Commodatum

Object
Articles 1936-1937, Civil Code

Article 1936. Consumable goods may be the subject of commodatum if the purpose of the contract
is not the consumption of the object, as when it is merely for exhibition. (n)

Article 1937. Movable or immovable property may be the object of commodatum. (n)

G.R. No. 115324 February 19, 2003

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner,

vs.
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision of the Court of Appeals dated June 25, 1991
1

in CA-G.R. CV No. 11791 and of its Resolution dated May 5, 1994, denying the motion for
2

reconsideration of said decision filed by petitioner Producers Bank of the Philippines.

Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles
Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the
Sterela Marketing and Services ("Sterela" for brevity). Specifically, Sanchez asked private respondent
Vuves to deposit in a bank a certain amount of money in the bank account of Sterela for purposes of
its incorporation. She assured private respondent that he could withdraw his money from said
account within a month’s time. Private respondent asked Sanchez to bring Doronilla to their house so
that they could discuss Sanchez’s request. 3

On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronilla’s
private secretary, met and discussed the matter. Thereafter, relying on the assurances and
representations of Sanchez and Doronilla, private respondent issued a check in the amount of Two
Hundred Thousand Pesos (₱200,000.00) in favor of Sterela. Private respondent instructed his wife,
Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account in the
name of Sterela in the Buendia, Makati branch of Producers Bank of the Philippines. However, only
Sanchez, Mrs. Vives and Dumagpi went to the bank to deposit the check by virtue of an authorization
by doronilla. They had with them an authorization letter from Doronilla authorizing Sanchez and her
companions, "in coordination with Mr. Rufo Atienza," to open an account for Sterela Marketing
Services in the amount of ₱200,000.00. In opening the account, the authorized signatories were
Inocencia Vives and/or Angeles Sanchez. A passbook for Savings Account No. 10-1567 was
thereafter issued to Mrs. Vives.4

Subsequently, private respondent learned that Sterela was no longer holding office in the address
previously given to him. Alarmed, he and his wife went to the Bank to verify if their money was still
intact. The bank manager referred them to Mr. Rufo Atienza, the assistant manager, who informed
them that part of the money in Savings Account No. 10-1567 had been withdrawn by Doronilla, and
that only ₱90,000.00 remained therein. He likewise told them that Mrs. Vives could not withdraw said
remaining amount because it had to answer for some postdated checks issued by Doronilla.
According to Atienza, after Mrs. Vives and Sanchez opened Savings Account No. 10-1567, Doronilla
opened Current Account No. 10-0320 for Sterela and authorized the Bank to debit Savings Account
No. 10-1567 for the amounts necessary to cover overdrawings in Current Account No. 10-0320. In
opening said current account, Sterela, through Doronilla, obtained a loan of ₱175,000.00 from the
Bank. To cover payment thereof, Doronilla issued three postdated checks, all of which were
dishonored. Atienza also said that Doronilla could assign or withdraw the money in Savings Account
No. 10-1567 because he was the sole proprietor of Sterela. 5

Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he
received a letter from Doronilla, assuring him that his money was intact and would be returned to him.
On August 13, 1979, Doronilla issued a postdated check for Two Hundred Twelve Thousand Pesos
(₱212,000.00) in favor of private respondent. However, upon presentment thereof by private
respondent to the drawee bank, the check was dishonored. Doronilla requested private respondent to
present the same check on September 15, 1979 but when the latter presented the check, it was again
dishonored. 6
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for
the return of his client’s money. Doronilla issued another check for ₱212,000.00 in private
respondent’s favor but the check was again dishonored for insufficiency of funds. 7

Private respondent instituted an action for recovery of sum of money in the Regional Trial Court
(RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was
docketed as Civil Case No. 44485. He also filed criminal actions against Doronilla, Sanchez and
Dumagpi in the RTC. However, Sanchez passed away on March 16, 1985 while the case was
pending before the trial court. On October 3, 1995, the RTC of Pasig, Branch 157, promulgated its
Decision in Civil Case No. 44485, the dispositive portion of which reads:

Rtc- in favor of plaintiff vives IN VIEW OF THE FOREGOING, judgment is hereby rendered
sentencing defendants Arturo J. Doronila, Estrella Dumagpi and Producers Bank of the Philippines to
pay plaintiff Franklin Vives jointly and severally –

(a) the amount of ₱200,000.00, representing the money deposited, with interest at the legal rate from the
filing of the complaint until the same is fully paid;

(b) the sum of ₱50,000.00 for moral damages and a similar amount for exemplary damages;

(c) the amount of ₱40,000.00 for attorney’s fees; and

(d) the costs of the suit.

SO ORDERED. 8

Petitioner appealed the trial court’s decision to the Court of Appeals. In its Decision dated June 25,
1991, the appellate court affirmed in toto the decision of the RTC. It likewise denied with finality
9

petitioner’s motion for reconsideration in its Resolution dated May 5, 1994. 10

On June 30, 1994, petitioner filed the present petition, arguing that –

I.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION BETWEEN THE
DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT
ACCOMMODATION;

II.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONER’S BANK MANAGER, MR.
RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be
PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE UNDER
THE PRINCIPLE OF NATURAL JUSTICE;

III.

THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE REGIONAL
TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS OF THE REGIONAL
TRIAL COURT WERE BASED ON A MISAPPREHENSION OF FACTS;

IV.

THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN SALUDARES
VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR ACTS COMMITTED BY AN
EMPLOYEE IS APPLICABLE;

V.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER COURT
THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER DEFENDANTS
FOR THE AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR
MORAL DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEY’S FEES AND THE
COSTS OF SUIT. 11

Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on
September 25, 1995. The Court then required private respondent to submit a rejoinder to the reply.
However, said rejoinder was filed only on April 21, 1997, due to petitioner’s delay in furnishing private
respondent with copy of the reply and several substitutions of counsel on the part of private
12

respondent. On January 17, 2001, the Court resolved to give due course to the petition and required
13
the parties to submit their respective memoranda. Petitioner filed its memorandum on April 16, 2001
14

while private respondent submitted his memorandum on March 22, 2001.

Petitioner contends that the transaction between private respondent and Doronilla is a simple loan
(mutuum) since all the elements of a mutuum are present: first, what was delivered by private
respondent to Doronilla was money, a consumable thing; and second, the transaction was onerous
as Doronilla was obliged to pay interest, as evidenced by the check issued by Doronilla in the amount
of ₱212,000.00, or ₱12,000 more than what private respondent deposited in Sterela’s bank
account. Moreover, the fact that private respondent sued his good friend Sanchez for his failure to
15

recover his money from Doronilla shows that the transaction was not merely gratuitous but "had a
business angle" to it. Hence, petitioner argues that it cannot be held liable for the return of private
respondent’s ₱200,000.00 because it is not privy to the transaction between the latter and Doronilla. 16

It argues further that petitioner’s Assistant Manager, Mr. Rufo Atienza, could not be faulted for
allowing Doronilla to withdraw from the savings account of Sterela since the latter was the sole
proprietor of said company. Petitioner asserts that Doronilla’s May 8, 1979 letter addressed to the
bank, authorizing Mrs. Vives and Sanchez to open a savings account for Sterela, did not contain any
authorization for these two to withdraw from said account. Hence, the authority to withdraw therefrom
remained exclusively with Doronilla, who was the sole proprietor of Sterela, and who alone had legal
title to the savings account. Petitioner points out that no evidence other than the testimonies of
17

private respondent and Mrs. Vives was presented during trial to prove that private respondent
deposited his ₱200,000.00 in Sterela’s account for purposes of its incorporation. Hence, petitioner
18

should not be held liable for allowing Doronilla to withdraw from Sterela’s savings account. 1a\^/phi1.net

Petitioner also asserts that the Court of Appeals erred in affirming the trial court’s decision since the
findings of fact therein were not accord with the evidence presented by petitioner during trial to prove
that the transaction between private respondent and Doronilla was a mutuum, and that it committed
no wrong in allowing Doronilla to withdraw from Sterela’s savings account. 19

Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable for
the actual damages suffered by private respondent, and neither may it be held liable for moral and
exemplary damages as well as attorney’s fees. 20

Private respondent, on the other hand, argues that the transaction between him and Doronilla is not a
mutuum but an accommodation, since he did not actually part with the ownership of his ₱200,000.00
21

and in fact asked his wife to deposit said amount in the account of Sterela so that a certification can
be issued to the effect that Sterela had sufficient funds for purposes of its incorporation but at the
same time, he retained some degree of control over his money through his wife who was made a
signatory to the savings account and in whose possession the savings account passbook was given. 22

He likewise asserts that the trial court did not err in finding that petitioner, Atienza’s employer, is liable
for the return of his money. He insists that Atienza, petitioner’s assistant manager, connived with
Doronilla in defrauding private respondent since it was Atienza who facilitated the opening of
Sterela’s current account three days after Mrs. Vives and Sanchez opened a savings account with
petitioner for said company, as well as the approval of the authority to debit Sterela’s savings account
to cover any overdrawings in its current account. 23

WON THE TRANSACTION BETWEEN VIVES AND DORONILLA IS A SIMPLE LOAN OR

MUTUUM.——NO, COMMODATUM SYA

There is no merit in the petition.

At the outset, it must be emphasized that only questions of law may be raised in a petition for review
filed with this Court. The Court has repeatedly held that it is not its function to analyze and weigh all
over again the evidence presented by the parties during trial. The Court’s jurisdiction is in principle
24

limited to reviewing errors of law that might have been committed by the Court of Appeals. Moreover,
25

factual findings of courts, when adopted and confirmed by the Court of Appeals, are final and
conclusive on this Court unless these findings are not supported by the evidence on record. There is 26

no showing of any misapprehension of facts on the part of the Court of Appeals in the case at bar that
would require this Court to review and overturn the factual findings of that court, especially since the
conclusions of fact of the Court of Appeals and the trial court are not only consistent but are also
amply supported by the evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between private
respondent and Doronilla was a commodatum and not a mutuum. A circumspect examination of the
records reveals that the transaction between them was a commodatum.

Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise:

By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which
case the contract is called a commodatum; or money or other consumable thing, upon
the condition that the same amount of the same kind and quality shall be paid, in which
case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum, the bailor retains the ownership of the thing loaned, while in simple
loan, ownership passes to the borrower.

ART. 1933 seems to imply that if the subject of the contract is a consumable thing, such as
money, the contract would be a mutuum. However, there are some instances where a
commodatum may have for its object a consumable thing. Article 1936 of the Civil Code
provides:

Consumable goods may be the subject of commodatum if the purpose of the contract is not
the consumption of the object, as when it is merely for exhibition.

Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention
of the parties is to lend consumable goods and to have the very same goods returned at the
end of the period agreed upon, the loan is a commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration
in determining the actual character of a contract. In case of doubt, the contemporaneous and
27

subsequent acts of the parties shall be considered in such determination. 28

As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that
private respondent agreed to deposit his money in the savings account of Sterela specifically
for the purpose of making it appear "that said firm had sufficient capitalization for
incorporation, with the promise that the amount shall be returned within thirty (30)
days." Private respondent merely "accommodated" Doronilla by lending his money without
29

consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the
transaction that the money would not be removed from Sterela’s savings account and would be
returned to private respondent after thirty (30) days.

INTEREST DID NOT CONVERT THE TRNSACTION INTO MUTUUM

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

WON BANK WAS NOT LIABLE BECAUSE NOT PRIVY TO THE TRANSACTION— liable

Neither does the Court agree with petitioner’s contention that it is not solidarily liable for the return of
private respondent’s money because it was not privy to the transaction between Doronilla and private
respondent. The nature of said transaction, that is, whether it is a mutuum or a commodatum, has no
bearing on the question of petitioner’s liability for the return of private respondent’s money because
the factual circumstances of the case clearly show that petitioner, through its employee Mr.
Atienza, was partly responsible for the loss of private respondent’s money and is liable for its
restitution.
Petitioner’s rules for savings depositsis that written on the passbook it issued Mrs. Vives on
behalf of Sterela for Savings Account No. 10-1567 expressly states that—

"2. Deposits and withdrawals must be made by the depositor personally or upon his written
authority duly authenticated, and neither a deposit nor a withdrawal will be permitted except
upon the production of the depositor savings bank book in which will be entered by the Bank the
amount deposited or withdrawn." 30

Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant
Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom even without
presenting the passbook (which Atienza very well knew was in the possession of Mrs. Vives), not
just once, but several times. Both the Court of Appeals and the trial court found that Atienza
allowed said withdrawals because he was party to Doronilla’s "scheme" of defrauding private
respondent:

XXX

But the scheme could not have been executed successfully without the knowledge, help and
cooperation of Rufo Atienza, assistant manager and cashier of the Makati (Buendia) branch of
the defendant bank. Indeed, the evidence indicates that Atienza had not only facilitated the
commission of the fraud but he likewise helped in devising the means by which it can be done
in such manner as to make it appear that the transaction was in accordance with banking
procedure.

To begin with, the deposit was made in defendant’s Buendia branch precisely because Atienza was a
key officer therein. The records show that plaintiff had suggested that the ₱200,000.00 be
deposited in his bank, the Manila Banking Corporation, but Doronilla and Dumagpi insisted
that it must be in defendant’s branch in Makati for "it will be easier for them to get a
certification". In fact before he was introduced to plaintiff, Doronilla had already prepared a letter
addressed to the Buendia branch manager authorizing Angeles B. Sanchez and company to open a
savings account for Sterela in the amount of ₱200,000.00, as "per coordination with Mr. Rufo Atienza,
Assistant Manager of the Bank x x x" (Exh. 1). This is a clear manifestation that the other defendants
had been in consultation with Atienza from the inception of the scheme. Significantly, there were
testimonies and admission that Atienza is the brother-in-law of a certain Romeo Mirasol, a friend and
business associate of Doronilla. 1awphi1.nét

Then there is the matter of the ownership of the fund. Because of the "coordination" between
Doronilla and Atienza, the latter knew before hand that the money deposited did not belong to
Doronilla nor to Sterela. Aside from such foreknowledge, he was explicitly told by Inocencia Vives
that the money belonged to her and her husband and the deposit was merely to accommodate
Doronilla. Atienza even declared that the money came from Mrs. Vives.

Although the savings account was in the name of Sterela, the bank records disclose that the only
ones empowered to withdraw the same were Inocencia Vives and Angeles B. Sanchez. In the
signature card pertaining to this account (Exh. J), the authorized signatories were Inocencia Vives
&/or Angeles B. Sanchez. Atienza stated that it is the usual banking procedure that withdrawals of
savings deposits could only be made by persons whose authorized signatures are in the signature
cards on file with the bank. He, however, said that this procedure was not followed here because
Sterela was owned by Doronilla. He explained that Doronilla had the full authority to withdraw by
virtue of such ownership. The Court is not inclined to agree with Atienza. In the first place, he was all
the time aware that the money came from Vives and did not belong to Sterela. He was also told by
Mrs. Vives that they were only accommodating Doronilla so that a certification can be issued to the
effect that Sterela had a deposit of so much amount to be sued in the incorporation of the firm. In the
second place, the signature of Doronilla was not authorized in so far as that account is concerned
inasmuch as he had not signed the signature card provided by the bank whenever a deposit is
opened. In the third place, neither Mrs. Vives nor Sanchez had given Doronilla the authority to
withdraw.

Moreover, the transfer of fund was done without the passbook having been presented. It is an
accepted practice that whenever a withdrawal is made in a savings deposit, the bank requires
the presentation of the passbook. In this case, such recognized practice was dispensed with.
The transfer from the savings account to the current account was without the submission of the
passbook which Atienza had given to Mrs. Vives. Instead, it was made to appear in a certification
signed by Estrella Dumagpi that a duplicate passbook was issued to Sterela because the original
passbook had been surrendered to the Makati branch in view of a loan accommodation assigning the
savings account (Exh. C). Atienza, who undoubtedly had a hand in the execution of this certification,
was aware that the contents of the same are not true. He knew that the passbook was in the hands of
Mrs. Vives for he was the one who gave it to her. Besides, as assistant manager of the branch and
the bank official servicing the savings and current accounts in question, he also was aware that the
original passbook was never surrendered. He was also cognizant that Estrella Dumagpi was not
among those authorized to withdraw so her certification had no effect whatsoever.

The circumstance surrounding the opening of the current account also demonstrate that Atienza’s
active participation in the perpetration of the fraud and deception that caused the loss. The records
indicate that this account was opened three days later after the ₱200,000.00 was deposited. In spite
of his disclaimer, the Court believes that Atienza was mindful and posted regarding the opening of the
current account considering that Doronilla was all the while in "coordination" with him. That it was he
who facilitated the approval of the authority to debit the savings account to cover any overdrawings in
the current account (Exh. 2) is not hard to comprehend.

Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x x x. 31

Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for
damages caused by their employees acting within the scope of their assigned tasks. To hold
the employer liable under this provision, it must be shown that an employer-employee relationship
exists, and that the employee was acting within the scope of his assigned task when the act
complained of was committed. Case law in the United States of America has it that a corporation that
32

entrusts a general duty to its employee is responsible to the injured party for damages flowing from
the employee’s wrongful act done in the course of his general authority, even though in doing such
act, the employee may have failed in its duty to the employer and disobeyed the latter’s instructions. 33

There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny
that Atienza was acting within the scope of his authority as Assistant Branch Manager when he
assisted Doronilla in withdrawing funds from Sterela’s Savings Account No. 10-1567, in which
account private respondent’s money was deposited, and in transferring the money withdrawn to
Sterela’s Current Account with petitioner. Atienza’s acts of helping Doronilla, a customer of the
petitioner, were obviously done in furtherance of petitioner’s interests even though in the process,
34

Atienza violated some of petitioner’s rules such as those stipulated in its savings account
passbook. It was established that the transfer of funds from Sterela’s savings account to its current
35

account could not have been accomplished by Doronilla without the invaluable assistance of Atienza,
and that it was their connivance which was the cause of private respondent’s loss.

The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil
Code, petitioner is liable for private respondent’s loss and is solidarily liable with Doronilla and
Dumagpi for the return of the ₱200,000.00 since it is clear that petitioner failed to prove that it
exercised due diligence to prevent the unauthorized withdrawals from Sterela’s savings account, and
that it was not negligent in the selection and supervision of Atienza. Accordingly, no error was
committed by the appellate court in the award of actual, moral and exemplary damages, attorney’s
fees and costs of suit to private respondent.

WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of
Appeals are AFFIRMED.

SO ORDERED.

Consideration
Articles 1933, 1935, 1939, Civil Code

Article 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid, in which case the contract is simply called a
loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower. (1740a)
Article 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any
compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum.
(1941a)

Article 1939. Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract;

(2) The bailee can neither lend nor lease the object of the contract to a third person. However,
the members of the bailee's household may make use of the thing loaned, unless there is a
stipulation to the contrary, or unless the nature of the thing forbids such use. (n)

Parties
1. Ownership by Bailor – Art. 1933, Art. 1938

Article 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid, in which case the contract is simply called a
loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower. (1740a)

Article 1938. The bailor in commodatum need not be the owner of the thing loaned. (n)

2. Use by Bailee – Art. 1935, Art. 1940, Art. 1939(2)

Article 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any
compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum.
(1941a)

Article 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. (n)

Article 1939. Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract;

(2) The bailee can neither lend nor lease the object of the contract to a third person. However,
the members of the bailee's household may make use of the thing loaned, unless there is a
stipulation to the contrary, or unless the nature of the thing forbids such use. (n)

3. Solidary Liability of Bailees – Art. 1945

Article 1945. When there are two or more bailees to whom a thing is loaned in the same contract,
they are liable solidarily. (1748a)

Liability for Expenses and Damages

Articles 1935, 1941, 1943, 1949, 1950, 1952, Civil Code

Article 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any
compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum.
(1941a)

Article 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of
the thing loaned. (1743a)
Article 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use
thereof and without his fault. (1746)

Article 1949. The bailor shall refund the extraordinary expenses during the contract for the
preservation of the thing loaned, provided the bailee brings the same to the knowledge of the bailor
before incurring them, except when they are so urgent that the reply to the notification cannot be
awaited without danger.

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even
though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless
there is a stipulation to the contrary. (1751a)

Article 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than
those referred to in articles 1941 and 1949, he is not entitled to reimbursement. (n)

Article 1952. The bailor cannot exempt himself from the payment of expenses or damages by
abandoning the thing to the bailee. (n)

G.R. No. 146364 June 3, 2004

COLITO T. PAJUYO, petitioner,

vs.
COURT OF APPEALS and EDDIE GUEVARRA, respondents.

DECISION

CARPIO, J.:

The Case

Before us is a petition for review1 of the 21 June 2000 Decision2 and 14 December 2000 Resolution of
the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11 November
1996 decision3 of the Regional Trial Court of Quezon City, Branch 81,4 affirming the 15 December
1995 decision5 of the Metropolitan Trial Court of Quezon City, Branch 31.6

The Antecedents

In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid ₱400 to a certain Pedro Perez for the rights
over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a house made
of light materials on the lot. Pajuyo and his family lived in the house from 1979 to 7 December 1985.

On 8 December 1985, Pajuyo and private respondent Eddie Guevarra ("Guevarra") executed
a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for
free provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra
promised that he would voluntarily vacate the premises on Pajuyo’s demand.

In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused.

Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City,
Branch 31 ("MTC").

In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot
where the house stands because the lot is within the 150 hectares set aside by Proclamation No. 137
for socialized housing. Guevarra pointed out that from December 1985 to September 1994, Pajuyo
did not show up or communicate with him. Guevarra insisted that neither he nor Pajuyo has valid title
to the lot.

On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion of
the MTC decision reads:

WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against defendant,
ordering the latter to:
 A) vacate the house and lot occupied by the defendant or any other person or persons claiming any
right under him;

B) pay unto plaintiff the sum of THREE HUNDRED PESOS (₱300.00) monthly as reasonable
compensation for the use of the premises starting from the last demand;

C) pay plaintiff the sum of ₱3,000.00 as and by way of attorney’s fees; and

D) pay the cost of suit.

SO ORDERED.7

Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 ("RTC").

On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC
decision reads:

WHEREFORE, premises considered, the Court finds no reversible error in the decision appealed from,
being in accord with the law and evidence presented, and the same is hereby affirmed en toto.

SO ORDERED.8

Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14 December
1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with the Court of
Appeals, Guevarra filed with the Supreme Court a "Motion for Extension of Time to File Appeal by
Certiorari Based on Rule 42" ("motion for extension"). Guevarra theorized that his appeal raised pure
questions of law. The Receiving Clerk of the Supreme Court received the motion for extension on 13
December 1996 or one day before the right to appeal expired.

On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.

On 8 January 1997, the First Division of the Supreme Court issued a Resolution9 referring the motion
for extension to the Court of Appeals which has concurrent jurisdiction over the case. The case
presented no special and important matter for the Supreme Court to take cognizance of at the first
instance.

On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution10 granting
the motion for extension conditioned on the timeliness of the filing of the motion.

On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevara’s petition for
review. On 11 April 1997, Pajuyo filed his Comment.

On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:

WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No. Q-96-26943
is REVERSED and SET ASIDE; and it is hereby declared that the ejectment case filed against defendant-
appellant is without factual and legal basis.

SO ORDERED.11

Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of Appeals
should have dismissed outright Guevarra’s petition for review because it was filed out of time.
Moreover, it was Guevarra’s counsel and not Guevarra who signed the certification against forum-
shopping.

On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyo’s motion for
reconsideration. The dispositive portion of the resolution reads:

WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.

SO ORDERED.12

The Ruling of the MTC

The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and not
the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only by
tolerance. Thus, Guevarra’s refusal to vacate the house on Pajuyo’s demand made Guevarra’s
continued possession of the house illegal.
 The Ruling of the RTC

The RTC upheld the Kasunduan, which established the landlord and tenant relationship between
Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return possession of the
house on demand.

The RTC rejected Guevarra’s claim of a better right under Proclamation No. 137, the Revised
National Government Center Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarra’s rights under these laws. The RTC
declared that in an ejectment case, the only issue for resolution is material or physical possession,
not ownership.

The Ruling of the Court of Appeals

The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra illegally
occupied the contested lot which the government owned.

Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right or
title over the lot because it is public land. The assignment of rights between Perez and Pajuyo, and
the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo and Guevarra
are in pari delicto or in equal fault. The court will leave them where they are.

The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan between
Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant relationship. The Court
of Appeals ruled that the Kasunduan is not a lease contract but a commodatum because the
agreement is not for a price certain.

Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court held
that Guevarra has a better right over the property under Proclamation No. 137. President Corazon C.
Aquino ("President Aquino") issued Proclamation No. 137 on 7 September 1987. At that time,
Guevarra was in physical possession of the property. Under Article VI of the Code of Policies
Beneficiary Selection and Disposition of Homelots and Structures in the National Housing Project
("the Code"), the actual occupant or caretaker of the lot shall have first priority as beneficiary of the
project. The Court of Appeals concluded that Guevarra is first in the hierarchy of priority.

In denying Pajuyo’s motion for reconsideration, the appellate court debunked Pajuyo’s claim that
Guevarra filed his motion for extension beyond the period to appeal.

The Court of Appeals pointed out that Guevarra’s motion for extension filed before the Supreme
Court was stamped "13 December 1996 at 4:09 PM" by the Supreme Court’s Receiving Clerk. The
Court of Appeals concluded that the motion for extension bore a date, contrary to Pajuyo’s claim that
the motion for extension was undated. Guevarra filed the motion for extension on time on 13
December 1996 since he filed the motion one day before the expiration of the reglementary period on
14 December 1996. Thus, the motion for extension properly complied with the condition imposed by
the Court of Appeals in its 28 January 1997 Resolution. The Court of Appeals explained that the
thirty-day extension to file the petition for review was deemed granted because of such compliance.

The Court of Appeals rejected Pajuyo’s argument that the appellate court should have dismissed the
petition for review because it was Guevarra’s counsel and not Guevarra who signed the certification
against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise this issue in his
Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal of the case after
he had extensively argued on the merits of the case. This technicality, the appellate court opined, was
clearly an afterthought.

The Issues

Pajuyo raises the following issues for resolution:

WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION
TANTAMOUNT TO LACK OF JURISDICTION:

1) in GRANTING, instead of denying, Private Respondent’s Motion for an Extension of thirty days to
file petition for review at the time when there was no more period to extend as the decision of the
Regional Trial Court had already become final and executory.

2) in giving due course, instead of dismissing, private respondent’s Petition for Review even though
the certification against forum-shopping was signed only by counsel instead of by petitioner himself.
 3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact a commodatum,
instead of a Contract of Lease as found by the Metropolitan Trial Court and in holding that "the
ejectment case filed against defendant-appellant is without legal and factual basis".

4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case No. Q-96-
26943 and in holding that the parties are in pari delicto being both squatters, therefore, illegal
occupants of the contested parcel of land.

5) in deciding the unlawful detainer case based on the so-called Code of Policies of the National
Government Center Housing Project instead of deciding the same under the Kasunduan voluntarily
executed by the parties, the terms and conditions of which are the laws between themselves.13

The Ruling of the Court

The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive
issues Pajuyo is submitting for resolution.

Procedural Issues

Pajuyo insists that the Court of Appeals should have dismissed outright Guevarra’s petition for review
because the RTC decision had already become final and executory when the appellate court acted
on Guevarra’s motion for extension to file the petition. Pajuyo points out that Guevarra had only one
day before the expiry of his period to appeal the RTC decision. Instead of filing the petition for review
with the Court of Appeals, Guevarra filed with this Court an undated motion for extension of 30 days
to file a petition for review. This Court merely referred the motion to the Court of Appeals. Pajuyo
believes that the filing of the motion for extension with this Court did not toll the running of the period
to perfect the appeal. Hence, when the Court of Appeals received the motion, the period to appeal
had already expired.

We are not persuaded.

Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable to the
Court of Appeals by petition for review in cases involving questions of fact or mixed questions of fact
and law.14 Decisions of the regional trial courts involving pure questions of law are appealable directly
to this Court by petition for review.15 These modes of appeal are now embodied in Section 2, Rule 41
of the 1997 Rules of Civil Procedure.

Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra thus
filed his motion for extension to file petition for review before this Court on 14 December 1996. On 3
January 1997, Guevarra then filed his petition for review with this Court. A perusal of Guevarra’s
petition for review gives the impression that the issues he raised were pure questions of law. There is
a question of law when the doubt or difference is on what the law is on a certain state of facts.16There
is a question of fact when the doubt or difference is on the truth or falsity of the facts alleged.17

In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarra’s petition
for review raised these questions: (1) Do ejectment cases pertain only to possession of a structure,
and not the lot on which the structure stands? (2) Does a suit by a squatter against a fellow squatter
constitute a valid case for ejectment? (3) Should a Presidential Proclamation governing the lot on
which a squatter’s structure stands be considered in an ejectment suit filed by the owner of the
structure?

These questions call for the evaluation of the rights of the parties under the law on ejectment and the
Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely legal.
However, some factual questions still have to be resolved because they have a bearing on the legal
questions raised in the petition for review. These factual matters refer to the metes and bounds of the
disputed property and the application of Guevarra as beneficiary of Proclamation No. 137.

The Court of Appeals has the power to grant an extension of time to file a petition for review.
In Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,18 we
declared that the Court of Appeals could grant extension of time in appeals by petition for review.
In Liboro v. Court of Appeals,19 we clarified that the prohibition against granting an extension of time
applies only in a case where ordinary appeal is perfected by a mere notice of appeal. The prohibition
does not apply in a petition for review where the pleading needs verification. A petition for review,
unlike an ordinary appeal, requires preparation and research to present a persuasive position.20 The
drafting of the petition for review entails more time and effort than filing a notice of appeal.21 Hence,
the Court of Appeals may allow an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,22 we held
that Liboro’s clarification of Lacsamana is consistent with the Revised Internal Rules of the Court of
Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for filing petitions
for review with the Court of Appeals. The extension, however, should be limited to only fifteen days
save in exceptionally meritorious cases where the Court of Appeals may grant a longer period.

A judgment becomes "final and executory" by operation of law. Finality of judgment becomes a fact
on the lapse of the reglementary period to appeal if no appeal is perfected.23 The RTC decision could
not have gained finality because the Court of Appeals granted the 30-day extension to Guevarra.

The Court of Appeals did not commit grave abuse of discretion when it approved Guevarra’s motion
for extension. The Court of Appeals gave due course to the motion for extension because it complied
with the condition set by the appellate court in its resolution dated 28 January 1997. The resolution
stated that the Court of Appeals would only give due course to the motion for extension if filed on
time. The motion for extension met this condition.

The material dates to consider in determining the timeliness of the filing of the motion for extension
are (1) the date of receipt of the judgment or final order or resolution subject of the petition, and (2)
the date of filing of the motion for extension.24 It is the date of the filing of the motion or pleading, and
not the date of execution, that determines the timeliness of the filing of that motion or pleading. Thus,
even if the motion for extension bears no date, the date of filing stamped on it is the reckoning point
for determining the timeliness of its filing.

Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his
motion for extension before this Court on 13 December 1996, the date stamped by this Court’s
Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for extension exactly
one day before the lapse of the reglementary period to appeal.

Assuming that the Court of Appeals should have dismissed Guevarra’s appeal on technical grounds,
Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the petition for
review at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the case. It was
only when the Court of Appeals ruled in Guevarra’s favor that Pajuyo raised the procedural issues
against Guevarra’s petition for review.

A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on the
merits, is estopped from attacking the jurisdiction of the court.25 Estoppel sets in not because the
judgment of the court is a valid and conclusive adjudication, but because the practice of attacking the
court’s jurisdiction after voluntarily submitting to it is against public policy.26

In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarra’s failure to sign
the certification against forum shopping. Instead, Pajuyo harped on Guevarra’s counsel signing the
verification, claiming that the counsel’s verification is insufficient since it is based only on "mere
information."

A party’s failure to sign the certification against forum shopping is different from the party’s failure to
sign personally the verification. The certificate of non-forum shopping must be signed by the party,
and not by counsel.27 The certification of counsel renders the petition defective.28

On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional
requisite.29 It is intended simply to secure an assurance that what are alleged in the pleading are true
and correct and not the product of the imagination or a matter of speculation, and that the pleading is
filed in good faith.30 The party need not sign the verification. A party’s representative, lawyer or any
person who personally knows the truth of the facts alleged in the pleading may sign the verification.31

We agree with the Court of Appeals that the issue on the certificate against forum shopping was
merely an afterthought. Pajuyo did not call the Court of Appeals’ attention to this defect at the early
stage of the proceedings. Pajuyo raised this procedural issue too late in the proceedings.

Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to Resolve the Issue
of Possession

Settled is the rule that the defendant’s claim of ownership of the disputed property will not divest the
inferior court of its jurisdiction over the ejectment case.32 Even if the pleadings raise the issue of
ownership, the court may pass on such issue to determine only the question of possession, especially
if the ownership is inseparably linked with the possession.33 The adjudication on the issue of
ownership is only provisional and will not bar an action between the same parties involving title to the
land.34 This doctrine is a necessary consequence of the nature of the two summary actions of
ejectment, forcible entry and unlawful detainer, where the only issue for adjudication is the physical or
material possession over the real property.35

In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of the
contested property and that they are mere squatters. Will the defense that the parties to the ejectment
case are not the owners of the disputed lot allow the courts to renounce their jurisdiction over the
case? The Court of Appeals believed so and held that it would just leave the parties where they are
since they are in pari delicto.

We do not agree with the Court of Appeals.

Ownership or the right to possess arising from ownership is not at issue in an action for recovery of
possession. The parties cannot present evidence to prove ownership or right to legal possession
except to prove the nature of the possession when necessary to resolve the issue of physical
possession.36 The same is true when the defendant asserts the absence of title over the property. The
absence of title over the contested lot is not a ground for the courts to withhold relief from the parties
in an ejectment case.

