Commercial Laws 1: Loan Case Digests

Cases: Contract of Loan

Real Contract

Naguiat vs. Court of Appeals, G.R. No. 118375, October 3, 2003

Characteristics of Loan - Real Contract. (Art. 1934)

The mere issuance of the checks did not result in the perfection of the contract of loan. The Civil Code provides that the delivery of bills of exchange and mercantile documents such as checks shall produce the effect of payment only when they have been cashed. It is only after the checks have produced the effect of payment that the contract of loan may be deemed perfected."
The objects of the contract are the loan proceeds that the private respondent would enjoy only upon the encashment of the checks signed or indorsed by the petitioner. The loan was not perfected because there was no proof that the checks were encashed or deposited. The petitioner would have certainly presented the corresponding documentary evidence, such as the returned checks and the pertinent bank records if the checks were presented for payment. Since the petitioner presented no such proof, it follows that the checks were not encashed or credited to the private respondent's account.

Commodatum

Commodatum is essentially gratuitous and temporary.

Mina v Pascual, G.R. No. L-8321, October 14, 1913

Essentially gratuitous. If any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. (Art. 1935)
Temporary. An essential feature of commodatum is that the use of the thing belonging to another shall be for a period.

Republic Bank v. Bagtas, G.R. No. L-10614, October 25, 1962

If the breeding fee is considered compensation, then the contract would be a lease of the bulls and not commodatum. (Art. 1935)
The borrower was made liable for the loss of the thing loaned. (Art. 1942)

The original period of the loan was from May 8, 1948 to May 7, 1949. The loan of bulls was renewed for another period of one year to end on May 8, 1950 but the borrower kept and used the bulls until November 1963. It was after May 8, 1950 when the bulls were killed by stray bullets during a Huk raid. In addition, when the lender lent and delivered the bulls to the borrower, the bulls had each an appraised book value, and it was not stipulated that in case of loss of the bulls due to fortuitous event, the borrower would be exempt from liability.

Colito T. Pajuyo v. Court of Appeals, G.R. No. 146364, June 3, 2004 (Art. 1937)

Pajuyo and private respondent Eddie Guevarra ("Guevarra") executed a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for free provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that he would voluntarily vacate the premises on Pajuyo's demand.

The Kasunduan is not one of commodatum. In a contract of commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it. An essential feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is for a certain period.
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the property in good condition. The imposition of this obligation makes the Kasunduan a contract different from a commodatum.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The obligation to deliver or to return the thing received attaches to contracts for safekeeping, or contracts of commission, administration and commodatum. These contracts certainly involve the obligation to deliver or return the thing received.

U.S. v. Camara, G.R. No. 9459, October 19, 1914, 28 Phil 238-241

Severino Camara cannot be guilty of the crime of estafa, but is a debtor for the price of the sale.
Return of the Thing. (Art. 1946)

The obligation to deliver or to return the thing received attaches to contracts for safekeeping, or contracts of commission, administration and commodatum. These contracts certainly involve the obligation to deliver or return the thing received."

Consumable goods may be subject of commodatum if the purpose of the contract is not the consumption of the object

Producers Bank of the Philippines v Court of Appeals, G.R. No. 115324, February 19, 2003

Consumable. (Art. 1936)

The intention of the parties turned the consumable thing to non-consumable. The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual character of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in such determination.

The agreement to deposit respondent's money in a savings account specifically for the purpose of making it appear that said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within 30 days is commodatum.

However, the facts indicate that the contract was really a bank deposit that is governed by the rules on simple loan. A bank deposit in trust for a corporation that is still in the process of incorporation is quite common. When a deposit in trust for the corporation is opened, there is no obligation on the part of the bank to return exactly the same peso bills that will be delivered to the bank. Although the deposit is for a specific purpose and for a limited period, the bank will still be a debtor with an obligation to pay money (a generic thing) upon the withdrawal of the deposited funds by the authorized person.
Neither does the Court agree with petitioner's contention that it is not solidarily liable for the return of private respondent's money because it was not privy to the transaction between Doronilla and private respondent. The nature of said transaction, that is, whether it is a mutuum or a commodatum, has no bearing on the question of petitioner's liability for the return of private respondent's money because the factual circumstances of the case clearly show that petitioner Bank, through its employee Mr. Atienza, was partly responsible for the loss of private respondent's money and is liable for its restitution.

Can the bailee acquire ownership of the property by prescription?

Heirs of Juanita Padilla v. Magdua, 630 SCRA 573 (2010)

PRESCRIPTION. (Art. 1952)

The rule is that the bailee cannot acquire ownership of the property through prescription. Possession of the bailee is not possession in the concept of a holder. Hence, prescription cannot run against the owner of the property unless the bailee repudiates the commodatum and the positive act of repudiation is known to the bailor or the owner.

Mutuum

Borrower in mutuum acquires ownership

Republic v. Sandiganbayan (First Division), G.R. Nos. 166859, 169203, 180702, April 12, 2011

Borrower acquires ownership. (Art. 1953)

In a contract of simple loan, "one of the parties (creditor) delivers money or other consumable thing to another (debtor) on the condition that the same amount of the same kind and quality shall be paid. Owing to the consumable nature of the thing loaned, the resulting duty of the borrower in a contract of loan is to pay, not to return to the creditor or lender the very thing loaned. This explains why the ownership of the thing loaned is transferred to the debtor upon perfection of the contract. Ownership of the thing loaned having transferred, the debtor enjoys all the rights conferred t o an owner of property, including the right to use and enjoy (jus utendi), to consume the thing by its use (jus abutendi), and to dispose ( jus disponendi), subject to such limitations as may be provided by law. Evidently, the resulting relationship between a creditor and debtor in a contract of loan cannot be characterized as fiduciary.
A debtor can appropriate the thing loaned without any responsibility or duty to his creditor to return the very thing that was loaned or to report how the proceeds were used.

Nor can he be compelled to return the proceeds and fruits of the loan, for there is nothing under our laws that compel a debtor in a contract of loan to do so. As owner, the debtor can dispose of the thing borrowed and his act will not be considered misappropriation of the thing. The only liability on his part is to pay the loan together with the interest that is either stipulated or provided under existing laws.

Chee Kiong Yam, et al., v. Hon. Nabdar J. Malik, et al., G.R. No. L-50550-52, October 31, 1979

Borrower acquires ownership. (Art. 1953)

There was no estafa, where the complaint stated on its face that petitioners received the amount from respondent "as a loan."
Moreover, the complaint in an independent action for the collection of the same amount filed by respondent stated that the P60,000.00 was a "simple business loan" which earned interest and was originally demandable six months from July 12, 1973. Such allegations do not support a case for estafa. In order that a person can be convicted for estafa for misappropriation of funds, it must be proven that he has the obligation to deliver or return the same money, goods or personal property that he received. Petitioners had no such obligation to return the same money, i.e .. the bills or coins, which they received from private respondents. This is so because as clearly stated in the criminal complaints, the related civil complaints and the supporting sworn statements, the sums of money that petitioners received were loans.
U.S. v. Ibañez: It was held that it is not estafa for a person to refuse to pay his debt or to deny its existence. When the relation is purely that of debtor and creditor, the debtor cannot be held liable for the crime of estafa, by merely refusing to pay or by denying the indebtedness.

In re: Tomboco, G.R. No. 10900, October 8, 1917

What should be paid. (Art. 1953)

It is true that prevailing rule at the time gave a court exercising probate jurisdiction the power to commit a person to jail for failure to obey its order, sentence, or decree; but it is declared in the proviso to the same section that nothing therein shall be construed to authorize imprisonment for ordinary debt.
It is evident that the receipt executed by Donato Chuatongco in favor of Justina Plaza is a mere acknowledgment of indebtedness, and that the delivery of the money to him constituted a loan. The transaction in question therefore created an ordinary debt, such as is contemplated in the proviso.
That the transaction in question does not constitute a technical deposit is also apparent from the circumstance that it was agreed between the parties that the firm of Quian Sieng & Co. should pay interest at the rate of P100 per annum; from which it is manifest that the firm had the right to utilize the money in its business, as was in fact done. This constitutes a loan.
The agreement for the payment of interest in this case, was not expressed in the receipt, but this is not material. Furthermore, if the money was used by the firm with the consent of Justina Plaza, as appears to have been the case, the obligation was converted into a loan under article 1768 of the Civil Code even supposing that it had originally been a deposit.

Bank deposits

The Metropolitan Bank and Trust Company v. Rosales, G.R. No. 183204, January 13, 2014

Bank Deposits (Art. 1953)

When a person deposits an amount to his bank account, he is, in legal effect, lending money to the bank. The bank deposit must be paid upon demand by the depositor.
Compensation can occur only if the depositor has an existing obligation to the bank that is due and demandable. Legal compensation or compensation based on an agreement, applies only if there is a valid and existing obligation arising f rom any of the sources of obligation enumerated in Article 1167 of the Civil Code, to wit: law, contracts, quasi-contracts, delict, and quasi-delict.
The filing of a criminal case is not enough reason for the bank to issue a "Hold Out" order as the case is still pending and no final judgment of conviction has been rendered against the depositor.

Tan Tiong Tick v. American Apothecaries, 65 Phil 414 (1938)

Bank Deposits (Art. 1953)

The bank can make use as its own the money deposited. Said amount is not being held in trust for the depositor nor is it being held for safekeeping.

Fulton Iron Works Co. v. China Banking Corporation, G.R. No. 32576, November 6, 1930

Bank Deposits (Art. 1953)

Third persons who may have a right to the money deposited cannot hold the bank responsible unless there is a court order or garnishment. The duty of the bank is to its creditor-depositor and not to third persons

Guingona v. City Fiscal of Manila, 128 SCRA 577 (1984)

Bank Deposits (Art. 1953)

The officers of the bank cannot be held liable for estafa if they authorized the use of the money deposited by the depositor. There would be no liability for estafa under Article 315(l)(b) of the Revised Penal Code even if the bank failed to return the amount deposited.

People of the Philippines v. Puig, G.R. No. 173654-765, August 28, 2008

Bank Deposits (Art. 1953)

The money that is deposited is not held in trust by the bank. If a teller, cashier, bookkeeper or any other bank employee takes the amount deposited, the appropriate crime is qualified theft.

Gullas v. Philippine National Bank, 62 SCRA 519

Bank Deposits (Art. 1953)

The bank has the right to legal compensation. It can set off the deposits with the indebtedness/loans of the depositor that are due and demandable.

Interest

Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money,:

The interest due should be that which may have been stipulated in writing.
The interest due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

When an obligation, not constituting a loan or forbearance of money, is breached:

The interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty.
Where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
When such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

Nacar v. Gallery Frames, Inc., G.R. No. 189871, August 13, 2013

When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.
With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.
Formula: TOTAL AMOUNT DUE = [principal - partial payments made] + [interest + interest on interest], where

; Interest = remaining balance x 6% per annum x number of years from due date (Date when demand was made) until full satisfaction/ payment
; Interest on interest = interest computed as of the filing of the complaint x 6% x number of years until full satisfaction/payment

PCI Leasing and Finance, Inc. v. Trojan Metal Industries Incorporated, et al., G.R. No. 1763281, December 15, 2010

TOTAL AMOUNT DUE = [principal – partial payments made] + [interest + interest on interest], where

Interest = remaining balance x 12% per annum x no. of years from due date (8 December 1998 when demand was made) until date of sale to a third party

Interest on interest = interest computed as of the filing of the complaint on 7 May 1999 x 12% x no. of years until date of sale to a third party

From the computed total amount should be deducted ₱1,025,000.00 representing the proceeds of the sale already in PCILF’s hands. The difference represents overpayment by TMI, which the law requires PCILF to refund to TMI.

Sps. Mallari v. Prudential Bank, G.R. No. 197861, June 5, 2013

Parties are free to enter into agreements and stipulations as to the terms and conditions of their contract, but such freedom is not absolute.
Thus the stipulation as to interest may be considered void if it is unconscionable.
Only the interest is void; the principal obligation is not affected by the invalidity of the stipulation as to interest.
Article 1306 of the Civil Code provides, "The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy."
Hence, if the stipulations in the contract are valid, the parties thereto are bound to comply with them, since such contract is the law between the parties.

Interest rates of 3% per month and higher are excessive, unconscionable and exorbitant, hence, the stipulation was void for being contrary to morals.
In this case, the interest rate agreed upon by the parties was only 23% p.a., or less than 2% per month.

Rey v. Anson, G.R. No. 211206, November 7, 2018

The freedom of contract is not absolute. Article 1306 of the Civil Code provides that "[t]he contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy."
Sps. Albos v. Sps. Embisan, et al:

As case law instructs, the imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals.

Castro v. Tan:

While we agree with petitioners that parties to a loan agreement have wide latitude to stipulate on any interest rate in view of the Central Bank Circular No. 905 s. 1982 which suspended the Usury Law ceiling on interest effective January 1, 1983, it is also worth stressing that interest rates whenever unconscionable may still be declared illegal. There is certainly nothing in said circular which grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.
In several cases, we have ruled that stipulations authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law. In Medel v. Court of Appeals, we annulled a stipulated 5.5% per month or 66% per annum interest on a P500,000.00 loan and a 6% per month or 72% per annum interest on a P60,000.00 loan, respectively, for being excessive, iniquitous, unconscionable and exorbitant. In Ruiz v. Court of Appeals, we declared a 3% monthly interest imposed on four separate loans to be excessive. In both cases, the interest rates were reduced to 12% per annum.
In this case, the 5% monthly interest rate, or 60% per annum, compounded monthly, stipulated in the Kasulatan is even higher than the 3% monthly interest rate imposed in the Ruiz case. Thus, we similarly hold the 5% monthly interest to be excessive, iniquitous, unconscionable and exorbitant, contrary to morals, and the law. It is therefore void ab initio for being violative of Article 1306 of the Civil Code. With this, and in accord with the Medel and Ruiz cases, we hold that the Court of Appeals correctly imposed the legal interest of 12% per annum in place of the excessive interest stipulated in the Kasulatan.

Forbearance

Estores v. Sps. Supangan, G.R. No. 175139, April 18, 2012

The respondent-spouses parted with their money even before the conditions were fulfilled. They have therefore allowed or granted forbearance to the seller (petitioner) to use their money pending fulfillment of the conditions. They were deprived of the use of their money for the period pending fulfillment of the conditions and when those conditions were breached, they are entitled not only to the return of the principal amount paid, but also to compensation for the use of their money.
The compensation for the use of their money, absent any stipulation, should be the same rate of legal interest applicable to a loan since the use or deprivation of funds is similar to a loan.

Interest may be imposed even in the absence of stipulation in the contract.

Land Bank of the Philippines v. Onate, G.R. No. 192371, January 15, 2014, 713 SCRA 678

There was also forbearance of money which involved the obligation to return the amount that was subjected to offsetting without legal justification.
The interest accrued from the time of judicial demand.

Escalation Clause

Silos v. Philippine National Bank, G.R. No. 181045, July 2, 2014

In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect. Moreover, the Court cannot consider a stipulation granting a party the option to prepay the loan if said party is not agreeable to the arbitrary interest rates imposed. Premium may not be placed upon a stipulation in a contract which grants one party the right to choose whether to continue with or withdraw from the agreement if it discovers that what the other party has been doing all along is improper or illegal.
The Usury Law as amended by Presidential Decree No. 1684 (and C.B. Circular No. 905) "no more than allow[s] contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated.
However, the said law and circular did not authorize either party to unilaterally raise the interest rate without the other's consent. The unbridled right to unilaterally upwardly adjust the interest would completely take away from the debtor the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts that is recognized under Article 1308 of the New Civil Code. Thus, it was further explained:

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.

