Credit BaTCH2 Cases

8/13/2019 Credit BaTCH2 Cases

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SECOND DIVISION

[G.R. Nos. 128833. April 20, 1998]

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO, pet i t ioners , v s . COURT OFAPPEALS and GOYU & SONS, INC., responden t s .

[G.R. No. 128834. April 20, 1998]

RIZAL COMMERCIAL BANKING CORPORATION, pet i t ioners , v s . COURT OF APPEALS, ALFREDO C.SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP, SPOUSES GO TENG KOK and BETTY CHIU SUK YINGalias BETTY GO, re sponden t s .

[G.R. No. 128866. April 20, 1998]

MALAYAN INSURANCE INC., pet i t ioner, vs . GOYU & SONS, INC. re sponden t .

D EC I S I O N

MELO, J . :

The issues relevant to the herein three consolidated petitions revolve around the fire loss claims of respondent Goyu& Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in connection with the mortgage contractsentered into by and between Rizal Commercial Banking Corporation (RCBC) and GOYU.

The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58, plus 37%interest per annum commencing July 27, 1992. RCBC was ordered to pay actual and compensatory damages in theamount of P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU P1,500,000.00 as exemplarydamages and P1,500,000.00 for attorneys fees. GOYUs obligation to RCBC was fi xed at P68,785,069.04 as of April1992, without any interest, surcharges, and penalties. RCBC and MICO appealed separately but, in view of the commonfacts and issues involved, their individual petitions were consolidated.

The undisputed facts may be summarized as follows:

GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due evaluation,RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYUsapplication for appr oval by RCBCs executive committee. A credit facility in the amount of P30 million was initially

granted. Upon GOYUs application and Uys and Laos recommendation, RCBCs executive committee increasedGOYUs credit facility to P50 million, then to P90 m illion, and finally to P117 million.

As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two chattel mortgagesin favor of RCBC, which were registered with the Registry of Deeds at Valenzuela, Metro Manila. Under each of thesefour mortgage contracts, GOYU committed itself to insure the mortgaged property with an insurance company approvedby RCBC, and subsequently, to endorse and deliver the insurance policies to RCBC.

GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies, issued nine endorsements infavor of RCBC seemingly upon instructions of GOYU (Exhibits 1 -Malayan to 9 -Malayan).

On April 27, 1992, one of GOYUs factory buildings in Valenzuela was gutted by fire. Consequently, GOYUsubmitted its claim for indemnity on account of the loss insured against. MICO denied the claim on the ground that the


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(Record, pp. 478-479.)

From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with the amountsawarded in its favor. MICO and RCBC disputed the trial courts findings of liability on their part. The Court of Appealspartly granted GOYUs appeal, but sustained the findings of the trial court with respect to MICO and RCBCs liabilities,thusly:

WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as follows:

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the amount of P50,505,594.60(per O.R. No. 3649285) plus deposited in court and damages by way of interest commencing July 27, 1992 until the timeGoyu receives the said amount at the rate of thirty-seven (37%) percent per annum which is twice the ceiling prescribedby the Monetary Board.

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION:

a) To pay the plaintiff actual and compensatory damages in the amount of P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL BANKING CORPORATION, UY

CHUN BING AND ELI D. LAO:

a) To pay the plaintiff jointly and severally the following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorneys fees.

4. And on RCBCs Counterclaim, o rdering the plaintiff Goyu & Sons, Inc. to pay its loan obligation with RCBC in theamount of P68,785,069.04 as of April 27, 1992 without any interest, surcharges and penalties.

The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately release to Goyu & Sons, Inc.the amount of P50,505,594.60 (per O.R. No. 3649285) deposited with it by Malayan Insurance Co., Inc., together with allthe interests thereon.

(Rollo , p. 200.)

RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review and consequentreversal of the above dispositions of the Court of Appeals.

In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which case, by virtue ofthe Court of Appeals resolu tion dated August 7, 1996, was consolidated with C.A. G.R. No. CV-46162 (subject of hereinG.R. No. 128833). At issue in said petition is RCBCs right to intervene in the action between Alfredo C. Sebastian (thecreditor) and GOYU (the debtor), where the subject insurance policies were attached in favor of Sebastian.

After a careful review of the material facts as found by the two courts below in relation to the pertinent and applicablelaws, we find merit in the submissions of RCBC and MICO.

The several causes of action pursued below by GOYU gave rise to several related issues which are now submitted inthe petitions before us. This Court, however, discerns one primary and central issue, and this is, whether or not RCBC,as mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor, in case of the occurrence of loss.

