.00 as exemplary damages, plus P6,000.00
as attorney's fees and costs. For another, respondent spouses asked Judge Fortun to
order the release of the shares pledged "upon payment of [respondent spouses'] loan
under Code No. 82-0904-AA without interest, as plaintiffs were not in delay in
accordance with Article 69 of the New Civil Code — " (Emphasis supplied). In other
words, respondent spouses did not themselves become very clear what they were
asking Judge Fortun to grant them; they did not apparently distinguish between regular
interest or "monetary interest" in the amount of seventeen percent (17%) per annum and
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 penalty charges or "compensatory interest" in the amount of two percent (2%) per
month or twenty-four percent (24%) per annum.
It thus appears that the Fortun decision was ambiguous in the sense that it was
cryptic. We believe that in these circumstances, we must assume that Judge Fortun
meant to decide in accordance with law, that we cannot fairly assume that Judge
Fortun was grossly ignorant of the law, or that he intended to grant the respondent
spouses relief to which they were not entitled under law. Thus, the ultimate question
which arises is: if respondent Aquino spouses were not in delay, what should they have
been held liable for in accordance with law? cdphil

We believe and so hold that since respondent Aquino spouses were held not to
have been in delay, they were properly liable only for: (a) the principal of the loan or
P110,000.00; and (b) regular or monetary interest in the amount of seventeen percent
(17%) per annum. They were not liable for penalty or compensatory interest, xed by
the promissory note in Account No. IF-82-0904-AA at two percent (2%) per month or
twenty-four (24%) per annum. It must be stressed in this connection that under Article
2209 of the Civil Code which provides that.
". . . [i]f the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no stipulation
to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per annum."
the appropriate measure for damages in case of delay in discharging an obligation
consisting of the payment of a sum or money, is the payment of penalty interest at the
rate agreed upon; and in the absence of a stipulation of a particular rate of penalty
interest, then the payment of additional interest at a rate equal to the regular monetary
interest; and if no regular interest had been agreed upon, then payment of legal interest
or six percent (6%) per annum. 4
The fact that the respondent Aquino spouses were not in default did not mean
that they, as a matter of law, were relieved from the payment not only of penalty or
compensatory interest at the rate of twenty-four percent (24%) per annum but also of
regular or monetary interest of seventeen percent (17%) per annum. The regular or
monetary interest continued to accrue under the terms of the relevant promissory note
until actual payment is effected. The payment of regular interest constitutes the price
or cost of the use of money and thus, until the principal sum due is returned to the
creditor, regular interest continues to accrue since the debtor continues to use such
principal amount. The relevant rule is set out in Article 1256 of the Civil Code which
provides as follows:
"Art. 1256. If the creditor to whom tender of payment has been made
refuses without just cause to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the
place of payment;
(2) When he is incapacitated to receive the payment at the time it is
due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost." (Emphasis
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 supplied)
Where the creditor unjustly refuses to accept payment, the debtor desirous of being
released from his obligation must comply with two (2) conditions: (a) tender of
payment; and (b) consignation of the sum due. Tender of payment must be
accompanied or followed by consignation in order that the effects of payment may be
produced. Thus, in Llamas v. Abaya , 5 the Supreme Court stressed that a written tender
of payment alone, without consignation in court of the sum due, does not suspend the
accruing of regular or monetary interest.
In the instant case, respondent spouses Aquino, while they are properly regarded
as having made a written tender of payment to petitioner State, failed to consign in
court the amount due at the time of the maturity of Account No. IF-820904-AA. It
follows that their obligation to pay principal-cum-regular or monetary interest under the
terms and conditions of Account No. IF-82-0904-AA was not extinguished by such
tender of payment alone.
For the respondent spouses to continue in possession of the principal of the loan
amounting to P110,000.00 and to continue to use the same after maturity of the loan
without payment of regular or monetary interest, would constitute unjust enrichment on
the part of the respondent spouses at the expense of petitioner State even though the
spouses had not been guilty of mora. It is precisely this unjust enrichment which Article
1256 of the Civil Code prevents by requiring, in addition to tender of payment, the
consignation of the amount due in court which amount would thereafter be deposited
by the Clerk of Court in a bank and earn interest to which the creditor would be entitled.
WHEREFORE, the Petition for Review is hereby GRANTED DUE COURSE. The
Decision of the Court of Appeals dated 30 August 1989 in C.A.-G.R. No. 17954 and the
Decision of the Regional Trial Court dated 17 February 1989 in Civil Case No. Q-42188
are hereby REVERSED and SET ASIDE. The dispositive portion of the decision of Judge
Fortun is hereby clarified so as to read as follows: Cdpr

"(1) Ordering defendants to immediately release the pledge and to

deliver to the plaintiff spouses Rafael and Refugio Aquino the shares of stock
enumerated and described in paragraph 4 of said spouses' complaint dated 17
July 1984, upon full payment of the amount of P110,000.00 plus seventeen
percent (17%) per annum regular interest computed from the time of maturity of
the plaintiffs' loan (Account No. IF-82-0904-AA) and until full payment of such
principal and interest to defendants;
(2) Ordering defendant State Investment House, Inc. to pay to the
plaintiff spouses Rafael and Refugio Aquino P10,000.00 as moral damages,
P5,000.00 as exemplary damages, P6,000.00 as attorney's fees, plus costs; and
(3) Dismissing defendants' counterclaim for lack of merit and
making the preliminary injunction permanent."
No pronouncement as to costs.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Bidin and Davide, Jr., JJ., concur.

Footnotes
1. G.R. No. 61250, 3 June 1991.

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 2. See also Campillo v. Margolles, G.R. No. 67388, 17 April 1991.
3. Annex "A-6", Comment to Petitioners' Petition for Review, Rollo, p. 78.
4. Reinsurance Company of the Orient, Inc. v. Court of Appeals, G.R. No. 61250, 3 June
1991.
5. 60 Phil. 502 (1934).

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 SECOND DIVISION

[G.R. No. 205578. March 1, 2017.]