"The fact that petitioners later received several statements of account detailing its outstanding obligations does not cure respondent's breach. To repeat, the belated discovery of the true cost of credit does not reverse the ill effects of an already consummated business decision.
Neither may the statements be considered proposals sent to secure the petitioners' conformity; they were sent after the imposition and application of the interest rate, and not before. And even if it were to be presumed that these are proposals or offers, there was no acceptance by petitioners. "No one receiving a proposal to modify a loan contract, especially regarding interest, is obliged to answer the proposal."
Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial interest rates, but actually accompanied by provisions written in fine print that allow lenders to later on increase or decrease interest rates unilaterally, without the consent of the borrower, and depending on complex and subjective factors. Because they have been lured into these contracts by initially low interest rates, borrowers get caught and stuck in the web of subsequent steep rates and penalties, surcharges and the like. Being ordinary individuals or entities, they naturally dread legal complications and cannot afford court litigation; they succumb to whatever charges the lenders impose. At the very least, borrowers should be charged rightly; but then again this is not possible in a one-sided credit system where the temptation to abuse is strong and the willingness to rectify is made weak by the eternal desire for profit.
Given the above supposition, the Court cannot subscribe to respondent's argument that in every repricing of petitioners' loan availment, they are given the right to question the interest rates imposed. The import of respondent's line of reasoning cannot be other than that if one out of every hundred borrowers questions respondent's practice of unilaterally .fixing interest rates, then only the loan arrangement with that lone complaining borrower will enjoy the benefit of review or re-negotiation; as to the 99 others, the questionable practice will continue unchecked, and respondent will continue to reap the profits from such unscrupulous practice. The Court can no more condone a view so perverse. This is exactly what the Court meant in the immediately preceding cited case when it said that "the belated discovery of the true cost of credit does not reverse the ill effects of an already consummated business decision-''96 as to the 99 borrowers who did not or could not complain, the illegal act shall have become a fait accompli - to their detriment, they have already suffered the oppressive rates.
Besides, that petitioners are given the right to question the interest rates imposed is, under the circumstances, irrelevant; we have a situation where the petitioners do not stand on equal footing with the respondent. It is doubtful that any borrower who finds himself in petitioners' position would dare question respondent's power to arbitrarily modify interest rates at any time. In the second place, on what basis could any borrower question such power, when the criteria or standards - which are really one-sided, arbitrary and subjective - for the exercise of such power are precisely lost on him?"

Philippine Savings Bank v. Castillo, G.R. No. 193178, May 30, 2011, 649 SCRA 527, 538

Effect of Invalidity of Escalation.
The lender should then refund the excess amount of interest that it has illegally imposed upon borrowers; the amount to be refunded refers to that paid by borrowers when they had no obligation to do so.

Naguiat vs. Court of Appeals, G.R. No. 118375, October 3, 2003, Real Contract

Aurora Queaño applied for a ₱200,000 loan from Celestina Naguiat.
Queaño claimed not to have received the loan proceeds and alleged that the checks were retained by Ruby Ruebenfeldt, Naguiat's agent.

The mere issuance of the checks did not result in the perfection of the contract of loan.

The Civil Code provides that the delivery of bills of exchange and mercantile documents such as checks shall produce the effect of payment only when they have been cashed. It is only after the checks have produced the effect of payment that the contract of loan may be deemed perfected.

The objects of the contract are the loan proceeds that the private respondent would enjoy only upon the encashment of the checks signed or indorsed by the petitioner. The loan was not perfected because there was no proof that the checks were encashed or deposited.

The petitioner would have certainly presented the corresponding documentary evidence, such as the returned checks and the pertinent bank records if the checks were presented for payment. Since the petitioner presented no such proof, it follows that the checks were not encashed or credited to the private respondent's account.

Commodatum is essentially gratuitous and temporary.

Mina v. Pascual, G.R. No. L-8321, October 14, 1913, Commodatum.

In 1874, Francisco Fontanilla acquired a lot in Laoag though a public auction. His brother, Andres Fontanilla, erected a warehouse on part of the lot with Francisco's consent.
Alejandro Mina, et al. (plaintiffs) were the heirs of Francisco. In 1909, Ruperta Pascual, as guardian of her minor children (defendants), petitioned to sell part (6/7 of 1/2) of the warehouse and its lot.
The warehouse and lot were sold to Cu Joco.
The agreement between parties acknowledged the existence of a commodatum.

Essentially gratuitous. If any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. (Art. 1935)
Temporary. An essential feature of commodatum is that the use of the thing belonging to another shall be for a period.

He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a transfer of the ownership of the thing, it is evident that he who has only the mere use of the thing cannot transfer its ownership. The sale of a thing effected by one who is not its owner is null and void.

It is, therefore, an essential feature of the commodatum that the use of the thing belonging to another shall for a certain period. Francisco Fontanilla did not fix any definite period or time during which Andres Fontanilla could have the use of the lot whereon the latter was to erect a stone warehouse of considerable value, and so it is that for the past thirty years of the lot has been used by both Andres and his successors in interest.

The present contention of the plaintiffs that Cu Joco, now in possession of the lot, should pay rent for it at the rate of P5 a month, would destroy the theory of the commodatum sustained by them, since, according to the second paragraph of the aforecited article 1740, "commodatum is essentially gratuitous," and, if what the plaintiffs themselves aver on page 7 of their brief is to be believed, it never entered Francisco's mind to limit the period during which his brother Andres was to have the use of the lot, because he expected that the warehouse would eventually fall into the hands of his son, Fructuoso Fontanilla, called the adopted son of Andres, which did not come to pass for the reason that Fructuoso died before his uncle Andres. With that expectation in view, it appears more likely that Francisco intended to allow his brother Andres a surface right; but this right supposes the payment of an annual rent, and Andres had the gratuitous use of the lot.

Republic Bank v. Bagtas, G.R. No. L-10614, October 25, 1962

In 1948, Jose V. Bagtas borrowed three bulls for a period of one year for breeding purposes subject to a government charge of breeding fee of 10% of the book value of the bulls.
Bagtas' surviving spouse, filed a motion to quash the writ of execution, stating that in 1952, two bulls were returned to the Bureau Animal of Industry and in 1953, the third died during a Huk raid.
Whether the contract was commodatum and for that reason, as the appellee retained ownership or title to the bull, it should suffer its loss due to force majeure NO

A contract of commodatum is essentially gratuitous. If the breeding fee be considered a compensation, then the contract would be a lease of the bull. The lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract.

And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum —. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event;

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability.

If the breeding fee is considered compensation, then the contract would be a lease of the bulls and not commodatum. (Art. 1935)
The borrower was made liable for the loss of the thing loaned. (Art. 1942)
The original period of the loan was from May 8, 1948 to May 7, 1949. The loan of bulls was renewed for another period of one year to end on May 8, 1950 but the borrower kept and used the bulls until November 1963. It was after May 8, 1950 when the bulls were killed by stray bullets during a Huk raid. In addition, when the lender lent and delivered the bulls to the borrower, the bulls had each an appraised book value, and it was not stipulated that in case of loss of the bulls due to fortuitous event, the borrower would be exempt from liability.

Colito T. Pajuyo v. Court of Appeals, G.R. No. 146364, June 3, 2004 (Art. 1937)

Colito Pajuyo and private respondent Eddie Guevarra executed a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for free provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that he would voluntarily vacate the premises on Pajuyo's demand.
The Kasunduan is not one of commodatum. In a contract of commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it. An essential feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is for a certain period.
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the property in good condition. The imposition of this obligation makes the Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also different from that of a commodatum. Case law on ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant relationship where the withdrawal of permission would result in the termination of the lease. The tenant’s withholding of the property would then be unlawful.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The obligation to deliver or to return the thing received attaches to contracts for safekeeping, or contracts of commission, administration and commodatum. These contracts certainly involve the obligation to deliver or return the thing received.

U.S. v. Camara, G.R. No. 9459, October 19, 1914, 28 Phil 238-241

Severino Camara was charged with estafa for allegedly appropriating a sum of P425.10 received on commission for the purchase of copra to the prejudice of Berbari Hermanos.
Severino Camara was an agent of Berbari Hermanos for purchasing copra on their behalf.

Severino Camara cannot be guilty of the crime of estafa, but is a debtor for the price of the sale.

Paragraph 5 of article 535 of the Penal Code does not, nor can it, specify a contract of sale as one that gives rise to the obligation to deliver or to return the thing received, as occurs with contracts for safe-keeping, or of commission, or administration, and others such as commodatum, which certainly involve the obligation to deliver or return the thing received.

A person who buys rice on credit becomes the owner of it and indebted for its price, but is not guilty of the crime of estafa by reason of not paying for it. Hence, the sum which the defendant is alleged to have embezzled is not P425.10, as stated in the complaint, but P416.60.

A mere shortage in an account does not prove the misapropriation and abstraction for which punishment is provided in the code. Delay in the execution of a commission, or in the delivery of a sum received by reason thereof, only involved civil liability. In the case at bar there was not even any delay, for, after all, there was only an agreement to repurchase pending. When, in February, 1912, the criminal complaint was filed, the defendant was not in debt to the complainant, even if we take into account the items owed for the rice purchased on credit, which cannot form the basis of an action for estafa.

Consumable goods may be subject of commodatum if the purpose of the contract is not the consumption of the object

Producers Bank of the Philippines v Court of Appeals, G.R. No. 115324, February 19, 2003

Franklin Vives was asked by his neighbor, Angeles Sanchez, to assist Col. Arturo Doronilla in incorporating his business, Sterela Marketing and Services. Vives issued a ₱200,000 check to Sterela for incorporation purposes.
Vives' wife, Mrs. Inocencia Vives, accompanied Doronilla's private secretary, Estrella Dumagpi, to open a bank account in Producers Bank of the Philippines-Makati for Sterela.
Doronilla withdrew part of the money from the account, leaving only ₱90,000.
Rufo Atienza, the assistant manager, informed Vives that the remaining amount could not be withdrawn due to postdated checks issued by Doronilla. Attempts to return the money through postdated checks failed.
Vives instituted an action for recovery of sum of money against Doronilla, Sanchez, Dumagpi and Producers Bank of the Philippines.
Producers Bank of the Philippines denied liability because it is not privy to the transaction between the Vives and Doronilla.
Whether the transaction between Vives and Doronilla was a simple loan or commodatum.

A circumspect examination of the records reveals that the transaction between them was a commodatum. The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual character of a contract.

As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private respondent agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear "that said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within thirty (30) days."

Private respondent merely "accommodated" Doronilla by lending his money without consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the transaction that the money would not be removed from Sterela’s savings account and would be returned to private respondent after thirty (30) days.

Doronilla’s attempts to return to private respondent the amount of ₱200,000.00 which the latter deposited in Sterela’s account together with an additional ₱12,000.00, allegedly representing interest on the mutuum, did not convert the transaction from a commodatum into a mutuum because such was not the intent of the parties and because the additional ₱12,000.00 corresponds to the fruits of the lending of the ₱200,000.00. Article 1935 of the Civil Code expressly states that "[t]he bailee in commodatum acquires the use of the thing loaned but not its fruits." Hence, it was only proper for Doronilla to remit to private respondent the interest accruing to the latter’s money deposited with petitioner.

Neither does the Court agree with petitioner’s contention that it is not solidarily liable for the return of private respondent’s money because it was not privy to the transaction between Doronilla and private respondent. The nature of said transaction, that is, whether it is a mutuum or a commodatum, has no bearing on the question of petitioner’s liability for the return of private respondent’s money because the factual circumstances of the case clearly show that petitioner, through its employee Mr. Atienza, was partly responsible for the loss of private respondent’s money and is liable for its restitution.

Can the bailee acquire ownership of the property by prescription?

Heirs of Juanita Padilla v. Magdua, 630 SCRA 573 (2010)

Juanita Padilla owned land in Leyte. After her death in 1989, her heirs sought partition.
In 1998, Ricardo Bahia, one of the heirs, claimed ownership through a notarized Affidavit of Transfer in 1966. The land was sold to Dominador Magdua by Ricardo's daughters.
In 2001, Petitioners filed for ownership recovery, but the case was initially dismissed due to jurisdictional issues (assessed value of the = ₱590.00). A motion for reconsideration was filed, and jurisdiction was upheld since actions to annul contracts are actions beyond pecuniary estimation.
Another motion to dismiss was filed by Dominador, citing prescription.
Whether the present action is already barred by prescription. NO

Aside from the Affidavit, Dominador did not present any proof to show that Ricardo’s possession of the land had been open, continuous and exclusive for more than 30 years in order to establish extraordinary acquisitive prescription. Dominador merely assumed that Ricardo had been in possession of the land for 30 years based on the Affidavit submitted to the RTC. The petitioners, on the other hand, in their pleading filed with the RTC for recovery of ownership, possession, partition and damages, alleged that Ricardo left the land after he separated from his wife sometime after 1966 and moved to another place. The records do not mention, however, whether Ricardo had any intention to go back to the land or whether Ricardo’s family ever lived there.

Further, Dominador failed to show that Ricardo had the land declared in his name for taxation purposes from 1966 after the Affidavit was executed until 2001 when the case was filed. Although a tax declaration does not prove ownership, it is evidence of claim to possession of the land.

Moreover, Ricardo and petitioners are co-heirs or co-owners of the land. Co-heirs or co-owners cannot acquire by acquisitive prescription the share of the other co-heirs or co-owners absent a clear repudiation of the co-ownership Since possession of co-owners is like that of a trustee, in order that a co-owner’s possession may be deemed adverse to the cestui que trust or other co-owners, the following requisites must concur:

that he has performed unequivocal acts of repudiation amounting to an ouster of the cestui que trust or other co-owners,
that such positive acts of repudiation have been made known to the cestui que trust or other co-owners, and
that the evidence thereon must be clear and convincing.

The rule is that the bailee cannot acquire ownership of the property through prescription. Possession of the bailee is not possession in the concept of a holder. Hence, prescription cannot run against the owner of the property unless the bailee repudiates the commodatum and the positive act of repudiation is known to the bailor or the owner.

Mutuum

Borrower in mutuum acquires ownership
Republic v. Sandiganbayan (First Division), G.R. Nos. 166859, 169203, 180702, April 12, 2011

On July 31, 1987, the Republic commenced Civil Case No. 0033 in the Sandiganbayan by complaint, impleading as defendants respondent Eduardo M. Cojuangco, Jr. and 59 individual defendants.
The amended complaint dated August 19, 1991, designated as Third Amended Complaint impleaded in addition to Cojuangco, President Marcos, and First Lady Imelda R. Marcos nine other individuals.
On March 24, 1999, the Sandiganbayan allowed the subdivision of the complaint in Civil Case No. 0033 into eight complaints:

Civil Case No. 0033-F Acquisition of SMC shares of stock

Allegedly, Cojuangco purchased a block of 33,000,000 shares of SMC stock through the 14 holding companies owned by the CIIF Oil Mills.

Also impleaded as defendants in Civil Case No. 0033-F were several corporations alleged to have been under Cojuangco’s control and used by him to acquire the block of shares of SMC stock totaling 16,276,879 at the time of acquisition (representing approximately 20% percent of the capital stock of SMC).

