3 & 4 - Lending Act and Deposits.docx

7/29/2019 3 & 4 - Lending Act and Deposits.docx

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Credit 3. Truth in Lending Act & 4. Deposits Page 1 of 31

G.R. No. 159912

UNITED COCONUT PLANTERS BANK,

Petitioner,

- versus -

SPOUSES SAMUEL and ODETTE BELUSO,

Respondents.

August 17, 2007

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks toannul the Court of Appeals Decision[1] dated 21 January 2003 and its Resolution[2] dated 9September 2003 in CA-G.R. CV No. 67318. The assailed Court of Appeals Decision andResolution affirmed in turn the Decision[3] dated 23 March 2000 and Order[4] dated 8 May

2000 of the Regional Trial Court (RTC), Branch 65 of Makati City, in Civil Case No. 99-314,declaring void the interest rate provided in the promissory notes executed by the respondentsSpouses Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United CoconutPlanters Bank (UCPB).

The procedural and factual antecedents of this case are as follows:

On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a CreditAgreement whereby the latter could avail from the former credit of up to a maximum amount ofP1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso constituted, otherthan their promissory notes, a real estate mortgage over parcels of land in Roxas City, coveredby Transfer Certificates of Title No. T-31539 and T-27828, as additional security for theobligation. The Credit Agreement was subsequently amended to increase the amount of thePromissory Notes Line to a maximum of P2.35 Million pesos and to extend the term thereof to28 February 1998.

The spouses Beluso availed themselves of the credit line under the following Promissory Notes:

PN #

Date of PN

Maturity Date

Amount Secured

8314-96-00083-3

29 April 1996

27 August 1996

P 700,000

8314-96-00085-0

2 May 1996

30 August 1996

P 500,000

8314-96-000292-2

20 November 1996

20 March 1997

P 800,000

The three promissory notes were renewed several times. On 30 April 1997, the payment of theprincipal and interest of the latter two promissory notes were debited from the spouses Belusos

account with UCPB; yet, a consolidated loan for P1.3 Million was again released to the spousesBeluso under one promissory note with a due date of 28 February 1998.

To completely avail themselves of the P2.35 Million c redit line extended to them by UCPB, thespouses Beluso executed two more promissory notes for a total of P350,000.00:

PN #

Date of PN

Maturity Date

Amount Secured

97-00363-1

11 December 1997

28 February 1998

P 200,000

98-00002-4

2 January 1998

28 February 1998


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P 150,000

However, the spouses Beluso alleged that the amounts covered by these last two promissorynotes were never released or credited to their account and, thus, claimed that the principalindebtedness was only P2 Million.

In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to

34%. From 1996 to February 1998 the spouses Beluso were able to pay the total sum ofP763,692.03.

From 28 February 1998to 10 June 1998, UCPB continued to charge interest and penalty on theobligations of the spouses Beluso, as follows:

PN #

Amount Secured

Interest

Penalty

Total

97-00363-1

P 200,000

31%

36%

P 225,313.24

97-00366-6

P 700,000

30.17%

(7 days)

32.786% (102 days)

P 795,294.72

97-00368-2

P 1,300,000

28%

(2 days)

30.41% (102 days)

P 1,462,124.54

98-00002-4

P 150,000

33%

(102 days)

36%

P 170,034.71

The spouses Beluso, however, failed to make any payment of the foregoing amounts.

On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation ofP2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to comply therewith. On28 December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso tosecure their credit line, which, by that time, already ballooned to P3,784,603.00.

On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting andDamages against UCPB with the RTC of Makati City.

On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case asfollows:

PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate used by

[UCPB] void and the foreclosure and Sheriffs Certificate of Sale void. [UCPB] is hereby orderedto return to [the spouses Beluso] the properties subject of the foreclosure; to pay [the spousesBeluso] the amount of P50,000.00 by way of attorneys fees; and to pay the costs of suit. [Thespouses Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00.[5]

On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration,[6] prompting UCPB to

appeal the RTC Decision with the Court of Appeals. The Court of Appeals affirmed the RTCDecision, to wit:

WHEREFORE, premises considered, the decision dated March 23, 2000 of the Regional TrialCourt, Branch 65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED subject to themodification that defendant-appellant UCPB is not liable for attorneys fees or the costs ofsuit.[7]


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On 9 September 2003, the Court of Appeals denied UCPBs Motion for Reconsideration for lack

of merit. UCPB thus filed the present petition, submitting the following issues for our resolution:

I

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ANDREVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH

DECLARED VOID THE PROVISION ON INTEREST RATE AGREED UPON BETWEENPETITIONER AND RESPONDENTS

II

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ANDREVERSIBLE ERROR WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL COURTOF RESPONDENTS INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY

PETITIONER THE AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY THOUSANDTHREE HUNDRED EIGHT PESOS (P1,560,308.00)

III

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ANDREVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICHANNULLED THE FORECLOSURE BY PETITIONER OF THE SUBJECT PROPERTIES DUETOAN ALLEGED INCORRECT COMPUTATION OF RESPONDENTS INDEBTEDNESS

IV

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ANDREVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICHFOUND PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN LENDING ACT

V

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS ANDREVERSIBLE ERROR WHEN IT FAILED TO ORDER THE DISMISSAL OF THE CASEBECAUSE THE RESPONDENTS ARE GUILTY OF FORUM SHOPPING[8]

Validity of the Interest Rates

The Court of Appeals held that the imposition of interest in the following provision found in thepromissory notes of the spouses Beluso is void, as the interest rates and the bases thereforwere determined solely by petitioner UCPB:

FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTEBELUSO (BORROWER), jointly and severally promise to pay to UNITED COCONUTPLANTERS BANK (LENDER) or order at UCPB Bldg., Makati Avenue, Makati City, Philippines,the sum of ______________ PESOS, (P_____), Philippine Currency, with interest thereon at

the rate indicative of DBD retail rate or as determined by the Branch Head.[9]

UCPB asserts that this is a reversible error, and claims that while the interest rate was notnumerically quantified in the face of the promissory notes, it was nonetheless categoricallyfixed, at the time of execution thereof, at the rate indicative of the DBD retail rate. UCPB

contends that said provision must be read with another stipulation in the promissory notessubjecting to review the interest rate as fixed:

The interest rate shall be subject to review and may be increased or decreased by the LENDER

considering among others the prevailing financial and monetary conditions; or the rate ofinterest and charges which other banks or financial institutions charge or offer to charge forsimilar accommodations; and/or the resulting profitability to the LENDER after dueconsideration of all dealings with the BORROWER.[10]

In this regard, UCPB avers that these are valid reference rates akin to a prevailing rate orprime rate allowed by this Court in Polotan v. Court of Appeals.[11] Furthermore, UCPB

argues that even if the proviso as determined by the branch head is considered void, such a

declaration would not ipso facto render the connecting clause indicative of DBD retail rate voidin view of the separability clause of the Credit Agreement, which reads:

Section 9.08 Separability Clause. If any one or more of the provisions contained in thisAGREEMENT, or documents executed in connection herewith shall be declared invalid, illegal

or unenforceable in any respect, the validity, legality and enforceability of the remainingprovisions hereof shall not in any way be affected or impaired.[12]

According to UCPB, the imposition of the questioned interest rates did not infringe on theprinciple of mutuality of contracts, because the spouses Beluso had the liberty to choosewhether or not to renew their credit line at the new interest rates pegged by petitioner.[13]UCPB also claims that assuming there was any defect in the mutuality of the contract at thetime of its inception, such defect was cured by the subsequent conduct of the spouses Belusoin availing themselves of the credit line from April 1996 to February 1998 without airing anyprotest with respect to the interest rates imposed by UCPB. According to UCPB, therefore, thespouses Beluso are in estoppel.[14]

We agree with the Court of Appeals, and find no merit in the contentions of UCPB.