GEORGIA OSMEÑA-JALANDONI , petitioner, vs . CARMEN A.

ENCOMIENDA , respondent.

DECISION

PERALTA , J : p

This is an appeal from the Decision 1 of the Court of Appeals, Cebu City (CA)
dated March 29, 2012 and its Resolution 2 dated December 19, 2012 in CA-G.R. CV No.
01339 which set aside the Decision 3 of the Cebu Regional Trial Court (RTC), Branch 57,
dated January 9, 2006, dismissing respondent Carmen Encomienda's claim for sum of
money. HTcADC

The facts, as shown by the records of the case, are as follows:

Encomienda narrated that she met petitioner Georgia Osmeña-Jalandoni in Cebu
on October 24, 1995, when the former was purchasing a condominium unit and the
latter was the real estate broker. Thereafter, Encomienda and Jalandoni became close
friends. On March 2, 1997, Jalandoni called Encomienda to ask if she could borrow
money for the search and rescue operation of her children in Manila, who were allegedly
taken by their father, Luis Jalandoni. Encomienda then went to Jalandoni's house and
handed P100,000.00 in a sealed envelope to the latter's security guard. While in Manila,
Jalandoni again borrowed money for the following errands: 4
1. Publication in SunStar Daily of Georgia's missing P11,000.00
children
2. Reproduction of the pictures of Georgia's children 720.00
3. Additional reproduction of pictures 1,350.00
4. Plane fare for Georgia's secretary to Manila 3,196.00
5. Allowance of Germana Berning in going to Manila 4,080.00
6. Cash airbill of Kabayan Forwarders 49.50
7. Cash airbill of Kabayan Forwarders 49.50
8. Salary of Georgia's household helper Reynilda Atillo 750.00
for March 16-31, 1997
9. Salary of Georgia's driver Billy Tano for March 16-31, 2,000.00
1997
10. Petty cash for Germana Berning 250.00
11. Consultancy fee of Germana Berning 7,000.00
12. Filing fee of case filed by Georgia against CIS 100,500.00
13. Cebu cable bill per receipt No. 197743 380.00
14. Cebu cable bill per receipt No. 197742 380.00
15. Bankard bill of Georgia 840.00
16. Services of 2 security guards for 2/1-15/97 and 3/1- 14,715.00
31/97

17. One sack of rice and gasoline 1,270.00

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 17. One sack of rice and gasoline 1,270.00
18. Food allowance for Georgia's household and 2,900.00
payment for food ordered
19. Shipping charge of immigration papers sent to 145.45
Georgia in Manila
20. Shipping charge of cellphone and easy call pager 145.45
sent to Georgia
21. Salary of Georgia's helper Renilda Atillo from April 1- 750.00
15, 1997
22. Purchase of cellphone registered in the name of 10,260.00
Encomienda's sister, Paz
23. Pager acquired on April 10, 1997 upon Georgia's 6,351.00
request
24. Wanted ad in Panay News and expenses of 8,500.00
Georgia's secretary
25. Salary of Billy Tano from April 1-15, 1997 2,000.00
26. Water consumption of Georgia's house in Paradise 1,120.00
Village
27. Services of security guard from April 1-15, 1997 4,905.00
28. Telephone bill for Georgia's residential phone from 3,609.77
March 25 to April 24, 1997
29. Telephone bill for Georgia's other telephone line 440.20
30. Plane ticket for Georgia's psychic friends $1,570.00
31. Petty cash for GRO Co. owned by Georgia 3,150.00
32. Bill of cellphone under the name of Paz Encomienda 5,468.70
33. Another bill of cellphone used by Georgia 3,923.87
34. Cost of reproduction of pictures 2,500.00
35. Salary of driver and house help of Georgia from May 3,250.00
15-31, 1997
36. Service charge of Georgia's cellphone number 550.00
37. Ritual performed in Georgia's house to drive away 17,500.00
evil spirits
38. Prayers for Georgia's missing children 5,500.00
39. Amount given to priest who performed a blessing of 500.00
the house of Georgia
40. Globe cellular phone bill of Georgia as of 5/10/97 7,957.24
41. Salary of Germana Berning for May 1997 6,000.00
42. Amount given to priest for mass and blessing 2,500.00
43. Cash given to G. Berning for payment of Georgia's 3,000.00
phone bill
44. Gasoline for Georgia's car paid on 6/10/97 per cash 150.00,
slip #221088
45. Gasoline for Georgia's car paid on 6/10/97 per cash 379.44
slip #220997
46. Bill for Georgia's Easycall pager 1,605.09
47. Security guard services for May 16-31 4,905.00
48. Globe bill for cellular phone from April 18, 1997 to 5,543.98
May 17, 1997
49. Bill of cellular phone registered in the name of Paz 14,169.21
Encomienda but used by Georgia paid on June 18, 1997
50. Charge for changing the cap of Easycall pager on 275.00
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 50. Charge for changing the cap of Easycall pager on 275.00
June 21, 1997
51. Monthly bill for Georgia's Easycall pager from 1,551.00
7/15/97 to 10/14/97
52. Water bill for April-May 1997 paid on June 25, 1997 1,728.31
53. Cebu Cable bill paid on 6/25/97 380.00
54. PLDT bill for the telephone in Georgia's residence 2,097.98
55. Electric bill paid on 6/25/97 1,964.43
56. Purchase of steel cabinet on 6/25/97 2,750.00
57. Airbill of JRS in sending the cap of Easycall pager 20.00
58. Bill for the cellphone in the name of Paz 8,630.11
Encomienda but used by Georgia, June to July 8, 1997
59. Penalty for downgrading of executive line of 1,045.00
cellphone
60. Globe cellphone bill paid on 9/10/97 1,903.00
61. Charge for downgrading of cellphone plan from 660.00
Advantage to Basic
62. Penalty for Easycall 11/17/97 1,248.50
On April 1, 1997, Jalandoni borrowed P1 Million from Encomienda and promised
that she would pay the same when her money in the bank matured. Thereafter,
Encomienda went to Manila to attend the hearing of Jalandoni's habeas corpus case
before the CA where P100,000.00 more was requested. On May 26, 1997, now crying,
Jalandoni asked if Encomienda could lend her an additional P900,000.00. Encomienda
still acceded, albeit already feeling annoyed. All in all, Encomienda spent around
P3,245,836.02 and $6,638.20 for Jalandoni. aScITE