As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter executed severalmortgage contracts in favor of RCBC. It was expressly stipulated in these mortgage contracts that GOYU shall insure themortgaged property with any of the insurance companies acceptable to RCBC. GOYU indeed insured the mortgagedproperty with MICO, an insurance company acceptable to RCBC. Based on their stipulations in the mortgage contracts,GOYU was supposed to endorse these insurance policies in favor of, and deliver them, to RCBC. Alchester Insurance

Agency, Inc., MICOs underwriter from whom GOYU obtained the subject insurance policies, prepared the nineendorsements (see Exh. 1 -Malayan to 9 -Malayan; also Exh. 51 -RCBC to 59 -RCBC), copies of which were delivered


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to GOYU, RCBC, and MICO. However, because these endorsements do not bear the signature of any officer of GOYU,the trial court, as well as the Court of Appeals, concluded that the endorsements are defective.

We do not quite agree.

It is settled that a mortgagor and a mortgagee have separate and distinct insurable interests in the same mortgagedproperty, such that each one of them may insure the same property for his own sole benefit. There is no question thatGOYU could insure the mortgaged property for its own exclusive benefit. In the present case, although it appears thatGOYU obtained the subject insurance policies naming itself as the sole payee, the intentions of the parties as shown bytheir contemporaneous acts, must be given due consideration in order to better serve the interest of justice and equity.

It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC. The Court is in aquandary how Alchester could arrive at the idea of endorsing any specific insurance policy in favor of any particularbeneficiary or payee other than the insured had not such named payee or beneficiary been specifically disclosed by theinsured itself. It is also significant that GOYU voluntarily and purposely took the insurance policies from MICO, a sistercompany of RCBC, and not just from any other insurance company. Alchester would not have found out that the subjectpieces of property were mortgaged to RCBC had not such information been voluntarily disclosed by GOYU itself. Had itnot been for GOYU, Alchester would not have known of GOYUs intention of obtaining insurance coverage in compliancewith its undertaking in the mortgage contracts with RCBC, and verily, Alchester would not have endorsed the policies toRCBC had it not been so directed by GOYU.

On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in favor of mortgagorRCBC. The basis and purpose of the doctrine was explained in Philippine National Bank vs. Court of Appeals (94 SCRA357 [1979]), to wit:

The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and justice, and its purpose isto forbid one to speak against his own act, representations, or commitments to the injury of one to whom they weredirected and who reasonably relied thereon. The doctrine of estoppel springs from equitable principles and the equities inthe case. It is designed to aid the law in the administration of justice where without its aid injustice might result. It hasbeen applied by this Court wherever and whenever special circumstances of a case so demand.

(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she prepared inquadruplicate on February 11, 1992 the nine endorsement documents for GOYUs nine insurance policies in favor ofRCBC. The original copies of each of these nine endorsement documents were sent to GOYU, and the others were sentto RCBC and MICO, while the fourth copies were retained for Alchesters file (tsn, February 23, pp. 7 -8). GOYU has not

denied having received from Alchester the originals of these endorsements. RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the stipulation in

the mortgage contracts. We find such reliance to be justified under the circumstances of the case. GOYU failed toseasonably repudiate the authority of the person or persons who prepared such endorsements. Over and above this,GOYU continued, in the meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After theoccurrence of the loss insured against, it was too late for GOYU to disown the endorsements for any imagined orcontrived lack of authority of Alchester to prepare and issue said endorsements. If there had not been actually an impliedratification of said endorsements by virtue of GOYUs inaction in this case, GOYU is at the very least estopped fromassailing their operative effects. To permit GOYU to capitalize on its non-confirmation of these endorsements while itcontinued to enjoy the benefits of the credit facilities of RCBC which believed in good faith that there was dueendorsement pursuant to their mortgage contracts, is to countenance grave contravention of public policy, fair dealing,good faith, and justice. Such an unjust situation, the Court cannot sanction. Under the peculiar circumstances obtainingin this case, the Court is bound to recognize RCBCs right to the proceeds of the insurance policies if not for the actualendorsement of the policies, at least on the basis of the equitable principle of estoppel.

GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of insuranceshall exclusively apply to the interest of the person in whose name or for whose benefit it is made. The peculiarity of thecircumstances obtaining in the instant case presents a justification to take exception to the strict application of saidprovision, it having been sufficiently established that it was the intention of the parties to designate RCBC as the party forwhose benefit the insurance policies were taken out. Consider thus the following:

1. It is undisputed that the insured pieces of property were the subject of mortgage contracts entered into betweenRCBC and GOYU in consideration of and for securing GOYUs credit facilities from RCBC. The mortgage contractscontained common provisions whereby GOYU, as mortgagor, undertook to have the mortgaged property properly coveredagainst any loss by an insurance company acceptable to RCBC.