Article 1308 of the Civil Code provides:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot beleft to the will of one of them.

We applied this provision in Philippine National Bank v. Court of Appeals,[15] where we held:

In order that obligations arising from contracts may have the force of law between the parties,there must be mutuality between the parties based on their essential equality. A contractcontaining a condition which makes its fulfillment dependent exclusively upon the uncontrolledwill of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).Hence, even assuming that the P1.8 million loan agreement between the PNB and the privaterespondent gave the PNB a license (although in fact there was none) to increase the interest

rate at will during the term of the loan, that license would have been null and void for beingviolative of the principle of mutuality essential in contracts. It would have invested the loan


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agreement with the character of a contract of adhesion, where the parties do not bargain onequal footing, the weaker partys (the debtor) participation being reduced to the alternative to

take it or leave it (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a

veritable trap for the weaker party whom the courts of justice must protect against abuse andimposition.

The provision stating that the interest shall be at the rate indicative of DBD retail rate or as

determined by the Branch Head is indeed dependent solely on the will of petitioner UCPB.Under such provision, petitioner UCPB has two choices on what the interest rate shall be: (1) arate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPBis given this choice, the rate should be categorically determinable in both choices. If either ofthese two choices presents an opportunity for UCPB to fix the rate at will, the bank can easilychoose such an option, thus making the entire interest rate provision violative of the principle ofmutuality of contracts.

Not just one, but rather both, of these choices are dependent solely on the will of UCPB.Clearly, a rate as determined by the Branch Head gives the latter unfettered discretion on

what the rate may be. The Branch Head may choose any rate he or she desires. As regards therate indicative of the DBD retail rate, the same cannot be considered as valid for being akin to

a prevailing rate or prime rate allowed by this Court in Polotan. The interest rate in Polotan

reads:

The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bankand Trust Company. x x x.[16]

In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, theparties can easily determine the interest rate by applying simple arithmetic. On the other hand,the provision in the case at bar does not specify any margin above or below the DBD retail rate.UCPB can peg the interest at any percentage above or below the DBD retail rate, again giving i tunfettered discretion in determining the interest rate.

The stipulation in the promissory notes subjecting the interest rate to review does not render theimposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According

to said stipulation:

The interest rate shall be subject to review and may be increased or decreased by the LENDERconsidering among others the prevailing financial and monetary conditions; or the rate ofinterest and charges which other banks or financial institutions charge or offer to charge forsimilar accommodations; and/or the resulting profitability to the LENDER after dueconsideration of all dealings with the BORROWER.[17]

It should be pointed out that the authority to review the interest rate was given UCPB alone asthe lender. Moreover, UCPB may apply the considerations enumerated in this provision as itwishes. As worded in the above provision, UCPB may give as much weight as it desires to eachof the following considerations: (1) the prevailing financial and monetary condition; (2) the rateof interest and charges which other banks or financial i nstitutions charge or offer to charge forsimilar accommodations; and/or (3) the resulting profitability to the LENDER (UCPB) after dueconsideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the caseof the interest rate provision, there is no fixed margin above or below these considerations.

In view of the foregoing, the Separability Clause cannot save either of the two options of UCPBas to the interest to be imposed, as both options violate the principle of mutuality of contracts.

UCPB likewise failed to convince us that the spouses Beluso were in estoppel.

Estoppel cannot be predicated on an illegal act. As between the parties to a contract, validitycannot be given to it by estoppel if it is prohibited by law or is against public policy.[18]

The interest rate provisions in the case at bar are illegal not only because of the provisions ofthe Civil Code on mutuality of contracts, but also, as shall be discussed later, because theyviolate the Truth in Lending Act. Not disclosing the true finance charges in connection with theextensions of credit is, furthermore, a form of deception which we cannot countenance. It isagainst the policy of the State as stated in the Truth in Lending Act:

Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect itscitizens from a lack of awareness of the true cost of credit to the user by assuring a fulldisclosure of such cost with a view of preventing the uninformed use of credit to the detriment ofthe national economy.[19]

Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending

provisions are found in the promissory notes themselves, not in the credit line. In fixing theinterest rates in the promissory notes to cover the renewed credit line, UCPB still reserved toitself the same two options (1) a rate indicative of the DBD retail rate; or (2) a rate asdetermined by the Branch Head.

Error in Computation

UCPB asserts that while both the RTC and the Court of Appeals voided the interest ratesimposed by UCPB, both failed to include in their computation of the outstanding obligation ofthe spouses Beluso the legal rate of interest of 12% per annum. Furthermore, the penaltycharges were also deleted in the decisions of the RTC and the Court of Appeals. Section 2.04,

Article II on Interest and other Bank Charges of the subject Credit Agreement, provides:

Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of thisARTICLE, any principal obligation of the CLIENT hereunder which is not paid when due shall besubject to a penalty charge of one percent (1%) of the amount of such obligation per monthcomputed from due date until the obligation is paid in full. If the bank accelerates teh (sic)payment of availments hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall beused on the total principal amount outstanding and unpaid computed from the date ofacceleration until the obligation is paid in full.[20]

Paragraph 4 of the promissory notes also states:

In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and severally,agree to pay an additional sum equivalent to twenty-five percent (25%) of the total due on theNote as attorneys fee, aside from the expenses and costs of collection whether actually

incurred or not, and a penalty charge of one percent (1%) per month on the total amount due

and unpaid from date of default until fully paid.[21]


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Petitioner further claims that it is l ikewise entitled to attorneys fees, pursuant to Section 9.06 of

the Credit Agreement, thus:

If the BANK shall require the services of counsel for the enforcement of its rights under thisAGREEMENT, the Note(s), the collaterals and other related documents, the BANK shall beentitled to recover attorneys fees equivalent to not less than twenty-five percent (25%) of thetotal amounts due and outstanding exclusive of costs and other expenses.[22]

Another alleged computational error pointed out by UCPB is the negation of the CompoundingInterest agreed upon by the parties under Section 2.02 of the Credit Agreement:

Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principaland shall be subject to the same interest rate as herein stipulated.[23]

and paragraph 3 of the subject promissory notes:

Interest not paid when due shall be added to, and become part of the principal and shalllikewise bear interest at the same rate.[24]

UCPB lastly avers that the application of the spouses Belusos payments in the disputed

computation does not reflect the parties agreement. The RTC deducted the payment made bythe spouses Beluso amounting to P763,693.00 from the principal of P2,350,000.00. This wasallegedly inconsistent with the Credit Agreement, as well as with the agreement of the partiesas to the facts of the case. In paragraph 7 of the spouses Belusos Manifestation and Motion on

Proposed Stipulation of Facts and Issues vis--vis UCPBs Manifestation, the parties agreedthat the amount of P763,693.00 was applied to the interest and not to the principal, in accordwith Section 3.03, Article II of the Credit Agreement on Order of the Application of Payments,

which provides:

Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied inaccordance with the following order of preference:

1. Accounts receivable and other out-of-pocket expenses

2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection;

3. Penalty charges;

4. Past due interest;

5. Principal amortization/Payment in arrears;

6. Advance interest;

7. Outstanding balance; and

8. All other obligations of CLIENT to the BANK, if any.[25]

Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees had beenerroneously excluded by the RTC and the Court of Appeals from the computation of the totalamount due and demandable from spouses Beluso.

The spouses Belusos defense as to all these issues is that the demand made by UCPB is for aconsiderably bigger amount and, therefore, the demand should be considered void. There beingno valid demand, according to the spouses Beluso, there would be no default, and therefore the

interests and penalties would not commence to run. As it was likewise improper to foreclose themortgaged properties or file a case against the spouses Beluso, attorneys fees were not

warranted.