Republic’s Third Amended Complaint (Subdivided) in Civil Case No. 0033-F:

Defendant Eduardo Cojuangco, Jr., allegedly acquired assets, funds, and property disproportionate to his lawful income during his tenure as a public officer.
Cojuangco, in association with Ferdinand and Imelda Marcos, allegedly used unlawful schemes to enrich themselves at the expense of the Filipino people.
Cojuangco purchased 33 million shares of the SMC through 14 holding companies.
Defendant Corporations are but "shell" corporations owned by interlocking shareholders who have previously admitted that they are just "nominee stockholders" who do not have any proprietary interest over the shares in their names.
These companies, which ACCRA Law Offices organized for Defendant Cojuangco to be able to control more than 60% of SMC shares, were funded by institutions which depended upon the coconut levy such as the UCPB, UNICOM, United Coconut Planters Assurance Corp. (COCOLIFE), among others.
Cojuangco and his ACCRA lawyers used the funds from 6 large coconut oil mills and 10 copra trading companies to borrow money from the UCPB and purchase these holding companies and the SMC stocks. Cojuangco used $150 million from the coconut levy.

Executive Order (E.O.) No. 1, issued by President Corazon C. Aquino, created the Presidential Commission on Good Government (PCGG) to recover ill-gotten wealth amassed by Ferdinand E. Marcos, his family, and associates.

Sandiganbayan: Dismissed the Third Amended Complaint in subdivided Civil Case No. 0033-F.

Failure of plaintiff to prove by preponderance of evidence its causes of action against defendants with respect to the twenty percent (20%) outstanding shares of stock of San Miguel Corporation registered in defendants’ names.
On account of plaintiff positions in the UCPB, PCA and the CIIF Oil Mills, the Court cannot conclude that he violated the fiduciary obligations of the positions he held in the absence of proof that he was so actuated and that he abused his positions.

Issue:

Whether Cojuangco breach his "fiduciary duties" as an officer and member of the Board of Directors of the UCPB. NO
Whether his acquisition and holding of the contested SMC shares come under a constructive trust in favor of the Republic. NO

Held:

It does not suffice, as in this case, that the respondent is or was a government official or employee during the administration of former Pres. Marcos. There must be a prima facie showing that the respondent unlawfully accumulated wealth by virtue of his close association or relation with former Pres. Marcos and/or his wife. This is so because otherwise the respondent’s case will fall under existing general laws and procedures on the matter. Accordingly, the Republic should furnish to the Sandiganbayan in proper judicial proceedings the competent evidence proving who were the close associates of President Marcos who had amassed assets and properties that would be rightly considered as ill-gotten wealth.

The Republic should have adduced evidence to substantiate its allegations against the Respondents

Referring to plaintiff’s causes of action against defendants Cojuangco, et al., the Court finds its evidence insufficient to prove that the source of funds used to purchase SMC shares indeed came from coconut levy funds. In fact, there is no direct link that the loans obtained by defendant Cojuangco, Jr. were the same money used to pay for the SMC shares. The scheme alleged to have been taken by defendant Cojuangco, Jr. was not even established by any paper trail or testimonial evidence that would have identified the same. On account of his positions in the UCPB, PCA and the CIIF Oil Mills, the Court cannot conclude that he violated the fiduciary obligations of the positions he held in the absence of proof that he was so actuated and that he abused his positions.

It was plain, indeed, that Cojuangco, et al. had tendered genuine issues through their responsive pleadings and did not admit that the acquisition of the Cojuangco block of SMC shares had been illegal, or had been made with public funds. As a result, the Republic needed to establish its allegations with preponderant competent evidence, because, as earlier stated, the fact that property was ill gotten could not be presumed but must be substantiated with competent proof adduced in proper judicial proceedings. That the Republic opted not to adduce competent evidence thereon despite stern reminders and warnings from the Sandiganbayan to do so revealed that the Republic did not have the competent evidence to prove its allegations against Cojuangco, et al.

To begin with, it is notable that the decision of November 28, 2007 did not rule on whether coconut levy funds were public funds or not. The silence of the Sandiganbayan on the matter was probably due to its not seeing the need for such ruling following its conclusion that the Republic had not preponderantly established the source of the funds used to pay the purchase price of the concerned SMC shares, and whether the shares had been acquired with the use of coconut levy funds.

Republic’s burden to establish by preponderance of evidence that respondents’ SMC shares had been illegally acquired with coconut-levy funds was not discharged

Madame Justice Carpio Morales argues in her dissent that although the contested SMC shares could be inescapably treated as fruits of funds that are prima facie public in character, Cojuangco, et al. abstained from presenting countervailing evidence; and that with the Republic having shown that the SMC shares came into fruition from coco levy funds that are prima facie public funds, Cojuangco, et al. had to go forward with contradicting evidence, but did not.

The Court disagrees. We cannot reverse the decision of November 28, 2007 on the basis alone of judicial pronouncements to the effect that the coconut levy funds were prima facie public funds, but without any competent evidence linking the acquisition of the block of SMC shares by Cojuangco, et al. to the coconut levy funds.

Cojuangco violated no fiduciary duties

The Republic invokes the following pertinent statutory provisions of the Civil Code, to wit:

Article 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong.

Article 1456. If property is acquired through mistake or fraud, the person obtaining it s by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes.

and the Corporation Code, as follows:

Section 31. Liability of directors, trustees or officers.—Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.

Did Cojuangco breach his "fiduciary duties" as an officer and member of the Board of Directors of the UCPB? Did his acquisition and holding of the contested SMC shares come under a constructive trust in favor of the Republic?

The answers to these queries are in the negative.

The conditions for the application of Articles 1455 and 1456 of the Civil Code (like the trustee using trust funds to purchase, or a person acquiring property through mistake or fraud), and Section 31 of the Corporation Code (like a director or trustee willfully and knowingly voting for or assenting to patently unlawful acts of the corporation, among others) require factual foundations to be first laid out in appropriate judicial proceedings. Hence, concluding that Cojuangco breached fiduciary duties as an officer and member of the Board of Directors of the UCPB without competent evidence thereon would be unwarranted and unreasonable.

Thus, the Sandiganbayan could not fairly find that Cojuangco had committed breach of any fiduciary duties as an officer and member of the Board of Directors of the UCPB. For one, the Amended Complaint contained no clear factual allegation on which to predicate the application of Articles 1455 and 1456 of the Civil Code, and Section 31 of the Corporation Code. Although the trust relationship supposedly arose from Cojuangco’s being an officer and member of the Board of Directors of the UCPB, the link between this alleged fact and the borrowings or advances was not established. Nor was there evidence on the loans or borrowings, their amounts, the approving authority, etc. As trial court, the Sandiganbayan could not presume his breach of fiduciary duties without evidence showing so, for fraud or breach of trust is never presumed, but must be alleged and proved.

The thrust of the Republic that the funds were borrowed or lent might even preclude any consequent trust implication. In a contract of loan, one of the parties (creditor) delivers money or other consumable thing to another (debtor) on the condition that the same amount of the same kind and quality shall be paid. Owing to the consumable nature of the thing loaned, the resulting duty of the borrower in a contract of loan is to pay, not to return, to the creditor or lender the very thing loaned. This explains why the ownership of the thing loaned is transferred to the debtor upon perfection of the contract.

Ownership of the thing loaned having transferred, the debtor enjoys all the rights conferred to an owner of property, including the right to use and enjoy (jus utendi), to consume the thing by its use (jus abutendi), and to dispose (jus disponendi), subject to such limitations as may be provided by law. Evidently, the resulting relationship between a creditor and debtor in a contract of loan cannot be characterized as fiduciary.

To say that a relationship is fiduciary when existing laws do not provide for such requires evidence that confidence is reposed by one party in another who exercises dominion and influence. Absent any special facts and circumstances proving a higher degree of responsibility, any dealings between a lender and borrower are not fiduciary in nature. This explains why, for example, a trust receipt transaction is not classified as a simple loan and is characterized as fiduciary, because the Trust Receipts Law (P.D. No. 115) 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.

Based on the foregoing, a debtor can appropriate the thing loaned without any responsibility or duty to his creditor to return the very thing that was loaned or to report how the proceeds were used. Nor can he be compelled to return the proceeds and fruits of the loan, for there is nothing under our laws that compel a debtor in a contract of loan to do so. As owner, the debtor can dispose of the thing borrowed and his act will not be considered misappropriation of the thing. The only liability on his part is to pay the loan together with the interest that is either stipulated or provided under existing laws.

Chee Kiong Yam, et al., v. Hon. Nabdar J. Malik, et al., G.R. No. L-50550-52, October 31, 1979

Criminal Case No. M-111:

Rosalinda M. Amin charges Yam Chee Kiong and Yam Yap Kieng with estafa for misappropriating P50,000.00.
The amount was received from Rosalinda M. Amin as a loan.

Criminal Case No. M-183:

Tan Chu Kao charges Yam Chee Kiong, Jose Y.C. Yam, Ampang Mah, and Anita Yam alias Yong Tay with estafa involving P30,000.00.
The complaint states the P30,000.00 was "a simple loan."

Criminal Case No. M-208:

Augusto Sajor charges Jose Y.C. Yam, Anita Yam alias Yong Tai Mah, Chee Kiong Yam, and Richard Yam with estafa involving P20,000.00.
The complaint does not explicitly state the amount was received as a loan.
However, a sworn statement by Augusto Sajor confirms the amount was a "loan."

Municipal Judge Nabdar J. Malik held preliminary investigation, found a prima facie case, and issued warrants of arrest.
Whether the respondent judge have acted without jurisdiction, in excess of jurisdiction and with grave abuse of discretion. YES
The facts alleged in the three criminal complaints do not constitute estafa through misappropriation.

Art. 315. Swindling (Estafa). — Any person who shall defraud another by any of the means mentioned herein below shall be punished by:

xxx xxx xxx

1. With unfaithfulness or abuse of confidence namely:

xxx xxx xxx

b) By misappropriating or converting, to the prejudice of another, money, goods, or any other personal property received by the offender in trust or on commission, or for administration, or under any other obligation involving the duty to make delivery of or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying having received such money, goods, or other property.

Misappropriation of funds requires the obligation to return the same money or property received, which is not present in loan transactions.
In order that a person can be convicted under the abovequoted provision, it must be proven that he has the obligation to deliver or return the same money, goods or personal property that he received. Petitioners had no such obligation to return the same money, i.e., the bills or coins, which they received from private respondents. This is so because as clearly stated in criminal complaints, the related civil complaints and the supporting sworn statements, the sums of money that petitioners received were loans.
It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to commodatum, the borrower acquires ownership of the money, goods or personal property borrowed. Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof. In U.S. vs. Ibañez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a person to refuse to nay his debt or to deny its existence. We are of the opinion and so decide that when the relation is purely that of debtor and creditor, the debtor can not be held liable for the crime of estafa, under said article, by merely refusing to pay or by denying the indebtedness.
Assuming then that the acts recited in the complaints constitute the crime of estafa, the Municipal Court of Jolo has no jurisdiction to try them on the merits. The alleged offenses are under the jurisdiction of the Court of First Instance. The criminal complaints declared null and void. Respondent judge ordered to dismiss the cases and recall warrants of arrest and rebuked for ignorance of elementary law.

In re: Tomboco, G.R. No. 10900, October 8, 1917, What should be paid. (Art. 1953)

In re guardianship of the minors FELIPE and ANTONIO TAMBOCO, TAN ENG and TAN LINJO. DONATO CHUATONGCO

On January 1, 1910, Justina Plaza of Surigao, acting as guardian of her minor children, entrusted the sum of P2,241.32 to the mercantile firm of Quian Sieng & Co.
Donato Chuatongco, as manager of the firm, issued a receipt acknowledging the receipt of the money, promising to render an account to Justina Plaza upon her request.

I hereby certify that the mercantile firm Quian Sieng & Co. has received from Justina Plaza, widow of Tamboco, in her capacity of guardian of the persons and property of the minor children of said Tamboco, the sum of two thousand, two hundred and forty-one pesos and thirty-two centavos owing to the said estate, of which sum said firm will render an account to the interested party [Justina Plaza] as son as she so requires.

In November 1914, the Court of First Instance of Surigao ordered Chuatongco to deposit the money into the Postal Savings Bank or the Agricultural Bank in the name of the minors or provide security by giving a duly registered and approved mortgage upon real property of the value of not less than P3,000.
Chuatongco failed to do so. In March 1915, the court subsequently ordered to arrest and commit Chuatongco to jail until compliance or release according to law.

We are of the opinion that the order appealed from was unauthorized. It is true that section 611 of the Code of Civil Procedure gives a court exercising probate jurisdiction the power to commit a person to jail for failure to obey its order, sentence, or decree; but it is declared in the proviso to the same section that nothing therein shall be construed to authorize imprisonment for ordinary debt.

It is evident that the receipt executed by Donato Chuatongco in favor of Justina Plaza is a mere acknowledgment of indebtedness, and that the delivery of the money to him constituted a loan. The transaction in question therefore created an ordinary debt, such as is contemplated in the proviso to section 611 of the Code of Civil Procedure.

That the transaction in question does not constitute a technical deposit is also apparent from the circumstance that it was agreed between the parties that the firm of Quian Sieng & Co. should pay interest at the rate of P100 per annum; from which it is manifest that the firm had the right to utilize the money in its business, as was in fact done. This constitutes a loan.

The agreement for the payment of interest in this case, was not expressed in the receipt, but this is not material. Furthermore, if the money was used by the firm with the consent of Justina Plaza, as appears to have been the case, the obligation was converted into a loan under article 1768 of the Civil Code even supposing that it had originally been a deposit.

Bank deposits
The Metropolitan Bank and Trust Company v. Rosales, G.R. No. 183204, January 13, 2014 (Art. 1953)

Petitioner: Metropolitan Bank and Trust Company (Metrobank), a domestic banking corporation.
Defendants: Ana Grace Rosales, owner of China Golden Bridge Travel Services, and Yo Yuk To, mother of respondent Rosales.

In 2000, respondents opened a Joint Peso Account with Metrobank Pritil-Tondo branch, which showed a balance of ₱2,515,693.52 as of August 4, 2004.
In May 2002, Rosales accompanied her client Liu Chiu Fang, a Taiwanese National, to Metrobank-Escolta branch to open a savings account as required by the Philippine Leisure and Retirement Authority (PLRA) for retiree’s visa application. Liu Chiu Fang could speak only in Mandarin, respondent Rosales acted as an interpreter for her.
On March 3, 2003, respondents opened a Joint Dollar Account with an initial deposit of US$14,000.00 at Metrobank Pritil-Tondo Branch.
On July 31, 2003, Metrobank issued a "Hold Out" order against respondents' accounts.
On September 3, 2003, Metrobank filed a criminal case for Estafa through False Pretences, Misrepresentation, Deceit, and Use of Falsified Documents accusing Rosales and an unidentified woman of orchestrating the fraudulent withdrawal of US$75,000.00 from Liu Chiu Fang’s dollar account at Metrobank-Escolta Branch.

It was claimed that on February 5, 2003, the branch received a Withdrawal Clearance from the PLRA for Liu Chiu Fang's dollar account.
Respondent Rosales allegedly visited the Escolta Branch that day, informing Branch Head Celia A. Gutierrez of Liu Chiu Fang's intention to withdraw cash.
Gutierrez advised Rosales to return the next day due to insufficient funds.
On February 6, 2003, Rosales purportedly accompanied an impostor of Liu Chiu Fang to the bank, who successfully withdrew US$75,000.00.
Further, on March 3, 2003, respondents opened a dollar account with petitioner, and it was later discovered that the serial numbers of deposited dollars matched those withdrawn by the impostor.

Whether the deposits are in the nature of a loan; thus, petitioner had the obligation to return the deposits to them upon demand. YES
Whether the CA erred in not applying the "Hold Out" clause stipulated in the Application and Agreement for Deposit Account. NO

The "Hold Out" clause does not apply to the instant case.