The only question that the courts must resolve in ejectment proceedings is - who is entitled to the
physical possession of the premises, that is, to the possession de facto and not to the possession de
jure.37 It does not even matter if a party’s title to the property is questionable,38 or when both parties
intruded into public land and their applications to own the land have yet to be approved by the proper
government agency.39 Regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be thrown out by a strong hand, violence or terror.40 Neither is
the unlawful withholding of property allowed. Courts will always uphold respect for prior possession.

Thus, a party who can prove prior possession can recover such possession even against the owner
himself.41 Whatever may be the character of his possession, if he has in his favor prior possession in
time, he has the security that entitles him to remain on the property until a person with a better right
lawfully ejects him.42 To repeat, the only issue that the court has to settle in an ejectment suit is the
right to physical possession.

In Pitargue v. Sorilla,43 the government owned the land in dispute. The government did not authorize
either the plaintiff or the defendant in the case of forcible entry case to occupy the land. The plaintiff
had prior possession and had already introduced improvements on the public land. The plaintiff had a
pending application for the land with the Bureau of Lands when the defendant ousted him from
possession. The plaintiff filed the action of forcible entry against the defendant. The government was
not a party in the case of forcible entry.

The defendant questioned the jurisdiction of the courts to settle the issue of possession because
while the application of the plaintiff was still pending, title remained with the government, and the
Bureau of Public Lands had jurisdiction over the case. We disagreed with the defendant. We ruled
that courts have jurisdiction to entertain ejectment suits even before the resolution of the application.
The plaintiff, by priority of his application and of his entry, acquired prior physical possession over the
public land applied for as against other private claimants. That prior physical possession enjoys legal
protection against other private claimants because only a court can take away such physical
possession in an ejectment case.

While the Court did not brand the plaintiff and the defendant in Pitargue44 as squatters, strictly
speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant entered the
public land without the owner’s permission. Title to the land remained with the government because it
had not awarded to anyone ownership of the contested public land. Both the plaintiff and the
defendant were in effect squatting on government property. Yet, we upheld the courts’ jurisdiction to
resolve the issue of possession even if the plaintiff and the defendant in the ejectment case did not
have any title over the contested land.

Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of the
public need to preserve the basic policy behind the summary actions of forcible entry and unlawful
detainer. The underlying philosophy behind ejectment suits is to prevent breach of the peace and
criminal disorder and to compel the party out of possession to respect and resort to the law alone to
obtain what he claims is his.45 The party deprived of possession must not take the law into his own
hands.46 Ejectment proceedings are summary in nature so the authorities can settle speedily actions
to recover possession because of the overriding need to quell social disturbances.47

We further explained in Pitargue the greater interest that is at stake in actions for recovery of
possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of possessory
actions involving these public lands before final award is made by the Lands Department, and before title is
given any of the conflicting claimants? It is one of utmost importance, as there are public lands everywhere
and there are thousands of settlers, especially in newly opened regions. It also involves a matter of policy,
as it requires the determination of the respective authorities and functions of two coordinate branches of the
Government in connection with public land conflicts.

Our problem is made simple by the fact that under the Civil Code, either in the old, which was in force in this
country before the American occupation, or in the new, we have a possessory action, the aim and purpose
of which is the recovery of the physical possession of real property, irrespective of the question as to who
has the title thereto. Under the Spanish Civil Code we had the accion interdictal, a summary proceeding
which could be brought within one year from dispossession (Roman Catholic Bishop of Cebu vs. Mangaron,
6 Phil. 286, 291); and as early as October 1, 1901, upon the enactment of the Code of Civil Procedure (Act
No. 190 of the Philippine Commission) we implanted the common law action of forcible entry (section 80 of
Act No. 190), the object of which has been stated by this Court to be "to prevent breaches of the peace
and criminal disorder which would ensue from the withdrawal of the remedy, and the reasonable
hope such withdrawal would create that some advantage must accrue to those persons who,
believing themselves entitled to the possession of property, resort to force to gain possession
rather than to some appropriate action in the court to assert their claims." (Supia and Batioco vs.
Quintero and Ayala, 59 Phil. 312, 314.) So before the enactment of the first Public Land Act (Act No. 926)
the action of forcible entry was already available in the courts of the country. So the question to be resolved
is, Did the Legislature intend, when it vested the power and authority to alienate and dispose of the public
lands in the Lands Department, to exclude the courts from entertaining the possessory action of forcible
entry between rival claimants or occupants of any land before award thereof to any of the parties? Did
Congress intend that the lands applied for, or all public lands for that matter, be removed from the
jurisdiction of the judicial Branch of the Government, so that any troubles arising therefrom, or any breaches
of the peace or disorders caused by rival claimants, could be inquired into only by the Lands Department to
the exclusion of the courts? The answer to this question seems to us evident. The Lands Department does
not have the means to police public lands; neither does it have the means to prevent disorders arising
therefrom, or contain breaches of the peace among settlers; or to pass promptly upon conflicts of
possession. Then its power is clearly limited to disposition and alienation, and while it may decide
conflicts of possession in order to make proper award, the settlement of conflicts of possession
which is recognized in the court herein has another ultimate purpose, i.e., the protection of actual
possessors and occupants with a view to the prevention of breaches of the peace. The power to
dispose and alienate could not have been intended to include the power to prevent or settle
disorders or breaches of the peace among rival settlers or claimants prior to the final award. As to
this, therefore, the corresponding branches of the Government must continue to exercise power and
jurisdiction within the limits of their respective functions. The vesting of the Lands Department with
authority to administer, dispose, and alienate public lands, therefore, must not be understood as
depriving the other branches of the Government of the exercise of the respective functions or
powers thereon, such as the authority to stop disorders and quell breaches of the peace by the
police, the authority on the part of the courts to take jurisdiction over possessory actions arising
therefrom not involving, directly or indirectly, alienation and disposition.

Our attention has been called to a principle enunciated in American courts to the effect that courts have no
jurisdiction to determine the rights of claimants to public lands, and that until the disposition of the land has
passed from the control of the Federal Government, the courts will not interfere with the administration of
matters concerning the same. (50 C. J. 1093-1094.) We have no quarrel with this principle. The
determination of the respective rights of rival claimants to public lands is different from the determination of
who has the actual physical possession or occupation with a view to protecting the same and preventing
disorder and breaches of the peace. A judgment of the court ordering restitution of the possession of a
parcel of land to the actual occupant, who has been deprived thereof by another through the use of force or
in any other illegal manner, can never be "prejudicial interference" with the disposition or alienation of public
lands. On the other hand, if courts were deprived of jurisdiction of cases involving conflicts of
possession, that threat of judicial action against breaches of the peace committed on public lands
would be eliminated, and a state of lawlessness would probably be produced between applicants,
occupants or squatters, where force or might, not right or justice, would rule.

It must be borne in mind that the action that would be used to solve conflicts of possession between rivals or
conflicting applicants or claimants would be no other than that of forcible entry. This action, both in England
and the United States and in our jurisdiction, is a summary and expeditious remedy whereby one in peaceful
and quiet possession may recover the possession of which he has been deprived by a stronger hand, by
violence or terror; its ultimate object being to prevent breach of the peace and criminal disorder. (Supia and
Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere possession as a fact, of
physical possession, not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or right to
possession is never in issue in an action of forcible entry; as a matter of fact, evidence thereof is expressly
banned, except to prove the nature of the possession. (Second 4, Rule 72, Rules of Court.) With this nature
of the action in mind, by no stretch of the imagination can conclusion be arrived at that the use of the
remedy in the courts of justice would constitute an interference with the alienation, disposition, and control of
public lands. To limit ourselves to the case at bar can it be pretended at all that its result would in any way
interfere with the manner of the alienation or disposition of the land contested? On the contrary, it would
facilitate adjudication, for the question of priority of possession having been decided in a final manner by the
courts, said question need no longer waste the time of the land officers making the adjudication or award.
(Emphasis ours)

The Principle of Pari Delicto is not Applicable to Ejectment Cases

The Court of Appeals erroneously applied the principle of pari delicto to this case.

Articles 1411 and 1412 of the Civil Code48 embody the principle of pari delicto. We explained the
principle of pari delicto in these words:

The rule of pari delicto is expressed in the maxims ‘ex dolo malo non eritur actio’ and ‘in pari delicto potior
est conditio defedentis.’ The law will not aid either party to an illegal agreement. It leaves the parties where it
finds them.49

The application of the pari delicto principle is not absolute, as there are exceptions to its application.
One of these exceptions is where the application of the pari delicto rule would violate well-established
public policy.50

In Drilon v. Gaurana,51 we reiterated the basic policy behind the summary actions of forcible entry
and unlawful detainer. We held that:

It must be stated that the purpose of an action of forcible entry and detainer is that, regardless of the actual
condition of the title to the property, the party in peaceable quiet possession shall not be turned out by
strong hand, violence or terror. In affording this remedy of restitution the object of the statute is to prevent
breaches of the peace and criminal disorder which would ensue from the withdrawal of the remedy, and the
reasonable hope such withdrawal would create that some advantage must accrue to those persons who,
believing themselves entitled to the possession of property, resort to force to gain possession rather than to
some appropriate action in the courts to assert their claims. This is the philosophy at the foundation of all
these actions of forcible entry and detainer which are designed to compel the party out of possession to
respect and resort to the law alone to obtain what he claims is his.52

Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is
fraught with danger. To shut out relief to squatters on the ground of pari delicto would openly invite
mayhem and lawlessness. A squatter would oust another squatter from possession of the lot that the
latter had illegally occupied, emboldened by the knowledge that the courts would leave them where
they are. Nothing would then stand in the way of the ousted squatter from re-claiming his prior
possession at all cost.

Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery
of possession seek to prevent.53 Even the owner who has title over the disputed property cannot take
the law into his own hands to regain possession of his property. The owner must go to court.

Courts must resolve the issue of possession even if the parties to the ejectment suit are squatters.
The determination of priority and superiority of possession is a serious and urgent matter that cannot
be left to the squatters to decide. To do so would make squatters receive better treatment under the
law. The law restrains property owners from taking the law into their own hands. However, the
principle of pari delicto as applied by the Court of Appeals would give squatters free rein to
dispossess fellow squatters or violently retake possession of properties usurped from them. Courts
should not leave squatters to their own devices in cases involving recovery of possession.

Possession is the only Issue for Resolution in an Ejectment Case

The case for review before the Court of Appeals was a simple case of ejectment. The Court of
Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate court held
that the pivotal issue in this case is who between Pajuyo and Guevarra has the "priority right as
beneficiary of the contested land under Proclamation No. 137."54 According to the Court of Appeals,
Guevarra enjoys preferential right under Proclamation No. 137 because Article VI of the Code
declares that the actual occupant or caretaker is the one qualified to apply for socialized housing.

The ruling of the Court of Appeals has no factual and legal basis.

First. Guevarra did not present evidence to show that the contested lot is part of a relocation site
under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land that it
declared open for disposition to bona fide residents.

The records do not show that the contested lot is within the land specified by Proclamation No. 137.
Guevarra had the burden to prove that the disputed lot is within the coverage of Proclamation No.
137. He failed to do so.

Second. The Court of Appeals should not have given credence to Guevarra’s unsubstantiated claim
that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the survey the
project administrator conducted, he and not Pajuyo appeared as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo
allowed Guevarra to occupy the disputed property in 1985. President Aquino signed Proclamation No.
137 into law on 11 March 1986. Pajuyo made his earliest demand for Guevarra to vacate the property
in September 1994.

During the time that Guevarra temporarily held the property up to the time that Proclamation No. 137
allegedly segregated the disputed lot, Guevarra never applied as beneficiary of Proclamation No.
137. Even when Guevarra already knew that Pajuyo was reclaiming possession of the property,
Guevarra did not take any step to comply with the requirements of Proclamation No. 137.

Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and
Guevarra has a pending application over the lot, courts should still assume jurisdiction and resolve
the issue of possession. However, the jurisdiction of the courts would be limited to the issue of
physical possession only.

In Pitargue,55 we ruled that courts have jurisdiction over possessory actions involving public land to
determine the issue of physical possession. The determination of the respective rights of rival
claimants to public land is, however, distinct from the determination of who has the actual physical
possession or who has a better right of physical possession.56 The administrative disposition and
alienation of public lands should be threshed out in the proper government agency.57

The Court of Appeals’ determination of Pajuyo and Guevarra’s rights under Proclamation No. 137
was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law. Courts
should not preempt the decision of the administrative agency mandated by law to determine the
qualifications of applicants for the acquisition of public lands. Instead, courts should expeditiously
resolve the issue of physical possession in ejectment cases to prevent disorder and breaches of
peace.58

Pajuyo is Entitled to Physical Possession of the Disputed Property

Guevarra does not dispute Pajuyo’s prior possession of the lot and ownership of the house built on it.
Guevarra expressly admitted the existence and due execution of the Kasunduan.
The Kasunduan reads:

Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay
pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng
"walang bayad." Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng bahay at lote.

Sa sandaling kailangan na namin ang bahay at lote, sila’y kusang aalis ng walang reklamo.

Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent, but
Guevarra was under obligation to maintain the premises in good condition. Guevarra promised to
vacate the premises on Pajuyo’s demand but Guevarra broke his promise and refused to heed
Pajuyo’s demand to vacate.

These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by a
person from another of the possession of real property to which the latter is entitled after the
expiration or termination of the former’s right to hold possession under a contract, express or
implied.59

Where the plaintiff allows the defendant to use his property by tolerance without any contract, the
defendant is necessarily bound by an implied promise that he will vacate on demand, failing which, an
action for unlawful detainer will lie.60 The defendant’s refusal to comply with the demand makes his
continued possession of the property unlawful.61 The status of the defendant in such a case is similar
to that of a lessee or tenant whose term of lease has expired but whose occupancy continues by
tolerance of the owner.62

This principle should apply with greater force in cases where a contract embodies the permission or
tolerance to use the property. The Kasunduan expressly articulated Pajuyo’s forbearance. Pajuyo did
not require Guevarra to pay any rent but only to maintain the house and lot in good condition.
Guevarra expressly vowed in the Kasunduan that he would vacate the property on demand.
Guevarra’s refusal to comply with Pajuyo’s demand to vacate made Guevarra’s continued possession
of the property unlawful.

We do not subscribe to the Court of Appeals’ theory that the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to another something not consumable so
that the latter may use the same for a certain time and return it.63 An essential feature
of commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing
belonging to another is for a certain period.64 Thus, the bailor cannot demand the return of the thing
loaned until after expiration of the period stipulated, or after accomplishment of the use for which
the commodatum is constituted.65 If the bailor should have urgent need of the thing, he may demand
its return for temporary use.66 If the use of the thing is merely tolerated by the bailor, he can demand
the return of the thing at will, in which case the contractual relation is called a precarium.67 Under the
Civil Code, precarium is a kind of commodatum.68

The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the
property in good condition. The imposition of this obligation makes the Kasunduan a contract different
from a commodatum. The effects of the Kasunduan are also different from that of a commodatum.
Case law on ejectment has treated relationship based on tolerance as one that is akin to a landlord-
tenant relationship where the withdrawal of permission would result in the termination of the
lease.69The tenant’s withholding of the property would then be unlawful. This is settled jurisprudence.

Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra
as bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The
obligation to deliver or to return the thing received attaches to contracts for safekeeping, or contracts
of commission, administration and commodatum.70 These contracts certainly involve the obligation to
deliver or return the thing received.71

Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they illegally
occupy. Guevarra insists that the contract is void.

Guevarra should know that there must be honor even between squatters. Guevarra freely entered
into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it.
The Kasunduan binds Guevarra.

The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a
right to physical possession of the contested property. The Kasunduan is the undeniable evidence of
Guevarra’s recognition of Pajuyo’s better right of physical possession. Guevarra is clearly a
possessor in bad faith. The absence of a contract would not yield a different result, as there would still
be an implied promise to vacate.

Guevarra contends that there is "a pernicious evil that is sought to be avoided, and that is allowing an
absentee squatter who (sic) makes (sic) a profit out of his illegal act."72 Guevarra bases his argument
on the preferential right given to the actual occupant or caretaker under Proclamation No. 137 on
socialized housing.

We are not convinced.

Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the property
without paying any rent. There is also no proof that Pajuyo is a professional squatter who rents out
usurped properties to other squatters. Moreover, it is for the proper government agency to decide
who between Pajuyo and Guevarra qualifies for socialized housing. The only issue that we are
addressing is physical possession.

Prior possession is not always a condition sine qua non in ejectment.73 This is one of the distinctions
between forcible entry and unlawful detainer.74 In forcible entry, the plaintiff is deprived of physical
possession of his land or building by means of force, intimidation, threat, strategy or stealth. Thus, he
must allege and prove prior possession.75 But in unlawful detainer, the defendant unlawfully withholds
possession after the expiration or termination of his right to possess under any contract, express or
implied. In such a case, prior physical possession is not required.76

Pajuyo’s withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarra’s transient
right to possess the property ended as well. Moreover, it was Pajuyo who was in actual possession of
the property because Guevarra had to seek Pajuyo’s permission to temporarily hold the property and
Guevarra had to follow the conditions set by Pajuyo in the Kasunduan. Control over the property still
rested with Pajuyo and this is evidence of actual possession.