We agree with UCPB on this score. Default commences upon judicial or extrajudicialdemand.[26] The excess amount in such a demand does not nullify the demand itself, which isvalid with respect to the proper amount. A contrary ruling would put commercial transactions indisarray, as validity of demands would be dependent on the exactness of the computationsthereof, which are too often contested.

There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso areconsidered in default with respect to the proper amount and, therefore, the interests and thepenalties began to run at that point.

As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognizedthat said legal interest should be imposed, thus: There being no valid stipulation as to interest,

the legal rate of interest shall be charged.[27] It seems that the RTC inadvertently overlookedits non-inclusion in its computation.

The spouses Beluso had even originally asked for the RTC to impose this legal rate of interestin both the body and the prayer of its petition with the RTC:

12. Since the provision on the fixing of the rate of interest by the sole will of the respondentBank is null and void, only the legal rate of interest which is 12% per annum can be legallycharged and imposed by the bank, which would amount to only about P599,000.00 since 1996up to August 31, 1998.

x x x x

WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:

x x x x

2. By way of example for the public good against the Banks taking unfair advantage of the

weaker party to their contract, declaring the legal rate of 12% per annum, as the imposable rateof interest up to February 28, 1999 on the loan of 2.350 million.[28]

All these show that the spouses Beluso had acknowledged before the RTC their obligation topay a 12% legal interest on their loans. When the RTC failed t o include the 12% legal interest inits computation, however, the spouses Beluso merely defended in the appellate courts this non-

inclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a


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12% legal interest in favor of petitioner in the case at bar, as what we have voided is merely thestipulated rate of interest and not the stipulation that the loan shall earn interest.

We must likewise uphold the contract stipulation providing the compounding of interest. Theprovisions in the Credit Agreement and in the promissory notes providing for the compoundingof interest were neither nullified by the RTC or the Court of Appeals, nor assailed by thespouses Beluso in their petition with the RTC. The compounding of interests has furthermore

been declared by this Court to be legal. We have held in Tan v. Court of Appeals,[29] that:

Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earninterest. However, the contracting parties may by stipulation capitalize the interest due andunpaid, which as added principal, shall earn new interest.

As regards the imposition of penalties, however, although we are likewise upholding theimposition thereof in the contract, we find the rate iniquitous. Like in the case of grosslyexcessive interests, the penalty stipulated in the contract may also be reduced by the courts if itis iniquitous or unconscionable.[30]

We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitousconsidering the fact that this penalty is already over and above the compounded interest

likewise imposed in the contract. If a 36% interest in itself has been declared unconscionable bythis Court,[31] what more a 30.41% to 36% penalty, over and above the payment ofcompounded interest? UCPB itself must have realized this, as it gave us a sample computationof the spouses Belusos obligation if both the interest and the penalty charge are reduced to

12%.

As regards the attorneys fees, the spouses Beluso can actually be liable therefor even if therehad been no demand. Filing a case in court is the judicial demand referred to in Article 1169[32]of the Civil Code, which would put the obligor in delay.

The RTC, however, also held UCPB liable for attorneys fees in this case, as the spousesBeluso were forced to litigate the issue on the illegality of the interest rate provision of thepromissory notes. The award of attorneys fees, it must be recalled, falls under the sound

discretion of the court.[33] Since both parties were forced to litigate to protect their respectiverights, and both are entitled to the award of attorneys fees from the other, practical reasons

dictate that we set off or compensate both parties liabilities for attorneys fees. Therefore,

instead of awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion ofthe award of attorneys fees to the spouses Beluso.

In sum, we hold that spouses Beluso should still be held liable for a compounded legal interestof 12% per annum and a penalty charge of 12% per annum. We also hold that, instead ofawarding attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award

of attorneys fees to the spouses Beluso.

Annulment of the Foreclosure Sale

Properties of spouses Beluso had been foreclosed, titles to which had already been

consolidated on 19 February 2001 and 20 March 2001 in the name of UCPB, as the spousesBeluso failed to exercise their right of redemption which expired on 25 March 2000. The RTC,

however, annulled the foreclosure of mortgage based on an alleged incorrect computation ofthe spouses Belusos indebtedness.

UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present inthe case at bar. Furthermore, the annulment of the foreclosure proceedings and the certificatesof sale were mooted by the subsequent issuance of new certificates of title in the name of saidbank. UCPB claims that the spouses Belusos action for annulment of foreclosure constitutes a

collateral attack on its certificates of title, an act proscribed by Section 48 of Presidential DecreeNo. 1529, otherwise known as the Property Registration Decree, which provides:

Section 48. Certificate not subject to collateral attack. A certificate of title shall not be subjectto collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding inaccordance with law.

The spouses Beluso retort that since they had the right to refuse payment of an excessivedemand on their account, they cannot be said to be in default for refusing to pay the same.Consequently, according to the spouses Beluso, the enforcement of such illegal and

overcharged demand through foreclosure of mortgage should be voided.

We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already

found that a valid demand was made by UCPB upon the spouses Beluso, despite beingexcessive, the spouses Beluso are considered in default with respect to the proper amount oftheir obligation to UCPB and, thus, the property they mortgaged to secure such amounts maybe foreclosed. Consequently, proceeds of the foreclosure sale should be applied to the extentof the amounts to which UCPB is rightfully entitled.

As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present inthis case. The grounds for the proper annulment of the foreclosure sale are the following: (1)that there was fraud, collusion, accident, mutual mistake, breach of trust or m isconduct by thepurchaser; (2) that the sale had not been fairly and regularly conducted; or (3) that the pricewas inadequate and the inadequacy was so great as to shock the conscience of the court.[34]

Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs allegedviolation of Republic Act No. 3765, otherwise known as the Truth in Lending Act.

UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Actwhich mandates the filing of an action to recover such penalty must be made under thefollowing circumstances:

Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to anyperson any information in violation of this Act or any regulation issued thereunder shall be liableto such person in the amount of P100 or in an amount equal to twice the finance chargerequired by such creditor in connection with such transaction, whichever is greater, except thatsuch liability shall not exceed P2,000 on any credit transaction. Action to recover such penaltymay be brought by such person within one year from the date of the occurrence of the violation,

in any court of competent jurisdiction. x x x (Emphasis ours.)


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According to UCPB, the Court of Appeals even stated that [a]dmittedly the original complaintdid not explicitly allege a violation of the Truth in Lending Act and no action to formally admit

the amended petition [which expressly alleges violation of the Truth in Lending Act] was madeeither by [respondents] spouses Beluso and the lower court. x x x.[35]

UCPB further claims that the action to recover the penalty for the violation of the Truth inLending Act had been barred by the one-year prescriptive period provided for in the Act. UCPB

asserts that per the records of the case, the latest of the subject promissory notes had beenexecuted on 2 January 1998, but the original petition of the spouses Beluso was filed before theRTC on 9 February 1999, which was after the expiration of the period to file the same on 2January 1999.

On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appealsruled:

Admittedly the original complaint did not explicitly allege a violation of the Truth in Lending Act

and no action to formally admit the amended petition was made either by [respondents]spouses Beluso and the lower court. In such transactions, the debtor and the lendinginstitutions do not deal on an equal footing and this law was intended to protect the public fromhidden or undisclosed charges on their loan obligations, requiring a full disclosure thereof by the

lender. We find that its infringement may be inferred or implied from allegations that when[respondents] spouses Beluso executed the promissory notes, the interest rate chargeablethereon were left blank. Thus, [petitioner] UCPB failed to discharge its duty to disclose in full to[respondents] Spouses Beluso the charges applicable on their l oans.[36]

We agree with the Court of Appeals. The allegations in the complaint, much more than the titlethereof, are controlling. Other than that stated by the Court of Appeals, we find that theallegation of violation of the Truth in Lending Act can also be inferred from the same allegationin the complaint we discussed earlier:

b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on theprovision of their promissory note granting respondent bank the power to unilaterally fix theinterest rates, which rate was not determined in the promissory note but was left solely to the

will of the Branch Head of the respondent Bank, x x x.[37]

The allegation that the promissory notes grant UCPB the power to unilaterally fix the interestrates certainly also means that the promissory notes do not contain a clearstatement inwriting of (6) the finance charge expressed in terms of pesos and centavos; and (7) the

percentage that the finance charge bears to the amount to be financed expressed as a simpleannual rate on the outstanding unpaid balance of the obligation.[38] Furthermore, the spousesBelusos prayer for such other reliefs just and equitable in the premises should be deemed to

include the civil penalty provided for in Section 6(a) of the Truth in Lending Act.