When Jalandoni came back to Cebu on July 14, 1997, she never informed
Encomienda. Encomienda then later gave Jalandoni six (6) weeks to settle her debts.
Despite several demands, no payment was made. Jalandoni insisted that the amounts
given were not in the form of loans. When they had to appear before the Barangay for
conciliation, no settlement was reached. But a member of the Lupong Tagapamayapa
of Barangay Kasambagan, Laureano Rogero, attested that Jalandoni admitted having
borrowed money from Encomienda and that she was willing to return it. Jalandoni said
she would talk to her lawyer rst, but she never came back. Hence, Encomienda led a
complaint. She impleaded Luis as a necessary party, being Georgia's husband.
For her defense, Jalandoni claimed that there was never a discussion or even just
an allusion about a loan. She con rmed that Encomienda would indeed deposit money
in her bank account and pay her bills in Cebu. But when asked, Encomienda would tell
her that she just wanted to extend some help and that it was not a loan. When Jalandoni
returned to Cebu, Encomienda wanted to fetch her at the airport but the former refused.
This allegedly made Encomienda upset, causing her to eventually demand payment for
the amounts originally intended to be gratuitous.
On January 9, 2006, the RTC of Cebu City dismissed Encomienda's complaint, the
dispositive portion of which states:
WHEREFORE, in view of the foregoing, this case is hereby dismissed.
SO ORDERED. 5
Therefore, Encomienda brought the case to the CA. On March 29, 2012, the
appellate court granted the appeal and reversed the RTC Decision, to wit:
WHEREFORE , the defendant-appellant's appeal is GRANTED . The
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 decision of the trial court dated January 9, 2006 is hereby REVERSED and SET
ASIDE and in its stead render judgment against defendant-appellee Georgia
Osmeña-Jalandoni ordering the latter to pay plaintiff-appellant Carmen A.
Encomienda the following:
1. The sum of Three Million Two Hundred Forty-Five Thousand Eight
Hundred Thirty-Six (P3,245,836.02) Pesos and 02/100 and Six
Thousand Six Hundred Thirty-Eight (US$6,638.20) US Dollars and
20/100;
2. Legal interest of Twelve (12%) Percent from August 14, 1997 the
date of extrajudicial demand.
HEITAD

3. Attorney's fees and expenses of litigation in the amount of One

Hundred Thousand (P100,000.00) Pesos.
Let a copy of this Decision be served upon defendants-appellees through
their respective counsels. The Division Clerk of Court is directed to furnish a
copy of this Decision to plaintiff-appellant who, to date, has yet to submit the
name of her new counsel following the death of appellant's original counsel of
record, Atty. Richard W. Sison.
SO ORDERED . 6
Jalandoni led a motion for reconsideration, but the same was denied. 7 Hence,
the instant petition.
The sole issue in this case is whether or not Encomienda is entitled to be
reimbursed for the amounts she defrayed for Jalandoni.
Jalandoni insists that she never borrowed any amount of money from
Encomienda. During the entire time that Encomienda was sending her money and
paying her bills, there was not one reference to a loan. In other words, Jalandoni would
have the Court believe that Encomienda volunteered to spend about P3,245,836.02 and
$6,638.20 of her hard-earned money in a span of eight (8) months for her and her family
simply out of pure generosity and the kindness of her heart, without expecting anything
in return. Such presupposition is incredible, highly unusual, and contrary to common
experience, unless the benefactor is a billionaire philanthropist who usually spends his
days distributing his fortune to the needy. It is a notable fact that Jalandoni was
married to one of the richest hacienderos of Iloilo and belong to the privileged and
a uent Osmeña family, being the daughter of the late Senator Sergio Osmeña, Jr.
Clearly then, Jalandoni is not one to be a convincing object of anyone's charitable acts,
especially not from someone like Encomienda who has not been endowed with such
wealth and powerful pedigree.
The appellate court aptly pointed out that when Encomienda gave a Barbie doll to
Jalandoni's daughter, she was quick to send a letter acknowledging receipt and
thanking Encomienda for the simple gift. However, not once did Jalandoni ever send a
simple note or letter, let alone a card, expressing her gratitude towards Encomienda for
the countless instances she received various amounts of money supposedly given to
her as gifts.
Jalandoni also contends that the amounts she received from Encomienda were
mostly provided and paid without her prior knowledge and thus she could not have
consented to any loan agreement. She relies on the trial court's nding that
Encomienda's claims were not supported by any documentary evidence. It must be
stressed, however, that the trial court merely found that no documentary evidence was
offered showing Jalandoni's authorization or undertaking to pay the expenses. But the
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 second paragraph of Article 1236 of the Civil Code provides: ATICcS