Pajuyo’s absence did not affect his actual possession of the disputed property. Possession in the
eyes of the law does not mean that a man has to have his feet on every square meter of the ground
before he is deemed in possession.77 One may acquire possession not only by physical occupation,
but also by the fact that a thing is subject to the action of one’s will.78 Actual or physical occupation is
not always necessary.79

Ruling on Possession Does not Bind Title to the Land in Dispute

We are aware of our pronouncement in cases where we declared that "squatters and intruders who
clandestinely enter into titled government property cannot, by such act, acquire any legal right to said
property."80 We made this declaration because the person who had title or who had the right to legal
possession over the disputed property was a party in the ejectment suit and that party instituted the
case against squatters or usurpers.

In this case, the owner of the land, which is the government, is not a party to the ejectment case. This
case is between squatters. Had the government participated in this case, the courts could have
evicted the contending squatters, Pajuyo and Guevarra.

Since the party that has title or a better right over the property is not impleaded in this case, we
cannot evict on our own the parties. Such a ruling would discourage squatters from seeking the aid of
the courts in settling the issue of physical possession. Stripping both the plaintiff and the defendant of
possession just because they are squatters would have the same dangerous implications as the
application of the principle of pari delicto. Squatters would then rather settle the issue of physical
possession among themselves than seek relief from the courts if the plaintiff and defendant in the
ejectment case would both stand to lose possession of the disputed property. This would subvert the
policy underlying actions for recovery of possession.

Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the
property until a person who has title or a better right lawfully ejects him. Guevarra is certainly not that
person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from introducing
evidence and presenting arguments before the proper administrative agency to establish any right to
which they may be entitled under the law.81

In no way should our ruling in this case be interpreted to condone squatting. The ruling on the issue
of physical possession does not affect title to the property nor constitute a binding and conclusive
adjudication on the merits on the issue of ownership.82 The owner can still go to court to recover
lawfully the property from the person who holds the property without legal title. Our ruling here does
not diminish the power of government agencies, including local governments, to condemn, abate,
remove or demolish illegal or unauthorized structures in accordance with existing laws.

Attorney’s Fees and Rentals

The MTC and RTC failed to justify the award of ₱3,000 attorney’s fees to Pajuyo. Attorney’s fees as
part of damages are awarded only in the instances enumerated in Article 2208 of the Civil
Code.83Thus, the award of attorney’s fees is the exception rather than the rule.84 Attorney’s fees are
not awarded every time a party prevails in a suit because of the policy that no premium should be
placed on the right to litigate.85 We therefore delete the attorney’s fees awarded to Pajuyo.

We sustain the ₱300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did
not dispute this factual finding of the two courts. We find the amount reasonable compensation to
Pajuyo. The ₱300 monthly rental is counted from the last demand to vacate, which was on 16
February 1995.

WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated 14
December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision
dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No. Q-
96-26943, affirming the Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon
City, Branch 31 in Civil Case No. 12432, is REINSTATED with MODIFICATION. The award of
attorney’s fees is deleted. No costs.

SO ORDERED.

G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas,petitioner-
appellant.
D. T. Reyes, Liaison and Associates for petitioner-appellant.
Office of the Solicitor General for plaintiff-appellee.

PADILLA, J.:

The Court of Appeals certified this case to this Court because only questions of law are raised.

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of
Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56
and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding
purposes subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon
the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of
one year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof
of only one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the
other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would
pay the value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value
with a deduction of yearly depreciation to be approved by the Auditor General. On 19 October 1950
the Director of Animal Industry advised him that the book value of the three bulls could not be
reduced and that they either be returned or their book value paid not later than 31 October 1950.
Jose V. Bagtas failed to pay the book value of the three bulls or to return them. So, on 20 December
1950 in the Court of First Instance of Manila the Republic of the Philippines commenced an action
was diled against bagtas and that he be ordered to return the three bulls loaned to him or to pay their
book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62, both
with interests, and costs; and that other just and equitable relief be granted in (civil No. 12818).

On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that
because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of
Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural
Resources and the President of the Philippines from the refusal by the Director of Animal
Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8% from the
date of acquisition, to which depreciation the Auditor General did not object, he could not return the
animals nor pay their value and prayed for the dismissal of the complaint.

After hearing, on 30 July 1956 the trial court render judgment —

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus
the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the filing of
this complaint and costs.

On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on
18 October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed
by the plaintiff on November 1958 for the appointment of a special sheriff to serve the writ outside
Manila. Of this order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas , the
surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and as
administratrix of his estate, was notified. On 7 January 1959 she file a motion alleging that on 26
June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal of Industry
and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound
inflicted during a Huk raid on Hacienda Felicidad Intal, and praying that the writ of execution be
quashed and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff
objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February,
the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this Court as
stated at the beginning of this opinion.

It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant,
returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station,
Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt
signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's
motion to quash the writ of execution the appellee prays "that another writ of execution in the sum of
P859.53 be issued against the estate of defendant deceased Jose V. Bagtas." She cannot be held
liable for the two bulls which already had been returned to and received by the appellee.

The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk
in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan,
where the animal was kept, and that as such death was due to force majeure she is relieved
from the duty of returning the bull or paying its value to the appellee. The appellant contends
that the contract was commodatum and that, for that reason, as the appellee retained
ownership or title to the bull it should suffer its loss due to force majeure.
WON BAGTAS IS STILL LIABLE TO PAY FOR THE VALUE OF THE BULLS DEPITE THE THIRD
BULL HVING DIED DUE TO FORCE MAJEUR—- YES

The contention is without merit. The loan to the late defendant Jose V. Bagtas of the three bulls
for breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed
for another year as regards one bull, was subject to the payment by the borrower of breeding fee
of 10% of the book value of the bulls. The appellant contends that the contract
was commodatum and that, for that reason, as the appellee retained ownership or title to the
bull it should suffer its loss due to force majeure.

A contract of commodatum is essentially gratuitous.1 If the breeding fee be considered a

compensation, then the contract would be a lease CONTRACT of the bull. Under article 1671
of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad
faith, because she had continued possession of the bull after the expiry of the contract. And even if
the contract be commodatum, still the appellant is liable, because article 1942 of the Civil
Code provides that a bailee in a contract of commodatum —

. . . is liable for loss of the things, even if it should be through a fortuitous event:

(2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event;

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

LIABLE UNG LEGAL REPRESENTATIVE KAHIT PATAY NA UNG DEFENDANT

The appellant's contention that the demand or prayer by the appellee for the return of the bull or the
payment of its value being a money claim should be presented or filed in the intestate proceedings of
the defendant who died on 23 October 1951, is not altogether without merit. However, the claim that
his civil personality having ceased to exist the trial court lost jurisdiction over the case against him, is
untenable, because section 17 of Rule 3 of the Rules of Court provides that —

After a party dies and the claim is not thereby extinguished, the court shall order, upon proper
notice, the legal representative of the deceased to appear and to be substituted for the deceased,
within a period of thirty (30) days, or within such time as may be granted. . . .

and after the defendant's death on 23 October 1951 his counsel failed to comply with section
16 of Rule 3 which provides that —

Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court
promptly of such death . . . and to give the name and residence of the executory administrator,
guardian, or other legal representative of the deceased . . . .

The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had
been issue letters of administration of the estate of the late Jose Bagtas and that "all persons having
claims for monopoly against the deceased Jose V. Bagtas, arising from contract express or implied,
whether the same be due, not due, or contingent, for funeral expenses and expenses of the last
sickness of the said decedent, and judgment for monopoly against him, to file said claims with the
Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the
date of the first publication of this order, serving a copy thereof upon the aforementioned Felicidad M.
Bagtas, the appointed administratrix of the estate of the said deceased," is not a notice to the court
and the appellee who were to be notified of the defendant's death in accordance with the above-
quoted rule, and there was no reason for such failure to notify, because the attorney who appeared
for the defendant was the same who represented the administratrix in the special proceedings
instituted for the administration and settlement of his estate. The appellee or its attorney or
representative could not be expected to know of the death of the defendant or of the administration
proceedings of his estate instituted in another court that if the attorney for the deceased defendant did
not notify the plaintiff or its attorney of such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the estate of the late
defendant is only liable for the sum of P859.63, the value of the bull which has not been
returned to the appellee, because it was killed while in the custody of the administratrix of his
estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the
motion filed on 7 January 1959 by the appellant for the quashing of the writ of execution.

Special proceedings for the administration and settlement of the estate of the deceased Jose V.
Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment
rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be
presented to the probate court for payment by the appellant, the administratrix appointed by the court.

ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to
costs.

Obligation to Return

Articles 1944, 1946, 1947, 1948, 1951

Article 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him
something, even though it may be by reason of expenses. However, the bailee has a right of
retention for damages mentioned in article 1951. (1747a)

ARTICLE 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the
period stipulated, or after the accomplishment of the use for which the commodatum has been
constituted. However, if in the meantime, he should have urgent need of the thing, he may demand
its return or temporary use.

In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in
the possession of the bailor. (1749a)

Article 1947. The bailor may demand the thing at will, and the contractual relation is called a
precarium, in the following cases:

(1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been
stipulated; or

(2) If the use of the thing is merely tolerated by the owner. (1750a)

Article 1948. The bailor may demand the immediate return of the thing if the bailee commits any act
of ingratitude specified in article 765. (n)

Article 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the
same, shall be liable to the latter for the damages which he may suffer by reason thereof. (1752)

Mutuum or Simple Loan

A. General Concepts – Art. 1933, Art. 1980

Article 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid, in which case the contract is simply called a
loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower. (1740a)

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

B. Object of Simple Loan – Art. 1933, 1953, 1954

Article 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid, in which case the contract is simply called a
loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower. (1740a)

Article 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.
(1753a)

Article 1954. A contract whereby one person transfers the ownership of non-fungible things to
another with the obligation on the part of the latter to give things of the same kind, quantity, and
quality shall be considered a barter. (n)

Act No. 2137 (1912), Sec. 58, definition of “fungible goods”

Fungible goods" means goods of which any unit is, from its nature by mercantile
custom, treated as the equivalent of any other unit. EXAMPLE MONEY — replaceable
with another item that is practically the same

G.R. Nos. 173654-765 August 28, 2008

PEOPLE OF THE PHILIPPINES, petitioner,

vs.
TERESITA PUIG and ROMEO PORRAS, respondents.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner People of the Philippines,
represented by the Office of the Solicitor General, praying for the reversal of the Orders dated 30 January 2006 and 9
June 2006 of the Regional Trial Court (RTC) of the 6th Judicial Region, Branch 68, Dumangas, Iloilo, dismissing the 112
cases of Qualified Theft filed against respondents Teresita Puig and Romeo Porras, and denying petitioner’s Motion for
Reconsideration, in Criminal Cases No. 05-3054 to 05-3165.

The following are the factual antecedents:

On 7 November 2005, the Iloilo Provincial Prosecutor’s Office filed before Branch 68 of the RTC in Dumangas, Iloilo, 112
cases of Qualified Theft against respondents Teresita Puig (Puig) and Romeo Porras (Porras) who were the Cashier and
Bookkeeper, respectively, of private complainant Rural Bank of Pototan, Inc. The cases were docketed as Criminal Cases
No. 05-3054 to 05-3165.

The allegations in the Informations1 filed before the RTC were uniform and pro-forma, except for the amounts, date and
time of commission, to wit:

INFORMATION

That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province of Iloilo, Philippines, and
within the jurisdiction of this Honorable Court, above-named [respondents], conspiring, confederating, and helping
one another, with grave abuse of confidence, being the Cashier and Bookkeeper of the Rural Bank of
 Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank and with
intent of gain, did then and there willfully, unlawfully and feloniously take, steal and carry away the sum of
FIFTEEN THOUSAND PESOS (P15,000.00), Philippine Currency, to the damage and prejudice of the said bank
in the aforesaid amount.

After perusing the Informations in these cases, the trial court did not find the existence of probable cause that
would have necessitated the issuance of a warrant of arrest based on the following grounds: 112
INFORMATIONS FOR QUALIFIED THEFT DID NOT SUFFICIENTLY ALLEGE THE ELEMENT OF TAKING
WITHOUT THE CONSENT OF THE OWNER, AND THE QUALIFYING CIRCUMSTANCE OF GRAVE ABUSE
OF CONFIDENCE.

(1) the element of ‘taking without the consent of the owners’ was missing on the ground that it is the
depositors-clients, and not the Bank, which filed the complaint in these cases, who are the owners of the money
allegedly taken by respondents and hence, are the real parties-in-interest; and

(2) the Informations are bereft of the phrase alleging "dependence, guardianship or vigilance between the
respondents and the offended party that would have created a high degree of confidence between them
which the respondents could have abused."

It added that allowing the 112 cases for Qualified Theft filed against the respondents to push through would be violative of
the right of the respondents under Section 14(2), Article III of the 1987 Constitution which states that in all criminal
prosecutions, the accused shall enjoy the right to be informed of the nature and cause of the accusation against him.
Following Section 6, Rule 112 of the Revised Rules of Criminal Procedure, the RTC dismissed the cases on 30 January
2006 and refused to issue a warrant of arrest against Puig and Porras.

A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner.

On 9 June 2006, an Order3 denying petitioner’s Motion for Reconsideration was issued by the RTC, finding as follows:

Accordingly, the prosecution’s Motion for Reconsideration should be, as it hereby, DENIED. The Order dated
January 30, 2006 STANDS in all respects.

Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45, raising the sole legal issue of:

WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT SUFFICIENTLY ALLEGE THE
ELEMENT OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND THE QUALIFYING
CIRCUMSTANCE OF GRAVE ABUSE OF CONFIDENCE.

Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30 January 2006 and 9 June
2006 issued by the trial court, and that it be directed to proceed with Criminal Cases No. 05-3054 to 05-3165.

Petitioner ARGUES that under Article 1980 of the New Civil Code, "fixed, savings, and current deposits of money in banks
and similar institutions shall be governed by the provisions concerning simple loans." Corollary thereto, Article 1953 of the
same Code provides that "a person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality." Hence, depositors who place
their money with the bank are considered creditors of the bank. The bank acquires ownership of the money deposited by
its clients, making the money taken by respondents as belonging to the bank.

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

Parenthetically, respondents raise procedural issues. They challenge the petition on the ground that a Petition for Review
on Certiorari via Rule 45 is the wrong mode of appeal because a finding of probable cause for the issuance of a warrant of
arrest presupposes evaluation of facts and circumstances, which is not proper under said Rule.

Respondents further claim that the Department of Justice (DOJ), through the Secretary of Justice, is the principal party to
file a Petition for Review on Certiorari, considering that the incident was indorsed by the DOJ.

WON THE BANK ACQUIRED OWNERSHIP OF THE MONEY DEPOSITED BY THEIR CLIENTS, HENCE A PARTY IN
INTEREST IN THE CASE—- YES

We find merit in the petition.

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

In determining the existence of probable cause to issue a warrant of arrest, the RTC judge found the allegations in the
Information inadequate. He ruled that the Information failed to state facts constituting the qualifying circumstance of grave
abuse of confidence and the element of taking without the consent of the owner, since the owner of the money is not the
Bank, but the depositors therein. He also cites People v. Koc Song,4 in which this Court held:
 There must be allegation in the information and proof of a relation, by reason of dependence, guardianship or
vigilance, between the respondents and the offended party that has created a high degree of confidence between
them, which the respondents abused.

At this point, it needs stressing that the RTC Judge based his conclusion that there was no probable cause simply on the
insufficiency of the allegations in the Informations concerning the facts constitutive of the elements of the offense charged.
This, therefore, makes the issue of sufficiency of the allegations in the Informations the focal point of discussion.

Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is committed as follows, viz:

ART. 310. Qualified Theft. – The crime of theft shall be punished by the penalties next higher by two degrees than
those respectively specified in the next preceding article, if committed by a domestic servant, or with grave abuse
of confidence, or if the property stolen is motor vehicle, mail matter or large cattle or consists of coconuts taken
from the premises of a plantation, fish taken from a fishpond or fishery or if property is taken on the occasion of
fire, earthquake, typhoon, volcanic eruption, or any other calamity, vehicular accident or civil disturbance.
(Emphasis supplied.)

Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of another’s property without
violence or intimidation against persons or force upon things. The elements of the crime under this Article are:

1. Intent to gain;

2. Unlawful taking;

3. Personal property belonging to another;

4. Absence of violence or intimidation against persons or force upon things.

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

1. Taking of personal property;

2. That the said property belongs to another;

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

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

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

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

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

On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of Court, is enlightening:

Section 9. Cause of the accusation. The acts or omissions complained of as constituting the offense and the
qualifying and aggravating circumstances must be stated in ordinary and concise language and not necessarily in
the language used in the statute but in terms sufficient to enable a person of common understanding to know
what offense is being charged as well as its qualifying and aggravating circumstances and for the court to
pronounce judgment.

It is evident that the Information need not use the exact language of the statute in alleging the acts or omissions
complained of as constituting the offense. The test is whether it enables a person of common understanding to know
the charge against him, and the court to render judgment properly. 5

The portion of the Information relevant to this discussion reads:

A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence, being the Cashier and Bookkeeper of the
Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank x x x.