UCPBs contention that this action to recover the penalty for the violation of the Truth in LendingAct has already prescribed is likewise without merit. The penalty for the violation of the act isP100 or an amount equal to twice the finance charge required by such creditor in connectionwith such transaction, whichever is greater, except that such liability shall not exceed P2,000.00

on any credit transaction.[39] As this penalty depends on the finance charge required of theborrower, the borrowers cause of action would only accrue when such finance charge is

required. In the case at bar, the date of the demand for payment of the finance charge is 2September 1998, while the foreclosure was made on 28 December 1998. The filing of the caseon 9 February 1999 is therefore within the one-year prescriptive period.

UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot beinferred nor implied from the allegations made in the complaint.[40] Pertinent provisions of the

Act read:

Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to anyperson any information in violation of this Act or any regulation issued thereunder shall be liableto such person in the amount of P100 or in an amount equal to twice the finance chargerequired by such creditor in connection with such transaction, whichever is the greater, exceptthat such liability shall not exceed P2,000 on any credit transaction. Action to recover suchpenalty may be brought by such person within one year from the date of the occurrence of theviolation, in any court of competent jurisdiction. In any action under this subsection in which anyperson is entitled to a recovery, the creditor shall be liable for reasonable attorneys fees and

court costs as determined by the court.

x x x x

(c) Any person who willfully violates any provision of this Act or any regulation issuedthereunder shall be fined by not less than P1,000 or more than P5,000 or imprisonment for notless than 6 months, nor more than one year or both.

As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the saidAct gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense thewillful violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose anyinformation of the required information to any person in violation of the Act. The penalty thereforis an amount of P100 or in an amount equal to twice the finance charge required by the creditorin connection with such transaction, whichever is greater, except that the liability shall notexceed P2,000.00 on any credit transaction. The action to recover such penalty may beinstituted by the aggrieved private person separately and independently from the c riminal case

for the same offense.

In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of theTruth in Lending Act had been jointly i nstituted with (1) the action to declare the interests in thepromissory notes void, and (2) the action to declare the foreclosure void. This joinder is allowedunder Rule 2, Section 5 of the Rules of Court, which provides:

SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the alternative orotherwise, as many causes of action as he may have against an opposing party, subject to thefollowing conditions:

(a) The party joining the causes of action shall comply with the rules on joinder of parties;

(b) The joinder shall not include special civil actions or actions governed by special rules;


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(c) Where the causes of action are between the same parties but pertain to different venues orjurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causesof action falls within the jurisdiction of said court and the venue lies therein; and

(d) Where the claims in all the causes of action are principally for recovery of money, theaggregate amount claimed shall be the test of jurisdiction.

In attacking the RTCs disposition on the violation of the Truth in Lending Act since the samewas not alleged in the complaint, UCPB is actually asserting a violation of due process. Indeed,due process mandates that a defendant should be sufficiently apprised of the matters he or shewould be defending himself or herself against. However, in the 1 July 1999 pre-trial brief fil ed bythe spouses Beluso before the RTC, the claim for civil sanctions for violation of the Truth inLending Act was expressly alleged, thus:

Moreover, since from the start, respondent bank violated the Truth in Lending Act in notinforming the borrower in writing before the execution of the Promissory Notes of the interestrate expressed as a percentage of the total loan, the respondent bank instead is liable to paypetitioners double the amount the bank is charging petitioners by way of sanction for itsviolation.[41]

In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:

b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in Lending Actprovision to express the interest rate as a simple annual percentage of the loan?[42]

These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance ofthe assertion of this issue in this case as to prevent it from putting up a defense thereto isplainly hogwash.

Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try andadjudicate the alleged violation of the Truth in Lending Act, considering that the present actionallegedly involved a single credit transaction as there was only one Promissory Note Line.

We disagree. We have already ruled that the action to recover the penalty under Section 6(a) ofthe Truth in Lending Act had been jointly instituted with (1) the action to declare the interests inthe promissory notes void, and (2) the action to declare the foreclosure void. There had been noquestion that the above actions belong to the jurisdiction of the RTC. Subsection (c) of theabove-quoted Section 5 of the Rules of Court on Joinder of Causes of Action provides:

(c) Where the causes of action are between the same parties but pertain to different venues orjurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causesof action falls within the jurisdiction of said court and the venue lies therein.

Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, sincethe former is merely a preparatory contract to the contract of loan or mutuum. Under such creditline, the bank is merely obliged, for the considerations specified therefor, to lend to the otherparty amounts not exceeding the limit provided. The credit transaction thus occurred not when

the credit line was opened, but rather when the credit line was availed of. In the case at bar, theviolation of the Truth in Lending Act allegedly occurred not when the parties executed the Credit

Agreement, where no interest rate was mentioned, but when the parties executed thepromissory notes, where the allegedly offending interest rate was stipulated.

UCPB further argues that since the spouses Beluso were duly given copies of the subjectpromissory notes after their execution, then they were duly notified of the terms thereof, insubstantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that thedisclosure statement must be furnished prior to the consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to theconsummation of the transaction, a clear statement in writing setting forth, to the extentapplicable and in accordance with rules and regulations prescribed by the Board, the followinginformation:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2)

(4) the charges, individually itemized, which are paid or to be paid by such person in connectionwith the transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as asimple annual rate on the outstanding unpaid balance of the obligation.

The rationale of this provision is to protect users of credit from a lack of awareness of the truecost thereof, proceeding from the experience that banks are able to conceal such true cost byhidden charges, uncertainty of interest rates, deduction of interests from the loaned amount,

and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate thetrue cost of their loan, to enable them to give full consent to the contract, and to properlyevaluate their options in arriving at business decisions. Upholding UCPBs claim of substantialcompliance would defeat these purposes of the Truth in Lending Act. The belated discovery ofthe true cost of credit will too often not be able to reverse the ill effects of an alreadyconsummated business decision.

In addition, the promissory notes, the copies of which were presented to the spouses Belusoafter execution, are not sufficient notification from UCPB. As earlier discussed, the interest rateprovision therein does not sufficiently indicate with particularity the interest rate to be applied tothe loan covered by said promissory notes.

Forum Shopping


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UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, MakatiCity) on the ground that the spouses Beluso instituted another case (Civil C ase No. V-7227)before the RTC of Roxas City, involving the same parties and issues. UCPB claims that whileCivil Case No. V-7227 initially appears to be a different action, as it prayed for the issuance of atemporary restraining order and/or injunction to stop foreclosure of spouses Belusos properties,it poses issues which are similar to those of the present case.[43] To prove its point, UCPBcited the spouses Belusos Amended Petition in Civil Case No. V -7227, which contains similar

allegations as those in the present case. The RTC of Makati denied UCPBs Motion to DismissCase No. 99-314 for lack of merit. Petitioner UCPB raised the same issue with the Court of

Appeals, and is raising the same issue with us now.

