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1SPOUSES DAVID B. CARPO and RECHILDA S. CARPO, Petitioners, v. ELEANOR CHUA and ELMA DY NG, Respondents. September 30, 2005D E C I S I O N TINGA, J.:

Before this Court are two consolidated petitions for review. The first,

docketed as G.R. No. 150773, assails the Decision[1] of the Regional Trial Court (RTC), Branch 26 of Naga City dated 26 October 2001 in Civil Case No. 99-4376. RTC Judge Filemon B. Montenegro dismissed the complaint[2] for annulment of real estate mortgage and consequent foreclosure proceedings filed by the spouses David B. Carpo and Rechilda S. Carpo (petitioners). The second, docketed as G.R. No. 153599, seeks to annul the Court of Appeals’ Decision[3] dated 30 April 2002 in CA-G.R. SP No. 57297. The Court of Appeals Third Division annulled and set aside the orders of Judge Corazon A. Tordilla to suspend the sheriff’s enforcement of the writ of possession. The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they borrowed from Eleanor Chua and Elma Dy Ng (respondents) the amount of One Hundred Seventy-Five Thousand Pesos (P175,000.00), payable within six (6) months with an interest rate of six percent (6%) per month. To secure the payment of the loan, petitioners mortgaged their residential house and lot situated at San Francisco, Magarao, Camarines Sur, which lot is covered by Transfer Certificate of Title (TCT) No. 23180. Petitioners failed to pay the loan upon demand. Consequently, the real estate mortgage was extrajudicially foreclosed and the mortgaged property sold at a public auction on 8 July 1996. The house and lot was awarded to respondents, who were the only bidders, for the amount of Three Hundred Sixty-Seven Thousand Four Hundred Fifty-Seven Pesos and Eighty Centavos (P367,457.80).

Upon failure of petitioners to exercise their right of redemption, a certificate of sale was issued on 5 September 1997 by Sheriff Rolando A. Borja. TCT No. 23180 was cancelled and in its stead, TCT No. 29338 was issued in the name of respondents.

Despite the issuance of the TCT, petitioners continued to occupy the said

house and lot, prompting respondents to file a petition for writ of possession with the RTC docketed as Special Proceedings (SP) No. 98-1665. On 23 March 1999, RTC Judge Ernesto A. Miguel issued an Order[4] for the issuance of a writ of possession.

On 23 July 1999, petitioners filed a complaint for annulment of real estate

mortgage and the consequent foreclosure proceedings, docketed as Civil Case No. 99-4376 of the RTC. Petitioners consigned the amount of Two Hundred Fifty-Seven Thousand One Hundred Ninety-Seven Pesos and Twenty-Six Centavos (P257,197.26) with the RTC.

Meanwhile, in SP No. 98-1665, a temporary restraining order was issued

upon motion on 3 August 1999, enjoining the enforcement of the writ of possession.

In an Order[5] dated 6 January 2000, the RTC suspended the enforcement of the writ of possession pending the final disposition of Civil Case No. 99-4376. Against this Order, respondents filed a petition for certiorari and mandamus before the Court of Appeals, docketed as CA-G.R. SP No. 57297.

During the pendency of the case before the Court of Appeals, RTC Judge

Filemon B. Montenegro dismissed the complaint in Civil Case No. 99-4376 on the ground that it was filed out of time and barred by laches. The RTC proceeded from the premise that the complaint was one for annulment of a voidable contract and thus barred by the four-year prescriptive period. Hence, the first petition for review now under consideration was filed with this Court, assailing the dismissal of the complaint.

The second petition for review was filed with the Court after the Court of

Appeals on 30 April 2002 annulled and set aside the RTC orders in SP No. 98-1665 on the ground that it was the ministerial duty of the lower court to issue the writ of possession when title over the mortgaged property had been consolidated in the mortgagee. This Court ordered the consolidation of the two cases, on motion of petitioners. In G.R. No. 150773, petitioners claim that following the Court’s ruling in Medel v. Court of Appeals[6] the rate of interest stipulated in the principal loan agreement is clearly null and void. Consequently, they also argue that the nullity of the agreed interest rate affects the validity of the real estate mortgage. Notably, while petitioners were silent in their petition on the issues of prescription and laches on which the RTC grounded the dismissal of the complaint, they belatedly raised the matters in their Memorandum. Nonetheless, these points warrant brief comment. On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not commit any grave abuse of discretion when it issued the orders dated 3 August 1999 and 6 January 2000, and that these orders could not have been “the proper subjects of a petition for certiorari and mandamus”. More accurately, the justiciable issues before us are whether the Court of Appeals could properly entertain the petition for certiorari from the timeliness aspect, and whether the appellate court correctly concluded that the writ of possession could no longer be stayed.