The "Hold Out" clause applies only if there is a valid and existing obligation arising from any of the sources of obligation enumerated in Article 1157 of the Civil Code, to wit: law, contracts, quasi-contracts, delict, and quasi-delict. In this case, petitioner failed to show that respondents have an obligation to it under any law, contract, quasi-contract, delict, or quasi-delict. And although a criminal case was filed by petitioner against respondent Rosales, this is not enough reason for petitioner to issue a "Hold Out" order as the case is still pending and no final judgment of conviction has been rendered against respondent Rosales. In fact, it is significant to note that at the time petitioner issued the "Hold Out" order, the criminal complaint had not yet been filed. Thus, considering that respondent Rosales is not liable under any of the five sources of obligation, there was no legal basis for petitioner to issue the "Hold Out" order. Accordingly, we agree with the findings of the RTC and the CA that the "Hold Out" clause does not apply in the instant case.

In view of the foregoing, we find that petitioner is guilty of breach of contract when it unjustifiably refused to release respondents’ deposit despite demand. Having breached its contract with respondents, petitioner is liable for damages.

When a person deposits an amount to his bank account, he is, in legal effect, lending money to the bank. The bank deposit must be paid upon demand by the depositor.
Compensation can occur only if the depositor has an existing obligation to the bank that is due and demandable. Legal compensation or compensation based on an agreement, applies only if there is a valid and existing obligation arising f rom any of the sources of obligation enumerated in Article 1167 of the Civil Code, to wit: law, contracts, quasi-contracts, delict, and quasi-delict.
The filing of a criminal case is not enough reason for the bank to issue a "Hold Out" order as the case is still pending and no final judgment of conviction has been rendered against the depositor.

Tan Tiong Tick v. American Apothecaries, 65 Phil 414 (1938)

Facts:

In the Liquidation of the Mercantile Bank of China, Tan Tiong Tick claimed that when the bank ceased to operate on September 19, 1931, he has a balance of:

P9,657.50 in his current account, and
P20,000 plus interest then due amounting to P194.78 in his savings account.

He also owe the bank the amount of P13,262.58, due to trust receipts for withdrawn merchandise against him.
He requested a set-off of these credits and debts, asserting a remaining credit of P16,589.70, which he sought as a preferred credit.
The commissioner appointed by the court recommended that the balance claimed be paid without interest and as an ordinary credit.
The commissioner categorized claims into six groups:

1. Current accounts, savings and fixed deposits
2. Checks or drafts sold by the Mercantile Bank of China and not paid by the correspondents or banks against which they were drawn.
3. Checks or drafts issued by the Mercantile Bank of China in payment or reimbursement of drafts or goods sent to it for collection by banks and foreign commercial houses against merchants or commercial entities of Manila. 4. Drafts for collection received by the Mercantile Bank of China to be collected from merchants and commercial entities in Manila and which were pending collection on the date of the suspension of payments.
5. Claims of depositors who are at the same time debtor of the Mercantile Bank of China.
6.Various claims.

The commissioner stated that Tan Tiong Tick claimed a total amount of P27,597.80 from the bank:
However, the commissioner refused to issue a proof of claim certificate due to pending obligations totaling $6,631.29.

Issue:

Whether the current account and savings deposits are preferred credits in cases involving insolvency and liquidation of the bank. NO
Whether or not the deposits could be offset with the debt of the depositor with the bank. YES
Whether or not the deposits should earn interest from the time the bank ceased to operate. NO

Recommendation:

1. Resolving the claims under the first group the recommendation of this official to the effect that they declared ordinary credits only, and approved them as preferred credits. However, in considering the other claims among them that of that of the appellant, classified under the fifth group, the court approved the recommendation of the commissioner that they be declared ordinary credits; in otherwords, the court considered and declared the claim of the appellant as an ordinary credit just because the latter is at the same time a debtor of the bank, notwithstanding the fact that his claim is of the same kind as those classified under the first group, inasmuch as they are also current account and savings deposits. To this part of the decision is addressed the appellant's first assignment of error.

In truth if the current account, savings, and fixed deposits are preferred credits for the reason states by the court in its decision, we see no reason why the preference should disappear when the depositors are at the same time debtors of the bank less than their credits. If the ground to declare them preferred credits is sound, the balances resulting after the set should likewise be preferred, unless there be a law providing that a set off, when it take place, produces such an effect, a law which does not exist as far as we know.

But we are of the opinion, for the reason presently to be stated, that current account and savings deposits are not preferred credits in the cases, like the present, involving the insolvency and liquidation of a bank, where there are various creditors and it becomes necessary to ascertain the preference of various credits.

In accordance with article 309, the so-called current account and savings deposits have lost the character of deposits properly so-called, and are converted into simple commercial loans, because the bank disposed of the funds deposited by the claimant for its ordinary transactions and for the banking business in which it was engaged.

That the bank had the authority of the claimant to make use of the money deposited on current and savings account is deducible from the fact that the bank has been paying interest on both deposits, and the claimant himself asks that he be allowed interest up to the time when the bank ceased its operations.

We, therefore, conclude that the law applicable to the appellant's claim is the Code of Commerce and that his current and savings account have converted into simple commercial loans.

It appears that even after the enactment of the Insolvency Law there was no law in this jurisdiction governing the order or preference of credits in case of insolvency and liquidation of a bank. The Bank Commissioner shall pay the debts of the company by virtue of an order of the court in the order of their priority, was to enforce the provisions of section 48, 49 and 50 of the Insolvency Law in the sense that they are made applicable to cases of insolvency or bankruptcy and liquidation of banks. No other deduction can be made from the phrase "in the order of their legal priority" employed by the law, for there being no law establishing any priority in the order of payment of credits, the legislature could not reasonably refer to any legislation upon the subject, unless the interpretation above stated is accepted.

Examining now the claims of the appellant, it appears that none of them falls under any of the cases specified by section 48, 49 and 50 of the Insolvency Law; wherefore, we conclude that the appellant's claims, consisting of his current and savings account, are not preferred credits.

Bank Deposits (Art. 1953)

The bank can make use as its own the money deposited. Said amount is not being held in trust for the depositor nor is it being held for safekeeping.

Fulton Iron Works Co. v. China Banking Corporation, G.R. No. 32576, November 6, 1930

In March 1921, Fulton Iron Works, a Delaware corporation, sold machinery for sugar mill to Binalbagan Estate, Inc., a Philippine corporation.
Three promissory notes totaling $80,000 were executed by Binalbagan Estate, Inc., but none were paid since it went under the administration of the Philippine National Bank.
Fulton Iron Works Co. hired a Manila law firm, where Sydney C. Schwarzkopf was a member and was in a visit in United States, to secure the debt.
Schwarzkopf opened a personal account in the China Banking Corporation.
He received a check for P10,000 from the Philippine Sugar Centrals Agency, which he deposited into a new account ("No. 2 account") with the bank. This money was used by Schwarzkopf for personal expenses, with no proof that the bank was aware it belonged to someone else.
In April 1922, Schwarzkopf received a check for P61,237.50, also from the Philippine Sugar Centrals Agency. He deposited this into a new account titled "S. C. Schwarzkopf, Attorney-in-Fact, Fulton Iron Works Co." with the defendant bank.

During the next two months, this account accumulated an additional P130.

The No. 2 account became depleted over time.

The bank manager, aware of funds in Schwarzkopf's third account, extended a credit of P25,000 to cover the overdraft.

By June 1922, the No. 2 account was overdrawn by P22,144.39, nearing the credit limit.

The bank manager intervened, urging Schwarzkopf to settle the overdraft. Schwarzkopf transferred P61,360.81 from his special account as plaintiff's attorney-in-fact to the No. 2 account via check. This transfer cleared the overdraft and left a credit balance of nearly P40,000 in the No. 2 account.

Schwarzkopf then purchased a $15,000 draft on New York, costing him P30,375.02.

This draft was transmitted by mail to the Fulton Iron Works, marking the only remittance Schwarzkopf made to his client.

Schwarzkopf collected a third check from the Philippine National Bank for P104,959.60, payable to him as attorney-in-fact for Fulton Iron Works Co.

Upon receiving the check, Schwarzkopf indorsed it properly and deposited it into his personal account No. 2.

Over the following months, Schwarzkopf withdrew the entire amount from his account No. 2 through self-written checks, thereby misappropriating the funds for personal use.
Fulton Iron Works Co. filed a complaint against China Banking Corporation and S. C. Schwarzkopf for the sum of P131,197.10, with interest, alleging misappropriation of funds deposited in the bank by Schwarzkopf.

The amount is part of a larger sum of money (P176, 197.10) belonging to the plaintiff which had been deposited in the defendant bank by Schwarzkopf and which had been misappropriated and embezzled by him, with the full knowledge and consent of the defendant bank.

Whether the defendant bank is liable to the plaintiff for the sum of P22,144.39 which was thus applied to the payment of Schwarzkopf's personal indebtedness resulting from his overdraft in the No. 2 account. YES

A depositor is presumed to be the owner of funds standing in his name in a bank deposit; and where a bank is not chargeable with notice that the money deposited in such account is the property of some other person than the depositor, the bank is justified in paying out the money to the depositor or upon his order, and cannot be liable to any other person as the true owner. It is hardly necessary to cite authority upon a proposition so manifestly in accord with the usage and the common sense of the commercial community. The proposition stated is implicit in all the cases concerned with the question of the liability of a bank to its depositors and other persons claiming an interest in the deposits.

Upon this point the first thing to be noted is that the very form in which the third account was carried on the books of the defendant bank was sufficient to charge the bank with notice of the fact that the money deposited in said account belonged to the Fulton Iron Works Co. and not to Schwarzkopf. It is commonly said, and truly said in a legal sense, that money has no earmarks. But bank accounts and commercial paper can have earmarks, and these earmarks consist of the word or words which infallibly convey to the mind notice that the money or credit represented by the account with which they are associated or the instrument upon which they are written rightfully belongs to some other person than the one having control thereof. A bank cannot permit, much less require, a depositor who is in control of a trust fund to apply any part of the same to his individual indebtedness to the bank. The decisions to this effect are uniformly accordant and it is believed no creditable authority to the contrary can be produced from any source. The expression "trust fund," in this connection, is not a technical term, and is applied in a loose sense to indicate the situation where a bank account or negotiable securities of any sort are under the control of a person other than the true owner.

Upon the facts before us it is evident that when credit to the extent of P25,000 was conceded to Schwarzkopf in his personal account No. 2, the eye of the banker was fixed upon the large amount then upon deposit to Schwarkopf's credit in his account as attorney-in-fact; but of course, if a bank cannot apply the money in such an account, or even permit it to be applied, to the personal indebtedness of the fiduciary depositor, it is not permissible for the bank to extend personal credit to such depositor upon the faith of the trust account. From any point that the matter be viewed, the liability of the bank is clear to the extent of P22144.39 this being the amount derived from Schwarkopf's account as attorney-in-fact which was absorbed by his overdraft in account No. 2 when the transfer of the balance in the former account to the latter account was effected, in the manner already stated.

It will be noted that the money thus squandered comprised not only the proceeds of the check last mentioned but the residue, consisting of a few thousand pesos, which had been left in No. 2 account after the overdraft had been paid and Schwarzkopf had remitted the draft of $15,000 to his principal in the United States. We consider that, from a legal point of view, the situation with respect to this money is precisely the same as that presented with respect to the money which came into the account later by deposit of the check for P104,959.60 above mentioned, because as to both funds, liability is sought to be fixed upon the bank by reason of its knowledge of the source from which said funds were derived; and in this connection it should be noted that there is no proof showing that the defendant bank had any knowledge of the misappropriation of this money by Schwarzkopf other than such as might have been derived from an inspection of its own books and the checks by which the money was paid in and paid out.

The specialized function of bank is to serve as a place of deposit for money, to keep it safely while on deposit, and to pay it out, upon demand to the person who effected the deposit or upon his order. A bank is not a guardian of trust funds deposited with it in the sense that it must see to their proper application nor is it its business to pry into the uses to which moneys on deposit in its vault are being put; and so long as it serves its function and pays the money out in good faith to the person who deposited it, or upon his order, without knowledge or notice that it is in fact assisting in the misappropriation of the fund, the bank will be protected. As is well said by the author of the monographic article on Banks and Banking in Ruling Case Law, It would seriously interfere with commercial transactions to charge banks with the duty of supervising the administration of trust funds, when, in due course of business, they receive checks and drafts in proper form drawn upon such funds in their custody. The law imposes no such duty upon them

Bank Deposits (Art. 1953)

Third persons who may have a right to the money deposited cannot hold the bank responsible unless there is a court order or garnishment. The duty of the bank is to its creditor-depositor and not to third persons

Guingona v. City Fiscal of Manila, 128 SCRA 577 (1984)

On December 23, 1981, private respondent Clement David filed a case in the Office of the City Fiscal of Manila charging petitioners Teofisto Guingona, Jr., Antonio Martin, Teresita Santos and others with estafa and violation of Central Bank regulations on foreign exchange transactions.

From 1979 to 1981, David invested with Nation Savings and Loan Association (NSLA):
David was allegedly induced into these investments by Robert Marshall, an Australian associate of NSLA President Guingona Jr., Executive Vice-President Martin, and General Manager Santos.
On March 21, 1981, NSLA was placed under receivership by the Central Bank prompting David to file claims for his and his sister's investments.
On July 22, 1981, a report from the Central Bank revealed that only P305,821.92 of David's investments were recorded by NSLA.
Despite demands, petitioner Guingona Jr. only paid P200,000.00, leaving a balance of P959,078.14 and US$75,000.00 allegedly misappropriated.

Issue:

Whether the production of the Promisory Notes, Banker's Acceptance, Certificates of Time Deposits and Savings Account allegedly showed that the transactions between David and NSLA were simple loans, i.e., civil obligations on the part of NSLA which were novated when Guingona, Jr. and Martin assumed them. YES
Whether the public respondents acted without jurisdiction when they investigated the charges. YES

Held:

There is merit in the contention of the petitioners that their liability is civil in nature and therefore, public respondents have no jurisdiction over the charge of estafa.

Moreover, the records reveal that when the aforesaid bank was placed under receivership on March 21, 1981, petitioners Guingona and Martin, upon the request of private respondent David, assumed the obligation of the bank to private respondent David by executing on June 17, 1981 a joint promissory note in favor of private respondent acknowledging an indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of account as of June 30, 1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness assumed appears to be bigger than the original claim because of the added interest and the inclusion of other deposits of private respondent's sister in the amount of P116,613.20.

Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said indebtedness, and petitioner Guingona executed another promissory note antedated to June 17, 1981 whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne with the Nation Savings and Loan Association.

Furthermore, the various pleadings and documents filed by private respondent David, before this Court indisputably show that he has indeed invested his money on time and savings deposits with the Nation Savings and Loan Association.

It must be pointed out that when private respondent David invested his money on nine. and savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that:

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

In the case of Central Bank of the Philippines vs. Morfe 63 SCRA 114,119 [1975], We said:

It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are hat true deposits. are considered simple loans and, as such, are not preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)."

This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 102 [1980]) that:

Bank deposits are in the nature of irregular deposits. They are really 'loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans to a bank because it can use the same. The petitioner here in making time deposits that earn interests will respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from a depositary's failure to return the subject matter of the deposit (Emphasis supplied).

Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public respondents have no jurisdiction.

But even granting that the failure of the bank to pay the time and savings deposits of private respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to private respondent David, thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original trust relation between the bank and private respondent David into an ordinary debtor-creditor relation between the petitioners and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as a debtor.

Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal information in court.

In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long before the filing of the criminal complaint with the Office of the City Fiscal.