The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of RoxasCity, a Petition for Injunction Against Foreclosure, is the propriety of the foreclosure before thetrue account of spouses Beluso is determined. On the other hand, the issue in Case No. 99-314before the RTC of Makati City is the validity of the interest rate provision. The spouses Belusoclaim that Civil Case No. V-7227 has become moot because, before the RTC of Roxas Citycould act on the restraining order, UCPB proceeded with the foreclosure and auction sale. Asthe act sought to be restrained by Civil Case No. V-7227 has already been accomplished, thespouses Beluso had to file a different action, that of Annulment of the Foreclosure Sale, CaseNo. 99-314 with the RTC, Makati City.

Even if we assume for the sake of argument, however, that only one cause of action is involvedin the two civil actions, namely, the violation of the right of the spouses Beluso not to have theirproperty foreclosed for an amount they do not owe, the Rules of Court nevertheless allows thefiling of the second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas Citybefore the filing of Case No. 99-314 with the RTC of Makati City, since the venue of l itigation asprovided for in the Credit Agreement is in Makati City.

Rule 16, Section 5 bars the refiling of an action previously dismissed only in the followinginstances:

SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a motion todismiss based on paragraphs (f), (h) and (i) of section 1 hereof shall bar the refiling of the same

action or claim. (n)

Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section1, not in paragraphs (f), (h) and (i):

SECTION 1. Grounds.Within the time for but before filing the answer to the complaint orpleading asserting a claim, a motion to dismiss may be made on any of the following grounds:

(a) That the court has no jurisdiction over the person of the defending party;

(b) That the court has no jurisdiction over the subject matter of the claim;

(c) That venue is improperly laid;

(d) That the plaintiff has no legal capacity to sue;

(e) That there is another action pending between the same parties for the same cause;

(f) That the cause of action is barred by a prior judgment or by the statute of limitations;

(g) That the pleading asserting the claim states no cause of action;

(h) That the claim or demand set forth in the plaintiffs pleading has been paid, waived,

abandoned, or otherwise extinguished;

(i) That the claim on which the action is founded is unenforceable under the provisions of thestatute of frauds; and

(j) That a condition precedent for filing the claim has not been complied with.[44] (Emphasessupplied.)

When an action is dismissed on the motion of the other party, it is only when the ground for thedismissal of an action is found in paragraphs (f), (h) and (i) that the action cannot be refiled. Asregards all the other grounds, the complainant is allowed to file same action, but should takecare that, this time, it is filed with the proper court or after the accomplishment of the erstwhileabsent condition precedent, as the case may be.

UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by thespouses Beluso on 15 January 1999 with the RTC of Roxas City, which Motion had not yetbeen ruled upon when the spouses Beluso filed Civil Case No. 99-314 with the RTC of Makati.Hence, there were allegedly two pending actions between the same parties on the same issueat the time of the filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati.This will still not change our findings. It is indeed the general rule that in cases where there aretwo pending actions between the same parties on the same issue, it should be the later casethat should be dismissed. However, this rule is not absolute. According to this Court in AlliedBanking Corporation v. Court of Appeals[45]:

In these cases, it is evident that the first action was filed in anticipation of the filing of the lateraction and the purpose is to preempt the later suit or provide a basis for seeking the dismissalof the second action.

Even if this is not the purpose for the filing of the first action, it may nevertheless be dismissed ifthe later action is the more appropriate vehicle for the ventilation of the issues between theparties. Thus, in Ramos v. Peralta, it was held:

[T]he rule on litis pendentia does not require that the later case should yield to the earlier case.What is required merely is that there be another pending action, not a prior pending action.Considering the broader scope of inquiry involved in Civil Case No. 4102 and the location of theproperty involved, no error was committed by the lower court in deferring to the Bataan courts

jurisdiction.

Given, therefore, the pendency of two actions, the following are the relevant considerations indetermining which action should be dismissed: (1) the date of fil ing, with preference generally

given to the first action fil ed to be retained; (2) whether the action sought to be dismissed wasfiled merely to preempt the later action or to anticipate its filing and lay the basis for its


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dismissal; and (3) whether the action is the appropriate vehicle for litigating the issues betweenthe parties.

In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action forinjunction against a foreclosure sale that has already been held, while Civil Case No. 99-314before the RTC of Makati City includes an action for the annulment of said foreclosure, anaction certainly more proper in view of the execution of the foreclosure sale. The former case

was improperly filed in Roxas City, while the latter was filed in Makati City, the proper venue ofthe action as mandated by the Credit Agreement. It is evident, therefore, that Civil Case No. 99-314 is the more appropriate vehicle for litigating the issues between the parties, as compared toCivil Case No. V-7227. Thus, we rule that the RTC of Makati City was not in error in notdismissing Civil Case No. 99-314.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the followingMODIFICATIONS:

1. In addition to the sum of P2,350,000.00 as determined by the courts a quo, respondentspouses Samuel and Odette Beluso are also liable for the following amounts:

a. Penalty of 12% per annum on the amount due[46] from the date of demand; and

b. Compounded legal interest of 12% per annum on the amount due[47] from date of demand;

2. The following amounts shall be deducted from the li ability of the spouses Samuel and OdetteBeluso:

a. Payments made by the spouses in the amount of P763,692.00. These payments shall beapplied to the date of actual payment of the following in the order that they are listed, to wit:

i. penalty charges due and demandable as of the time of payment;

ii. interest due and demandable as of the time of payment;

iii. principal amortization/payment in arrears as of the time of payment;

iv. outstanding balance.

b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount shall bededucted from the liability of the spouses Samuel and Odette Beluso on 9 February 1999 to thefollowing in the order that they are listed, to wit:

i. penalty charges due and demandable as of time of payment;

ii. interest due and demandable as of the time of payment;

iii. principal amortization/payment in arrears as of the time of payment;

iv. outstanding balance.

3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts whichthe Regional Trial Court and the Court of Appeals ordered respondents to pay, as modified inthis Decision, shall be deducted from the proceeds of the foreclosure sale.

SO ORDERED.

[32] Article 1169 of the Civil Code provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligeejudicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that thedesignation of the time when the thing is to be delivered or the service is to be rendered was acontrolling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to

perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is notready to comply in a proper manner with what is incumbent upon him. From the moment one ofthe parties fulfills his obligation, delay by the other begins.

G.R. No. L-66826 August 19, 1988

BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.

THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.

Pacis & Reyes Law Office for petitioner.

Ernesto T. Zshornack, Jr. for private respondent.

CORTES, J.:

The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and TrustCompany of the Philippines [hereafter referred to as COMTRUST.] In 1980, the Bank of thePhilippine Islands (hereafter referred to as BPI absorbed COMTRUST through a corporatemerger, and was substituted as party to the case.

Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instanceof Rizal Caloocan City a complaint against COMTRUST alleging four causes of action.


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Except for the third cause of action, the CFI ruled in favor of Zshornack. The bank appealed tothe Intermediate Appellate Court which modified the CFI decision absolving the bank fromliability on the fourth cause of action. The pertinent portions of the judgment, as modified, read:

IN VIEW OF THE FOREGOING, the Court renders judgment as follows:

1. Ordering the defendant COMTRUST to restore to the dollar savings account of plaintiff (No.

25-4109) the amount of U.S $1,000.00 as of October 27, 1975 to earn interest together with theremaining balance of the said account at the rate fixed by the bank for dollar deposits underCentral Bank Circular 343;

2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S. $3,000.00immediately upon the finality of this decision, without interest for the reason that the saidamount was merely held in custody for safekeeping, but was not actually deposited with thedefendant COMTRUST because being cash currency, it cannot by law be deposited withplaintiffs dollar account and defendants only obligation is to return the same to plaintiff upon

demand;

xxx xxx xxx

5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as damages inthe concept of litigation expenses and attorneys fees suffered by plaintiff as a result of thefailure of the defendant bank to restore to his (plaintiffs) account the amount of U.S. $1,000.00and to return to him (plaintiff) the U.S. $3,000.00 cash left for safekeeping.