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Issue Date : January 18, 1992

Expiry Date : February 15, 1993

Amount : P6,603,586.43

d. Policy Number : ACIA/F-114-07662 Exhibit 3-Malayan


Expiry Date : (not legible)

Amount : P6,603,586.43

e. Policy Number : ACIA/F-114-07663 Exhibit 4-Malayan


Expiry Date : February 9, 1993

Amount : P9,457,972.76

f. Policy Number : ACIA/F-114-07623 Exhibit 7 -Malayan


Expiry Date : January 13, 1993

Amount : P24,750,000.00

g. Policy Number : ACIA/F-174-07223 Exhibit 6 -Malayan

Issue Date : May 29, 1991

Expiry Date : June 27, 1992

Amount : P6,000,000.00

h. Policy Number : CI/F-128-03341 None

Issue Date : May 3, 1991

Expiry Date : May 3, 1992

Amount : P10,000,000.00


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The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that the documents arespurious, for it is presumed that the ordinary course of business had been followed ( Metropolitan Bank and TrustCompany vs. Quilts and All, Inc ., 222 SCRA 486 [1993]). The obligor and not the holder of the negotiable instrument hasthe burden of proof of showing that he no longer owes the obligee any amount ( Travel-On, Inc. vs. Court of Appeals , 210SCRA 351 [1992]).

Even casting aside the presumption of regularity of private transactions, receipt of the loan amounting toP121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the testimony of Go Song Hiap when heanswered the queries of the trial court:

ATTY. NATIVIDAD Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the amounts stated therein?

A: Yes, sir, I received the amount.

COURT

He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?

WITNESS:

Yes, Your Honor, I received all the amounts.

COURT

Indicated in the Promissory Notes?

WITNESS

A. The promissory Notes they did not give to me but the amount I asked which is correct, Your Honor.

COURT

Q: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?

A: Yes, Your Honor.

(tsn, Jan. 14, 1994, p. 26.)

Furthermore, aside from its judicial admission of having received all the proceeds of the 29 promissory notes ashereinabove quoted, GOYU also offered and admitted to RCBC that its obligation be fixed at P116,301,992.60 as shownin its letter dated March 9, 1993, which pertinently reads:

We wish to inform you, therefore that we are ready and willing to pay the current past due account of this company in theamount of P116,301,992.60 as of 21 January 1993, specified in pars. 15, p. 10, and 18, p. 13 of your affidavits of ThirdParty Claims in the Urban case at Makati, Metro Manila and in the Zamboanga case at Zamboanga city, respectively, lessthe total of P8,851,519.71 paid from the Seaboard and Equitable insurance companies and other legitimatedeductions. We accept and confirm this amount of P116,301,992.60 as stated as true and correct.

(Exhibit BB.)

The Court of Appeals erred in placing much significance on the fact that the excluded promissory notes are datedafter the fire. It failed to consider that said notes had for their origin transactions consummated prior to the fire. Thus,careful attention must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are mere renewals of Promissory

Notes No. 908-91 and 952-91, loans already availed of by GOYU. The two courts below erred in failing to see that the promissory notes which they ruled should be excluded for

bearing dates which are after that of the fire, are mere renewals of previous ones. The proceeds of the loan representedby these promissory notes were admittedly received by GOYU. There is ample factual and legal basis for giving GOYUs

judicial admission of liability in the amount of P116,301,992.60 full force and effect

It should, however, be quickly added that whatever amount RCBC may have recovered from the other insurers of themortgaged property will, nonetheless, have to be applied as payment against GO YUs obligation. But, contrary to thelower courts findings, payments effected by GOYU prior to January 21, 1993 should no longer be deducted. Suchpayments had obviously been duly considered by GOYU, in its aforequoted letter dated March 9, 1993, wherein itadmitted that its past due account totaled P116,301,992.60 as of January 21, 1993.

The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21, 1993, to wit:


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The essence or rationale for the payment of interest or cost of money is separate and distinct from that of surchargesand penalties. What may justify a court in not allowing the creditor to charge surcharges and penalties despite expressstipulation therefor in a valid agreement, may not equally justify non-payment of interest. The charging of interest forloans forms a very essential and fundamental element of the banking business, which may truly be considered to be atthe very core of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any interestat all. We fail to find justification for the Court of Appeals outright deletion of t he payment of interest as agreed upon inthe respective promissory notes. This constitutes gross error.

For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down by this Courtin Eastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]), shall apply, to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts isbreached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages of the CivilCode 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 ofinterest, 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 ofmoney, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shallitself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisionsof Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount ofdamages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shallbe adjudged on unliquidated claims or damages except when or until the demand can be established with reasonablecertainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from thetime the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonablyestablished at the time the demand is made, the interest shall begin to run only from the date of the judgment of the courtis made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actualbase 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 itssatisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

(pp. 95-97.)