Bank Deposits (Art. 1953)

The officers of the bank cannot be held liable for estafa if they authorized the use of the money deposited by the depositor. There would be no liability for estafa under Article 315(l)(b) of the Revised Penal Code even if the bank failed to return the amount deposited.

People of the Philippines v. Puig, G.R. No. 173654-765, August 28, 2008

On November 7, 2005, the Iloilo Provincial Prosecutor’s Office filed 112 cases of Qualified Theft against respondents Teresita Puig and Romeo Porras who were the Cashier and Bookkeeper of private complainant Rural Bank of Pototan, Inc.
It was alleged that in 2002, the respondents stole P15,000.00 from the bank.

Whether the Informations sufficiently allege all the elements of the crime of qualified theft, citing that a perusal of the Informations will show that they specifically allege that the respondents were the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., respectively, and that they took various amounts of money with grave abuse of confidence, and without the knowledge and consent of the bank, to the damage and prejudice of the bank. YES

The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the Informations and, therefore, because of this defect, there is no basis for the existence of probable cause which will justify the issuance of the warrant of arrest. Petitioner assails the dismissal contending that the Informations for Qualified Theft sufficiently state facts which constitute (a) the qualifying circumstance of grave abuse of confidence; and (b) the element of taking, with intent to gain and without the consent of the owner, which is the Bank.

To fall under the crime of Qualified Theft, the following elements must concur:

1. Taking of personal property;

2. That the said property belongs to another;

3. That the said taking be done with intent to gain;

4. That it be done without the owner’s consent;

5. That it be accomplished without the use of violence or intimidation against persons, nor of force upon things;

6. That it be done with grave abuse of confidence.

On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter alia, that the information must state the acts or omissions complained of as constitutive of the offense.

It is evident that the Information need not use the exact language of the statute in alleging the acts or omissions complained of as constituting the offense. The test is whether it enables a person of common understanding to know the charge against him, and the court to render judgment properly.

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into possession of the monies deposited therein enjoy the confidence reposed in them by their employer.

Banks, on the other hand, where monies are deposited, are considered the owners thereof.

This is very clear not only from the express provisions of the law, but from established jurisprudence. The relationship between banks and depositors has been held to be that of creditor and debtor.

The Court has consistently considered the allegations in the Information that such employees acted with grave abuse of confidence, to the damage and prejudice of the Bank, without particularly referring to it as owner of the money deposits, as sufficient to make out a case of Qualified Theft. Conspicuously, in all of the foregoing cases, where the Informations merely alleged the positions of the respondents; that the crime was committed with grave abuse of confidence, with intent to gain and without the knowledge and consent of the Bank, without necessarily stating the phrase being assiduously insisted upon by respondents, "of a relation by reason of dependence, guardianship or vigilance, between the respondents and the offended party that has created a high degree of confidence between them, which respondents abused," and without employing the word "owner" in lieu of the "Bank" were considered to have satisfied the test of sufficiency of allegations.

As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in this case, there is even no reason to quibble on the allegation in the Informations that they acted with grave abuse of confidence. In fact, the Information which alleged grave abuse of confidence by accused herein is even more precise, as this is exactly the requirement of the law in qualifying the crime of Theft.

In summary, the Bank acquires ownership of the money deposited by its clients; and the employees of the Bank, who are entrusted with the possession of money of the Bank due to the confidence reposed in them, occupy positions of confidence. The Informations, therefore, sufficiently allege all the essential elements constituting the crime of Qualified Theft.

The money that is deposited is not held in trust by the bank. If a teller, cashier, bookkeeper or any other bank employee takes the amount deposited, the appropriate crime is qualified theft.

Gullas v. Philippine National Bank, 62 SCRA 519

Paulino Gullas is a member of the Philippine Bar residing in Cebu.
On August 2, 1933, the Treasurer of the United States for the United States Veterans Bureau issued a Warrant in the amount of $361 or P722, payable to the order of Francisco Sabectoria Bacos.
Paulino Gullas and Pedro Lopez signed as endorsers of this check.
It was cashed by the Philippine National Bank.
Subsequently the treasury warrant was dishonored by the Insular Treasurer.
At that time, the outstanding balance of Attorney Gullas on the books of the bank was P509.
On August 20, 1933, Gullas left for Manila. The bank, upon learning of the dishonor, sent notices to Gullas, who was in Manila at the time.
On August 21, 1933, the bank informed Gullas and Lopez of the dishonor and stated that they had applied the outstanding balance of Gullas's account to partially cover the dishonored Treasury Warrant.
On August 31, 1933, Gullas returned to Cebu and immediately paid the unpaid balance of the Treasury Warrant.

Whether the Philippine National Bank has the right to apply a deposit to the debt of depositor to the bank. YES

The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles 1195 et seq., 1758 et seq. The portions of Philippine law provide that compensation shall take place when two persons are reciprocally creditor and debtor of each other (Civil Code, article 1195). In his connection, it has been held that the relation existing between a depositor and a bank is that of creditor and debtor. (

The Negotiable Instruments Law contains provisions establishing the liability of a general indorser and giving the procedure for a notice of dishonor. The general indorser of negotiable instrument engages that if he be dishonored and the, necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder. (Negotiable Instruments Law, sec. 66.)

In this connection, it has been held a long line of authorities that notice of dishonor is in order to charge all indorser and that the right of action against him does not accrue until the notice is given.

As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor.

Starting, therefore, from the premise that the Philippine National Bank had with respect to the deposit of Gullas a right of set off, we next consider if that remedy was enforced properly. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting for any action by Gullas, the bank made use of the money standing in his account to make good for the treasury warrant. At this point recall that Gullas was merely an indorser and had issued in good faith.

We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to follow up that statement with others proving exact damages is not so easy. For instance, for alleged libelous articles the bank would not be primarily liable. The same remark could be made relative to the loss of business which Gullas claims but which could not be traced definitely to this occurrence. Also Gullas having eventually been reimbursed lost little through the actual levy by the bank on his funds. On the other hand, it was not agreeable for one to draw checks in all good faith, then, leave for Manila, and on return find that those checks had not been cashed because of the action taken by the bank. That caused a disturbance in Gullas' finances, especially with reference to his insurance, which was injurious to him. All facts and circumstances considered, we are of the opinion that Gullas should be awarded nominal damages because of the premature action of the bank against which Gullas had no means of protection, and have finally determined that the amount should be P250.

The bank has the right to legal compensation. It can set off the deposits with the indebtedness/loans of the depositor that are due and demandable.

Interest
Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel SS Eastern Comet owned by Eastern Shipping Lines.
The shipment was insured under Mercantile Insurance Company for P36,382,466.38.
On December 12, 1981, the shipment arrived in Manila and it was discharged unto the custody Metro Port Service, Inc. It excepted to one drum, said to be in bad order, which damage was unknown to plaintiff.
On January 7, 1982, Allied Brokerage Corporation received the shipment from Metro Port Service, Inc., one drum opened and without seal.
On January 8 and 14, 1982, Allied Brokerage Corporation made deliveries of the shipment to the consignee's warehouse.

The latter excepted to one drum which contained spillages, while the rest of the contents was adulterated/fake.

Mercantile Insurance Company contended that due to the losses/damage sustained by said drum, the consignee suffered losses totaling P19,032.95, due to the fault and negligence of Eastern Shipping Lines, Metro Port Service, Inc. and Allied Brokerage Corporation and, who failed and refused to pay the same.
As a consequence of the losses sustained, Mercantile Insurance Company was compelled to pay the consignee P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against Eastern Shipping Lines, Metro Port Service, Inc. and Allied Brokerage Corporation.

Trial Court: Ordered to pay the amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the date of filing of this complaints, until fully paid.

Whether the CA erred when it held that the grant of interest on the claim of private respondent should commence from the date of the filing of the complaint at the rate of twelve percent per annum instead of from the date of the decision of the trial court and only at the rate of six percent per annum, the claim being indisputably unliquidated.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money,:

The interest due should be that which may have been stipulated in writing.
The interest due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached:

The interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty.
Where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
When such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained).

The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

Nacar v. Gallery Frames, Inc., G.R. No. 189871, August 13, 2013

Dario Nacar filed a complaint for constructive dismissal before the NLRC against Gallery Frames (GF) and/or Felipe Bordey, Jr.

Labor Arbiter: Found that he was dismissed from employment without a valid or just cause.

Considering the strained relationship between the parties, Nacar was awarded backwages and separation pay in lieu of reinstatement in the amount of ₱158,919.92:
Order:

To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six pesos and 56/100 (₱62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred thirty-three and 36/100 (₱95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.

Issue:

Whether the CA erred in upholding the questioned resolutions of the NLRC which, in turn, sustained the order of Labor Arbiter Magat making the dispositive portion of the October 15, 1998 decision of Labor Arbiter Lustria subservient to an opinion expressed in the body of the same decision.

Argument:

Petitioner argues that backwages computation is not final until reinstatement or until decision's finality.

Petitioner contends that decision only became final on May 27, 2002, not on October 15, 1998.
Petitioner asserts entitlement to interest from decision's finality until full payment.
Respondents argue no recomputation needed as decision clearly stated backwages only till its promulgation.

Held:

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved the amendment of Section 234 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799,35 Series of 2013, effective July 1, 2013, the pertinent portion of which reads:

The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905, Series of 1982:

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.

Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and Sections 4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial Institutions are hereby amended accordingly.

This Circular shall take effect on 1 July 2013.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum - as reflected in the case of Eastern Shipping Lines40 and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799 - but will now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest when applicable.

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

Respondents are Ordered to Pay petitioner:

(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became final and executory;

(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per year of service; and

(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.

Formula: TOTAL AMOUNT DUE = [principal - partial payments made] + [interest + interest on interest], where

; Interest = remaining balance x 6% per annum x number of years from due date (Date when demand was made) until full satisfaction/ payment
; Interest on interest = interest computed as of the filing of the complaint x 6% x number of years until full satisfaction/payment

PCI Leasing and Finance, Inc. v. Trojan Metal Industries Incorporated, et al., G.R. No. 1763281, December 15, 2010

In 1997, Trojan Metal Industries, Inc. (TMI) sought a loan from PCI Leasing and Finance, Inc. (PCILF)
Instead of extending a loan, PCILF bought various equipment TMI owned, including hydraulic presses, power presses, a lathe machine, a vertical milling machine, and a radial drill from TMI for ₱2,865,070.00.
PCILF and TMI then entered into a lease agreement, with TMI leasing back the equipment it previously sold to PCILF, agreeing to pay monthly rentals and providing a guaranty deposit of P1,030,350.00.
Pursuant to the lease agreement, TMI issued postdated checks representing 24 monthly installments.
Spouses Walfrido and Elizabeth Dizon, TMI's President and Vice-President, executed a Continuing Guaranty of Lease Obligations to guarantee TMI's obligations under the lease agreement.
TMI later used the leased equipment as temporary collateral for an additional loan without PCILF's consent, which PCILF considered a violation of the lease agreement. At this time, TMI’s partial payments had reached P1,717,091.00.
On December 8, 1998, PCILF sent TMI a demand letter for the outstanding obligation which remained unpaid.
PCILF filed a complaint against TMI, the Dizon spouses, and John Doe for recovery of sum of money and personal property with prayer for the issuance of a writ of replevin.

RTC-Quezon City: Issued a writ of replevin directing the sheriff to take custody of the leased equipment, which PCILF sold to a third party for ₱1,025,000.00.

In their answer, respondents claimed the sale with lease agreement was a simulated financial lease, where the property of the debtor would be sold to the creditor to be repaid through rentals; at the end of the lease period, the property sold would revert back to the debtor.
They sought to reform the lease agreement to reflect the true agreement, which they argued was a loan secured by a chattel mortgage.

Thus, in a true financial leasing, whether under RA 5980 or RA 8556, a finance company purchases on behalf of a cash-strapped lessee the equipment the latter wants to buy but, due to financial limitations, is incapable of doing so. The finance company then leases the equipment to the lessee in exchange for the latter’s periodic payment of a fixed amount of rental.

In this case, however, TMI already owned the subject equipment before it transacted with PCILF. Therefore, the transaction between the parties in this case cannot be deemed to be in the nature of a financial leasing as defined by law.

In the present case, since the transaction between PCILF and TMI involved equipment already owned by TMI, it cannot be considered as one of financial leasing, as defined by law, but simply a loan secured by the various equipment owned by TMI.

Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a written contract and for reformation of an instrument is ten years. The right of action for reformation accrued from the date of execution of the lease agreement on 8 April 1997. TMI timely exercised its right of action when it filed an answer on 14 February 2000 asking for the reformation of the lease agreement.

Hence, had the true transaction between the parties been expressed in a proper instrument, it would have been a simple loan secured by a chattel mortgage, instead of a simulated financial leasing. Thus, upon TMI’s default, PCILF was entitled to seize the mortgaged equipment, not as owner but as creditor-mortgagee for the purpose of foreclosing the chattel mortgage. PCILF’s sale to a third party of the mortgaged equipment and collection of the proceeds of the sale can be deemed in the exercise of its right to foreclose the chattel mortgage as creditor-mortgagee.

The Court of Appeals correctly ruled that the transaction between the parties was simply a loan secured by a chattel mortgage. However, in reckoning the amount of the principal obligation, the Court of Appeals should have taken into account the proceeds of the sale to PCILF less the guaranty deposit paid by TMI. After deducting payments made by TMI to PCILF, the balance plus applicable interest should then be applied against the aggregate cash already in PCILF’s hands.

Records show that PCILF paid TMI ₱2,865,070.00 as consideration for acquiring the mortgaged equipment.

In turn, TMI gave PCILF a guaranty deposit of ₱1,030,350.00.

Thus, the amount of the principal loan was ₱1,834,720.00, which was the net amount actually received by TMI (proceeds of the sale of the equipment to PCILF minus the guaranty deposit). Against the principal loan of ₱1,834,720.00 plus the applicable interest should be deducted loan payments, totaling ₱1,717,091.00.

Since PCILF sold the mortgaged equipment to a third party for ₱1,025,000.00, the proceeds of the said sale should be applied to offset the remaining balance on the principal loan plus applicable interest.

Computation:

Obligation = 2,865,070.00 - 1,030,350.00 = 1,834,720.00
Deduction of Payments = 1,834,720.00 - 1,717,091.00

However, the exact date of the sale of the mortgaged equipment, which is needed to compute the interest on the remaining balance of the principal loan, cannot be gleaned from the facts on record. We thus remand the case to the RTC for the computation of the total amount due from the date of demand on 8 December 1998 until the date of sale of the mortgaged equipment to a third party, which amount due shall be offset against the proceeds of the sale.

In the absence of stipulation, the applicable interest due on the remaining balance of the loan is the legal rate of 12% per annum, computed from the date PCILF sent a demand letter to TMI on 8 December 1998. No interest can be charged prior to this date because TMI was not yet in default prior to 8 December 1998. The interest due shall also earn legal interest from the time it is judicially demanded, pursuant to Article 2212 of the Civil Code, which provides:

Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.

The foregoing provision has been incorporated in the comprehensive summary of existing rules on the computation of legal interest laid down by the Court in Eastern Shipping Lines, Inc. v. Court of Appeals, to wit:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money,:

The interest due should be that which may have been stipulated in writing.
The interest due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached:

The interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty.
Where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
When such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained).

The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

Applying the rules in the computation of interest, the remaining balance of the principal loan subject of the chattel mortgage must earn the legal interest of 12% per annum, which interest, as long as unpaid, also earns legal interest of 12% per annum, computed from the filing of the complaint on 7 May 1999.