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into possession
of the monies deposited therein enjoy the confidence reposed in them by their employer. Banks, on the other
hand, where monies are deposited, are considered the owners thereof. This is very clear not only from the express
provisions of the law, but from established jurisprudence. The relationship between banks and depositors has been
held to be that of creditor and debtor as provided in Articles 1953 and 1980 of the New Civil Code, as appropriately
pointed out by petitioner, provide as follows:

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

Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the nature of possession by
the Bank of the money deposits therein, and the duties being performed by its employees who have custody of
the money or have come into possession of it. The Court has consistently considered the allegations in the
Information that such employees acted with grave abuse of confidence, to the damage and prejudice of the Bank, without
particularly referring to it as owner of the money deposits, as sufficient to make out a case of Qualified Theft. For a
graphic illustration, we cite Roque v. People,6 where the accused teller was convicted for Qualified Theft based on this
Information:

That on or about the 16th day of November, 1989, in the municipality of Floridablanca, province of Pampanga,
Philippines and within the jurisdiction of his Honorable Court, the above-named accused ASUNCION GALANG
ROQUE, being then employed as teller of the Basa Air Base Savings and Loan Association Inc. (BABSLA) with
office address at Basa Air Base, Floridablanca, Pampanga, and as such was authorized and reposed with the
responsibility to receive and collect capital contributions from its member/contributors of said corporation, and
having collected and received in her capacity as teller of the BABSLA the sum of TEN THOUSAND PESOS
(P10,000.00), said accused, with intent of gain, with grave abuse of confidence and without the knowledge
and consent of said corporation, did then and there willfully, unlawfully and feloniously take, steal and carry
away the amount of P10,000.00, Philippine currency, by making it appear that a certain depositor by the name of
Antonio Salazar withdrew from his Savings Account No. 1359, when in truth and in fact said Antonio Salazar did
not withdr[a]w the said amount of P10,000.00 to the damage and prejudice of BABSLA in the total amount
of P10,000.00, Philippine currency.

In convicting the therein appellant, the Court held that:

[S]ince the teller occupies a position of confidence, and the bank places money in the teller’s possession
due to the confidence reposed on the teller, the felony of qualified theft would be committed.7

Also in People v. Sison,8 the Branch Operations Officer was convicted of the crime of Qualified Theft based on the
Information as herein cited:

That in or about and during the period compressed between January 24, 1992 and February 13, 1992, both dates
inclusive, in the City of Manila, Philippines, the said accused did then and there wilfully, unlawfully and feloniously,
with intent of gain and without the knowledge and consent of the owner thereof, take, steal and carry away the
following, to wit:

Cash money amounting to P6,000,000.00 in different denominations belonging to the PHILIPPINE COMMERCIAL
INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch, Manila represented by its Branch Manager,
HELEN U. FARGAS, to the damage and prejudice of the said owner in the aforesaid amount of P6,000,000.00,
Philippine Currency.

That in the commission of the said offense, herein accused acted with grave abuse of confidence and
unfaithfulness, he being the Branch Operation Officer of the said complainant and as such he had free access to
the place where the said amount of money was kept.

The judgment of conviction elaborated thus:

The crime perpetuated by appellant against his employer, the Philippine Commercial and Industrial Bank (PCIB),
is Qualified Theft. Appellant could not have committed the crime had he not been holding the position of Luneta
Branch Operation Officer which gave him not only sole access to the bank vault xxx. The management of the
PCIB reposed its trust and confidence in the appellant as its Luneta Branch Operation Officer, and it was this trust
and confidence which he exploited to enrich himself to the damage and prejudice of PCIB x x x.9

From another end, People v. Locson,10 in addition to People v. Sison, described the nature of possession by the Bank.
The money in this case was in the possession of the defendant as receiving teller of the bank, and the possession of the
defendant was the possession of the Bank. The Court held therein that when the defendant, with grave abuse of
confidence, removed the money and appropriated it to his own use without the consent of the Bank, there was taking as
contemplated in the crime of Qualified Theft.11

Conspicuously, in all of the foregoing cases, where the Informations merely alleged the positions of the respondents; that
the crime was committed with grave abuse of confidence, with intent to gain and without the knowledge and consent of
the Bank, without necessarily stating the phrase being assiduously insisted upon by respondents, "of a relation by
reason of dependence, guardianship or vigilance, between the respondents and the offended party that has
created a high degree of confidence between them, which respondents abused,"12 and without employing the word
"owner" in lieu of the "Bank" were considered to have satisfied the test of sufficiency of allegations.

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

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

On the theory of the defense that the DOJ is the principal party who may file the instant petition, the ruling in Mobilia
Products, Inc. v. Hajime Umezawa13 is instructive. The Court thus enunciated:
 In a criminal case in which the offended party is the State, the interest of the private complainant or the offended
party is limited to the civil liability arising therefrom. Hence, if a criminal case is dismissed by the trial court or if
there is an acquittal, a reconsideration of the order of dismissal or acquittal may be undertaken, whenever legally
feasible, insofar as the criminal aspect thereof is concerned and may be made only by the public prosecutor; or in
the case of an appeal, by the State only, through the OSG. x x x.

On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is well-settled that in appeals by
certiorari under Rule 45 of the Rules of Court, only errors of law may be raised,14 and herein petitioner certainly raised a
question of law.

As an aside, even if we go beyond the allegations of the Informations in these cases, a closer look at the records of the
preliminary investigation conducted will show that, indeed, probable cause exists for the indictment of herein respondents.
Pursuant to Section 6, Rule 112 of the Rules of Court, the judge shall issue a warrant of arrest only upon a finding of
probable cause after personally evaluating the resolution of the prosecutor and its supporting evidence. Soliven v.
Makasiar,15 as reiterated in Allado v. Driokno,16explained that probable cause for the issuance of a warrant of arrest is
the existence of such facts and circumstances that would lead a reasonably discreet and prudent person to believe that
an offense has been committed by the person sought to be arrested.17 The records reasonably indicate that the
respondents may have, indeed, committed the offense charged.

Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as the case may be, to relieve
the respondents from the pain of going through a trial once it is ascertained that no probable cause exists to form a
sufficient belief as to the guilt of the respondents, conversely, it is also equally imperative upon the judge to proceed with
the case upon a showing that there is a prima facie case against the respondents.

WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby GRANTED. The Orders dated 30
January 2006 and 9 June 2006 of the RTC dismissing Criminal Cases No. 05-3054 to 05-3165 are REVERSED and SET
ASIDE. Let the corresponding Warrants of Arrest issue against herein respondents TERESITA PUIG and ROMEO
PORRAS. The RTC Judge of Branch 68, in Dumangas, Iloilo, is directed to proceed with the trial of Criminal Cases No.
05-3054 to 05-3165, inclusive, with reasonable dispatch. No pronouncement as to costs.

G.R. No. 123498 November 23, 2007

BPI FAMILY BANK, Petitioner,

vs.
AMADO FRANCO and COURT OF APPEALS, Respondents.

DECISION

NACHURA, J.:

Banks are exhorted to treat the accounts of their depositors with meticulous care and utmost fidelity.
We reiterate this exhortation in the case at bench.

Before us is a Petition for Review on Certiorari seeking the reversal of the Court of Appeals (CA)
Decision1 in CA-G.R. CV No. 43424 which affirmed with modification the judgment2 of the Regional
Trial Court, Branch 55, Manila (Manila RTC), in Civil Case No. 90-53295.

This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI Family Bank (BPI-
FB) allegedly by respondent Amado Franco (Franco) in conspiracy with other individuals,3 some of
whom opened and maintained separate accounts with BPI-FB, San Francisco del Monte (SFDM)
branch, in a series of transactions.

On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings
and current account with BPI-Famliy bank. Soon thereafter, or on August 25, 1989, First Metro
Investment Corporation (FMIC) also opened a time deposit account with the same branch of BPI-FB
with a deposit of ₱100,000,000.00, to mature one year thence.

Subsequently, on August 31, 1989, Franco opened three accounts, namely, a current,4 savings,5 and
time deposit,6 with BPI-FB. The current and savings accounts were respectively funded with an initial
deposit of ₱500,000.00 each, while the time deposit account had ₱1,000,000.00 with a maturity date
of August 31, 1990. The total amount of ₱2,000,000.00 used to open these accounts is traceable to a
check issued by Tevesteco allegedly in consideration of Franco’s introduction of Eladio Teves,7 who
was looking for a conduit bank to facilitate Tevesteco’s business transactions, to Jaime Sebastian,
who was then BPI-FB SFDM’s Branch Manager. In turn, the funding for the ₱2,000,000.00 check was
part of the ₱80,000,000.00 debited by BPI-FB from FMIC’s time deposit account and credited to
Tevesteco’s current account pursuant to an Authority to Debit purportedly signed by FMIC’s officers.

It appears, however, that the signatures of FMIC’s officers on the Authority to Debit were forged.8 On
September 4, 1989, Antonio Ong,9 upon being shown the Authority to Debit, personally declared his
signature therein to be a forgery. Unfortunately, Tevesteco had already effected several withdrawals
from its current account (to which had been credited the ₱80,000,000.00 covered by the forged
Authority to Debit) amounting to ₱37,455,410.54, including the ₱2,000,000.00 paid to Franco.

On September 8, 1989, impelled by the need to protect its interests in light of FMIC’s forgery claim,
BPI-FB, thru its Senior Vice-President, Severino Coronacion, instructed Jesus Arangorin10 to debit
Franco’s savings and current accounts for the amounts remaining therein.11 However, Franco’s time
deposit account could not be debited due to the capacity limitations of BPI-FB’s computer.12

In the meantime, two checks13 drawn by Franco against his BPI-FB current account were dishonored
upon presentment for payment, and stamped with a notation "account under garnishment."
Apparently, Franco’s current account was garnished by virtue of an Order of Attachment issued by
the Regional Trial Court of Makati (Makati RTC) in Civil Case No. 89-4996 (Makati Case), which had
been filed by BPI-FB against Franco et al.,14 to recover the ₱37,455,410.54 representing Tevesteco’s
total withdrawals from its account.

Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB prior to
Franco’s receipt of notice that his accounts were under garnishment.15 In fact, at the time the Notice of
Garnishment dated September 27, 1989 was served on BPI-FB, Franco had yet to be impleaded in
the Makati case where the writ of attachment was issued.

It was only on May 15, 1990, through the service of a copy of the Second Amended Complaint in Civil
Case No. 89-4996, that Franco was impleaded in the Makati case.16 Immediately, upon receipt of
such copy, Franco filed a Motion to Discharge Attachment which the Makati RTC granted on May 16,
1990. The Order Lifting the Order of Attachment was served on BPI-FB on even date, with Franco
demanding the release to him of the funds in his savings and current accounts. Jesus Arangorin, BPI-
FB’s new manager, could not forthwith comply with the demand as the funds, as previously stated,
had already been debited because of FMIC’s forgery claim. As such, BPI-FB’s computer at the SFDM
Branch indicated that the current account record was "not on file."

With respect to Franco’s savings account, it appears that Franco agreed to an arrangement, as a
favor to Sebastian, whereby ₱400,000.00 from his savings account was temporarily transferred to
Domingo Quiaoit’s savings account, subject to its immediate return upon issuance of a certificate of
deposit which Quiaoit needed in connection with his visa application at the Taiwan Embassy. As part
of the arrangement, Sebastian retained custody of Quiaoit’s savings account passbook to ensure that
no withdrawal would be effected therefrom, and to preserve Franco’s deposits.

On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted the amount of
₱63,189.00 from the remaining balance of the time deposit account representing advance interest
paid to him.

These transactions spawned a number of cases, some of which we had already resolved.

FMIC filed a complaint against BPI-FB for the recovery of the amount of ₱80,000,000.00 debited from
its account.17 The case eventually reached this Court, and in BPI Family Savings Bank, Inc. v. First
Metro Investment Corporation,18 we upheld the finding of the courts below that BPI-FB failed to
exercise the degree of diligence required by the nature of its obligation to treat the accounts of its
depositors with meticulous care. Thus, BPI-FB was found liable to FMIC for the debited amount in its
time deposit. It was ordered to pay ₱65,332,321.99 plus interest at 17% per annum from August 29,
1989 until fully restored. In turn, the 17% shall itself earn interest at 12% from October 4, 1989 until
fully paid.

In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica (Buenaventura, et
al.),19recipients of a ₱500,000.00 check proceeding from the ₱80,000,000.00 mistakenly credited to
Tevesteco, likewise filed suit. Buenaventura et al., as in the case of Franco, were also prevented from
effecting withdrawals20 from their current account with BPI-FB, Bonifacio Market, Edsa, Caloocan City
Branch. Likewise, when the case was elevated to this Court docketed as BPI Family Bank v.
Buenaventura,21 we ruled that BPI-FB had no right to freeze Buenaventura, et al.’s accounts and
adjudged BPI-FB liable therefor, in addition to damages.

Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to be the
perpetrators of the multi-million peso scam.22 In the criminal case, Franco, along with the other
accused, except for Manuel Bienvenida who was still at large, were acquitted of the crime of Estafa
as defined and penalized under Article 351, par. 2(a) of the Revised Penal Code.23 However, the civil
case24 remains under litigation and the respective rights and liabilities of the parties have yet to be
adjudicated.
Consequently, in light of BPI-FB’s refused to heed Franco’s demands to unfreeze his accounts and
release his deposits therein, the franco filed on June 4, 1990 with the Manila RTC the subject suit. In
his complaint, Franco prayed for the following reliefs: (1) the interest on the remaining balance25 of his
current account which was eventually released to him on October 31, 1991; (2) the balance26 on his
savings account, plus interest thereon; (3) the advance interest27 paid to him which had been
deducted when he pre-terminated his time deposit account; and (4) the payment of actual, moral and
exemplary damages, as well as attorney’s fees.

BPI-FB traversed this complaint, insisted that it was correct in freezing the accounts of Franco and
refusing to release his deposits, claiming that it had a better right to the amounts which consisted of
part of the money allegedly fraudulently withdrawn from it by Tevesteco and ending up in Franco’s
accounts. BPI-FB asseverated that the claimed consideration of ₱2,000,000.00 for the introduction
facilitated by Franco between George Daantos and Eladio Teves, on the one hand, and Jaime
Sebastian, on the other, spoke volumes of Franco’s participation in the fraudulent transaction.

On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of which reads as
follows:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of [Franco] and
against [BPI-FB], ordering the latter to pay to the former the following sums:

1. ₱76,500.00 representing the legal rate of interest on the amount of ₱450,000.00 from May 18, 1990 to
October 31, 1991;

2. ₱498,973.23 representing the balance on [Franco’s] savings account as of May 18, 1990, together with
the interest thereon in accordance with the bank’s guidelines on the payment therefor;

3. ₱30,000.00 by way of attorney’s fees; and

4. ₱10,000.00 as nominal damages.

The counterclaim of the defendant is DISMISSED for lack of factual and legal anchor.

Costs against [BPI-FB].

SO ORDERED.28

Unsatisfied with the decision, both parties filed their respective appeals before the CA. Franco
confined his appeal to the Manila RTC’s denial of his claim for moral and exemplary damages, and
the diminutive award of attorney’s fees. In affirming with modification the lower court’s decision, the
appellate court decreed, to wit:

WHEREFORE, foregoing considered, theCA appealed decision is hereby AFFIRMED with

modification ordering [BPI-FB] to pay [Franco] ₱63,189.00 representing the interest deducted from
the time deposit of plaintiff-appellant. ₱200,000.00 as moral damages and ₱100,000.00 as exemplary
damages, deleting the award of nominal damages (in view of the award of moral and exemplary
damages) and increasing the award of attorney’s fees from ₱30,000.00 to ₱75,000.00.

Cost against [BPI-FB].

SO ORDERED.29

In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had a better right to
the deposits in the subject accounts which are part of the proceeds of a forged Authority to Debit; (2)
Franco is entitled to interest on his current account; (3) Franco can recover the ₱400,000.00 deposit
in Quiaoit’s savings account; (4) the dishonor of Franco’s checks was not legally in order; (5) BPI-FB
is liable for interest on Franco’s time deposit, and for moral and exemplary damages; and (6) BPI-
FB’s counter-claim has no factual and legal anchor.

First. On the issue of who has a better right to the deposits in Franco’s accounts, BPI-FB claimes that
the legal consequence of FMIC’s forgery claim is that the money transferred by BPI-FB to Tevesteco
is its own, and considering that it was able to recover possession of the same when the money was
redeposited by Franco, it had the right to set up its ownership thereon and freeze Franco’s accounts.

BPI-FB contends that its position is not unlike that of an owner of personal property who regains
possession after it is stolen, and to illustrate this point, BPI-FB gives the following example: where X’s
television set is stolen by Y who thereafter sells it to Z, and where Z unwittingly entrusts possession
of the TV set to X, the latter would have the right to keep possession of the property and preclude Z
from recovering possession thereof. To bolster its position, BPI-FB cites Article 559 of the Civil
Code, which provides:

Article 559. The possession of movable property acquired in good faith is equivalent to a title.
Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may
recover it from the person in possession of the same.