Costs against defendant COMTRUST.

SO ORDERED. [Rollo, pp. 47-48.]

Undaunted, the bank comes to this Court praying that it be totally absolved from any liability toZshornack. The latter not having appealed the Court of Appeals decision, the issues facing thisCourt are limited to the banks liability with regard to the first and second causes of action and

its liability for damages.

1. We first consider the first cause of action, On the dates material to this case, RizaldyZshornack and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, adollar savings account and a peso current account.

On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia,Assistant Branch Manager of COMTRUST Quezon City, payable to a certain Leovigilda D.Dizon in the amount of $1,000.00. In the application, Garcia indicated that the amount was to becharged to Dollar Savings Acct. No. 25-4109, the savings account of the Zshornacks; thecharges for commission, documentary stamp tax and others totalling P17.46 were to becharged to Current Acct. No. 210465-29, again, the current account of the Zshornacks. Therewas no indication of the name of the purchaser of the dollar draft.

On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia,

issued a check payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on

the Chase Manhattan Bank, New York, with an indication that it was to be charged to DollarSavings Acct. No. 25-4109.

When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded anexplanation from the bank. In answer, COMTRUST claimed that the peso value of thewithdrawal was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on October 27, 1975when he (Ernesto) encashed with COMTRUST a cashiers check for P8,450.00 issued by the

Manila Banking Corporation payable to Ernesto.

Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of boththe trial court and the Appellate Court on the first cause of action. Petitioner must be held liablefor the unauthorized withdrawal of US$1,000.00 from private respondents dollar account.

In its desperate attempt to justify its act ofwithdrawing from its depositors savings account, thebank has adopted inconsistent theories. First, it still maintains that the peso value of the amountwithdrawn was given to Atty. Ernesto Zshornack, Jr. when the latter encashed the ManilabankCashiers Check. At the same time, the bank claims that the withdrawal was made pursuant toan agreement where Zshornack allegedly authorized the bank to withdraw from his dollarsavings account such amount which, when converted to pesos, would be needed to fund hispeso current account. If indeed the peso equivalent of the amount withdrawn from the dollar

account was credited to the peso current account, why did the bank still have to pay Ernesto?

At any rate, both explanations are unavailing. With regard to the first explanation, petitionerbank has not shown how the transaction involving the cashiers check is related to the

transaction involving the dollar draft in favor of Dizon financed by the withdrawal from Rizaldys

dollar account. The two transactions appear entirely independent of each other. Moreover,Ernesto Zshornack, Jr., possesses a personality distinct and separate from Rizaldy Zshornack.Payment made to Ernesto cannot be considered payment to Rizaldy.

As to the second explanation, even if we assume that there was such an agreement, theevidence do not show that the withdrawal was made pursuant to it. Instead, the record revealsthat the amount withdrawn was used to finance a dollar draft in favor of Leovigilda D. Dizon,and not to fund the current account of the Zshornacks. There is no proof whatsoever that pesoCurrent Account No. 210-465-29 was ever credited with the peso equivalent of theUS$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109.

2. As for the second cause of action, the complaint filed with the trial court alleged that onDecember 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash(popularly known as greenbacks) for safekeeping, and that the agreement was embodied in adocument, a copy of which was attached to and made part of the complaint. The documentreads:

Makati Cable Address:

Philippines COMTRUST

COMMERCIAL BANK AND TRUST COMPANY

of the Philippines


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Quezon City Branch

December 8, 1975

MR. RIZALDY T. ZSHORNACK

&/OR MRS SHIRLEY E. ZSHORNACK

Sir/Madam:

We acknowledged (sic) having received from you today the sum of US DOLLARS: THREETHOUSAND ONLY (US$3,000.00) for safekeeping.

Received by:

(Sgd.) VIRGILIO V. GARCIA

It was also alleged in the complaint that despite demands, the bank refused to return themoney.

In its answer, COMTRUST averred that the US$3,000 was credited to Zshornacks peso current

account at prevailing conversion rates.

It must be emphasized that COMTRUST did not deny specifically under oath the authenticityand due execution of the above instrument.

During trial, it was established that on December 8, 1975 Zshornack indeed delivered to thebank US $3,000 for safekeeping. When he requested the return of the money on May 10, 1976,COMTRUST explained that the sum was disposed of in this manner: US$2,000.00 was sold onDecember 29, 1975 and the peso proceeds amounting to P14,920.00 were deposited toZshornacks current account per deposit slip accomplished by Garcia; the remaining

US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00were deposited to his current account per deposit slip also accomplished by Garcia.

Aside from asserting that the US$3,000.00 was properly credited to Zshornacks currentaccount at prevailing conversion rates, BPI now posits another ground to defeat privaterespondents claim. It now argues that the contract embodied in the document is the contract of

depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. Thebank alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it isclaimed, the bank cannot be liable under the contract, and the obligation is purely personal toGarcia.

Before we go into the nature of the contract entered into, an important point which arises on thepleadings, must be considered.

The second cause of action is based on a document purporting to be signed by COMTRUST, acopy of which document was attached to the complaint. In short, the second cause of action

was based on an actionable document. It was therefore incumbent upon the bank to specificallydeny under oath the due execution of the document, as prescribed under Rule 8, Section 8, if it

desired: (1) to question the authority of Garcia to bind the corporation; and (2) to deny itscapacity to enter into such contract. [See, E.B. Merchant v. International Banking Corporation, 6Phil. 314 (1906).] No sworn answer denying the due execution of the document in question, orquestioning the authority of Garcia to bind the bank, or denying the banks capacity to enter intothe contract, was ever filed. Hence, the bank is deemed to have admitted not only Garcias

authority, but also the banks power, to enter into the contract in question.

In the past, this Court had occasion to explain the reason behind this procedural requirement.

The reason for the rule enunciated in the foregoing authorities will, we think, be readilyappreciated. In dealing with corporations the public at large is bound to rely to a large extentupon outward appearances. If a man is found acting for a corporation with the external indicia ofauthority, any person, not having notice of want of authority, may usually rely upon thoseappearances; and if it be found that the directors had permitted the agent to exercise thatauthority and thereby held him out as a person competent to bind the corporation, or hadacquiesced in a contract and retained the benefit supposed to have been conferred by it, thecorporation will be bound, notwithstanding the actual authority may never have been granted

Whether a particular officer actually possesses the authority which he assumes to exercise is

frequently known to very few, and the proof of it usually is not readily accessible to the stranger

who deals with the corporation on the faith of the ostensible authority exercised by some of thecorporate officers. It is therefore reasonable, in a case where an officer of a corporation hasmade a contract in its name, that the corporation should be required, if it denies his authority, tostate such defense in its answer. By this means the plaintiff is apprised of the fact that theagents authority is contested; and he is given an opportunity to adduce evidence showing

either that the authority existed or that the contract was ratified and approved. [Ramirez v.Orientalist Co. and Fernandez, 38 Phil. 634, 645- 646 (1918).]

Petitioners argument must also be rejected for another reason. The practical effect of absolving

a corporation from liability every time an officer enters into a contract which is beyond corporatepowers, even without the proper allegation or proof that the corporation has not authorized norratified the officers act, is to cast corporations in so perfect a mold that transgressions and

wrongs by such artificial beings become impossible [Bissell v. Michigan Southern and N.I.R.Cos 22 N.Y 258 (1860).] To say that a corporation has no right to do unauthorized acts is only

to put forth a very plain truism but to say that such bodies have no power or capacity to err is toimpute to them an excellence which does not belong to any created existence with which weare acquainted. The distinction between power and right is no more to be lost sight of in respectto artificial than in respect to natural persons. [Ibid.]