There being written stipulations as to the rate of interest owing on each specific promissory note as summarized andtabulated by the trial court in its decision (pp.470 and 471, Record) such agreed interest rates must be followed. This isvery clear from paragraph II, sub-paragraph 1 quoted above.

On the issue of payment of surcharges and penalties, we partly agree that GOYUs pitiful situation must be taken intoaccount. We do not agree, however, that payment of any amount as surcharges and penalties should altogether bedeleted. Even assuming that RCBC, through its responsible officers, herein petitioners Eli Lao and Uy Chun Bing, mayhave relayed its assurance for assistance to GOYU immediately after the occurrence of the fire, we cannot accept thelower courts finding that RCBC had thereby ipso facto effectively waived collection of any additional interests, surcharges,and penalties from GOYU. Assurances of assistance are one thing, but waiver of additional interests, surcharges, andpenalties is another.

Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidateddamages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides:

ART. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably reduced if they areiniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider thecircumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges andpenalties imposed by banks for non-payment of the loans extended by them are generally iniquitous andunconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in


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The undisputed facts of the case are as follows:chanrob1es virtual 1aw library

On May 21, 1974, Davao Timber Corporation, DATICOR for brevity, and the Private DevelopmentCorporation (PDCP) entered into a loan agreement 3 whereby PDCP extended to DATICOR a loan inforeign currency equivalent to US$ 265,000.00 and another in the amount of P2,500,000.00 for thepurpose of establishing a kiln drying and woodworking plant in Mati, Davao Oriental.

It was stipulated in the loan agreement, that the foreign currency loan was to be paid with an interest rate

of eleven and three fourths (11-3/4%) per cent per annum on the disbursed amount of the foreigncurrency; and the peso loan at the rate of twelve (12%) per cent per annum on the disbursed amount ofthe peso loan outstanding, commencing on the several dates on which disbursements of the proceeds ofthe loans were made. 4

The loans were originally secured by a first mortgage 5 executed by Ernesto del Rosario, President ofDATICOR, in his personal capacity, and his sister, Lourdes C. Cuerva, as third party mortgagors on aparcel of land which they owned in common. On December 28, 1976, the third party mortgagors, DelRosario and Cuerva partitioned this mortgaged property which they owned in common, such that saidparcel was re-surveyed and two certificates of titles were issued, each with an area of 3,854 squaremeters, one in the name of Del Rosario and the other in the name of Cuerva.

Thereafter, PDCP executed a partial release of mortgage 6 on the parcel of land owned by Cuerva, on thecondition that in lieu thereof, DATICOR was to mortgage an additional five (5) parcels of land consisting ofprime industrial lands with buildings thereon. As a consequence, DATICOR executed an Addendum toMortgage 7 in favor of PDCP.

DATICOR likewise executed a Deed of Chattel Mortgage 8 on the machineries and equipments attached tothe land in Davao Oriental as added security for said loans.

The approved value of the parcel of land of Del Rosario, including the building thereon, wasP12,000,000.00 while the appraised value of the DATICOR properties consisting of the five parcels of landin Davao Oriental, including the buildings and structure thereon and the machineries and equipments, is atleast P15,000,000.00 or a total of P27,000,000.00 for the loan of about P4.4 million pesos.chanroblesvirtual lawlibrary

PDCP asked DATICOR to pay a service fee of one (1%) per cent per annum on the outstanding balance ofthe peso loan to cover the cost of administering DATICORs account and supervision of the project. 9 Thisservice fee was subsequently increased to six (6%) per cent per annum in addition to the twelve (12%)per cent per annum interest on the peso loan. 10 Furthermore, DATICOR was asked to pay penaltycharges at the rate of two (2%) per cent per month. 11

A total of P3,000,000.00 was already paid by Del Rosario to PDCP and which the latter applied tointerests, service fees and penalty charges, such that according to PDCP, DATICOR still has an outstandingbalance on the principal loan of P10,887,856.99 as of May 15, 1983.

By virtue of which, PDCP initiated extra-judicial foreclosure proceedings 12 against the parcel of landowned by Del Rosario in Manila and the five (5) parcels of land owned by DATICOR in Davao Oriental.

Del Rosario and Cuerva then filed a complaint 13 on March 31, 1982 against the PDCP in the Court of FirstInstance of Manila in Civil Case No. 82-8088 for violation of the Usury Law, annulment of contract anddamages with prayer for the issuance of a writ of preliminary injunction. On April 13, 1982, a restrainingorder 14 was issued by the Court of First Instance of Manila.