In accordance with the rules laid down in Eastern Shipping Lines, Inc. v. Court of Appeals, we derive the following formula for the RTC’s guidance:

TOTAL AMOUNT DUE = [principal – partial payments made] + [interest + interest on interest], where

Interest = remaining balance x 12% per annum x no. of years from due date (8 December 1998 when demand was made) until date of sale to a third party

Interest on interest = interest computed as of the filing of the complaint on 7 May 1999 x 12% x no. of years until date of sale to a third party

From the computed total amount should be deducted ₱1,025,000.00 representing the proceeds of the sale already in PCILF’s hands. The difference represents overpayment by TMI, which the law requires PCILF to refund to TMI.

TMI’s right to the refund accrued from the time PCILF received the proceeds of the sale of the mortgaged equipment. However, since TMI never made a counterclaim or demand for refund due on the resulting overpayment after offsetting the proceeds of the sale against the remaining balance on the principal loan plus applicable interest, no interest applies on the amount of refund due. Nonetheless, in accord with prevailing jurisprudence, the excess amount PCILF must refund to TMI is subject to interest at 12% per annum from finality of this Decision until fully paid.

Sps. Mallari v. Prudential Bank, G.R. No. 197861, June 5, 2013

On December 11, 1984, Florentino T. Mallari obtained a loan of ₱300,000.00 from Prudential Bank-Tarlac Branch, evidenced by Promissory Note.
Under the promissory note, the loan was subject to:

interest rate of 21% per annum,
attorney’s fees equivalent to 15% of the total amount due but not less than P200.00
in case of default, a penalty and collection charges of 12% p.a. of the total amount due.

The loan had a maturity date of January 10, 1985, but was renewed up to February 17, 1985.
Mallari executed a Deed of Assignment, authorizing the bank to pay his loan with his time deposit of ₱300,000.00.
On December 22, 1989, Florentino and Aurea Mallari obtained another loan of ₱1.7 million from the same bank, evidenced by a Promissory Note and with a maturity date of March 22, 1990.
They stipulated that the loan will bear:

23% interest p.a.
attorney’s fees equivalent to 15% p.a. of the total amount due, but not less than P200.00
penalty and collection charges of 12% p.a.

Petitioners executed a Deed of Real Estate Mortgage in favor of respondent bank for the loan.
Petitioners failed to settle their loan obligations.
The bank sent demand letters when Sps. Mallari failed to settle their obligations, which when computed up to January 31, 1992, amounted to P571,218.54 and P2,991,294.82.
The bank filed a petition for the extrajudicial foreclosure of petitioners’ mortgaged property for the satisfaction of the latter’s obligation of P1,700,000.00 secured by such mortgage.
Sps. Mallari by filed a complaint for annulment of mortgage, deeds, injunction, preliminary injunction, temporary restraining order and damages claiming that:

the ₱300,000.00 loan obligation should have been considered paid, because the time deposit with the same amount had already been assigned to respondent bank;
respondent bank still added the ₱300,000.00 loan to the ₱1.7 million loan obligation for purposes of applying the proceeds of the auction sale; and
they realized that there were onerous terms and conditions imposed by respondent bank when it tried to unilaterally increase the charges and interest over and above those stipulated. Petitioners asked the court to restrain respondent bank from proceeding with the scheduled foreclosure sale.

RTC allowed the extrajudicial foreclosure and a Certificate of Sale was issued to respondent bank being the highest bidder in the amount of ₱3,500,000.00.

Whether the 23% p.a. interest rate and the 12% p.a. penalty charge on petitioners' ₱1,700,000.00 loan to which they agreed upon is excessive or unconscionable under the circumstances. NO

Held:

Parties are free to enter into agreements and stipulate as to the terms and conditions of their contract, but such freedom is not absolute. As Article 1306 of the Civil Code provides, "The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy."

Hence, if the stipulations in the contract are valid, the parties thereto are bound to comply with them, since such contract is the law between the parties. In this case, petitioners and respondent bank agreed upon on a 23% p.a. interest rate on the ₱1.7 million loan.

We said that we need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, unconscionable and exorbitant, hence, the stipulation was void for being contrary to morals.

In this case, the interest rate agreed upon by the parties was only 23% p.a., or less than 2% per month, which are much lower than those interest rates agreed upon by the parties in the above-mentioned cases. Thus, there is no similarity of factual milieu for the application of those cases.We do not consider the interest rate of 23% p.a. agreed upon by petitioners and respondent bank to be unconscionable.

Here, petitioners defaulted in the payment of their loan obligation with respondent bank and their contract provided for the payment of 12% p.a. penalty charge, and since there was no showing that petitioners' failure to perform their obligation was due to force majeure or to respondent bank's acts, petitioners cannot now back out on their obligation to pay the penalty charge. A contract is the law between the parties and they are bound by the stipulations therein.

Rey v. Anson, G.R. No. 211206, November 7, 2018

Rosemarie Q. Rey, President of Southern Luzon Technological College Foundation Incorporated, needed a quick infusion of cash for the said school. She approached Ben Del Castillo, who introduced her to his acquaintance, Cesar Anson.
On August 23, 2002, Rey borrowed P200,000.00 from Anson, payable in one year with 7.5% interest per month or P15,000.00 monthly interest, which would be paid bi-monthly by way of postdated checks.
The loan was secured by a real estate mortgage.
In the event of default, the Spouses Rey would pay a penalty charge of 10% of the total amount, plus 12% attorney’s fees.
Rey issued 24 postdated checks for P7,500.00 each, as well as another postdated check for the principal amount of P200,000.00.
Three days later, Rey borrowed P350,000.00 from Anson, payable in four months with 7% interest per month, secured by another real estate mortgage over a parcel of land registered in the name of Rosemarie Rey’s mother, Isabel B. Quinto.
Rey paid interest on the first loan for twelve months but could not pay the principal on due date. She appealed to Anson not to foreclose the mortgage or to impose the stipulated penalty charges, but instead to extend the terms thereof.

Anson agreed and Rey later signed a promissory note and executed a Deed of Real Estate Mortgage, stating that the principal obligation of P200,000.00 shall be payable in four (4) months from the execution of the Deed of Real Estate Mortgage, and it shall be subject to interest of 7.5% per month.
Rey once again issued postdated checks to cover the interest payments on the amended first loan, but thereafter failed to pay the principal amount of P200,000.00.

For the second loan, Rey also failed to meet monthly interest payments and was unable to pay the principal amount thereof when it became due. Rey appealed to Anson not to foreclose the mortgage or to impose the penalty charges, but instead to extend the terms thereof.

Anson agreed, and the parties executed anew a Deed of Real Estate Mortgage acknowledging her indebtedness to Anson in the amount of P611,340.00, payable within four months from the execution of the Deed of Real Estate Mortgage, and subject to 7% interest per month.
Rey again failed to fulfill her obligation on the second loan and was extended once more in a Deed of Real Estate Mortgage acknowledging her indebtedness in the amount of P761,450.00, payable within six months from the execution of the Deed of Real Estate Mortgage, and subject to the same 7% interest per month.

Rey obtained two additional loans of P100,000.00 each, with verbal agreements for monthly interest rates of 3% and 4%, respectively.
On February 25, 2005, Anson demanded full payment of all loans totaling P2,214,587.50.
Instead of paying her loan obligations, Rey sent Anson a letter stating that the interest rates imposed on the four loans were irregular, if not contrary to law.
Rey filed a complaint against Anson for Recomputation of Loans and Recovery of Excess Payments and Cancellation of Real Estate Mortgages and Checks.

They prayed for the recomputation of all four loans reflecting the reduction of the interest rates of the first and second loans to 12% per annum and the disallowance of interest on the third and fourth loans; and the return of overpayment amounting to P269,700.68;

Answer of Anson:

With the suspension of the Usury Law, parties can freely stipulate on the imposable rates of interest that shall accrue on a loan.
The Spouses Rey freely agreed with him and even proposed the rate of interest to be imposed on Loan 1 and Loan 2.
As the Spouses Rey have benefited from the proceeds of the loan, they cannot now be allowed to raise the alleged illegality of the interest rates imposed on the loans.

RTC-Legazpi: Granted the Spouses Rey’s complaint for recomputation of the loans.

In regard to the third and fourth loans, the RTC held that since the said loans were not in writing, they could not legally earn interest.
The stipulated interest rates at 90% per annum and 84% per annum for the first and second loans, respectively, were void.

CA: Reversed and set aside the Decision of the RTC.

When Rosemarie Rey entered into the two loan transactions with Cesar Anson, she was fully aware of the imposable interests thereon, as it was the latter who proposed the interest rates of 7.5% and 7% per month.
After years of benefiting from the proceeds of the loans, she cannot now be allowed to renege on her obligation to comply with what is incumbent upon her under the loan agreement.

Issue:

Whether the interest rates on the first and second loans are unconscionable and contrary to morals. YES
Whether the computation of payment of interest and the principal amount is correct in Loan 1 and Loan 2. NO
Whether interest is imposable on the excess payments. NO
Whether or not petitioner is entitled to the award of attorney's fees. NO

Held:

I. Petitioner contends that the Decision of the Court of Appeals insofar as it declared that the stipulated 7.5% and 7% monthly interest rates imposed on Loan 1 and Loan 2, respectively, are valid must be reversed and set aside, as it is contrary to the jurisprudential pronouncements of this Court that stipulated interest rates of 3% per month or higher are unconscionable and contrary to morals.

The Court agrees with petitioner.

The freedom of contract is not absolute. Article 1306 of the Civil Code provides that "[t]he contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy."

In Sps. Albos v. Sps. Embisan, et al. the Court held:

As case law instructs, the imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals.

Summarizing the jurisprudential trend towards this direction is the recent case of Castro v. Tan in which We held:

While we agree with petitioners that parties to a loan agreement have wide latitude to stipulate on any interest rate in view of the Central Bank Circular No. 905 s. 1982 which suspended the Usury Law ceiling on interest effective January 1, 1983, it is also worth stressing that interest rates whenever unconscionable may still be declared illegal. There is certainly nothing in said circular which grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.

In several cases, we have ruled that stipulations authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law. In Medel v. Court of Appeals, we annulled a stipulated 5.5% per month or 66% per annum interest on a P500,000.00 loan and a 6% per month or 72% per annum interest on a P60,000.00 loan, respectively, for being excessive, iniquitous, unconscionable and exorbitant. In Ruiz v. Court of Appeals, we declared a 3% monthly interest imposed on four separate loans to be excessive. In both cases, the interest rates were reduced to 12% per annum.

In this case, the 5% monthly interest rate, or 60% per annum, compounded monthly, stipulated in the Kasulatan is even higher than the 3% monthly interest rate imposed in the Ruiz case. Thus, we similarly hold the 5% monthly interest to be excessive, iniquitous, unconscionable and exorbitant, contrary to morals, and the law. It is therefore void ab initio for being violative of Article 1306 of the Civil Code. With this, and in accord with the Medel and Ruiz cases, we hold that the Court of Appeals correctly imposed the legal interest of 12% per annum in place of the excessive interest stipulated in the Kasulatan.

In the case before us, even if Rosemarie Rey initially suggested the interest rate on the first loan, voluntariness does not make the stipulation on an interest, which is iniquitous, valid. As Rosemarie Rey later realized through the counsel of her lawyer that the interest rates of the first and second loans were excessive and no interest should be imposed on the third and fourth loans, she came to court for recomputation of the loans and recovery of excess payments.

In this case, the first loan had a 7.5% monthly interest rate or 90% interest per annum, while the second loan had a 7% monthly interest rate or 84% interest per annum, which rates are very much higher than the 3% monthly interest rate imposed in Ruiz v. Court of Appeals and the 5% monthly interest rate imposed in Sps. Albos v. Sps. Embisan, et al.

Based on the ruling of the Spouses Albos case, the Court holds that the interest rates of 7.5% and 7% are excessive, unconscionable, iniquitous, and contrary to law and morals; and, therefore, void ab initio. Hence, the Court of Appeals erred in sustaining the imposition of the said interest rates, while the RTC correctly imposed the legal interest of 12% per annum in place of the said interest rates.

Anent the third and fourth loans both in the amount of P100,000.00, the Court of Appeals correctly held that as the agreement of 3% monthly interest on the third loan and 4% monthly interest on the fourth loan was merely verbal and not put in writing. no interest was due on the third and fourth loans. This is in accordance with Article 1956 of the Civil Code which provides that "[n]o interest shall be due unless it has been stipulated in writing."

Hence, the payments made as of March 18, 2005 in the third loan amounting to P141,360.0035 resulted in the overpayment of P41,360.00. Moreover, the payments made as of February 2, 2005 in the fourth loan amounting to P117,960.0036 resulted in an overpayment of P17,960.00. Consequently, as found by the Court of Appeals, there was a total overpayment of P59,320.00 for the third and fourth loans.

II. The Court agrees with petitioner that Articles 1253 and 2154 of the Civil Code apply to this case, and Cesar Anson is obliged to return to petitioner excess payments received by him.

Article 1253 of the Civil Code states that "[i]f the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered." The Court reviewed the computation above made by petitioner for Loan 1 and Loan 2, and found the computation to be correct.

The Court finds that in Loan 1, petitioner already paid in full the principal amount of P200,000.00 and monthly interest thereon on November 8, 2003, leaving an excess payment of P1,759.64.

Further payments made by petitioner from November 23, 2003 to August 23, 2004 resulted in overpayment amounting to P144,259.64.

The excess payment of P9,259.64 as of November 23, 2003 plus excess payments made from December 23, 2003 to April 23, 2004 amounting to P84,259.64 in Loan 1 may be applied to Loan 2, leaving a final excess payment of P60,000.00 for Loan 1.

As regards Loan 2, petitioner fully paid the principal amount of P350,000.00 and monthly interest thereon on May 26, 2004, leaving an excess payment of P31,856.68.

Payments made thereafter, from June 26, 2004 to September 26, 2004, resulted in excess payments amounting to P150,380.68 for Loan 2.

Petitioner also made excess payments of P41,360.00 in Loan 3, and P17,960.00 in Loan 4.

Hence, the total excess payments made by petitioner in the four loans amounted to P269,700.68.

Since Cesar Anson received a total overpayment of P269,700.68 from petitioner, he is obliged to return the amount in accordance with the principle of solutio indebiti under Article 2154 of the Civil Code, to wit:

Article 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.

However, in regard to payment of interest on the overpayment made by petitioner, the Court notes its ruling in Sps. Abella v. Sps. Abella, thus:

As respondents made an overpayment, the principle of solutio indebiti as provided by Article 2154 of the Civil Code applies. xxx

x x x x

In Moreno-Lentfer v. Wolff, this court explained the application of solutio indebiti:

The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the expense of another. It applies where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment, and (2) the payment is made through mistake, and not through liberality or some other cause.

As respondents had already fully paid the principal and all conventional interest that had accrued, they were no longer obliged to make further payments. Any further payment they made was only because of a mistaken impression that they were still due. Accordingly, petitioners are now bound by a quasi-contractual obligation to return any and all excess payments delivered by respondents.

Nacar provides that "[w]hen an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum." This applies to obligations arising from quasi-contracts such as solutio indebiti.

Further, Article 2159 of the Civil Code provides:

Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is involved, or shall be liable for fruits received or which should have been received if the thing produces fruits.

He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for damages to the person who delivered the thing, until it is recovered.

Consistent however, with our finding that the excess payment made by respondents were borne out of a mere mistake that it was due, we find it in the better interest of equity to no longer hold petitioners liable for interest arising from their quasi-contractual obligation.

In this case, the excess payments made by petitioner were also borne out of a mistake that they were due; hence, following the ruling in Sps. Abella v. Sps. Abella, the Court deems it in the better interest of equity not to hold Cesar Anson liable for interest on the excess payments.