Having determined that Garcias act of entering into the contract binds the corporation, we nowdetermine the correct nature of the contract, and its legal consequences, including itsenforceability.

The document which embodies the contract states that the US$3,000.00 was received by thebank for safekeeping. The subsequent acts of the parties also show that the intent of the partieswas really for the bank to safely keep the dollars and to return it to Zshornack at a later time,Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months later.


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The above arrangement is that contract defined under Article 1962, New Civil Code, whichreads:

Art. 1962. A deposit is constituted from the moment a person receives a thing belonging toanother, with the obligation of safely keeping it and of returning the same. If the safekeeping ofthe thing delivered is not the principal purpose of the contract, there is no deposit but someother contract.

Note that the object of the contract between Zshornack and COMTRUST was foreignexchange. Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions onGold and Foreign Exchange Transactions, promulgated on December 9, 1949, which was inforce at the time the parties entered into the transaction involved in this case. The circularprovides:

xxx xxx xxx

2. Transactions in the assets described below and all dealings in them of whatever nature,including, where applicable their exportation and importation, shall NOT be effected, except withrespect to deposit accounts included in sub-paragraphs (b) and (c) of this paragraph, whensuch deposit accounts are owned by and in the name of, banks.

(a) Any and all assets, provided they are held through, in, or with banks or banking institutionslocated in the Philippines, including money, checks, drafts, bullions bank drafts, depositaccounts (demand, time and savings), all debts, indebtedness or obligations, financial brokersand investment houses, notes, debentures, stocks, bonds, coupons, bank acceptances,mortgages, pledges, liens or other rights in the nature of security, expressed in foreigncurrencies, or if payable abroad, irrespective of the currency in which they are expressed, andbelonging to any person, firm, partnership, association, branch office, agency, company or otherunincorporated body or corporation residing or located within the Philippines;

(b) Any and all assets of the kinds included and/or described in subparagraph (a) above,whether or not held through, in, or with banks or banking institutions, and existent within thePhilippines, which belong to any person, firm, partnership, association, branch office, agency,company or other unincorporated body or corporation not residing or located within thePhilippines;

(c) Any and all assets existent within the Philippines including money, checks, drafts, bullions,bank drafts, all debts, indebtedness or obligations, financial securities commonly dealt in bybankers, brokers and investment houses, notes, debentures, stock, bonds, coupons, bankacceptances, mortgages, pledges, liens or other rights in the nature of security expressed inforeign currencies, or if payable abroad, irrespective of the currency in which they areexpressed, and belonging to any person, firm, partnership, association, branch office, agency,company or other unincorporated body or corporation residing or located within the Philippines.

xx xxx xxx

4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those

authorized to deal in foreign exchange. All receipts of foreign exchange by any person, firm,partnership, association, branch office, agency, company or other unincorporated body or

corporation shall be sold to the authorized agents of the Central Bank by the recipients withinone business day following the receipt of such foreign exchange. Any person, firm, partnership,association, branch office, agency, company or other unincorporated body or corporation,residing or located within the Philippines, who acquires on and after the date of this Circularforeign exchange shall not, unless licensed by the Central Bank, dispose of such foreignexchange in whole or in part, nor receive less than its full value, nor delay taking ownershipthereof except as such delay is customary; Provided, further, That within one day upon taking

ownership, or receiving payment, of foreign exchange the aforementioned persons and entitiesshall sell such foreign exchange to designated agents of the Central Bank.

xxx xxx xxx

8. Strict observance of the provisions of this Circular is enjoined; and any person, firm orcorporation, foreign or domestic, who being bound to the observance thereof, or of such otherrules, regulations or directives as may hereafter be issued in implementation of this Circular,shall fail or refuse to comply with, or abide by, or shall violate the same, shall be subject to thepenal sanctions provided in the Central Bank Act.

xxx xxx xxx

Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulationson Foreign Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippineresidents only. Section 6 provides:

SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporationshall be sold to authorized agents of the Central Bank by the recipients within one business dayfollowing the receipt of such foreign exchange. Any resident person, firm, company orcorporation residing or located within the Philippines, who acquires foreign exchange shall not,unless authorized by the Central Bank, dispose of such foreign exchange in whole or in part,nor receive less than its full value, nor delay taking ownership thereof except as such delay iscustomary; Provided, That, within one business day upon taking ownership or receivingpayment of foreign exchange the aforementioned persons and entities shall sell such foreignexchange to the authorized agents of the Central Bank.

As earlier stated, the document and the subsequent acts of the parties show that they intendedthe bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in hiscomplaint that he is a Philippine resident. The parties did not intended to sell the US dollars tothe Central Bank within one business day from receipt. Otherwise, the contract of depositumwould never have been entered into at all.

Since the mere safekeeping of the greenbacks, without selling them to the Central Bank withinone business day from receipt, is a transaction which is not authorized by CB Circular No. 20, itmust be considered as one which falls under the general class of prohibited transactions.Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against theprovisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties acause of action against the other. When the nullity proceeds from the illegality of the cause or

object of the contract, and the act constitutes a criminal offense, both parties being in pari

delicto, they shall have no cause of action against each other [Art. 1411, New Civil Code.]The only remedy is one on behalf of the State to prosecute the parties for violating the law.


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We thus rule that Zshornack cannot recover under the second cause of action.

3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept oflitigation expenses and attorneys fees to be reasonable. The award is sustained.

WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered torestore to the dollar savings account of private respondent the amount of US$1,000.00 as of

October 27, 1975 to earn interest at the rate fixed by the bank for dollar savings deposits.Petitioner is further ordered to pay private respondent the amount of P8,000.00 as damages.The other causes of action of private respondent are ordered dismissed.

SO ORDERED.

G.R. No. L-6913 November 21, 1913

THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,

vs.

GREGORIO DE LA PEA, administrator of the estate of Father Agustin de la Pea, defendant-appellant.

J. Lopez Vito, for appellant.

Arroyo and Horrilleno, for appellee.

MORELAND, J.:

This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo,awarding to the plaintiff the sum of P6,641, with interest at the legal rate from the beginning ofthe action.

It is established in this case that the plaintiff is the trustee of a charitable bequest made for theconstruction of a leper hospital and that father Agustin de la Pea was the duly authorizedrepresentative of the plaintiff to receive the legacy. The defendant is the administrator of theestate of Father De la Pea.

In the year 1898 the books Father De la Pea, as trustee, showed that he had on hand as suchtrustee the sum of P6,641, collected by him for the charitable purposes aforesaid. In the sameyear he deposited in his personal account P19,000 in the Hongkong and Shanghai Bank atIloilo. Shortly thereafter and during the war of the revolution, Father De la Pea was arrested bythe military authorities as a political prisoner, and while thus detained made an order on saidbank in favor of the United States Army officer under whose charge he then was for the sumthus deposited in said bank. The arrest of Father De la Pea and the confiscation of the fundsin the bank were the result of the claim of the military authorities that he was an insurgent and

that the funds thus deposited had been collected by him for revolutionary purposes. The money

was taken from the bank by the military authorities by virtue of such order, was confiscated andturned over to the Government.

While there is considerable dispute in the case over the question whether the P6,641 of trustfunds was included in the P19,000 deposited as aforesaid, nevertheless, a careful examinationof the case leads us to the conclusion that said trust funds were a part of the funds depositedand which were removed and confiscated by the military authorities of the United States.

That branch of the law known in England and America as the law of trusts had no exactcounterpart in the Roman law and has none under the Spanish law. In this jurisdiction,therefore, Father De la Peas liability is determined by those portions of the Civil Code which

relate to obligations. (Book 4, Title 1.)