DATICOR filed another case on April 1, 1982 in the Court of First Instance of Davao Oriental seeking a writof injunction to prevent PDCP from foreclosing its properties in Davao, and likewise praying for theannulment of the loan contract as it is in violation of the Usury Law and damages. 15

On January 25, 1983, the Court of First Instance of Manila rendered a decision 16 dismissing Del Rosariospetition. A motion for reconsideration was filed and was still pending when the PDCP filed another petition


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for extra-judicial foreclosure of the real properties of Del Rosario in Manila and anchored on the samegrounds, requesting the Sheriff to conduct the same. The Sheriff had thus posted and caused publicationof the public auction sale scheduled on July 27, 1983.

Del Rosario and Cuerva therefore sought a restraining order from another branch of the Regional TrialCourt in Manila as their right to appeal would be rendered meaningless if the foreclosure proceedings wereconducted in the meantime that their motion for reconsideration with Judge Ejercito in Civil Case No. 82-8088 was still pending resolution.cralawnad

On August 3, 1983, herein respondents received a copy of the order in Civil Case No. 82-8088 denyingtheir motion for reconsideration for lack of merit. On that same day, they appealed to the thenIntermediate Appellate Court seeking an injunction to issue against the sheriff of Manila from proceedingwith the auction sale and likewise appealing the dismissal of their complaint in Civil Case No. 82-8088 forviolation of the Usury Law, annulment of contract and damages.

The then Intermediate Appellate Court rendered its decision, 17 the dispositive portion of whichreads:jgc:chanrobles.com.ph

"WHEREFORE, the decision appealed from is hereby set aside and another one is rendered declaring voidand of no effect the stipulations of interest in the loan agreement (Annex "A") between DATICOR andPDCP, as if the loan agreement is without stipulation as to payment of interest."cralaw virtua1aw library

Hence, this appeal.

We find no merit in the instant petition.

Inasmuch as the loan agreement herein was entered into on May 21, 1974, the prevailing law applicable isAct No. 2655, otherwise known as the Usury Law, as amended by P.D. No. 116, which took effect onJanuary 29, 1974.

Section 2 of Act No. 2655 provides:jgc:chanrobles.com.ph

"No person or corporation shall directly or indirectly take or receive money or other property, real orpersonal, or choses in action, a higher rate of interest or greater sum of value including commission

premiums, fines and penalties for the loan or renewal thereof or forbearance of money, goods or credit,where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate,the title to which is duly registered or by a document conveying such real estate at an interest, thantwelve percent per annum."cralaw virtua1aw library

The usury law therefore, as amended by Presidential Decree 116, fixed all interest rates for all loans withmaturity of more than 360 days at twelve (12%) per cent per annum including premiums, fines andpenalties.

It is to be noted that PDCP was charging penalties at the rate of two (2%) per cent per month or aneffective rate of twenty four (24%) per cent per annum on the peso loan and one-half (1/2%) per centper month or an effective six (6%) per cent per annum on the foreign currency loan. It is therefore veryclear that PDCP has been charging and imposing interests in violation of the prevailing usurylaws.chanroblesvirtualawlibrary

In the beginning, PDCP was charging a total of nineteen (19%) per cent interest per annum on the pesoloan and eighteen and three-fourths (18-3/4%) per cent on the foreign currency loan. Since the penaltycharges was increased to two (2%) per cent per month with regard to the peso loan, PDCP begancharging a total of forty two (42%) per cent per annum on the peso loan, clearly in violation of the usurylaw.

DATICOR obtained a loan of P4.4 million pesos and has paid a total of about P3 million pesos, theremaining balance on the principal debt left unpaid is about P1.4 million pesos, to which respondents muststill pay the petitioner.


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The law should not be interpreted to mean forfeiture of the principal loan as that would be unjustlyenriching the borrower. The unpaid principal debt still stands and remains valid but the stipulation as tothe usurious interest is void, consequently, the debt is to be c onsidered without stipulation as to theinterest.

As held in Angel Jose Warehousing Co., Inc. v. Chelda Enterprises, Et. Al.: 18

"In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt,which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the

prestation to pay the stipulated interest: hence, being separable, the latter only should be deemed void,since it is only one that is illegal."cralaw virtua1aw library

x x x

"The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discouragestipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomesone without stipulation as to the payment of interest. It should not, however, be interpreted to meanforfeiture even of the principal, for this would unjustly enrich the borrower at the expense of the lender.Furthermore, penal sanctions are available against a usurious lender, as a further deterrence tousury.chanrobles.com.ph : virtual law library

"The principal debt remaining without stipulation for payment of interest can thus be recovered by judicialaction."cralaw virtua1aw library

Petitioner contends that petitioner Del Rosario is not a party-in-interest in the case.