xxx xxx xxx

Whoever pays for another may demand from the debtor what he has
paid, except that if he paid without the knowledge or against the will of
the debtor , he can recover only insofar as the payment has been
beneficial to the debtor . 8
Clearly, Jalandoni greatly bene ted from the purportedly unauthorized payments.
Thus, even if she asseverates that Encomienda's payment of her household bills was
without her knowledge or against her will, she cannot deny the fact that the same still
inured to her bene t and Encomienda must therefore be consequently reimbursed for
it. Also, when Jalandoni learned about the payments, she did nothing to express her
objection to or repudiation of the same, within a reasonable time. Even when she
claimed that she was prepared with her own money, 9 she still accepted the nancial
assistance and actually made use of it. While she asserts to have been upset because
of Encomienda's supposedly intrusive actions, she failed to protest and, in fact,
repeatedly accepted money from her and further allowed her to pay her driver, security
guard, house help, and bills for her cellular phone, cable television, pager, gasoline, food,
and other utilities. She cannot, therefore, deny the bene ts she reaped from said acts
now that the time for restitution has come. The debtor who knows that another has
paid his obligation for him and who does not repudiate it at any time, must corollarily
pay the amount advanced by such third person. 1 0
The RTC likewise harped on the fact that if Encomienda really intended the
amounts to be a loan, normal human behavior would have prompted at least a
handwritten acknowledgment or a promissory note the moment she parted with her
money for the purpose of granting a loan. This would be particularly true if the loan
obtained was part of a business dealing and not one extended to a close friend who
suddenly needed monetary aid. In fact, in case of loans between friends and relatives,
the absence of acknowledgment receipts or promissory notes is more natural and real.
In a similar case, 1 1 the Court upheld the CA's pronouncement that the existence of a
contract of loan cannot be denied merely because it was not reduced in writing. Surely,
there can be a verbal loan. Contracts are binding between the parties, whether oral or
written. The law is explicit that contracts shall be obligatory in whatever form they may
have been entered into, provided all the essential requisites for their validity are present.
A simple loan or mutuum exists when a person receives a loan of money or any other
fungible thing and acquires its ownership. He is bound to pay to the creditor the equal
amount of the same kind and quality. Jalandoni posits that the more logical reason
behind the disbursements would be what Encomienda candidly told the trial court, that
her acts were plainly an "unsel sh display of Christian help" and done out of "genuine
concern for Georgia's children." However, the "display of Christian help" is not
inconsistent with the existence of a loan. Encomienda immediately offered a helping
hand when a friend asked for it. But this does not mean that she had already waived her
right to collect in the future. Indeed, when Encomienda felt that Jalandoni was
beginning to avoid her, that was when she realized that she had to protect her right to
demand payment. The fact that Encomienda kept the receipts even for the smallest
amounts she had advanced, repeatedly sent demand letters, and immediately led the
instant case when Jalandoni stubbornly refused to heed her demands su ciently
disproves the latter's belief that all the sums of money she received were merely given
out of charity.
Truly, Jalandoni herself admitted that she received the aforementioned amounts
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 from Encomienda and is merely using her lack of authorization over the payments as
her defence. In fact, Lupong Tagapamayapa member Rogero, a disinterested third
party, con rmed this, saying that during the barangay conciliation, Jalandoni indeed
admitted having borrowed money from Encomienda and that she would return it.
Jalandoni, however, reneged on said promise. TIADCc

The principle of unjust enrichment nds application in this case. Unjust

enrichment exists when a person unfairly retains a bene t 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. There is unjust enrichment under Article 22 of
the Civil Code when (1) a person is unjustly bene ted, and (2) such bene t is derived at
the expense of or with damages to another. The principle of unjust enrichment
essentially contemplates payment when there is no duty to pay, and the person who
receives the payment has no right to receive it. 1 2 The CA is then correct when it ruled
that allowing Jalandoni to keep the amounts received from Encomienda will certainly
cause an unjust enrichment on Jalandoni's part and to Encomienda's damage and
prejudice.
WHEREFORE , PREMISES CONSIDERED , the Court DISMISSES the petition for
lack of merit and AFFIRMS the Decision of the Court of Appeals, Cebu City dated
March 29, 2012 and its Resolution dated December 19, 2012 in CA-G.R. CV No. 01339,
with MODIFICATION as to the interest which must be twelve percent (12%) per
annum of the amount awarded from the time of demand on August 14, 1997 to June
30, 2013, and six percent (6%) 1 3 per annum from July 1, 2013 until its full satisfaction.
SO ORDERED.
Carpio, Mendoza and Jardeleza, JJ., concur.
Leonen, * J., on official leave.
Footnotes
* On official leave.
1. Penned by Associate Justice Gabriel T. Ingles, with Associate Justices Nina G. Antonio-
Valenzuela and Pamela Ann Abella Maxino; concurring; rollo, pp. 30-54.
2. Penned by Associate Justice Gabriel T. Ingles, with Associate Justices Pamela Ann Abella
Maxino and Carmelita Salandanan Manahan; concurring; id. at 55-56.
3. Penned by Judge Enriqueta Loquillano-Belarmino; id. at 64-79.
4. Rollo, pp. 31-34.
5. Id. at 79.
6. Id. at 53-54. (Emphasis in the original)

7. Id. at 55-56.
8. Emphasis ours.
9. Rollo, p. 19.
10. Spouses Publico v. Bautista, 639 Phil. 147, 154 (2010).

11. Spouses Tan v. Villapaz, 512 Phil. 366, 376 (2005).

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 12. Filinvest Land, Inc., et al. v. Backy, et al., 697 Phil. 403, 412-413 (2012).

13. Pursuant to the Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013; Nacar v.
Gallery Frames, 716 Phil. 267 (2013).

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 SECOND DIVISION

[G.R. No. 201074. October 19, 2016.]

SPOUSES RAMON SY and ANITA NG, RICHARD SY, JOSIE ONG,

WILLIAM SY and JACKELINE DE LUCIA , petitioners, vs. WESTMONT
BANK (now UNITED OVERSEAS BANK PHILIPPINES) and
PHILIPPINE DEPOSIT INSURANCE CORPORATION, as assignee of
UNITED OVERSEAS BANK PHILIPPINES , respondents.