Nevertheless, an interest at the rate of 6% per annum is imposable on the total judgment award pursuant to Nacar v. Gallery Frames, et al., which held that "[w]hen the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest x x x shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit."

III.

Petitioner contends that the Court of Appeals and the RTC erred in not awarding attorney's fees and litigation expenses in her favor.

Petitioner's contention is without merit.

It is a settled rule that attorney's fees and litigation expenses cannot be automatically recovered as part of damages in light of the policy that the right to litigate should bear no premium. Attorney's fees are awarded only in those cases enumerated in Article 2208 of the Civil Code. Considering the absence of facts that justify the award of attorney's fees to herein petitioner, the Court of Appeals was correct in not awarding attorney's fees and litigation expenses to petitioner.

WHEREFORE, the Decision of the Court of Appeals dated September 6, 2013 and its Resolution dated January 10, 2014 in CA-G.R. CV No. 95012 are REVERSED AND SET ASIDE, and the Decision of the Regional Trial Court of Legazpi City, Branch 5 in Civil Case No. 10489 is REINSTATED with the following MODIFICATION: respondent Cesar G. Anson is ordered to pay petitioner Rosemary Q. Rey the amount of Two Hundred Sixty-Nine Thousand Seven Hundred Pesos and Sixty-Eight Centavos (P269,700.68), with legal interest at the rate of 6% per annum reckoned from the finality of this Decision until full payment.

Forbearance

Estores v. Sps. Supangan, G.R. No. 175139, April 18, 2012

In 1993, Hermojina Estores and Sps. Arturo and Laura Supangan entered into a Conditional Deed of Sale for a parcel of land in Cavite.
After almost seven years and despite Sps. Supangan's payment of ₱3.5 million, Estores failed to comply with several obligations stated in the contract,
On September 27, 2000, Supangan demanded the return of ₱3.5 million within 15 days, which Estores promised to return within 120 days with a proposed 12% annual interest.
When Estores failed to return the amount, Sps. Supangan filed a Complaint for sum of money against Estores and Roberto U. Arias who acted as agent.

In the Complaint, Supangan sought the return of the principal amount with 12% compounded annual interest from October 1, 1993, along with damages and attorney’s fees.

In their Answer with Counterclaim, Estores and Arias, agreed to return the principal amount but opposed the imposition of interest since the Conditional Deed of Sale provided only for the return of the downpayment in case of breach, they cannot be held liable to pay legal interest.

RTC-Malabon: Respondent-spouses entitled to interest but only at the rate of 6% per annum and not 12% as prayed by them. They are also entitled to attorney’s fees as they were compelled to litigate to protect their interest.

CA: Modified the Decision of the RTC.

The rate of interest shall be six percent (6%) per annum, computed from September 27, 2000 until its full payment before finality of the judgment.
If the adjudged principal and the interest (or any part thereof) remain[s] unpaid thereafter, the interest rate shall be adjusted to twelve percent (12%) per annum, computed from the time the judgment becomes final and executory until it is fully satisfied.
The award of attorney’s fees is hereby reduced to ₱100,000.00. Costs against the petitioner.

Issue:

Whether the imposition of interest and attorney’s fees is proper. YES

Respondent-spouses’ Arguments:

Respondent-spouses aver that it is only fair that interest be imposed on the amount they paid considering that petitioner failed to return the amount upon demand and had been using the ₱3.5 million for her benefit. Moreover, it is undisputed that petitioner failed to perform her obligations to relocate the house outside the perimeter of the subject property and to complete the necessary documents. As regards the attorney’s fees, they claim that they are entitled to the same because they were forced to litigate when petitioner unjustly withheld the amount. Besides, the amount awarded by the CA is even smaller compared to the filing fees they paid.

Held:

The petition lacks merit.

Interest may be imposed even in the absence of stipulation in the contract.

We sustain the ruling of both the RTC and the CA that it is proper to impose interest notwithstanding the absence of stipulation in the contract. Article 2210 of the Civil Code expressly provides that "[i]nterest may, in the discretion of the court, be allowed upon damages awarded for breach of contract."

In this case, there is no question that petitioner is legally obligated to return the ₱3.5 million because of her failure to fulfill the obligation under the Conditional Deed of Sale, despite demand. She has in fact admitted that the conditions were not fulfilled and that she was willing to return the full amount of ₱3.5 million but has not actually done so. Petitioner enjoyed the use of the money from the time it was given to her until now. Thus, she is already in default of her obligation from the date of demand, i.e., on September 27, 2000.

The interest at the rate of 12% is applicable in the instant case.

Anent the interest rate, the general rule is that the applicable rate of interest "shall be computed in accordance with the stipulation of the parties." Absent any stipulation, the applicable rate of interest shall be 12% per annum "when the obligation arises out of a loan or a forbearance of money, goods or credits. In other cases, it shall be six percent (6%)." In this case, the parties did not stipulate as to the applicable rate of interest. The only question remaining therefore is whether the 6% as provided under Article 2209 of the Civil Code, or 12% under Central Bank Circular No. 416, is due.

The contract involved in this case is admittedly not a loan but a Conditional Deed of Sale. However, the contract provides that the seller (petitioner) must return the payment made by the buyer (respondent-spouses) if the conditions are not fulfilled. There is no question that they have in fact, not been fulfilled as the seller (petitioner) has admitted this. Notwithstanding demand by the buyer (respondent-spouses), the seller (petitioner) has failed to return the money and should be considered in default from the time that demand was made on September 27, 2000.

Even if the transaction involved a Conditional Deed of Sale, can the stipulation governing the return of the money be considered as a forbearance of money which required payment of interest at the rate of 12%? We believe so.

In Crismina Garments, Inc. v. Court of Appeals, "forbearance" was defined as a "contractual obligation of lender or creditor to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable." This definition describes a loan where a debtor is given a period within which to pay a loan or debt.

In such case, "forbearance of money, goods or credits" will have no distinct definition from a loan. We believe however, that the phrase "forbearance of money, goods or credits" is meant to have a separate meaning from a loan, otherwise there would have been no need to add that phrase as a loan is already sufficiently defined in the Civil Code. Forbearance of money, goods or credits should therefore refer to arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain events or fulfillment of certain conditions.

In this case, the respondent-spouses parted with their money even before the conditions were fulfilled. They have therefore allowed or granted forbearance to the seller (petitioner) to use their money pending fulfillment of the conditions. They were deprived of the use of their money for the period pending fulfillment of the conditions and when those conditions were breached, they are entitled not only to the return of the principal amount paid, but also to compensation for the use of their money. And the compensation for the use of their money, absent any stipulation, should be the same rate of legal interest applicable to a loan since the use or deprivation of funds is similar to a loan.

Petitioner’s unwarranted withholding of the money which rightfully pertains to respondent-spouses amounts to forbearance of money which can be considered as an involuntary loan. Thus, the applicable rate of interest is 12% per annum.

Land Bank of the Philippines v. Onate, G.R. No. 192371, January 15, 2014, 713 SCRA 678

Emmanuel C. Oñate opened and maintained seven trust accounts with Land Bank of the Philippines from 1978 to 1980.

Each trust account had a beginning balance ranging from ₱43.98 to ₱1,312,896.00.

The trust accounts were covered by Investment Management Accounts (IMAs) with Full Discretion, giving Land Bank authority to hold, invest, and reinvest the funds.
On October 8, 1981, Land Bank demanded the return of ₱4 million it claimed was inadvertently deposited to one of Oñate's trust accounts, which he refused.
On June 21, 1991, Land Bank unilaterally applied the outstanding balance in all of Oñate’s trust accounts against his resulting indebtedness by reason of the "miscrediting" of funds.

Although it exhausted the funds in all of Oñate’s trust accounts, Land Bank was able to debit the amount of P1,528,583.48 only.

On September 7, 1992, Land Bank filed a Complaint seeking to recover the the amount of P8,222,687.89 plus interest at the legal rate of 12% per annum computed from May 15, 1992 until fully paid.

Allegations:

Land Bank became a Trustee of certain funds belonging to Philippine Virginia Tobacco Administration (PVTA) and Philippine Virginia Tobacco Board (PVTB) through Deeds of Revocable Trust.
Land Bank invested ₱4 million from PVTA and PVTB's trust accounts in a direct lending scheme to four companies: Republic Telephone Company, Inc. (RETELCO), Philippine Blooming Mills Company, Inc. (PBM), Cheng Ban Yek (CBY), and Philippine Tobacco Filters Corporation (PHILTOFIL).
Land Bank issued four cashier’s checks for ₱1 million each payable to RETELCO, PBM, CBY, and PHILTOFIL.
On November 24 and 28, 1980, RETELCO, PBM, CBY, and PHILTOFIL pre-terminated their loans and paid their obligations to Land Bank in the form of checks.
Oñate's representative, Mr. Eduardo Polonio, delivered the checks to Land Bank. He fraudulently misrepresented to Land Bank that these payments were his additional capital contribution to his personal trust account (Trust Account No. 01-125).
Land Bank credited the payments made by the corporate borrowers to Oñate's Trust Account No. 01-125.
Oñate proceeded to withdraw the credited payments, causing damage and prejudice to Land Bank as the owner of the funds.

Oñate's Answer:

Oñate denied any involvement or knowledge in the transaction between Land Bank and its clients PVTA and PVTB.
He refuted the claim of fraudulent misrepresentation to induce the bank to deposit payments into his Trust Account No. 01-125.
Oñate asserted that the setoff was without legal and factual bases and maintained that the funds in his trust accounts totaled ₱35,555,464.78 as of June 30, 1982, and reached ₱229,222,160.25 and $3,472,683.94 as of January 1993, with interest.

Board of Commissioners Report:

RTC created a Board of Commissioners to examine the records of Oñate’s trust accounts and determine the total amount of deposits, withdrawals, funds invested, earnings, and expenses incurred.
The Board submitted a consolidated report revealing undocumented withdrawals and over withdrawals from Oñate’s trust accounts.
Oñate argued that the undocumented withdrawals should be treated as unauthorized transactions and the amounts credited back to his accounts.
Land Bank did not file any comment or objection to the Board’s consolidated report.
During the pre-trial conference, the parties agreed to submit the case for decision based on the Board's reports.

RTC-Makati: Dismissed Land Bank’s Complaint for its failure to establish that the amount of ₱4,086,888.89 allegedly "miscredited" to Oñate’s Trust Account No. 01-125 actually came from the investments of PVTA and PVTB.

Ordered Land Bank to pay Oñate the total amount of ₱1,471,416.52 representing the total amount of funds debited from the five (5) trust accounts of the defendant with legal rate of interest of 12% per annum, compounded yearly, effective on 21 June 1991 until fully paid.

CA: Affirmed the RTC’s ruling that Land Bank failed to establish the source of the funds it claimed to have been erroneously credited to Oñate’s account.

With respect to Oñate’s appeal, the CA agreed that he is entitled to the unaccounted withdrawals.
The CA’s ruling is anchored on the bank’s failure to observe Sections X401 and X425 of the Bangko Sentral ng Pilipinas Manual of Regulation for Banks (MORB) requiring it to give full disclosure of the services it offered and conduct its dealings with transparency, as well as to render reports that would sufficiently apprise its clients of the significant developments in the administration of their accounts.
Land Bank also failed to keep an accurate record and render an accounting of Oñate’s accounts. The entries in the passbooks are not sufficient because they do not specify where the funds withdrawn from Oñate’s accounts were invested.
Land Bank is hereby ordered to pay defendant-appellant Oñate the sum of ₱60,663,488.11 and $3,210,222.85 representing the undocumented withdrawals it debited from the latter’s trust account with interest at the rate of 12% per annum, compounded yearly from June 21, 1991 until fully paid.

Issue:

Whether the imposition of interest is proper. YES

Land Bank’s Arguments:

Land Bank challenges the 12% per annum interest rate imposed by the CA, arguing trust accounts differ from regular deposits and should incur only 6% per annum in the absence of stipulation, with no compounding.

Oñate’s Arguments:

Defends the CA’s grant of 12% per annum rate of interest as under BSP Circular No. 416, said rate shall be applied in cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged.
Land Bank is estopped from disputing said rate for Land Bank itself applied the same 12% per annum rate of interest when it sought to recover the amount allegedly "miscredited" to his account.
As to the compounding of interest, Oñate claims that the parties intended that interest income shall be capitalized and shall form part of the principal.

Held:

We deny the Petition.

The proper rate of legal interest.

Land Bank’s argument that the lower courts erred in imposing 12% per annum rate of interest is likewise devoid of merit. The unilateral offsetting of funds without legal justification and the undocumented withdrawals are tantamount to forbearance of money. In the analogous case of Estores v. Supangan, we held that "[the] unwarranted withholding of the money which rightfully pertains to [another] amounts to forbearance of money which can be considered as an involuntary loan." Following Eastern Shipping Lines, Inc. v. Court of Appeals, therefore, the applicable rate of interest in this case is 12% per annum.

Besides, Land Bank is estopped from assailing the award of 12% per annum rate of interest. In its Complaint, Land Bank arrived at ₱8,222,687.89 as the outstanding indebtedness of Oñate by using the same 12% per annum rate of interest. It was only after the lower courts rendered unfavorable decisions that Land Bank started to insist that the applicable rate of interest is 6% per annum.

Of equal importance is the determination of when the said 12% per annum rate of interest should commence. Recall that both the RTC and the CA reckoned the running of the 12% per annum rate of interest from June 21, 1991, or the day Land Bank unilaterally applied the outstanding balance in all of Oñate’s trust accounts, until fully paid. The compounding of interest, on the other hand, was based on the provision of the IMAs granting Land Bank "to hold, invest and reinvest the Fund and keep the same invested, in your sole discretion, without distinction between principal and income."

While we find sufficient basis for the compounding of interest, we find it necessary however to modify the commencement date. In Eastern Shipping, it was observed that the commencement of when the legal interest should start to run varies depending on the factual circumstances obtaining in each case.

As a rule of thumb, it was suggested that "where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained)."

In the case at bench, while Oñate protested the setting off, no proof was presented that he formally demanded for the return of the amount so debited prior to the filing of the Complaint. Quite understandably so because at that time he could not determine with some degree of certainty the outstanding balances of his accounts as Land Bank neglected on its duty to keep him updated on the status of his accounts. Land Bank even undertook to furnish him with "the exact computation" of what remains in his accounts after the set off. But this never happened until Land Bank initiated the Complaint on September 7, 1992.

Oñate, on the other hand, filed his Answer (With Compulsory Counterclaim) on May 26, 1993. In other words, we cannot reckon the running of the interest prior to the filing of the Complaint or Oñate’s Counterclaim as no demand prior thereto was made. Neither could the interest commence to run at the time of filing of any of aforesaid pleadings (as to constitute judicial demand) since the undocumented withdrawals in the sums of ₱60,663,488.11 and US$3,210,222.85, as well as the amount actually debited from all of Oñate’s accounts, were determined only after the Board submitted its consolidated report on August 16, 2004 or more than 10 years after Land Bank and Oñate filed their Complaint and Answer, respectively.

Note too that while Oñate sought to recover the amount of undocumented withdrawals before the RTC, the same was denied in the latter’s May 31, 2006 Decision. The RTC granted Oñate only the total amount of funds debited from his trust accounts. It was only when the CA rendered its December 18, 2009 Decision that Oñate was awarded the undocumented withdrawals. Hence, we find it just and proper to reckon the running of the interest of 12% per annum, compounded yearly, for the debited amount and undocumented withdrawals on different dates. The debited amount of ₱1,471,416.52, shall earn interest beginning May 31, 2006 or the day the RTC rendered its Decision granting said amount to Oñate. As to the undocumented withdrawals of ₱60,663,488.11 and US 3,210,222.85, the legal rate of interest should start to run the day the CA promulgated its Decision on December 18, 2009.