Although the Civil Code states that a person obliged to give something is also bound topreserve it with the diligence pertaining to a good father of a family (art. 1094), it also provides,

following the principle of the Roman law, major casus est, cui humana infirmitas resistere nonpotest, that no one shall be liable for events which could not be foreseen, or which having beenforeseen were inevitable, with the exception of the cases expressly mentioned in the law orthose in which the obligation so declares. (Art. 1105.)

By placing the money in the bank and mixing it with his personal funds De la Pea did notthereby assume an obligation different from that under which he would have lain if such deposithad not been made, nor did he thereby make himself liable to repay the money at all hazards. Ifthe had been forcibly taken from his pocket or from his house by the military forces of one of thecombatants during a state of war, it is clear that under the provisions of the Civil Code he wouldhave been exempt from responsibility. The fact that he placed the trust fund in the bank in hispersonal account does not add to his responsibility. Such deposit did not make him a debtorwho must respond at all hazards.

We do not enter into a discussion for the purpose of determining whether he acted more or lessnegligently by depositing the money in the bank than he would if he had left it in his home; orwhether he was more or less negligent by depositing the money in his personal account than hewould have been if he had deposited it in a separate account as trustee. We regard suchdiscussion as substantially fruitless, inasmuch as the precise question is not one of negligence.There was no law prohibiting him from depositing it as he did and there was no law whichchanged his responsibility be reason of the deposit. While it may be true that one who i s underobligation to do or give a thing is in duty bound, when he sees events approaching the results ofwhich will be dangerous to his trust, to take all reasonable means and measures to escape or, ifunavoidable, to temper the effects of those events, we do not feel constrained to hold that, inchoosing between two means equally legal, he is culpably negligent in selecting one whereashe would not have been if he had selected the other.

The court, therefore, finds and declares that the money which is the subject matter of this actionwas deposited by Father De la Pea in the Hongkong and Shanghai Banking Corporation ofIloilo; that said money was forcibly taken from the bank by the armed forces of the UnitedStates during the war of the insurrection; and that said Father De la Pea was not responsiblefor its loss.


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The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by hiscomplaint.

Arellano, C.J., Torres and Carson, JJ., concur.

Separate Opinions

TRENT, J., dissenting:

I dissent. Technically speaking, whether Father De la Pea was a trustee or an agent of theplaintiff his books showed that in 1898 he had in his possession as trustee or agent the sum ofP6,641 belonging to the plaintiff as the head of the church. This money was then clothed with allthe immunities and protection with which the law seeks to invest trust funds. But when De laPea mixed this trust fund with his own and deposited the whole in the bank to his personalaccount or credit, he by this act stamped on the said fund his own private marks and unclothedit of all the protection it had. If this money had been deposited in the name of De la Pea astrustee or agent of the plaintiff, I think that it may be presumed that the military authorities wouldnot have confiscated it for the reason that they were looking for insurgent funds only. Again, theplaintiff had no reason to suppose that De la Pea would attempt to strip the fund of its identity,nor had he said or done anything which tended to relieve De la Pea from the legal reponsibility

which pertains to the care and custody of trust funds.

The Supreme Court of the United States in the United State vs. Thomas (82 U. S., 337), atpage 343, said: Trustees are only bound to exercise the same care and solicitude with regard

to the trust property which they would exercise with regard to their own. Equity will not exactmore of them. They are not liable for a loss by theft without their fault. But this exemptionceases when they mix the trust-money with their own, whereby it loses its identity, and theybecome mere debtors.

If this proposition is sound and is applicable to cases arising in this jurisdiction, and I entertainno doubt on this point, the liability of the estate of De la Pea cannot be doubted. But this courtin the majority opinion says: The fact that he (Agustin de la Pea) placed the trust fund in the

bank in his personal account does not add to his responsibility. Such deposit did not make hima debtor who must respond at all hazards . There was no law prohibiting him from depositing

it as he did, and there was no law which changed his responsibility, by reason of the deposit.

I assume that the court in using the language which appears in the latter part of the abovequotation meant to say that there was no statutory law regulating the question. Questions of thischaracter are not usually governed by statutory law. The law is to be found in the very nature ofthe trust itself, and, as a general rule, the courts say what facts are necessary to hold thetrustee as a debtor.

If De la Pea, after depositing the trust fund in his personal account, had used this money forspeculative purposes, such as the buying and selling of sugar or other products of the country,thereby becoming a debtor, there would have been no doubt as to the liability of his estate.Whether he used this money for that purpose the record is silent, but it will be noted that aconsiderable length of time intervened from the time of the deposit until the funds were

confiscated by the military authorities. In fact the record shows that De la Pea deposited onJune 27, 1898, P5,259, on June 28 of that year P3,280, and on August 5 of the same year

P6,000. The record also shows that these funds were withdrawn and again deposited alltogether on the 29th of May, 1900, this last deposit amounting to P18,970. These facts stronglyindicate that De la Pea had as a matter of fact been using the money in violation of the trustimposed in him. lawph!1.net

If the doctrine announced in the majority opinion be followed in cases hereafter arising in thisjurisdiction trust funds will be placed in precarious condition. The position of the trustee will

cease to be one of trust.

G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,

vs.

THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY,respondents.

Dolorfino & Dominguez Law Offices for petitioner.

Danilo B. Banares for private respondent.

DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another party in a contract of rent ofa safety deposit box with respect to its contents placed by the latter one of bailor and bailee orone of lessor and lessee?

This is the crux of the present controversy.

On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon andPaula Pugao entered into an agreement whereby the former purchased from the latter two (2)

parcels of land for a consideration of P350,625.00. Of this amount, P75,725.00 was paid asdownpayment while the balance was covered by three (3) postdated checks. Among the termsand conditions of the agreement embodied in a Memorandum of True and Actual Agreement ofSale of Land were that the ti tles to the lots shall be transferred to the petitioner upon fullpayment of the purchase price and that the owners copies of the certificates of titles thereto,

Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safetydeposit box of any bank. The same could be withdrawn only upon the joint signatures of arepresentative of the petitioner and the Pugaos upon full payment of the purchase price.Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 ofprivate respondent Security Bank and Trust Company, a domestic banking corporationhereinafter referred to as the respondent Bank. For this purpose, both signed a contract oflease (Exhibit 2) which contains, inter alia, the following conditions:

13. The bank is not a depositary of the contents of the safe and it has neither the possessionnor control of the same.


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14. The bank has no interest whatsoever in said contents, except herein expressly provided,and it assumes absolutely no liability in connection therewith. 1

After the execution of the contract, two (2) renters keys were given to the renters one toAguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the possessionof the respondent Bank. The safety deposit box has two (2) keyholes, one for the guard key andthe other for the renters key, and can be opened only with the use of both keys. Petitioner

claims that the certificates of title were placed inside the said box.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots ata price of P225.00 per square meter which, as petitioner alleged in its complaint, translates to aprofit of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramosdemanded the execution of a deed of sale which necessarily entailed the production of thecertificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to therespondent Bank on 4 October 1979 to open the safety deposit box and get the certificates oftitle. However, when opened in the presence of the Banks representative, the box yielded no

such certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos withdrewher earlier offer to purchase the lots; as a consequence thereof, the petitioner allegedly failed torealize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 acomplaint 2 for damages against the respondent Bank with the Court of First Instance (now

Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.

In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause ofaction because of paragraphs 13 and 14 of the contract of lease (Exhibit 2); corollarily, loss ofany of the items or articles contained in the box could not give rise to an action against it. It theninterposed a counterclaim for exemplary damages as well as attorneys fees in the amount of

P20,000.00. Petitioner subsequently filed an answer to the counterclaim. 4

In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC)of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986,the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiffs

complaint.

On defendants counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant

the amount of FIVE THOUSAND (P5,000.00) PESOS as attorneys fees.

With costs aga

Documents

3 & 4 - Lending Act and Deposits.docx