DECISION

MENDOZA , J : p

This is a Petition for Review on Certiorari seeking to reverse and set aside the
August 4, 2011 Decision 1 and the March 19, 2012 Resolution 2 of the Court of Appeals
(CA) in CA-G.R. CV No. 90425, which af rmed the November 9, 2007 Decision 3 and
February 6, 2008 Order 4 of the Regional Trial Court, Branch 12, Manila (RTC) in Civil
Case No. 99-95945.
The Facts
The present case stemmed from a Complaint for Sum of Money, 5 dated August
30, 1999, led by respondent Westmont Bank (Westmont), now United Overseas Bank
Philippines (UOBP), against petitioners Spouses Ramon Sy and Anita Ng, Richard Sy,
Josie Ong, William Sy, and Jackeline de Lucia (petitioners) before the RTC.
Westmont alleged that on October 21, 1997, petitioners, doing business under
the trade name of Moondrops General Merchandising (Moondrops), obtained a loan in
the amount of P2,429,500.00, evidenced by Promissory Note No. GP-5280 6 (PN 5280),
payable on November 20, 1997. Barely a month after, or on November 25, 1997,
petitioners obtained another loan from Westmont Bank in the amount of
P4,000,000.00, evidenced by Promissory Note No. GP-5285 7 (PN 5285), payable on
December 26, 1997. Disclosure Statements on the Loan/Credit Transactions 8 were
signed by the parties. Earlier, a Continuing Suretyship Agreement, 9 dated February 4,
1997, was executed between Westmont and petitioners for the purpose of securing
any future indebtedness of Moondrops.
Westmont averred that petitioners defaulted in the payment of their loan
obligations. It sent a Demand Letter, 10 dated August 27, 1999, to petitioners, but it was
unheeded. Hence, Westmont filed the subject complaint. caITAC

In their Answer, 11 petitioners countered that in August 1997, Ramon Sy and

Richard Sy applied for a loan with Westmont Bank, through its bank manager William
Chu Lao (Lao). According to them, Lao required them to sign blank forms of
promissory notes and disclosure statements and promised that he would notify them
immediately regarding the status of their loan application.
In September 1997, Lao informed Ramon Sy and Richard Sy that their application
was disapproved. He, however, offered to help them secure a loan through Amado Chua
(Chua), who would lend them the amounts of P2,500,000.00 and P4,000,000.00, both
payable within three (3) months. Ramon Sy and Richard Sy accepted Lao's offer and
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 received the amounts of P2,429,500.00 and P3,994,000.00, respectively, as loans from
Chua. Petitioners claimed that they paid Chua the total amount of their loans.
Petitioners insisted that their loan applications from Westmont were denied and
it was Chua who lent them the money. Thus, they contended that Westmont could not
demand the payment of the said loans.
In the pre-trial conference, the parties agreed on one issue — whether or not the
defendants obtained loans from Westmont in the total amount of P6,429,500.00. 12
During trial, Westmont presented, among others, its employee Consolacion Esplana,
who testi ed that the proceeds of the loan were credited to the account of Moondrops
per its loan manifold. 13 Westmont, however, never offered such loan manifold in
evidence. 14
On the other hand, petitioners presented a Cashier's Check, 15 dated October 21,
1997, in the amount of P2,429,500.00, purchased from Chua, to prove that the said loan
was obtained from Chua, and not from Westmont. The cashier's check for the
subsequent loan of P4,000,000.00 could not have been obtained from Westmont.
The RTC Ruling
In its decision, dated November 9, 2007, the RTC ruled in favor of Westmont. It
held that Westmont's cause of action was based on PN 5280 and PN 5285, the
promissory notes executed by petitioners. The RTC opined that petitioners admitted
the genuineness and due execution of the said actionable documents because they
failed to make a speci c denial in the answer. It added that it should be presumed that
the two (2) loan transactions were fair and regular; that the ordinary course of business
was followed; and that they were issued for a sufficient consideration.
The RTC underscored that Ramon Sy never took any steps to have the
promissory notes cancelled and annulled, which led to the conclusion that their
obligations to Westmont were valid and binding. The fallo of the decision reads:
WHEREFORE, the foregoing premises considered, judgment is hereby
rendered in favor of plaintiff WESTMONT BANK (now United Overseas Bank)
and against defendants Spouses Ramon Sy and Anita Ng, Richard Sy, Josie
Ong, William Sy and Jackeline De Lucia, and to pay plaintiff the following
amounts, as follows:
1. P20,573,948.66, representing the outstanding amounts due on the
aforementioned loan accounts as of February 15, 2001;
2. Interests and penalty charges due thereon as stipulated under the
respective promissory notes from and after February 15, 2001, until
fully paid;
3. 20% of the total outstanding sum, as and by way of attorney's fees;
and
4. Costs of suit.
SO ORDERED. 16
Petitioners moved for reconsideration, arguing that it had suf ciently denied the
genuineness and due execution of the promissory notes in their answer.
In its Order, dated February 6, 2008, the RTC repeated that petitioners were
deemed to have admitted the genuineness and due execution of the actionable
documents. It, however, modified the dispositive portion of its decision as follow:
WHEREFORE, the foregoing premises considered, judgment is hereby
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 rendered in favor of plaintiff WESTMONT BANK (now United Overseas Bank)
and against defendants Spouses Ramon Sy and Anita Ng, Richard Sy, Josie
Ong, William Sy and Jackeline De Lucia, and to pay plaintiff the following
amounts, as follows:
1. On Promissory Note No. PN-GP 5280:
a) The sum of Two Million Four Hundred Twenty Nine Thousand Five
Hundred Pesos (P2,429,500.00), representing the principal amount
of the promissory note;
b) The sum of Seven Hundred Twenty Eight Thousand Eight Hundred
Fifty Pesos (P728,850.00), representing interest due on the
promissory note payable on November 20, 1997;
c) The above amounts shall collectively earn interest at the rate of
thirty-six (36) percent per annum by way of liquidated damages,
reckoned from November 20, 1997, until fully paid.
2. On Promissory Note No. PN-GP 5285:
a) The sum of Four Million Pesos (P4,000,000.00), representing the
principal amount of the promissory note;
b) The sum of One Million One Hundred Sixty Thousand Pesos
(P1,160,000.00), representing interest due on the promissory note
payable on December 26, 1997;
c) The above amounts shall collectively earn interest at the rate of
thirty-six (36) percent per annum by way of liquidated damages,
reckoned from December 26, 1997, until fully paid. ICHDca