During the pendency of this case, however, the Monetary Board issued Resolution No. 796 dated May 16, 2013, stating that in the absence of express stipulation between the parties, the rate of interest in loan or forbearance of any money, goods or credits and the rate allowed in judgments shall be 6% per annum. Said Resolution is embodied in Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013, which took effect on July 1, 2013. Hence, the 12% annual interest mentioned above shall apply only up to June 30, 2013. Thereafter, or starting July 1, 2013, the applicable rate of interest for both the debited amount and undocumented withdrawals shall be 6% per annum compounded annually, until fully paid.

WHEREFORE, the Petition is hereby DENIED and the December 18, 2009 Decision of the Court of Appeals in CA-G.R. CV No. 89346 is AFFIRMED with modification in that the:

interest of 12% per annum compounded annually

for the debited amount of ₱1,471,416.52 shall commence to run on May 31, 2006,
to the undocumented withdrawals in the amounts of ₱60,663,488.11 and US 3,210,222.85 starting December 18 2009.

Beginning July 1, 2013, however, the applicable rate of interest on all amounts awarded shall earn interest at the rate of 6% per annum compounded yearly, until fully paid.

Escalation Clause

Silos v. Philippine National Bank, G.R. No. 181045, July 2, 2014

Spouses Eduardo and Lydia Silos operated a department store and engaged in buying and selling ready-to-wear apparel for about two decades.
In 1987, they obtained a one-year revolving credit line of ₱150,000.00 from Philippine National Bank (PNB), secured by a Real Estate Mortgage over a 370-square meter lot in Aklan.
In July 1988, the credit line was later increased to ₱1.8 million, and the mortgage was correspondingly increased to P1.8 million.
In July 1989, the credit line was later increased to ₱2.5 million, with additional security provided in the form of a 134-square meter lot.
Petitioners issued eight Promissory Notes and signed a Credit Agreement.

The Credit Agreement provided that the loan shall be subject to interest at the rate of 19.5% per annum and allowed PNB to modify interest rates based on its policies in the future.
The Promissory Notes granted PNB the right to increase or reduce interest rates “within the limits allowed by law or by the Monetary Board.
The Real Estate Mortgage agreement also provided the same right to increase or reduce interest rates “at any time depending on whatever policy PNB may adopt in the future.”

Petitioners paid interest rates on the notes ranging from 19.5% to 32% on the promissory notes.
In August 1991, an Amendment to Credit Agreement stipulated interest rates based on the prime rate plus applicable spread.
Petitioners made regular payments until 1997 when they defaulted due to high interest rates during the Asian financial crisis.
PNB foreclosed on the mortgage after petitioners failed to pay the outstanding amount, totaling ₱3,620,541.60.
On January 14, 1999, the properties were sold to at an auction for the amount of ₱4,324,172.96.21.
On March 24, 2000, petitioners filed a case seeking annulment of the foreclosure sale, claiming the interest rates imposed were void and they overpaid.
PNB argued that interest rates were determined based on various factors, and penalties were included in the mortgage agreement.

RTC: Dismissed the case.

Stipulation in the Credit Agreement allowing PNB to increase or decrease interest rates is valid.
Banks can stipulate variable interest rates dependent on prevailing rates.
Promissory Note prevails over Credit Agreement and Real Estate Mortgage.
Foreclosure was regular as the loan was due and demandable.

CA: Partly granted the appeal.

Petitioners estopped from questioning interest rates as they paid without complaint for seven years.
Interest rate after the first 30-day period to be 12% per annum.
The foreclosure and sale of properties came as a necessary result of petitioners’ failure to pay the outstanding obligation upon demand.

Issue:

Whether the escalation clause is proper. NO

Held:

It appears that respondent’s practice, more than once proscribed by the Court, has been carried over once more to the petitioners. In a number of decided cases, the Court struck down provisions in credit documents issued by PNB to, or required of, its borrowers which allow the bank to increase or decrease interest rates "within the limits allowed by law at any time depending on whatever policy it may adopt in the future."

The common denominator in these cases is the lack of agreement of the parties to the imposed interest rates. For this case, this lack of consent by the petitioners has been made obvious by the fact that they signed the promissory notes in blank for the respondent to fill. We find credible the testimony of Lydia in this respect. Respondent failed to discredit her; in fact, its witness PNB Kalibo Branch Manager Aspa admitted that interest rates were fixed solely by its Treasury Department in Manila, which were then simply communicated to all PNB branches for implementation. If this were the case, then this would explain why petitioners had to sign the promissory notes in blank, since the imposable interest rates have yet to be determined and fixed by respondent’s Treasury Department in Manila.

Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB fixes – such as cost of money, foreign currency values, bank administrative costs, profitability, and considerations which affect the banking industry – it can be seen that considerations which affect PNB’s borrowers are ignored. A borrower’s current financial state, his feedback or opinions, the nature and purpose of his borrowings, the effect of foreign currency values or fluctuations on his business or borrowing, etc. – these are not factors which influence the fixing of interest rates to be imposed on him. Clearly, respondent’s method of fixing interest rates based on one-sided, indeterminate, and subjective criteria such as profitability, cost of money, bank costs, etc. is arbitrary for there is no fixed standard or margin above or below these considerations.

To repeat what has been said in the above-cited cases, any modification in the contract, such as the interest rates, must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan agreements, the rate of interest is a principal condition, if not the most important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect.

What is even more glaring in the present case is that, the stipulations in question no longer provide that the parties shall agree upon the interest rate to be fixed; -instead, they are worded in such a way that the borrower shall agree to whatever interest rate respondent fixes. In credit agreements covered by the above-cited cases, it is provided that:

For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the 26th promissory notes, petitioners are granted the option to prepay the loan or credit facility without penalty within 10 calendar days from the Interest Setting Date if they are not agreeable to the interest rate fixed. It has been shown that the promissory notes are executed and signed in blank, meaning that by the time petitioners learn of the interest rate, they are already bound to pay it because they have already pre-signed the note where the rate is subsequently entered.

Besides, premium may not be placed upon a stipulation in a contract which grants one party the right to choose whether to continue with or withdraw from the agreement if it discovers that what the other party has been doing all along is improper or illegal.

Thus said, respondent’s arguments relative to the credit documents – that documentary evidence prevails over testimonial evidence; that the credit documents are in proper form, presumed regular, and endure, against arbitrary claims by petitioners, experienced business persons that they are, they signed questionable loan documents whose provisions for interest rates were left blank, and yet they continued to pay the interests without protest for a number of years – deserve no consideration.

With regard to interest, the Court finds that since the escalation clause is annulled, the principal amount of the loan is subject to the original or stipulated rate of interest, and upon maturity, the amount due shall be subject to legal interest at the rate of 12% per annum. This is the uniform ruling adopted in previous cases, including those cited here.

The interests paid by petitioners should be applied first to the payment of the stipulated or legal and unpaid interest, as the case may be, and later, to the capital or principal. Respondent should then refund the excess amount of interest that it has illegally imposed upon petitioners; "[t]he amount to be refunded refers to that paid by petitioners when they had no obligation to do so."

Thus, the parties’ original agreement stipulated the payment of 19.5% interest; however, this rate was intended to apply only to the first promissory note which expired on November 21, 1989 and was paid by petitioners; it was not intended to apply to the whole duration of the loan. Subsequent higher interest rates have been declared illegal; but because only the rates are found to be improper, the obligation to pay interest subsists, the same to be fixed at the legal rate of 12% per annum. However, the 12% interest shall apply only until June 30, 2013. Starting July 1, 2013, the prevailing rate of interest shall be 6% per annum pursuant to our ruling in Nacar v. Gallery Frames and Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799.

Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment thereon, when due, shall constitute default, and a penalty charge of 24% per annum based on the defaulted principal amount shall be imposed. Petitioners claim that this penalty should be excluded from the foreclosure amount or bid price because the Real Estate Mortgage and the Supplement thereto did not specifically include it as part of the secured amount. Respondent justifies its inclusion in the secured amount, saying that the purpose of the penalty or a penal clause is to ensure the performance of the obligation and substitute for damages and the payment of interest in the event of non-compliance. Respondent adds that the imposition and collection of a penalty is a normal banking practice, and the standard rate per annum for all commercial banks, at the time, was 24%. Its inclusion as part of the secured amount in the mortgage agreements is thus valid and necessary.

The Court sustains petitioners’ view that the penalty may not be included as part of the secured amount. Having found the credit agreements and promissory notes to be tainted, we must accord the same treatment to the mortgages. After all, "[a] mortgage and a note secured by it are deemed parts of one transaction and are construed together." Being so tainted and having the attributes of a contract of adhesion as the principal credit documents, we must construe the mortgage contracts strictly, and against the party who drafted it. An examination of the mortgage agreements reveals that nowhere is it stated that penalties are to be included in the secured amount. Construing this silence strictly against the respondent, the Court can only conclude that the parties did not intend to include the penalty allowed under PN 9707237 as part of the secured amount. Given its resources, respondent could have – if it truly wanted to – conveniently prepared and executed an amended mortgage agreement with the petitioners, thereby including penalties in the amount to be secured by the encumbered properties. Yet it did not.

Philippine Savings Bank v. Castillo, G.R. No. 193178, May 30, 2011, 649 SCRA 527, 538

Spouses Alfredo M. Castillo and Elizabeth Capati-Castillo owned a lot, while Spouses Romeo B. Capati and Aquilina M. Lobo owned another lot, both in Tondo, Manila.
On May 7, 1997, respondents obtained a loan of ₱2,500,000.00 from Philippine Savings Bank secured by real estate mortgage on their properties.
The loan carried an interest rate of 17% per annum, subject to adjustment every ninety days, with penalty charges for late payments.
Petitioner adjusted interest rates several times between May 1997 and December 1999, highest at 29% and lowest at 15.5% per annum, notifying respondents.
In December 1999, respondents defaulted on payments, with outstanding balance reaching ₱2,525,910.29 by February 2000, leading to petitioner initiating foreclosure proceedings.
On June 16, 2000, the auction sale of mortgaged properties occurred, with petitioner as the sole bidder, and the properties were credited towards the loan.
On July 3, 2000, the certificate of sale was registered, without the approval of the RTC Executive Judge.
Despite failing to redeem the properties within the redemption period, respondents requested a 60-day extension, offering ₱3,000,000.00 for redemption, but failed to follow through.
Respondents filed a case against petitioner for various claims including reformation of instruments and declaration of nullity of foreclosure proceedings.

RTC: Ruled in favor of respondents, declaring interest rate increases excessive and foreclosure proceedings void, ordering petitioner to refund excess interest and pay damages.

The RTC partially granted petitioner's motion for reconsideration, modifying the interest rate to 24% per annum.

CA: Affirmed the RTC decision with modifications, declaring the foreclosure proceedings as valid.

Issue:

Whether the CA erred in:

declaring that the modifications in the interest rates are unreasonable;
sustaining the award of damages and attorney’s fees. NO

Held:

The petition should be partially granted.

The unilateral determination and imposition of the increased rates is violative of the principle of mutuality of contracts under Article 1308 of the Civil Code, which provides that "[t]he contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." A perusal of the Promissory Note will readily show that the increase or decrease of interest rates hinges solely on the discretion of petitioner. It does not require the conformity of the maker before a new interest rate could be enforced. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result, thus partaking of the nature of a contract of adhesion, is void. Any stipulation regarding the validity or compliance of the contract left solely to the will of one of the parties is likewise invalid.

Petitioner contends that respondents acquiesced to the imposition of the modified interest rates; thus, there was no violation of the principle of mutuality of contracts. To buttress its position, petitioner points out that the exhibits presented by respondents during trial contained a uniform provision, which states:

The interest rate adjustment is in accordance with the Conformity Letter you have signed amending your account’s interest rate review period from ninety (90) to thirty days.

It further claims that respondents requested several times for the reduction of the interest rates, thus, manifesting their recognition of the legality of the said rates. It also asserts that the contractual provision on the interest rates cannot be said to be lopsided in its favor, considering that it had, on several occasions, lowered the interest rates.

We disagree. The above-quoted provision of respondents’ exhibits readily shows that the conformity letter signed by them does not pertain to the modification of the interest rates, but rather only to the amendment of the interest rate review period from 90 days to 30 days. Verily, the conformity of respondents with respect to the shortening of the interest rate review period from 90 days to 30 days is separate and distinct from and cannot substitute for the required conformity of respondents with respect to the modification of the interest rate itself.

Moreover, respondents’ assent to the modifications in the interest rates cannot be implied from their lack of response to the memos sent by petitioner, informing them of the amendments. The said memos were in the nature of a proposal to change the contract with respect to one of its significant components, i.e., the interest rates. As we have held, no one receiving a proposal to change a contract is obliged to answer the proposal. Therefore, respondents could neither be faulted, nor could they be deemed to have assented to the modified interest rates, for not replying to the said memos from petitioner.

We likewise disagree with petitioner’s assertion that respondents recognized the legality of the imposed interest rates through the letters requesting for the reduction of the rates. The request for reduction of the interest does not translate to consent thereto.

Basic is the rule that there can be no contract in its true sense without the mutual assent of the parties. If this consent is absent on the part of one who contracts, the act has no more efficacy than if it had been done under duress or by a person of unsound mind. Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, the interest rate is undeniably always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it produces no binding effect.18

Escalation clauses are generally valid and do not contravene public policy. They are common in credit agreements as means of maintaining fiscal stability and retaining the value of money on long-term contracts. To prevent any one-sidedness that these clauses may cause, we have held in Banco Filipino Savings and Mortgage Bank v. Judge Navarro that there should be a corresponding de-escalation clause that would authorize a reduction in the interest rates corresponding to downward changes made by law or by the Monetary Board. As can be gleaned from the parties’ loan agreement, a de-escalation clause is provided, by virtue of which, petitioner had lowered its interest rates.

Nevertheless, the validity of the escalation clause did not give petitioner the unbridled right to unilaterally adjust interest rates. The adjustment should have still been subjected to the mutual agreement of the contracting parties. In light of the absence of consent on the part of respondents to the modifications in the interest rates, the adjusted rates cannot bind them notwithstanding the inclusion of a de-escalation clause in the loan agreement.

The order of refund was based on the fact that the increases in the interest rate were null and void for being violative of the principle of mutuality of contracts. The amount to be refunded refers to that paid by respondents when they had no obligation to do so. Simply put, petitioner should refund the amount of interest that it has illegally imposed upon respondents. Any deficiency in the payment of the obligation can be collected by petitioner in a foreclosure proceeding, which it already did.

On the matter of damages, we agree with petitioner. Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. The breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive. Likewise, a breach of contract may give rise to exemplary damages only if the guilty party acted in a fraudulent or malevolent manner.

In this case, we are not sufficiently convinced that fraud, bad faith, or wanton disregard of contractual obligations can be imputed to petitioner simply because it unilaterally imposed the changes in interest rates, which can be attributed merely to bad business judgment or attendant negligence. Bad faith pertains to a dishonest purpose, to some moral obliquity, or to the conscious doing of a wrong, a breach of a known duty attributable to a motive, interest or ill will that partakes of the nature of fraud. Respondents failed to sufficiently establish this requirement. Thus, the award of moral and exemplary damages is unwarranted. In the same vein, respondents cannot recover attorney’s fees and litigation expenses. Accordingly, these awards should be deleted.

Effect of Invalidity of Escalation.
The lender should then refund the excess amount of interest that it has illegally imposed upon borrowers; the amount to be refunded refers to that paid by borrowers when they had no obligation to do so.

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Commercial Laws 1: Loan Case Digests

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