If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it
in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid
therefor.

WON THE BANK CAN FREEZE FRANCOS ACCT AN PRECLUDE HIM FROM WITHDAWING HIS
DEPOSITS—- no

The petition is partly meritorious.

We are in full accord with the common ruling of the lower courts that BPI-FB cannot unilaterally freeze
Franco’s accounts and preclude him from withdrawing his deposits. However, contrary to the
appellate court’s ruling, we hold that Franco is not entitled to unearned interest on the time deposit as
well as to moral and exemplary damages.

BPI-FB’s argument is unsound. To begin with, the movable property mentioned in Article 559 of
the Civil Code pertains to a specific or determinate thing.30 A determinate or specific thing is one
that is individualized and a thing that can be identified or distinguished from others of the same
kind.31

In this case, the deposit in Franco’s accounts consists of money which, albeit characterized as a
movable, is generic and fungible.32 The quality of being fungible it depends upon the possibility
of the property, because of its nature or the will of the parties, it can be substituted by others
of the same kind, not having a distinct individuality.33

Significantly, while Article 559 permits an owner who has lost or has been unlawfully deprived
of a movable to recover the exact same thing from the current possessor, BPI-FB simply claims
ownership of the equivalent amount of money, i.e., the value thereof, which it had mistakenly debited
from FMIC’s account and credited to Tevesteco’s, and subsequently traced to Franco’s account. In
fact, this is what BPI-FB did in filing the Makati Case against Franco, et al. It staked its claim on the
money itself which passed from one account to another, commencing with the forged Authority to
Debit.

It bears emphasizing that money bears no earmarks of peculiar ownership,34 and this
characteristic is all the more manifest in the instant case which involves money in a banking
transaction gone awry. Its primary function is to pass from hand to hand as a medium of
exchange, without other evidence of its title. 35 Money, which had passed through various
transactions in the general course of banking business, even if of traceable origin, is no
exception.

Thus, inasmuch as what is involved is not a specific or determinate personal property, BPI-FB’s
illustrative example, ostensibly based on Article 559, is inapplicable to the instant case.

There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as a
legal consequence of its unauthorized transfer of FMIC’s deposits to Tevesteco’s account. BPI-FB
conveniently forgets that the deposit of money in banks is governed by the Civil Code
provisions on simple loan or mutuum.

As there is a debtor-creditor relationship between a bank and its depositor, BPI-FB ultimately
acquired ownership of Franco’s deposits, however such ownership is coupled with a
corresponding obligation to pay him an equal amount on demand. 37

Although BPI-FB owns the deposits in Franco’s accounts, it cannot prevent him from
demanding payment of BPI-FB’s obligation by drawing checks against his current account, or
asking for the release of the funds in his savings account. Thus, when Franco issued checks drawn
against his current account, he had every right as creditor to expect that those checks would
be honored by BPI-FB as debtor.
BOI CANNOT FREEZE FRANCOS ACCOUNTS BASED ON ASSUMPTION OF SCAM

More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco based on
its mere suspicion that the funds therein were proceeds of the multi-million peso scam Franco was
allegedly involved in. To grant BPI-FB, or any bank for that matter, the right to take whatever
action it pleases on deposits which it supposes are derived from shady transactions, would
open the floodgates of public distrust in the banking industry.

Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals38 continues to resonate,
thus:

The banking system is an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized nation. Whether as mere passive entities for the safekeeping and
saving of money or as active instruments of business and commerce, banks have become an
ubiquitous presence among the people, who have come to regard them with respect and even
gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to
entrust his life’s savings to the bank of his choice, knowing that they will be safe in its custody and will
even earn some interest for him. The ordinary person, with equal faith, usually maintains a modest
checking account for security and convenience in the settling of his monthly bills and the payment of
ordinary expenses. x x x.

In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must
record every single transaction accurately, down to the last centavo, and as promptly as possible.
This has to be done if the account is to reflect at any given time the amount of money the depositor
can dispose of as he sees fit, confident that the bank will deliver it as and to whomever directs. A
blunder on the part of the bank, such as the dishonor of the check without good reason, can cause
the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal
litigation.

The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship. x x x.

Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the
signatures of its customers. Having failed to detect the forgery in the Authority to Debit and in
the process inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift
liability thereon to Franco and the other payees of checks issued by Tevesteco, or prevent
withdrawals from their respective accounts without the appropriate court writ or a favorable
final judgment.

Further, it boggles the mind why BPI-FB, even without delving into the authenticity of the signature in
the Authority to Debit, effected the transfer of ₱80,000,000.00 from FMIC’s to Tevesteco’s account,
when FMIC’s account was a time deposit and it had already paid advance interest to FMIC.
Considering that there is as yet no indubitable evidence establishing Franco’s participation in
the forgery, he remains an innocent party. As between him and BPI-FB, the latter, which made
possible the present predicament, must bear the resulting loss or inconvenience.

Second. With respect to its liability for interest on Franco’s current account, BPI-FB argues that its
non-compliance with the Makati RTC’s Order Lifting the Order of Attachment and the legal
consequences thereof, is a matter that ought to be taken up in that court.

The argument is tenuous. We agree with the succinct holding of the appellate court in this respect.
The Manila RTC’s order to pay interests on Franco’s current account arose from BPI-FB’s unjustified
refusal to comply with its obligation to pay Franco pursuant to their contract of mutuum. In other
words, from the time BPI-FB refused Franco’s demand for the release of the deposits in his current
account, specifically, from May 17, 1990, interest at the rate of 12% began to accrue thereon.39

Undeniably, the Makati RTC is vested with the authority to determine the legal consequences of BPI-
FB’s non-compliance with the Order Lifting the Order of Attachment. However, such authority does
not preclude the Manila RTC from ruling on BPI-FB’s liability to Franco for payment of interest based
on its continued and unjustified refusal to perform a contractual obligation upon demand. After all, this
was the core issue raised by Franco in his complaint before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoit’s account, we find no reason to depart
from the factual findings of both the Manila RTC and the CA.

Noteworthy is the fact that Quiaoit himself testified that the deposits in his account are
actually owned by Franco who simply accommodated Jaime Sebastian’s request to
temporarily transfer ₱400,000.00 from Franco’s savings account to Quiaoit’s account. 40 His
testimony cannot be characterized as hearsay as the records reveal that he had personal knowledge
of the arrangement made between Franco, Sebastian and himself.41

BPI-FB makes capital of Franco’s belated allegation relative to this particular arrangement. It insists
that the transaction with Quiaoit was not specifically alleged in Franco’s complaint before the Manila
RTC. However, it appears that BPI-FB had impliedly consented to the trial of this issue given its
extensive cross-examination of Quiaoit.

Section 5, Rule 10 of the Rules of Court provides:

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

In all, BPI-FB’s argument that this case is not the right forum for Franco to recover the ₱400,000.00
begs the issue. To reiterate, Quiaoit, testifying during the trial, unequivocally disclaimed ownership of
the funds in his account, and pointed to Franco as the actual owner thereof. Clearly, Franco’s action
for the recovery of his deposits appropriately covers the deposits in Quiaoit’s account.

Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor of Franco’s
checks respectively dated September 11 and 18, 1989 was legally in order in view of the Makati
RTC’s supplemental writ of attachment issued on September 14, 1989. It posits that as the party that
applied for the writ of attachment before the Makati RTC, it need not be served with the Notice of
Garnishment before it could place Franco’s accounts under garnishment.

The argument is specious. In this argument, we perceive BPI-FB’s clever but transparent ploy to
circumvent Section 4,42 Rule 13 of the Rules of Court. It should be noted that the strict requirement on
service of court papers upon the parties affected is designed to comply with the elementary requisites
of due process. Franco was entitled, as a matter of right, to notice, if the requirements of due process
are to be observed. Yet, he received a copy of the Notice of Garnishment only on September 27,
1989, several days after the two checks he issued were dishonored by BPI-FB on September
20 and 21, 1989. Verily, it was premature for BPI-FB to freeze Franco’s accounts without even
awaiting service of the Makati RTC’s Notice of Garnishment on Franco.

Additionally, it should be remembered that the enforcement of a writ of attachment cannot be made
without including in the main suit the owner of the property attached by virtue thereof. Section 5, Rule
13 of the Rules of Court specifically provides that "no levy or attachment pursuant to the writ issued x
x x shall be enforced unless it is preceded, or contemporaneously accompanied, by service of
summons, together with a copy of the complaint, the application for attachment, on the defendant
within the Philippines."

Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC had yet to
acquire jurisdiction over the person of Franco when BPI-FB garnished his
accounts.43 Effectively, therefore, the Makati RTC had no authority yet to bind the deposits of Franco
through the writ of attachment, and consequently, there was no legal basis for BPI-FB to dishonor the
checks issued by Franco.

Fifth. Anent the CA’s finding that BPI-FB was in bad faith and as such liable for the advance interest it
deducted from Franco’s time deposit account, and for moral as well as exemplary damages, we find it
proper to reinstate the ruling of the trial court, and allow only the recovery of nominal damages in the
amount of ₱10,000.00. However, we retain the CA’s award of ₱75,000.00 as attorney’s fees.

In granting Franco’s prayer for interest on his time deposit account and for moral and exemplary
damages, the CA attributed bad faith to BPI-FB because it (1) completely disregarded its obligation to
Franco; (2) misleadingly claimed that Franco’s deposits were under garnishment; (3) misrepresented
that Franco’s current account was not on file; and (4) refused to return the ₱400,000.00 despite the
fact that the ostensible owner, Quiaoit, wanted the amount returned to Franco.

In this regard, we are guided by Article 2201 of the Civil Code which provides:

Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good
faith is liable shall be those that are the natural and probable consequences of the breach of the
obligation, and which the parties have foreseen or could have reasonable foreseen at the time the
obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages
which may be reasonably attributed to the non-performance of the obligation. (Emphasis supplied.)

We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection and not out
of malevolence or ill will. BPI-FB was not in the corrupt state of mind contemplated in Article 2201
and should not be held liable for all damages now being imputed to it for its breach of obligation. For
the same reason, it is not liable for the unearned interest on the time deposit.

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of wrong; it partakes of the nature of fraud.44 We have held
that it is a breach of a known duty through some motive of interest or ill will.45 In the instant case, we
cannot attribute to BPI-FB fraud or even a motive of self-enrichment. As the trial court found,
there was no denial whatsoever by BPI-FB of the existence of the accounts. The computer-
generated document which indicated that the current account was "not on file" resulted from the prior
debit by BPI-FB of the deposits. The remedy of freezing the account, or the garnishment, or even the
outright refusal to honor any transaction thereon was resorted to solely for the purpose of holding on
to the funds as a security for its intended court action,46 and with no other goal but to ensure the
integrity of the accounts.

We have had occasion to hold that in the absence of fraud or bad faith, 47 moral damages
cannot be awarded; and that the adverse result of an action does not per se make the action
wrongful, or the party liable for it. One may err, but error alone is not a ground for granting such
damages.48

An award of moral damages contemplates the existence of the following requisites: (1) there must be
an injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there must
be a culpable act or omission factually established; (3) the wrongful act or omission of the defendant
is the proximate cause of the injury sustained by the claimant; and (4) the award for damages is
predicated on any of the cases stated in Article 2219 of the Civil Code.49

Franco could not point to, or identify any particular circumstance in Article 2219 of the Civil
Code,50upon which to base his claim for moral damages. 1âwphi1

Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages under Article
2220 of the Civil Code for breach of contract.51

We also deny the claim for exemplary damages. Franco should show that he is entitled to moral,
temperate, or compensatory damages before the court may even consider the question of whether
exemplary damages should be awarded to him.52 As there is no basis for the award of moral
damages, neither can exemplary damages be granted.

While it is a sound policy not to set a premium on the right to litigate,53 we, however, find that Franco
is entitled to reasonable attorney’s fees for having been compelled to go to court in order to assert his
right. Thus, we affirm the CA’s grant of ₱75,000.00 as attorney’s fees.

Attorney’s fees may be awarded when a party is compelled to litigate or incur expenses to protect his
interest,54 or when the court deems it just and equitable.55 In the case at bench, BPI-FB refused to
unfreeze the deposits of Franco despite the Makati RTC’s Order Lifting the Order of Attachment and
Quiaoit’s unwavering assertion that the ₱400,000.00 was part of Franco’s savings account. This
refusal constrained Franco to incur expenses and litigate for almost two (2) decades in order to
protect his interests and recover his deposits. Therefore, this Court deems it just and equitable to
grant Franco ₱75,000.00 as attorney’s fees. The award is reasonable in view of the complexity of the
issues and the time it has taken for this case to be resolved.56

Sixth. As for the dismissal of BPI-FB’s counter-claim, we uphold the Manila RTC’s ruling, as affirmed
by the CA, that BPI-FB is not entitled to recover ₱3,800,000.00 as actual damages. BPI-FB’s alleged
loss of profit as a result of Franco’s suit is, as already pointed out, of its own making. Accordingly, the
denial of its counter-claim is in order.

WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision dated
November 29, 1995 is AFFIRMED with the MODIFICATION that the award of unearned interest on
the time deposit and of moral and exemplary damages is DELETED.

No pronouncement as to costs.

C. Obligation to Pay – Art. 1955, 1249, 1250

Art. 1955. The obligation of a person who borrows money shall be governed by the provisions of
Articles 1249 and 1250 of this Code.

If what was loaned is a fungible thing other than money, the debtor owes another thing of the same
kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the
same kind, its value at the time of the perfection of the loan shall be paid. (1754a)

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of
the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170)

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

D. Interest
1. Conventional Interest
a) General Concepts – Art. 1933, 1956, 1306, 1253, 1958, 1960, 2154, 1423

Article 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid, in which case the contract is simply called a
loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower. (1740a)

Article 1956. No interest shall be due unless it has been expressly stipulated in writing. (1755a)

Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions
as they may deem convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy. (1255a)

Article 1253. If the debt produces interest, payment of the principal shall not be deemed to have
been made until the interests have been covered. (1173)

Article 1958. In the determination of the interest, if it is payable in kind, its value shall be
appraised at the current price of the products or goods at the time and place of payment. (n)

Article 1960. If the borrower pays interest when there has been no stipulation therefor, the
provisions of this Code concerning solutio indebiti, or natural obligations, shall be applied, as the
case may be. (n)
Article 2154. If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises. (1895)

Article 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their
performance. Natural obligations, not being based on positive law but on equity and natural law, do
not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor,
they authorize the retention of what has been delivered or rendered by reason thereof. Some natural
obligations are set forth in the following articles

b) Monetary Interest

G.R. No. 155223 April 4, 2007

BOBIE ROSE V. FRIAS, represented by her Attorney-in-fact, MARIE F. FUJITA, Petitioner,

vs.
FLORA SAN DIEGO-SISON, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before us is a Petition for Review on Certiorari filed by Bobie Rose V. Frias represented by her
Attorney-in-fact, Marie Regine F. Fujita (petitioner) seeking to annul the Decision1 dated June 18,
2002 and the Resolution2 dated September 11, 2002 of the Court of Appeals (CA) in CA-G.R. CV No.
52839.

Petitioner bobie rose frias is the owner of a house and lot located at No. 589 Batangas East, Ayala
Alabang, Muntinlupa, Metro Manila, which she acquired from Island Masters Realty and Development
Corporation (IMRDC) by virtue of a Deed of Sale dated Nov. 16, 1990.3 The property is covered by
TCT No. 168173 of the Register of Deeds of Makati in the name of IMRDC.4

On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San Diego-Sison
(respondent), as the SECOND PARTY, entered into a Memorandum of Agreement5 over the property
with the following terms:

NOW, THEREFORE, for and in consideration of the sum of THREE MILLION PESOS
(₱3,000,000.00) receipt of which is hereby acknowledged by the FIRST PARTY from the SECOND
PARTY, the parties have agreed as follows:

1. That the SECOND PARTY ( Dra Flora) has a period of Six (6) months from the date of the execution of
this contract within which to notify Frias the FIRST PARTY of her intention to purchase the aforementioned
parcel of land together within (sic) the improvements thereon at the price of SIX MILLION FOUR HUNDRED
THOUSAND PESOS (₱6,400,000.00). Upon notice to the FIRST PARTY of the SECOND PARTY’s intention
to purchase the same, the latter Dra flora has a period of another six months within which to pay the
remaining balance of ₱3.4 million.

2. That prior to the six months period given to the SECOND PARTY within which to decide whether or not to
purchase the above-mentioned property, the FIRST PARTY may still offer the said property to other persons
who may be interested to buy the same provided that the amount of ₱3,000,000.00 given to the FIRST
PARTY BY THE SECOND PARTY shall be paid to the latter including interest based on prevailing
compounded bank interest plus the amount of the sale in excess of ₱7,000,000.00 should the property be
sold at a price more than ₱7 million.