We do not agree.

Del Rosario mortgaged his properties in his personal capacity to secure the debt of DATICOR. As such, thecreditor, PDCP, may proceed against Del Rosario or DATICOR or both of them simultaneously for thepayment of the loan or for the performance of the obligation. In fact, PDCP filed for the foreclosure of thereal properties belonging to Del Rosario.

Petitioner further contends that the cause of action of Ernesto del Rosario in Civil Case No. 82-8088 isbarred by prescription and that there is a pending case before the Court of First Instance of Mati, Davaowith the same cause of action.

With regard to the first contention, Article 1957 of the Civil Code provides:jgc:chanrobles.com.ph

". . . contracts and stipulations, under any cloak or device whatever, intended to circumvent the lawagainst usury shall be void."cralaw virtua1aw library

Furthermore, Article 1410 provides:jgc:chanrobles.com.ph

"The action or defense for the declaration of the inexistence of a contract does not prescribe."cralawvirtua1aw library

The aforesaid articles therefore state that all usurious stipulations are void and as such, an action to annulsuch usurious stipulations does not prescribe.chanrobles virtualawlibrarychanrobles.com:chanrobles.com.ph

As to the issue of litis pendencia, such principle is not applicable to the case at bar. Records show and asadmitted by petitioner, the action filed in the Court of First Instance of Manila in Civil Case No. 82-8088was against Del Rosario while the case filed in the Court of First Instance of Mati, Davao Oriental in CivilCase No. 998 was against DATICOR. The first case against a natural person, while the second, against a

juridical person. Clearly, there is no identity of parties, hence, litis pendencia cannot apply.

WHEREFORE, finding no reversible error in the decision appealed herefrom, the same is hereby AFFIRMED


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in toto.chanrobles.com:cralaw:red

SO ORDERED.

Narvasa, C.J. , Padilla and Regalado, JJ. , concur.

Melo, J. , took no part.

THIRD DIVISION

[G.R. No. 131622. November 27, 1998]

LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO FRANCO, peti tioners, vs. COURT OF APPEALS, SPOUSES

VERONICA R. GONZALES and DANILO G. GONZALES, JR., doing lending business under the trade name andstyle "GONZALES CREDIT ENTERPRISES", respondents .

D E C I S I O N

PARDO, J.:

The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules of Court, seeking to setaside the decision of the Court of Appeals ,[1] and its resolution denying reconsideration ,[2]the dispositive portion of which decisionreads as follows:

"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annumeffective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effectiveAugust 23, 1986, until the entire amount is fully paid.

"The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costsagainst the defendants.

SO ORDERED. "[3]

The Court required the respondents to comment on the petition ,[4] which was filed on April 3, 1998 ,[5] and the petitioners to replythereto, which was filed on May 29, 1998 .[6] We now resolve to give due course to the petition and decide the case.

The facts of the case, as found by the Court of Appeals in its decision, which are considered binding and conclusive on the parties herein, as the appeal is limited to questions of law, are as follows:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia) obtained a loan from Veronica R.Gonzales (hereafter Veronica), who was engaged in the money lending business under the name "Gonzales Credit Enterprises", in theamount of P50,000.00, payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as sheretained P3,000.00, as advance interest for one month at 6% per month. Servado and Leticia executed a promissory notefor P50,000.00, to evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the amount of P90,000.00, payable in twomonths, at 6% interest per month. They executed a promissory note to evidence the loan, maturing on January 19, 1986. Theyreceived only P84,000.00, out of the proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount of P300,000.00, maturing in onemonth, secured by a real estate mortgage over a property belonging to Leticia Makalintal Yaptinchay, who issued a special power of
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Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which reads as follows:

"WHEREFORE, premises considered, judgment is hereby rendered, as follows:

"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay plaintiffs the amount of P47,000.00 plus12% interest per annum from November 7, 1985 and 1% per month as penalty, until the entire amount is paid in full.

"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally the amount of P84,000.00 with12% interest per annum and 1% per cent per month as penalty from November 19,1985 until the whole amount is fully paid;

"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of P285,000.00 plus 12% interest per annum and1% per month as penalty from July 11, 1986, until the whole amount is fully paid;

"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as attorney's fees;

"5. All counterclaims are hereby dismissed.

"With costs against the defendants. " [8]

In due time, both plaintiffs and defendants appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the unpaid loans of the defendants, isthe law that governs the parties. They further argued that Circular No. 416 of the Central Bank prescribing the rate of interest forloans or forbearance of money, goods or credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but notwhen the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law having become 'legallyinexistent' with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and borrower could agree on any interestthat may be charged on the loan" .[9] The Court of Appeals further held that "the imposition of 'an additional amount equivalent to 1%

per month of the amount due and demandable as penalty charges in the form of liquidated damages until fully paid ' was allowed bylaw" .[10]

Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that of the Regional Trial Court,disposing as follows:

"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to

pay the plaintiffs the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annumeffective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effectiveAugust 24, 1986, until the entire amount is fully paid.