3. The sum equivalent to twenty (20) percent of the total amount due
(referred to in Items 1 and 2 hereof), by way of attorney's fees; and costs of
suit.
SO ORDERED. 17
Aggrieved, petitioners elevated an appeal before the CA.
The CA Ruling
In its assailed August 4, 2011 decision, the CA affirmed the ruling of the RTC. It
wrote that petitioners failed to speci cally deny the genuineness and due execution of
the promissory notes in their answer before the trial court. Accordingly, the CA ruled
that under Section 8, Rule 8 of the Rules of Court (Section 8 of Rule 8), the genuineness
and due execution of the promissory notes were deemed admitted by petitioners. It
added that the admission of the said actionable documents created a prima facie case
in favor of Westmont which dispensed with the necessity of presenting evidence that
petitioners actually received the loan proceeds. The CA disposed the case in this wise:
WHEREFORE, the instant appeal is DENIED. The assailed Decision dated
November 9, 2007 as amended by the assailed Order dated February 6, 2008 of
the Regional Trial Court of Manila, Branch 12, is hereby AFFIRMED.
SO ORDERED. 18
Petitioners led a motion for reconsideration, but it was denied by the CA in its
assailed decision, dated March 19, 2012.
Hence, this petition, raising the following:
ISSUES

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 I.
THE HONORABLE COURT OF APPEALS ERRONEOUSLY RULED, AS A
MATTER OF LAW, THAT PETITIONERS SPS. RAMON SY AND ANITA
NG, RICHARD SY, JOSIE ONG, WILLIAM SY AND JACKELINE DE LUCIA
FAILED TO SPECIFICALLY DENY THE ACTIONABLE DOCUMENTS
UNDER OATH AND THUS, PETITIONERS DEEMED TO HAVE ADMITTED
THEIR GENUINENESS AND DUE EXECUTION.
II.
THE HONORABLE COURT OF APPEALS FAILED TO RULE THAT THE
PIECES OF EVIDENCE PRESENTED AND FORMALLY OFFERED BY
WESTMONT BANK ARE INADMISSIBLE AND HENCE, SHOULD NOT
HAVE BEEN CONSIDERED. 19
Petitioners argue that: they speci cally denied the allegations of Westmont
under oath in their answer led before the RTC; although they signed blank forms of
promissory notes, disclosure statements and continuing suretyship agreements, they
were informed that their loan application were denied; these should be considered as
suf cient compliance with Section 8 of Rule 8; Westmont Bank failed to prove the
existing loan obligations; and the original copy of the promissory notes were never
presented in court.
In a Resolution, 20 dated July 4, 2012, the Court initially denied the petition for
failure to show any reversible error in the challenged decision and resolution of the CA.
In a Resolution, 21 dated June 15, 2015, however, the Court granted petitioners' motion
for reconsideration, reinstated the petition and required the respondents to le their
comment.
In its Entry of Appearance with Compliance/Manifestation, 22 dated October 19,
2015, UOBP, formerly Westmont, informed the Court that all their interests in the
present litigated case were already transferred to the Philippine Deposit Insurance
Corporation (PDIC).
In its Comment, 23 dated September 23, 2015, the PDIC stated that the CA
correctly ruled that petitioners failed to speci cally deny the actionable documents in
their answer and were deemed to have admitted the genuineness and due execution
thereof. Citing Permanent Savings and Loan Bank v. Velarde , 24 the PDIC underscored
that the speci c denial meant that the defendant must declare under oath that he did
not sign the document or that it was otherwise false or fabricated.
In their Reply, 25 dated November 2, 2015, petitioners insisted that they made a
categorical speci c denial in their answer and never admitted the genuineness and due
execution of the promissory notes, disclosure statements and continuing surety
agreements; the promissory notes presented by Westmont were mere photocopies;
and Westmont failed to establish that they received the proceeds of any loan.
The Court's Ruling
The Court finds the petition meritorious.
Whenever an action or defense is based upon a written instrument or document,
the substance of such instrument or document shall be set forth in the pleading, and
the original or a copy thereof shall be attached to the pleading as an exhibit, which shall
be deemed to be a part of the pleading, or said copy may with like effect be set forth in
the pleading. 26 The said instrument or document is called an actionable document and
Section 8 of Rule 8 provides the proper method for the adverse party to deny its
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 genuineness and due execution, to wit:
Sec. 8. How to contest such documents. — When an action or defense is
founded upon a written instrument, copied in or attached to the corresponding
pleading as provided in the preceding Section, the genuineness and due
execution of the instrument shall be deemed admitted unless the adverse
party, under oath, speci cally denies them, and sets forth what he
claims to be the facts; but the requirement of an oath does not apply when
the adverse party does not appear to be a party to the instrument or when
compliance with an order for an inspection of the original instrument is refused.
[Emphasis supplied] TCAScE