3. That in case the FIRST PARTY has no other buyer within the first six months from the execution of this
contract, no interest shall be charged by the SECOND PARTY on the P3 million however, in the event that
on the sixth month dra flora would decide not to purchase the aforementioned property, the FIRST PARTY
has a period of another six months within which to pay the sum of ₱3 million pesos provided that the said
amount shall earn compounded bank interest for the last six months only. Under this circumstance,
the amount of P3 million given by the SECOND PARTY which shall be treated as [a] loan and the property
shall be considered as the security for the mortgage which can be enforced in accordance with law.

x x x x.6

Petitioner received from respondent two million pesos in cash and one million pesos in a post-dated
check dated February 28, 1990, instead of 1991, which rendered said check stale.7 Petitioner then
gave respondent TCT No. 168173 in the name of IMRDC and the Deed of Absolute Sale over the
property between petitioner and IMRDC.
Respondent decided not to purchase the property and notified petitioner through a letter8 dated March
20, 1991, which petitioner received only on June 11, 1991,9 reminding petitioner of their agreement
that the amount of two million pesos which petitioner received from respondent should be considered
as a loan payable within six months. Petitioner subsequently failed to pay respondent the amount of
two million pesos.

On April 1, 1993, respondent filed with the Regional Trial Court (RTC) of Manila, a complaint10 for sum
of money with preliminary attachment against petitioner. The case was docketed as Civil Case
No. 93-65367 and raffled to Branch 30. Respondent alleged the foregoing facts and in addition thereto
averred that petitioner tried to deprive her of the security for the loan by making a false report11 of the
loss of her owner’s copy of TCT No. 168173 to the Tagig Police Station on June 3, 1991, executing
an affidavit of loss and by filing a petition12 for the issuance of a new owner’s duplicate copy of said
title with the RTC of Makati, Branch 142; that the petition was granted in an Order13 dated August 31,
1991; that said Order was subsequently set aside in an Order dated April 10, 199214 where the RTC
Makati granted respondent’s petition for relief from judgment due to the fact that respondent is in
possession of the owner’s duplicate copy of TCT No. 168173, and ordered the provincial public
prosecutor to conduct an investigation of petitioner for perjury and false testimony. Respondent
prayed for the ex-parte issuance of a writ of preliminary attachment and payment of two million pesos
with interest at 36% per annum from December 7, 1991, ₱100,000.00 moral, corrective and
exemplary damages and ₱200,000.00 for attorney’s fees.

In an Order dated April 6, 1993, the Executive Judge of the RTC of Manila issued a writ of preliminary
attachment upon the filing of a bond in the amount of two million pesos.15

Petitioner filed an Amended Answer16 alleging that the Memorandum of Agreement was conceived
and arranged by her lawyer, Atty. Carmelita Lozada, who is also respondent’s lawyer; that she was
asked to sign the agreement without being given the chance to read the same; that the title to the
property and the Deed of Sale between her and the IMRDC were entrusted to Atty. Lozada for
safekeeping and were never turned over to respondent as there was no consummated sale yet; that
out of the two million pesos cash paid, Atty. Lozada took the one million pesos which has not been
returned, thus petitioner had filed a civil case against her; that she was never informed of
respondent’s decision not to purchase the property within the six month period fixed in the
agreement; that when she demanded the return of TCT No. 168173 and the Deed of Sale between
her and the IMRDC from Atty. Lozada, the latter gave her these documents in a brown envelope on
May 5, 1991 which her secretary placed in her attache case; that the envelope together with her other
personal things were lost when her car was forcibly opened the following day; that she sought the
help of Atty. Lozada who advised her to secure a police report, to execute an affidavit of loss and to
get the services of another lawyer to file a petition for the issuance of an owner’s duplicate copy; that
the petition for the issuance of a new owner’s duplicate copy was filed on her behalf without her
knowledge and neither did she sign the petition nor testify in court as falsely claimed for she was
abroad; that she was a victim of the manipulations of Atty. Lozada and respondent as shown by the
filing of criminal charges for perjury and false testimony against her; that no interest could be due as
there was no valid mortgage over the property as the principal obligation is vitiated with fraud and
deception. She prayed for the dismissal of the complaint, counter-claim for damages and attorney’s
fees.

Trial on the merits ensued. On January 31, 1996, the RTC issued a decision in favor of dra flora17 the
dispositive portion of which reads:

WHEREFORE, judgment is hereby RENDERED:

1) Ordering defendant to pay plaintiff the sum of P2 Million plus interest thereon at the rate of thirty
two (32%) per cent per annum beginning December 7, 1991 until fully paid.

2) Ordering defendant to pay plaintiff the sum of ₱70,000.00 representing premiums paid by plaintiff on the
attachment bond with legal interest thereon counted from the date of this decision until fully paid.

3) Ordering defendant to pay plaintiff the sum of ₱100,000.00 by way of moral, corrective and exemplary
damages.

4) Ordering defendant to pay plaintiff attorney’s fees of ₱100,000.00 plus cost of litigation.18

The RTC found that petitioner was under obligation to pay respondent the amount of two million
pesos with compounded interest pursuant to their Memorandum of Agreement; that the fraudulent
scheme employed by petitioner to deprive respondent of her only security to her loaned money when
petitioner executed an affidavit of loss and instituted a petition for the issuance of an owner’s
duplicate title knowing the same was in respondent’s possession, entitled respondent to moral
damages; and that petitioner’s bare denial cannot be accorded credence because her testimony and
that of her witness did not appear to be credible.

The RTC further found that petitioner admitted that she received from respondent the two million
pesos in cash but the fact that petitioner gave the one million pesos to Atty. Lozada was without
respondent’s knowledge thus it is not binding on respondent; that respondent had also proven that in
1993, she initially paid the sum of ₱30,000.00 as premium for the issuance of the attachment bond,
₱20,000.00 for its renewal in 1994, and ₱20,000.00 for the renewal in 1995, thus plaintiff should be
reimbursed considering that she was compelled to go to court and ask for a writ of preliminary
attachment to protect her rights under the agreement.

Petitioner filed her appeal with the CA. In a Decision dated June 18, 2002, the CA affirmed the RTC
decision with modification, the dispositive portion of which reads:

WHEREFORE, premises considered, the decision appealed from is MODIFIED in the sense that the
rate of interest is reduced from 32% to 25% per annum, effective June 7, 1991 until fully paid.19

The CA found that: petitioner gave the one million pesos to Atty. Lozada partly as her commission
and partly as a loan; respondent did not replace the mistakenly dated check of one million pesos
because she had decided not to buy the property and petitioner knew of her decision as early as April
1991; the award of moral damages was warranted since even granting petitioner had no hand in the
filing of the petition for the issuance of an owner’s copy, she executed an affidavit of loss of TCT No.
168173 when she knew all along that said title was in respondent’s possession; petitioner’s claim that
she thought the title was lost when the brown envelope given to her by Atty. Lozada was stolen from
her car was hollow; that such deceitful conduct caused respondent serious anxiety and emotional
distress.

The CA concluded that there was no basis for petitioner to say that the interest should be charged for
six months only and no more; that a loan always bears interest otherwise it is not a loan; that interest
should commence on June 7, 199120 with compounded bank interest prevailing at the time the
two million was considered as a loan which was in June 1991; that the bank interest rate for
loans secured by a real estate mortgage in 1991 ranged from 25% to 32% per annum as
certified to by Prudential Bank,21 that in fairness to petitioner, the rate to be charged should be
25% only.

Petitioner’s motion for reconsideration was denied by the CA in a Resolution dated September 11,
2002.

Hence the instant Petition for Review on Certiorari filed by petitioner raising the following issues:

ISSUE : (A) WHETHER OR NOT THE COMPOUNDED BANK INTEREST SHOULD

BE LIMITED TO SIX (6) MONTHS AS CONTAINED IN THE MEMORANDUM OF
AGREEMENT.—- No
(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO MORAL DAMAGES.

(C) WHETHER OR NOT THE GRANT OF CORRECTIVE AND EXEMPLARY DAMAGES AND
ATTORNEY’S FEES IS PROPER EVEN IF NOT MENTIONED IN THE TEXT OF THE DECISION.22

Petitioner contends that the interest, whether at 32% per annum awarded by the trial court or at 25%
per annum as modified by the CA which should run from June 7, 1991 until fully paid, is contrary to
the parties’ Memorandum of Agreement; that the agreement provides that if respondent would decide
not to purchase the property, petitioner has the period of another six months to pay the loan with
compounded bank interest for the last six months only; that the CA’s ruling that a loan always bears
interest otherwise it is not a loan is contrary to Art. 1956 of the New Civil Code which provides that no
interest shall be due unless it has been expressly stipulated in writing.

We are not persuaded.

While the CA’s conclusion, that a loan always bears interest otherwise it is not a loan, is flawed since
a simple loan may be gratuitous or with a stipulation to pay interest,23 Tge Court found no error by
CA in awarding a 25% interest per annum on the two-million peso loan even beyond the
second six months stipulated period.

The Memorandum of Agreement executed between the petitioner and respondent on December 7,
1990 is the law between the parties. In resolving an issue based upon a contract, we must first
examine the contract itself, especially the provisions thereof which are relevant to the
controversy.24The general rule is that if the terms of an agreement are clear and leave no doubt
as to the intention of the contracting parties, the literal meaning of its stipulations shall
prevail.25 It is further required that the various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from all of them taken
jointly.26

In this case, the phrase "for the last six months only" should be taken in the context of the entire
agreement. We agree with and adopt the CA’s interpretation of the phrase in this wise:

Their agreement speaks of two (2) periods of six months each. The first six-month period was
given to dra flora to make up her mind whether or not to purchase defendant-appellant’s
(petitioner's) property.

The second six-month period was given to Friasbto pay the P2 million loan in the event that
plaintiff-appellee decided not to buy the subject property in which case interest will be
charged "for the last six months only", referring to the second six-month period. This means that
no interest will be charged for the first six-month period while appellee was making up her mind
whether to buy the property, but only for the second period of six months after Dra Flora had
decided not to buy the property. This is the meaning of the phrase "for the last six months only".
Certainly, there is nothing in their agreement that suggests that interest will be charged for six
months only even if it takes defendant-appellant an eternity to pay the loan.27

The agreement that the amount given shall bear compounded bank interest for the last six months
only, i.e., referring to the second six-month period, it does not mean that interest will no longer be
charged after the second six-month period since such stipulation was made on the logical and
reasonable expectation that such amount would be paid within the date stipulated. Considering that
petitioner failed to pay the amount given which under the Memorandum of Agreement shall be
considered as a loan, hence the monetary interest for the last six months continued to accrue
until actual payment of the loaned amount.

The payment of regular interest constitutes the price or cost of the use of money and thus, until the
principal sum due is returned to the creditor, regular interest continues to accrue since the debtor
continues to use the principal amount.28 It has been held that for a debtor to continue in
possession of the principal of the loan and to continue to use the same after maturity of the
loan without payment of the monetary interest, would constitute unjust enrichment on the part
of the debtor at the expense of the creditor. 29

Petitioner and respondent stipulated that the loaned amount shall earn compounded bank interests,
and per the certification issued by Prudential Bank, the interest rate for loans in 1991 ranged from
25% to 32% per annum. The CA reduced the interest rate to 25% instead of the 32% awarded by the
trial court which petitioner no longer assailed.
1awphi1.nét

In Bautista v. Pilar Development Corp.,30 we upheld the validity of a 21% per annum interest on a
₱142,326.43 loan. In Garcia v. Court of Appeals,31 we sustained the agreement of the parties to a
24% per annum interest on an ₱8,649,250.00 loan. Thus, the interest rate of 25% per annum
awarded by the CA to a ₱2 million loan is fair and reasonable.

DAMAGES—respondent is entitled for moral damages

Petitioner next claims that moral damages were awarded on the erroneous finding that she used a
fraudulent scheme to deprive respondent of her security for the loan; that such finding is baseless
since petitioner was acquitted in the case for perjury and false testimony filed by respondent against
her.

We are not persuaded.

Article 31 of the Civil Code provides that when the civil action is based on an obligation not
arising from the act or omission complained of as a felony, such civil action may proceed
independently of the criminal proceedings and regardless of the result of the latter.32

While petitioner was acquitted in the false testimony and perjury cases filed by respondent
against her, those actions are entirely distinct from the collection of sum of money with
damages filed by respondent against petitioner.
We agree with the findings of the trial court and the CA that petitioner’s act of trying to deprive
respondent of the security of her loan by executing an affidavit of loss of the title and instituting a
petition for the issuance of a new owner’s duplicate copy of TCT No. 168173 entitles respondent to
moral damages. Moral damages may be awarded in culpa contractual or breach of contract
1a\^/phi1.net

cases when the defendant acted fraudulently or in bad faith. Bad faith does not simply connote
bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious
doing of wrong. It partakes of the nature of fraud.33

The Memorandum of Agreement provides that in the event that respondent opts not to buy the
property, the money given by respondent to petitioner shall be treated as a loan and the property
shall be considered as the security for the mortgage. It was testified to by respondent that after
they executed the agreement on December 7, 1990, petitioner gave her the owner’s copy of the
title to the property, the Deed of Sale between petitioner and IMRDC, the certificate of
occupancy, and the certificate of the Secretary of the IMRDC who signed the Deed of
Sale.34 However, notwithstanding that all those documents were in respondent’s possession,
petitioner executed an affidavit of loss that the owner’s copy of the title and the Deed of Sale
were lost.

Although petitioner testified that her execution of the affidavit of loss was due to the fact that she was
of the belief that since she had demanded from Atty. Lozada the return of the title, she thought that
the brown envelope with markings which Atty. Lozada gave her on May 5, 1991 already contained the
title and the Deed of Sale as those documents were in the same brown envelope which she gave to
Atty. Lozada prior to the transaction with respondent.35 Such statement remained a bare statement. It
was not proven at all since Atty. Lozada had not taken the stand to corroborate her claim. In fact,
even petitioner’s own witness, Benilda Ynfante (Ynfante), was not able to establish petitioner's claim
that the title was returned by Atty. Lozada in view of Ynfante's testimony that after the brown
envelope was given to petitioner, the latter passed it on to her and she placed it in petitioner’s attaché
case36and did not bother to look at the envelope.37

It is clear therefrom that petitioner’s execution of the affidavit of loss became the basis of the filing of
the petition with the RTC for the issuance of new owner’s duplicate copy of TCT No. 168173.
Petitioner’s actuation would have deprived respondent of the security for her loan were it not
for respondent’s timely filing of a petition for relief whereby the RTC set aside its previous
order granting the issuance of new title. Thus, the award of moral damages is in order.

The entitlement to moral damages having been established, the award of exemplary damages is
proper.38 Exemplary damages may be imposed upon petitioner by way of example or correction for
the public good.39 The RTC awarded the amount of ₱100,000.00 as moral and exemplary damages.
While the award of moral and exemplary damages in an aggregate amount may not be the usual way
of awarding said damages,40 no error has been committed by CA. There is no question that
respondent is entitled to moral and exemplary damages.

Petitioner argues that the CA erred in awarding attorney’s fees because the trial court’s decision did
not explain the findings of facts and law to justify the award of attorney’s fees as the same was
mentioned only in the dispositive portion of the RTC decision.

We agree.

Article 220841 of the New Civil Code enumerates the instances where such may be awarded and, in
all cases, it must be reasonable, just and equitable if the same were to be granted.42 Attorney's fees
as part of damages are not meant to enrich the winning party at the expense of the losing litigant.
They are not awarded every time a party prevails in a suit because of the policy that no premium
should be placed on the right to litigate.43 The award of attorney's fees is the exception rather than the
general rule. As such, it is necessary for the trial court to make findings of facts and law that would
bring the case within the exception and justify the grant of such award. The matter of attorney's fees
cannot be mentioned only in the dispositive portion of the decision.44 They must be clearly explained
and justified by the trial court in the body of its decision. On appeal, the CA is precluded from
supplementing the bases for awarding attorney’s fees when the trial court failed to discuss in its
Decision the reasons for awarding the same. Consequently, the award of attorney's fees should
be deleted.

WHEREFORE, in view of all the foregoing, the Decision dated June 18, 2002 and the Resolution
dated September 11, 2002 of the Court of Appeals in CA-G.R. CV No. 52839 are AFFIRMED with
MODIFICATION that the award of attorney’s fees is DELETED.

G.R. No. 173227 January 20, 2009

SEBASTIAN SIGA-AN, Petitioner,
vs.
ALICIA VILLANUEVA, Respondent.

DECISION

CHICO-NAZARIO, J.:

Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court seeking to set
aside the Decision,2 dated 16 December 2005, and Resolution,3 dated 19 June 2006 of the Court of
Appeals in CA-G.R. CV No. 71814, which affirmed in toto the Decision,4 dated 26 January 2001, of
the Las Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.

The facts gathered from the records are as follows:

On 30 March 1998, respondent Alicia Villanueva filed a complaint5 for sum of money against
petitioner Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255,
docketed as Civil Case No. LP-98-0068. Respondent alleged that she was a businesswoman
engaged in supplying office materials and equipments to the Philippine Navy Office (PNO) located at
Fort Bonifacio, Taguig City, while petitioner Sigaan was a military officer and comptroller of the PNO
from 1991 to 1996.

Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to
loan her the amount of ₱540,000.00. Since she needed capital for her business transactions with the
PNO, she accepted petitioner’s proposal. The loan agreement was not reduced in writing And, there
was no stipulation as to the payment of interest for the loan.6

On 31 August 1993, respondent issued a check worth ₱500,000.00 to petitioner as partial payment of
the loan. On 31 October 1993, she issued another check in the amount of ₱200,000.00 to petitioner
as payment of the remaining balance of the loan. Petitioner told her that since she paid a total amount
of ₱700,000.00 for the ₱540,000.00 worth of loan, the excess amount of ₱160,000.00 would be
applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered
her to pay additional interest and threatened to block or disapprove her transactions with the PNO if
she would not comply with his demand. As all her transactions with the PNO were subject to the
approval of petitioner as comptroller of the PNO, and fearing that petitioner might block or unduly
influence the payment of her vouchers in the PNO, due to fear she conceded and paid additional
amounts in cash and checks as interests for the loan. She asked petitioner for receipt for the
payments but petitioner told her that it was not necessary as there was mutual trust and confidence
between them. According to her computation, the total amount she paid to petitioner for the loan and
interest accumulated to ₱1,200,000.00.7

Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan
despite absence of agreement to that effect. Her lawyer told her that petitioner could not validly
collect interest on the loan because there was no agreement between her and petitioner regarding
payment of interest. Since she paid petitioner a total amount of ₱1,200,000.00 for the ₱540,000.00
worth of loan, and upon being advised by her lawyer that she made overpayment to petitioner,
respondent sent a demand letter to petitioner asking for the return of the excess amount of
₱660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim for reimbursement.8

Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1)
₱660,000.00 plus legal interest from the time of demand; (2) ₱300,000.00 as moral damages; (3)
₱50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of ₱660,000.00 as
attorney’s fees.9

In his answer10 to the complaint, petitioner denied that he offered a loan to respondent. He averred
that in 1992, that it was respondent whimapproached him and asked him if he could grant her a loan,
as she needed money to finance her business venture with the PNO. At first, he was reluctant to deal
with respondent, because the latter had a spotty record as a supplier of the PNO. At first he was
hesitnt However, since respondent was an acquaintance of his officemate, he agreed to grant her a
loan. Respondent paid the loan in full.11

Subsequently, respondent again asked him to give her a loan. Bec. respondent paid the previous
loan in full, he agreed to grant her another loan. Later, respondent requested him to restructure the
payment of the loan, he agreed because she could not give full payment on the due date. He
acceded to her request. Thereafter, respondent pleaded for another restructuring of the payment of
the loan. This time he rejected her plea. Thus, respondent proposed to execute a promissory note
wherein she would acknowledge her obligation to him, inclusive of interest, and that she would issue
several postdated checks to guarantee the payment of her obligation. Upon his approval of
respondent’s request for restructuring of the loan, respondent executed a promissory note dated 12
September 1994 wherein she admitted having borrowed an amount of ₱1,240,000.00, inclusive of
interest, from petitioner and that she would pay said amount in March 1995. Respondent also issued
to him six postdated checks amounting to ₱1,240,000.00 as guarantee of compliance with her
obligation. Subsequently, he presented the six checks for encashment but only one check was
honored. He demanded that respondent settle her obligation, but the latter failed to do so. Hence, he
filed criminal cases for Violation of the Bouncing Checks Law (Batas Pambansa Blg. 22) against
respondent. The cases were assigned to the Metropolitan Trial Court of Makati City, Branch 65
(MeTC).12

Petitioner insisted that there was no overpayment because respondent admitted in the latter’s
promissory note that her monetary obligation as of 12 September 1994 amounted to ₱1,240,000.00
inclusive of interests. He argued that respondent was already estopped from complaining that
she should not have paid any interest, because she was given several times to settle her
obligation but failed to do so. He maintained that to rule in favor of respondent is tantamount to
concluding that the loan was given interest-free. Based on the foregoing averments, he asked the
RTC to dismiss respondent’s complaint.

After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an
overpayment of her loan obligation to petitioner and that the latter should refund the excess amount
to the former. It ratiocinated that respondent’s obligation was only to pay the loaned amount of
₱540,000.00, and that the alleged interests due should not be included in the computation of
respondent’s total monetary debt because there was no agreement between them regarding
payment of interest. It concluded that since respondent made an excess payment to petitioner in the
amount of ₱660,000.00 through mistake, petitioner should return the said amount to
respondent pursuant to the principle of solutio indebiti.13

The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded
feelings experienced by respondent. Further, petitioner should pay exemplary damages by way of
example or correction for the public good, plus attorney’s fees and costs of suit.

The dispositive portion of the RTC Decision reads:

WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and against the
defendant as follows:

(1) Ordering defendant to pay plaintiff the amount of ₱660,000.00 plus legal interest of 12% per annum
computed from 3 March 1998 until the amount is paid in full;

(2) Ordering defendant to pay plaintiff the amount of ₱300,000.00 as moral damages;

(3) Ordering defendant to pay plaintiff the amount of ₱50,000.00 as exemplary damages;

(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of ₱660,000.00 as attorney’s fees; and

(5) Ordering defendant to pay the costs of suit.14

Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court
promulgated its Decision affirming in toto the RTC Decision, thus:

WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed
decision [is] AFFIRMED in toto.15

Petitioner filed a motion for reconsideration of the appellate court’s decision but this was
denied.16Hence, petitioner lodged the instant petition before us assigning the following errors:

I.

THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE TO
PETITIONER;

II.

THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.

ISSUE: WON RESPONDENT IS LIABLE TO PAY FOR INTEREST—— NO, NO

EXPRESS STIPULTION
monetary interest- Interest is a compensation fixed by the parties for the use or forbearance of
money. Due only if there is an express stipulation

Compensatory interest- Interest may also be imposed by law or by courts as penalty or indemnity
for damages. This is called compensatory interest.18

The right to interest arises only by virtue of a contract or by virtue of damages for delay or
failure to pay the principal loan on which interest is demanded.19

Article 1956 of the Civil Code, which refers to monetary interest,20 specifically mandates
provides that no interest shall be due unless it has been expressly stipulated in writing. As can
be gleaned from the foregoing provision, hence payment of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of interest; and (2) the agreement for the
payment of interest was reduced in writing. The concurrence of the two conditions is required
for the payment of monetary interest. Therefore, we have held that collection of interest without
any stipulation therefor in writing is prohibited by law. 21

It appears that in this case, petitioner and respondent did not agree on the payment of interest
for the loan. Neither was there convincing also, there was no proof of written agreement
between the two regarding the payment of interest. Respondent testified that although she
accepted petitioner’s offer of loan amounting to ₱540,000.00, there was, nonetheless, no verbal or
written agreement for her to pay interest on the loan.

HENCE, SOLUTIO INDEBITI IS APPLICABLE IN THIS CASE

Issue no. 2: WON SOLUTIO INDEBITI IS APPLICABLE IN THIS CASE— Yes

SI- based on principle of no one should unjustly enrich himself

Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not
apply to the instant case. Thus, he cannot be compelled to return the alleged excess amount paid by
respondent as interest.30

Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been
no stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be
applied.

Article 2154 of the Civil Code PROVIDES THE principle of solutio indebiti. Said provision
provides that if something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises.

In such a case, a creditor-debtor relationship is created under a quasi-contract whereby the payor
becomes the creditor who then has the right to demand the return of payment made by mistake, and
the person who has no right to receive such payment becomes obligated to return the same. The
quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself
unjustly at the expense of another.

WHEN APPLICABLE?

The principle of solutio indebiti applies where

(1) a payment is made when there exists no binding relation between the payor, who has no
duty to pay, and the person who received the payment; and

(2) the payment is made through mistake, and not through liberality or some other cause

.32 We have held that the principle of solutio indebiti applies in case of erroneous payment of
undue interest.33

It was duly established that respondent paid interest to petitioner. In this case Respondent was
under no duty to make such payment because there was no express stipulation in writing to
that effect. There was no binding relation between petitioner and respondent as regards the
payment of interest. The payment was clearly a mistake. Since petitioner received something
when there was no right to demand it, he has an obligation to return it.
PROMISORY NOTE—

Petitioner presented a handwritten promissory note dated 12 September 199423 wherein respondent
purportedly admitted owing petitioner "capital and interest." Respondent, however, explained that it
was petitioner who made a promissory note and she was told to copy it in her own
handwriting; that all her transactions with the PNO were subject to the approval of petitioner as
comptroller of the PNO; that petitioner threatened to disapprove her transactions with the PNO
if she would not pay interest; that being unaware of the law on interest and fearing that petitioner
would make good of his threats if she would not obey his instruction to copy the promissory note, she
copied the promissory note in her own handwriting; and that such was the same promissory note
presented by petitioner as alleged proof of their written agreement on interest.24 Petitioner did not
rebut the foregoing testimony. It is evident that respondent did not really consent to the payment
of interest for the loan and that she was merely tricked and coerced by petitioner to pay
interest. Hence, it cannot be gainfully said that such promissory note cannot pertain to an
express stipulation of interest or written agreement of interest on the loan between petitioner
and respondent.

JUDICIAL ADMISSION OF INTEREST IN ANOTHER CASE—

Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and
respondent agreed on the payment of 7% rate of interest on the loan; that the agreed 7% rate of
interest was duly admitted by respondent in her testimony in the Batas Pambansa Blg. 22 cases he
filed against respondent; that despite such judicial admission by respondent, the RTC and the Court
of Appeals, citing Article 1956 of the Civil Code, still held that no interest was due him since the
agreement on interest was not reduced in writing; that the application of Article 1956 of the Civil Code
should not be absolute, and an exception to the application of such provision should be made when
the borrower admits that a specific rate of interest was agreed upon as in the present case; and that it
would be unfair to allow respondent to pay only the loan when the latter very well knew and even
admitted in the Batas Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on the
loan.25

We have carefully examined the RTC Decision and found that the RTC did not make a ruling
therein that petitioner and respondent agreed on the payment of interest at the rate of 7% for
the loan. The RTC clearly stated that although petitioner and respondent entered into a valid
oral contract of loan amounting to ₱540,000.00, they, nonetheless, never intended the payment
of interest thereon.26While the Court of Appeals mentioned in its Decision that it concurred in the
RTC’s ruling that petitioner and respondent agreed on a certain rate of interest as regards the loan,
we consider this as merely an inadvertence because, as earlier elucidated, both the RTC and
the Court of Appeals ruled that petitioner is not entitled to the payment of interest on the loan.
The rule is that factual findings of the trial court deserve great weight and respect especially when
affirmed by the appellate court.27 We found no compelling reason to disturb the ruling of both courts.

Petitioner’s reliance on respondent’s alleged admission in the Batas Pambansa Blg. 22 cases that
they had agreed on the payment of interest at the rate of 7% deserves scant consideration. In the
said case, respondent merely testified that after paying the total amount of loan, petitioner
ordered her to pay interest.28 Respondent did not categorically declare in the same case that
she and respondent made an express stipulation in writing as regards payment of interest at
the rate of 7%. As earlier discussed, monetary interest is due only if there was an express stipulation
in writing for the payment of interest.

There are instances in which an interest may be imposed even in the absence of express stipulation,
verbal or written, regarding payment of interest.

INSTANCES NA PEDE MAY INTEREST KAHIT WALANG EXPRESS STIPULATION

Article 2209 of the Civil Code states that if the obligation consists in the payment of a sum of
money, and the debtor incurs delay, a legal interest of 12% per annum may be imposed as
indemnity for damages if no stipulation on the payment of interest was agreed upon. Likewise,
Article 2212 of the Civil Code provides that interest due shall earn legal interest from the time it
is judicially demanded, although the obligation may be silent on this point.

All the same, the interest under these two instances may be imposed only as a penalty or
damages for breach of contractual obligations. It cannot be charged as a compensation for the
use or forbearance of money. In other words, the two instances apply only to compensatory
interest and not to monetary interest.29 The case at bar involves petitioner’s claim for monetary
interest.

Further, said compensatory interest is not chargeable in the instant case because it was not
duly proven that respondent defaulted in paying the loan. Also, as earlier found, no interest
was due on the loan because there was no written agreement as regards payment of interest

DAMAGES

We shall now determine the propriety of the monetary award and damages imposed by the RTC and
the Court of Appeals.

Records show that respondent received a loan amounting to ₱540,000.00 from

petitioner.34Respondent issued two checks with a total worth of ₱700,000.00 in favor of petitioner as
payment of the loan.35 These checks were subsequently encashed by petitioner.36 Obviously, there
was an excess of ₱160,000.00 in the payment for the loan. Petitioner claims that the excess of
₱160,000.00 serves as interest on the loan to which he was entitled. Aside from issuing the said two
checks, respondent also paid cash in the total amount of ₱175,000.00 to petitioner as
interest.37 Although no receipts reflecting the same were presented because petitioner refused to
issue such to respondent, petitioner, nonetheless, admitted in his Reply-Affidavit38 in the Batas
Pambansa Blg. 22 cases that respondent paid him a total amount of ₱175,000.00 cash in addition to
the two checks. Section 26 Rule 130 of the Rules of Evidence provides that the declaration of a party
as to a relevant fact may be given in evidence against him. Aside from the amounts of ₱160,000.00
and ₱175,000.00 paid as interest, no other proof of additional payment as interest was
presented by respondent. Since we have previously found that petitioner is not entitled to payment
of interest and that the principle of solutio indebiti applies to the instant case, petitioner should
return to respondent the excess amount of ₱160,000.00 and ₱175,000.00 or the total amount of
₱335,000.00. Accordingly, the reimbursable amount to respondent fixed by the RTC and the Court of
Appeals should be reduced from ₱660,000.00 to ₱335,000.00.

As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22
against respondent. In the said cases, the MeTC found respondent guilty of violating Batas
Pambansa Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless, respondent’s
conviction therein does not affect our ruling in the instant case. The two checks, subject matter of this
case, totaling ₱700,000.00 which respondent claimed as payment of the ₱540,000.00 worth of loan,
were not among the five checks found to be dishonored or bounced in the five criminal cases.
Further, the MeTC found that respondent made an overpayment of the loan by reason of the interest
which the latter paid to petitioner.39

Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injury. Respondent testified that she experienced
sleepless nights and wounded feelings when petitioner refused to return the amount paid as interest
despite her repeated demands. Hence, the award of moral damages is justified. However, its
corresponding amount of ₱300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant
and should be equitably reduced. Article 2216 of the Civil Code instructs that assessment of damages
is left to the discretion of the court according to the circumstances of each case. This discretion is
limited by the principle that the amount awarded should not be palpably excessive as to indicate that
it was the result of prejudice or corruption on the part of the trial court.40 To our mind, the amount of
₱150,000.00 as moral damages is fair, reasonable, and proportionate to the injury suffered by
respondent.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary
damages may be imposed if the defendant acted in an oppressive manner. Petitioner acted
oppressively when he pestered respondent to pay interest and threatened to block her transactions
with the PNO if she would not pay interest. This forced respondent to pay interest despite lack of
agreement thereto. Thus, the award of exemplary damages is appropriate. The amount of
₱50,000.00 imposed as exemplary damages by the RTC and the Court is fitting so as to deter
petitioner and other lenders from committing similar and other serious wrongdoings.41
Jurisprudence instructs that in awarding attorney’s fees, the trial court must state the factual, legal or
equitable justification for awarding the same.42 In the case under consideration, the RTC stated in its
Decision that the award of attorney’s fees equivalent to 25% of the amount paid as interest by
respondent to petitioner is reasonable and moderate considering the extent of work rendered by
respondent’s lawyer in the instant case and the fact that it dragged on for several years.43 Further,
respondent testified that she agreed to compensate her lawyer handling the instant case such
amount.44 The award, therefore, of attorney’s fees and its amount equivalent to 25% of the
amount paid as interest by respondent to petitioner is proper.

Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount
refundable to respondent computed from 3 March 1998 until its full payment. This is erroneous.

We held in Eastern Shipping Lines, Inc. v. Court of Appeals,45 that when an obligation, not
constituting a loan or forbearance of money is breached, an interest on the amount of
damages awarded may be imposed at the rate of 6% per annum. We further declared that when
the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether it is a loan/forbearance of money or not, shall be 12% per annum from such finality
until its satisfaction, this interim period being deemed equivalent to a forbearance of credit.

In the present case, petitioner’s obligation arose from a quasi-contract of solutio indebiti and not from
a loan or forbearance of money. Thus, an interest of 6% per annum should be imposed on the
amount to be refunded as well as on the damages awarded and on the attorney’s fees, to be
computed from the time of the extra-judicial demand on 3 March 1998,46 up to the finality of this
Decision. In addition, the interest shall become 12% per annum from the finality of this Decision up to
its satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December
2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of ₱660,000.00 as
refundable amount of interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS
(₱335,000.00); (2) the amount of ₱300,000.00 imposed as moral damages is reduced to ONE
HUNDRED FIFTY THOUSAND PESOS (₱150,000.00); (3) an interest of 6% per annum is imposed
on the ₱335,000.00, on the damages awarded and on the attorney’s fees to be computed from the
time of the extra-judicial demand on 3 March 1998 up to the finality of this Decision; and (4) an
interest of 12% per annum is also imposed from the finality of this Decision up to its satisfaction.
Costs against petitioner.