"The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costsagainst the defendants.

"SO OREDERED. "[11]

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By resolution dated November25, 1997, the Court of Appeals denied the motion .[12]

Hence, defendants interposed the present recourse via petition for review on certiorari .[13]

We find the petition meritorious.

Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question presented is whether or notthe stipulated rate of interest at 5.5% per month on the loan in the sum of P500,000.00, that plaintiffs extended to the defendants isusurious. In other words, is the Usury Law still effective, or has it been repealed by Central Bank Circular No. 905, adopted onDecember 22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684?

We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous,unconscionable and exorbitant .13 However, we can not consider the rate "usurious" because this Court has consistently held thatCirculr No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by theUsury Law [14] and that the Usury Law is now "legally inexistent" .[15]

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 6 1 [16] the Court held that CB Circular No. 905"did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity." Indeed, we have held that "aCentral Bank Circular can not repeal a law. Only a law can repeal another law. " [17] In the recent case of Florendo vs. Court of
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Appeal s[18] , the Court reiterated the ruling that "by virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usuryhas been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon. " [19]

Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory noteiniquitous or unconscionable, and, hence, contrary to morals (" contra bonos mores "), if not against the law .[20] The stipulation isvoid .[21] The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous orunconscionable .[22]

Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we agree with the trial court that,under the circumstances, interest at 12% per annum, and an additional 1% a month penalty charge as liquidated damages may be more

reasonable.WHEREFORE , the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals promulgated on March

21, 1997, and its resolution dated November 25, 1997. Instead, we render judgment REVIVING and AFFIRMING the decision datedDecember 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving thesame parties.

No pronouncement as to costs in this instance

SO ORDERED.

Narvasa, C.J. (Chairman), Romero, Kapunan, and Purisima, JJ., concur .

FIRST DIVISION

[G.R. No. 133498. April 18, 2002]

C.F. SHARP & CO., INC., petitioner, vs. NORTHWEST AIRLINES, INC., respondent.

D E C I S I O N

YNARES-SANTIAGO, J .:

This is a petition for review under Rule 45 of the Rules of Court assailing the February 17, 1997 Decisio n [1] and the April 2,1998 Resolutio n[2] of the Court of Appeal s[3] in CA-G.R. SP No. 40996.

The undisputed facts are as follows:

On May 9, 1974, respondent, through its Japan Branch, entered into an International Passenger Sales Agency Agreement with petitioner, authorizing the latter to sell its air transport tickets. Petitioner failed to remit the proceeds of the ticket sales, for whichreason, respondent filed a collection suit against petitioner before the Tokyo District Court which rendered judgment on January 29,1981, ordering petitioner to pay respondent the amount of 83,158,1 95 Yen and damages for the delay at the rate of 6%

per annum from August 28, 1980 up to and until payment is completed. [4]

Unable to execute the decision in Japan, respondent filed acase to enforce said foreign judgment with the Regional Trial Court of Manila, Branch 54 . [5] However, the case was dismissed on theground of failure of the Japanese Court to acquire jurisdiction over the person of the petitioner. Respondent appealed to the Court ofAppeals, which affirmed the decision of the trial court.

Respondent filed a petition for review with this Court, docketed as G.R. No. 112573. On February 9, 1995, a decision wasrendered, the dispositive portion of which reads:

WHEREFORE, the instant petition is partly GRANTED, and the challenged decision is AFFIRMED insofar as it denied NORTHWESTs claims for attorneys fees, litigatio n expenses, and exemplary damages but REVERSED insofar as it sustained thetrial courts dismissal of NORTHWESTs complaint in Civil Case No. 83 -17637 of Branch 54 of the Regional Trial Court of Manila,and another in its stead is hereby rendered ORDERING private respondent C.F. SHARP & COMPANY, INC. to pay to
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NORTHWEST the amounts adjudged in the foreign judgment subject of said case, with interest thereon at the legal rate from thefiling of the complaint therein until the said foreign judgment is fully satisfied.

Costs against the private respondent.

SO ORDERED .[6]

Accordingly, the Regional Trial Court of Manila, Branch 54 , issued a writ of execution of the foregoing decision .[7] On November 22, 1995 , the trial court modified its order for the execution of the decision, viz :

WHEREFORE, in view of the foregoing, this Court hereby issues another order, as follows: the writ of execution is issued againstdefendant C.F. Sharp ordering said defendant to pay the plaintiff the sum of 83,158,195 Yen at the exchange rate prevailing on thedate of the foreign judgment on January 29, 1981, plus 6% per annum until May 19, 1983; and from said date until full payment,12% per annum (6% by way of damages and 6% interest) until the entire obligation is fully satisfied.