Accordingly, to deny the genuineness and due execution of an actionable

document: (1) there must be a speci c denial in the responsive pleading of the adverse
party; (2) the said pleading must be under oath; and (3) the adverse party must set
forth what he claims to be the facts. Failure to comply with the prescribed procedure
results in the admission of the genuineness and due execution of the actionable
document.
I n Toribio v. Bidin , 27 the Court expounded that the purpose of speci cally
denying an actionable document "appears to have been to relieve a party of the trouble
and expense of proving in the rst instance an alleged fact, the existence or non-
existence of which is necessarily within the knowledge of the adverse party, and of the
necessity (to his opponent's case) of establishing which such adverse party is noti ed
by his opponent's pleading." 28 In other words, the reason for the rule is to enable the
adverse party to know beforehand whether he will have to meet the issue of
genuineness or due execution of the document during trial. 29
In that said case, the petitioners therein failed to le a responsive pleading to
speci cally deny a deed of sale, the actionable document, attached in the answer of the
respondents therein. Despite such failure, the Court held that Section 8, Rule 8, was
suf ciently complied with because they had already stated under oath in their
complaint that they never sold, transferred, or disposed of their shares in the
inheritance to others. Thus, respondents therein were placed on adequate notice that
they would be called upon during trial to prove the genuineness or due execution of the
disputed deeds of sale. Notably, the Court exercised liberality in applying the rules of
procedure so that substantial justice may be served.
Similarly, in Titan Construction Corporation v. David, Sr. , 30 the Court relaxed the
rules of procedure regarding Section 8 of Rule 8. In that case, the respondent failed to
le a responsive pleading under oath to speci cally deny the special power of attorney,
the actionable document therein, which was attached to the answer of the petitioner
therein. Notwithstanding such de ciency, the Court ruled that there was substantial
compliance because the respondent therein consistently denied the genuineness and
due execution of the actionable document in his complaint and during trial.
In ne, although Section 8 of Rule 8 provides for a precise method in denying the
genuineness and due execution of an actionable document and the dire consequences
of its non-compliance, it must not be applied with absolute rigidity. What should guide
judicial action is the principle that a party-litigant is to be given the fullest opportunity to
establish the merits of his complaint or defense rather than for him to lose life, liberty,
honor, or property on technicalities.
In the present case, the actionable documents attached to the complaint of
Westmont were PN 5280 and PN 5285. The CA opined that petitioners failed to
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 speci cally deny the genuineness and due execution of the said instruments because
nowhere in their answer did they "speci cally deny" the genuineness and due execution
of the said documents.
After a judicious study of the records, the Court nds that petitioners suf ciently
complied with Section 8 of Rule 8 and grants the petition.
Petitioners specifically
denied the genuineness
and due execution of the
promissory notes
The complaint of Westmont alleged, among others, that:
3. On or about October 21, 1997, defendants Richard Sy and Ramon
Sy, under the trade name and style of "Moondrops General Merchandising,"
obtained a loan from the plaintiff in the principal amount of Two Million Four
Hundred Twenty-Nine Thousand Five Hundred Pesos (P2,429,500.00),
Philippine Currency, in evidence of which said defendants executed in plaintiff's
favor Promissory Note No. GP-5280, . . . .
4. Again, on or about November 25, 1997, defendants Richard Sy and
Ramon Sy, under the trade name and style of "Moondrops General
Merchandising," applied for and were granted another loan by the plaintiff in the
principal amount of Four Million Pesos (P4,000,000.00), Philippine Currency, in
evidence of which said defendants executed in plaintiff's favor Promissory Note
No. GP-5285, . . . .
6. The defendants Anita Ng, Josie Ong, William Sy and Jackeline De
Lucia, for purposes of securing the payment of said loans, collectively executed
a Continuing Suretyship Agreement, . . ., whereby they jointly and severally
bound themselves to plaintiff for the payment of the obligations of defendants
Richard Sy and Ramon Sy/Moondrops General Merchandising thereto.
7. The defendants defaulted in the payment of the aforementioned
loan obligations when the same fell due and, despite demands, continue to fail
and/or refuse to pay the same, to the prejudice of the plaintiff, . . .
8. As of November 9, 1999, the defendants' outstanding obligation to
the plaintiff on both loans amounted to Fifteen Million Six Hundred Thirty-Nine
Thousand Five Hundred Eighty Nine and 25/100 Pesos, . . . . 31
On the other hand, petitioners alleged in the answer, under oath:
2. Paragraphs 3, 4, 5, 6, 7 and 8 are speci cally denied, the truth of
the matter being those alleged in the Special and Af rmative Defenses
hereunder. cTDaEH

3. Paragraph 9 is speci cally denied for want of knowledge or

information suf cient to form a belief as to the truth or falsity thereof. Besides,
the plaintiff has no one to blame except itself and its personnel for maliciously
ling the instant complaint for collection knowing fully well that the alleged
loan obligations were not consummated; and by way of —
SPECIAL AND AFFIRMATIVE DEFENSES
4. The complaint does not state a cause of action.
5. While the limited partnership Moondrops General Merchandising
Co., Ltd. (Moondrops for brevity) appears in the alleged loan documents to be
the borrower and, therefore, the real party in interest, it is not impleaded as a
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 party, . . . .
6. The alleged loan obligations were never consummated for want of
consideration.
7. Sometime in August, 1997, Moondrops desperately needed
additional working capital, thus it applied for a loan of P6,500,000.00 with the
plaintiff Westmont Bank through the Manager of Grace Park Branch William
Chu Lao.
8. Manager William Chu Lao required herein defendants to sign
blank forms of plaintiff's promissory notes, Disclosure Statements and
Continuing Suretyship Agreement.
9. Sometime in September, 1997, Manager William Chu Lao
informed herein defendants that the application of Moondrops for an additional
working capital was disapproved by Westmont Bank but that, however, he
offered to lend the defendants, through Mr. Amado Chua, the initial amount of
P2,500,000.00 payable in three (3) months, and then another P4,000,000.00
likewise payable in three (3) months, against customers' checks.
10. Since Moondrops desperately needed the additional working
capital, defendants agreed to and accepted the offer of Manager William Chu
Lao, thus Mr. Amado Chua loaned to defendants the amounts of P2,500,000.00
and P4,000,000.00.
11. Pursuant to the agreement between Mr. Amado Chua and the
defendants, the latter delivered to the former customers' checks in the total
amount of P6,500,000.00.
12. Defendants have fully paid Mr. Amado Chua the loan obligations
in the amounts of P2,500,000.00 and P4,000,000.00, including the interests
thereon. 32
The answer above readily shows that petitioners did not spell out the words
"speci cally deny the genuineness and due execution of the promissory notes."
Nevertheless, when the answer is read as whole, it can be deduced that petitioners
speci cally denied the paragraphs of the complaint regarding the promissory notes.
More importantly, petitioners were able to set forth what they claim to be the facts,
which is a crucial element under Section 8 of Rule 8. In particular, they alleged that
although Ramon Sy and Richard Sy signed blank forms of promissory notes and
disclosure statements, they were later informed that their loans were not approved.
Such disapproval led them to seek loans elsewhere, through Lao and Chua, but
definitely not with the bank anymore.
Verily, petitioners asserted throughout the entire proceedings that the loans they
applied from Westmont were disapproved, and that they never received the loan
proceeds from the bank. Stated differently, they insisted that the promissory notes and
disclosure statement attached to the complaint were false and different from the
documents they had signed. These signi cant and consistent denials by petitioners
suf ciently informed Westmont beforehand that it would have to meet the issue of
genuineness or due execution of the actionable documents during trial.
Accordingly, petitioners substantially complied with Section 8 of Rule 8. Although
their answer did not indicate the exact words contained in the said provision, the
questionable loans and the non-delivery of its proceeds compel the Court to relax the
rules of procedure in the present case. Law and jurisprudence grant to courts the
prerogative to relax compliance with procedural rules of even the most mandatory
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 character, mindful of the duty to reconcile both the need to put an end to litigation
speedily and the parties' right to an opportunity to be heard. 33
Westmont failed to prove
that it delivered the
proceeds of the loan to
petitioners
A simple loan or mutuum is a contract where one of the parties delivers to
another, either money or other consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid. 34 A simple loan is a real contract
and it shall not be perfected until the delivery of the object of the contract. 35
Necessarily, the delivery of the proceeds of the loan by the lender to the borrower is
indispensable to perfect the contract of loan. Once the proceeds have been delivered,
the unilateral characteristic of the contract arises and the borrower is bound to pay the
lender an amount equal to that received. 36
Here, there were purported contracts of loan entered between Westmont and
petitioners for the amounts of P2,429,500.00 and P4,000,000.00, respectively. The
promissory notes evidencing such loans were denied by petitioners, thus, the
genuineness and due execution of such documents were not admitted. Petitioners
averred that they never received such loans because their applications were
disapproved by the bank and they had to acquire loans from other persons. They
presented a cashier's check, in the amount of P2,429,500.00, obtained from Chua,
which showed that the latter personally provided the loan, and not the bank. As the
proceeds of the loan were not delivered by the bank, petitioners stressed that there
was no perfected contract of loan. In addition, they doubt the reliability of the
promissory notes as their original copies were not presented before the RTC. cSaATC

Due to the doubtful circumstances surrounding the loan transactions, Westmont

cannot rely on the disputable presumptions that private transactions have been fair and
regular and that the ordinary course of business has been followed. The afore-stated
presumptions are disputable, meaning, they are satisfactory if uncontradicted, but may
be contradicted and overcome by other evidence. 37
At any rate, granting that they did execute the promissory note and other
actionable documents, still it was incumbent on Westmont, as plaintiff, to establish that
the proceeds of the loans were delivered to petitioners, resulting into a perfected
contract of loan. 38 Notably, these documents also did not state that the loan proceeds
had been delivered to petitioners, and that they had acknowledged its receipt.
In civil cases, the burden of proof rests upon the plaintiff who is required to
establish his case by a preponderance of evidence. 39 As aptly stated by the RTC, the
primordial issue that must be resolved is whether petitioners obtained loans from
Westmont in the total amount of P6,429,500.00. 40
The Court nds that Westmont miserably failed to establish that it released and
delivered the proceeds of the loans in the total amount of P6,429,500.00 to petitioners.
Westmont could have easily presented a receipt, a ledger, a loan release manifold, or a
statement of loan release to indubitably prove that the proceeds were actually released
and received by petitioners. During trial, Westmont committed to the RTC that it would
submit as evidence a loan manifold indicating the names of petitioners as recipients of
the loans, 41 but these purported documents were never presented, identi ed or
offered. 42

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 As Westmont failed to prove that it had delivered the loan proceeds to
respondents, then there is no perfected contract of loan.
WHEREFORE , the petition is GRANTED . The August 4, 2011 Decision and the
March 19, 2012 Resolution of the Court of Appeals in CA-G.R. CV No. 90425 are hereby
REVERSED and SET ASIDE . The Complaint, dated August 30, 1999, docketed as Civil
Case No. 99-95945 led before the Regional Trial Court, Branch 12, City of Manila, is
DISMISSED.
SO ORDERED.
Carpio, Brion and Del Castillo, JJ., concur.
Leonen, * J., is on official leave.
Footnotes
* On Official Leave.

1. Penned by Associate Justice Samuel H. Gaerlan with Associate Justice Ramon R. Garcia
and Associate Justice Socorro B. Inting, concurring; rollo, pp. 34-43.

2. Id. at 44-45.
3. Penned by Judge Ruben Reynaldo G. Roxas; id. at 157-164.
4. Id. at 198-204.
5. Id. at 57-61.
6. Id. at 62.

7. Id. at 64.
8. Id. at 63 and 65.
9. Id. at 66-68.
10. Id. at 69-70.

11. Id. at 72-77.

12. Id. at 104.
13. TSN, January 11, 2002, p. 27.
14. Rollo, pp. 105-107.
15. Id. at 152.

16. Id. at 163-164.

17. Id. at 202-203.
18. Id. at 43.
19. Id. at 17.
20. Id. at 323-324.

21. Id. at 383-384.

22. Id. at 411-413.
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 23. Id. at 401-408.
24. 482 Phil. 193 (2004).
25. Rollo, pp. 420-424.
26. Section 7, Rule 7 of the Rules of Court.

27. 219 Phil. 139 (1985).

28. Id.
29. Id. at n
30. 629 Phil. 346 (2010).
31. Rollo, pp. 57-59.

32. Id. at 72-74.

33. Hadji-Sirad v. Civil Service Commission, 614 Phil. 119, 134 (2009).
34. Article 1933 of the New Civil Code.
35. Article 1934 of the New Civil Code.

36. See Article 1953 of the New Civil Code.

37. Citibank, N.A. v. Sabeniano, 535 Phil. 384 (2006).
38. See Oliver v. Philippine Savings Bank, G.R. No. 214567, April 4, 2016.
39. De Leon v. Bank of the Philippines, 721 Phil. 839-851 (2013). n
40. Rollo, p. 159.

41. TSN, pp. 27-29, January 11, 2002; rollo, pp. 103 and 175.
42. Id. at 105 and 155-156.
n Note from the Publisher: Copied verbatim from the official copy.
n Note from the Publisher: Copied verbatim from the of cial copy. Formerly “39. De Leon v.
Bank of the Philippines, Phil. 839 (2013).”

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