SO ORDERED .[8]

On December 18, 1995, petitioner filed a petition for certiorari under Rule 65, docketed as G.R. No. 122890, assailing theaforequoted order. On May 29, 1996, the case was referred to the Court of Appeals. Petitioner contended that it had already made

partial payments; hence, it was liable only for the amount of 61,734,633 Yen. Moreover, it argued that it was not liable to payadditional interest on top of the 6% interest imposed in the foreign judgment.

The Court of Appeals rendered the assailed decision on February 17, 1997. It sustained the imposition of additional interest onthe liability of petitioner as adjudged in the foreign judgment. The appellate court likewise corrected the reckoning date of theimposition of the interests in accordance with the February 9, 1995 decision to be executed, but lowered the additional interest from12% to 6% per annum. Further, it ruled that the basis of the conversion of petitioners liability in its peso equivalent should be the

prevailing rate at the time of payment and not the rate on the date of the foreign judgment. The dispositive portion of the said decisionreads:

WHEREFORE, the petition is GRANTED. The assailed Orders dated October 13, 1995 and November 22, 1995 are annulled and setaside on the ground that they varied the final judgment of the First Division of the Supreme Court in G.R. No. 112573, entitled,NORTHWEST ORIENT AIRLINES, INC., Petitioner, versus, COURT OF APPEALS and C. F. SHARP & COMPANY, INC.,Respon dents.

Respondent court is enjoined to execute the said final judgment with an unpaid principal balance of Y61,734,633 plus damages fordelay at the rate of 6% per annum from August 28, 1980, until fully paid, which may be paid in local currency based on theconversion rate prevailing at the time of payment; plus 6% legal interest per annum from August 28, 1980, the date of the filing of thecomplaint in the foreign judgment.

No costs.

SO ORDERED .[9]

On April 2, 1998, the Court of Appeals denied both the motion for reconsideration and the partial motion for reconsiderationfiled by petitioner and respondent, respectively.

In the present recourse, petitioner questions the applicable conversion rate of its liability, and claims that a ruling thereon by theCourt of Appeals effectively deprived it of due process of law because said rate was not among the issues submitted for resolution.

The petition is without merit.

In ruling that the applicable conversion rate of petitioners liability is the rate at the time of payment, the Court of Appeals citedthe case of Zagala v. Jimenez ,[10] interpreting the provisions of Republic Act No. 529, as amended by R.A. No. 4100. Under this law,stipulations on the satisfaction of obligations in foreign currency are void. Payments of monetary obligations, subject to certainexceptions, shall be discharged in the currency which is the legal tender in the Philippines. But since R.A. No. 529 does not providefor the rate of exchange for the payment of foreign currency obligations incurred after its enactment, the Court held in a number ofcase s[11] that the rate of exchange for the conversion in the peso equivalent should be the prevailing rate at the time of payment.

Petitioner, however, contends that with the repeal of R.A. No. 529 by R.A. No. 8183 ,[12] the jurisprudence relied upon by theCourt of Appeals is no longer applicable.

Republic Act No. 529, as amended by R.A. No. 4100, provides:
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The Court is clothed with ample authority to review matters, even if they are not assigned as errors on appeal, if it finds that theirconsideration is necessary in arriving at a just decision of the case. Rules of procedure are mere tools designed to facilitate theattainment of justice. Their strict and rigid application, which would result in technicalities that tend to frustrate rather than promotesubstantial justice, must be avoided. Hence, substantive rights, like the applicable legal rate of interest on petitioners long due anddemandable obligation, must not be prejudiced by a rigid and technical application of the rules .[19]

WHEREFORE , in view of all the foregoing, the instant petition is DENIED. The February 17, 1997 decision and the April 2,1998 resolution of the Court of Appeals in CA-G.R. SP No. 40996 are AFFIRMED with MODIFICATION. Petitioner is directed to

pay respondent 61,734,633 Yen plus damages for the delay at the rate of 6% per annum from August 28, 1980 up to and until paymentis completed, with interest at the rate of 12% per annum counted from the date of filing of the complaint on August 28, 1980, until

fully satisfied. Petitioners liability may be paid in Philippine currency, comp uted at the exchange rate prevailing at the time of payment.

SO ORDERED.

Puno, and Sandoval-Gutierrez, JJ., concur. Davide, Jr., C.J., (Chairman), Kapunan, and Austria-Martinez, JJ., on official leave.
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