We first resolve the petition in G.R. No. 150773. Petitioners contend that the agreed rate of interest of 6% per month or 72%

per annum is so excessive, iniquitous, unconscionable and exorbitant that it should have been declared null and void. Instead of dismissing their complaint, they aver that the lower court should have declared them liable to respondents for the original amount of the loan plus 12% interest per annum and 1% monthly penalty charge as liquidated damages,[7] in view of the ruling in Medel v. Court of Appeals.[8]

In Medel, the Court found that the interest stipulated at 5.5% per month or

66% per annum was so iniquitous or unconscionable as to render the stipulation void.

Nevertheless, we find the interest at 5.5% per month, or 66% per annum,

stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals (“contra bonos mores”), if not against the law. The stipulation is void. The Court shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.[9]

In a long line of cases, this Court has invalidated similar stipulations on

interest rates for being excessive, iniquitous, unconscionable and exorbitant. In Solangon v. Salazar,[10] we annulled the stipulation of 6% per month or 72% per annum interest on a P60,000.00 loan. In Imperial v. Jaucian,[11] we reduced the interest rate from 16% to 1.167% per month or 14% per annum. In Ruiz v. Court of Appeals,[12] we equitably reduced the agreed 3% per month or 36% per annum interest to 1% per month or 12% per annum interest. The 10% and 8% interest rates per month on a P1,000,000.00 loan were reduced to 12% per annum in Cuaton v. Salud.[13] Recently, this Court, in Arrofo v. Quino,[14] reduced the 7% interest per month on a P15,000.00 loan amounting to 84% interest per annum to 18% per annum.

There is no need to unsettle the principle affirmed in Medel and like cases. From that perspective, it is apparent that the stipulated interest in the subject loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in Article 1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. In the ordinary course, the codal provision may be invoked to annul the excessive stipulated interest.

In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the standards set in the above-cited cases, this stipulation is similarly invalid. However, the RTC refused to apply the principle cited and employed in Medel on the ground that Medel did not pertain to the annulment of a real estate mortgage,[15] as it was a case for annulment of the loan contract itself. The question thus sensibly arises whether the invalidity of the stipulation on interest carries with it the invalidity of the principal obligation.

The question is crucial to the present petition even if the subject thereof is

not the annulment of the loan contract but that of the mortgage contract. The consideration of the mortgage contract is the same as that of the principal contract from which it receives life, and without which it cannot exist as an independent contract. Being a mere accessory contract, the validity of the mortgage contract would depend on the validity of the loan secured by it.[16] Notably in Medel, the Court did not invalidate the entire loan obligation despite the inequitability of the stipulated interest, but instead reduced the rate of interest to the more reasonable rate of 12% per annum. The same remedial approach to the wrongful interest rates involved was employed or affirmed by the Court in Solangon, Imperial, Ruiz, Cuaton, and Arrofo. The Court’s ultimate affirmation in the cases cited of the validity of the principal

loan obligation side by side with the invalidation of the interest rates thereupon is congruent with the rule that a usurious loan transaction is not a complete nullity but defective only with respect to the agreed interest. We are aware that the Court of Appeals, on certain occasions, had ruled that a usurious loan is wholly null and void both as to the loan and as to the usurious interest.[17] However, this Court adopted the contrary rule,

as comprehensively discussed in Briones v. Cammayo:[18]

In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any event, the debtor in a usurious contract of loan should pay the creditor the amount which he justly owes him, citing in support of this ruling its previous decisions in Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739.

. . . . Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also

held that the standing jurisprudence of this Court on the question under consideration was clearly to the effect that the Usury Law, by its letter and spirit, did not deprive the lender of his right to recover from the borrower the money actually loaned to and enjoyed by the latter. This Court went further to say that the Usury Law did not provide for the forfeiture of the capital in favor of the debtor in usurious contracts, and that while the forfeiture might appear to be convenient as a drastic measure to eradicate the evil of usury, the legal question involved should not be resolved on the basis of convenience.

Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919

and Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter We expressly held that when a contract is found to be tainted with usury "the only right of the respondent (creditor) . . . was merely to collect the amount of the loan, plus interest due thereon."

The view has been expressed, however, that the ruling thus consistently

adhered to should now be abandoned because Article 1957 of the new Civil Code — a subsequent law — provides that contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury, shall be void, and that in such cases "the borrower may recover in accordance with the laws on usury." From this the conclusion is drawn that the whole contract is void and that, therefore, the creditor has no right to recover — not even his capital.

The meaning and scope of our ruling in the cases mentioned heretofore is

clearly stated, and the view referred to in the preceding paragraph is adequately answered, in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On the question of whether a creditor in a usurious contract may or may not recover the principal of the loan, and, in the affirmative, whether or not he may also recover interest thereon at the legal rate, We said the following:

“. . . . Appealing directly to Us, defendants raise two questions of law: (1) In a loan

with usurious interest, may the creditor recover the principal of the loan? (2) Should attorney's fees be awarded in plaintiff's favor?"

Great reliance is made by appellants on Art. 1411 of the New Civil Code . . .

.

Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule of pari delicto expressed in Article 1411, supra, applies, so that neither party can bring action against each other. Said rule, however, appellants add, is modified as to the borrower, by express provision of the law (Art. 1413, New Civil Code), allowing the borrower to recover interest paid in excess of the interest allowed by the Usury Law. As to the lender, no exception is made to the rule; hence, he cannot recover on the contract. So — they continue — the New Civil Code provisions must be upheld as against the Usury Law, under which a loan with usurious interest is not totally void, because of Article 1961 of the New Civil Code, that: "Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code."

We do not agree with such reasoning. Article 1411 of the New Civil Code is

not new; it is the same as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from previous interpretation that, as provided in the Usury Law (Act No. 2655, as amended), a loan with usurious interest is not totally void only as to the interest.

. . . [a]ppellants fail to consider that a contract of loan with usurious

interest consists of principal and accessory stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest thereon.

And said two stipulations are divisible in the sense that the former can

still stand without the latter. Article 1273, Civil Code, attests to this: "The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force."

The question therefore to resolve is whether the illegal terms as to

payment of interest likewise renders a nullity the legal terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in this regard: "In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced."

In simple loan with stipulation of usurious interest, the prestation of

the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal.

. . . .

The principal debt remaining without stipulation for payment of interest can

thus be recovered by judicial action. And in case of such demand, and the debtor incurs in delay, the debt earns interest from the date of the demand (in this case from the filing of the complaint). Such interest is not due to stipulation, for there was none, the same being void. Rather, it is due to the general provision of law that in obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil Code). The court a quo therefore, did not err in ordering defendants to pay the principal debt with interest thereon at the legal rate, from the date of filing of the complaint."[19] The Court’s wholehearted affirmation of the rule that the principal obligation subsists despite the nullity of the stipulated interest is evinced by its subsequent rulings, cited above, in all of which the main obligation was upheld and the offending interest rate merely corrected. Hence, it is clear and settled that the principal loan obligation still stands and remains valid. By the same token, since the mortgage contract derives its vitality from the validity of the principal obligation, the invalid stipulation on interest rate is similarly insufficient to render void the ancillary mortgage contract. It should be noted that had the Court declared the loan and mortgage agreements void for being contrary to public policy, no prescriptive period could have run. Such benefit is obviously not available to petitioners.

Yet the RTC pronounced that the complaint was barred by the four-year prescriptive period provided in Article 1391 of the Civil Code, which governs voidable contracts. This conclusion was derived from the allegation in the complaint that the consent of petitioners was vitiated through undue influence. While the RTC correctly acknowledged the rule of prescription for voidable contracts, it erred in applying the rule in this case. We are hard put to conclude in this case that there was any undue influence in the first place.

There is ultimately no showing that petitioners’ consent to the loan and

mortgage agreements was vitiated by undue influence. The financial condition of petitioners may have motivated them to contract with respondents, but undue influence cannot be attributed to respondents simply because they had lent money. Article 1391, in relation to Article 1390 of the Civil Code, grants the aggrieved party the right to obtain the annulment of contract on account of factors which vitiate consent. Article 1337 defines the concept of undue influence, as follows:

There is undue influence when a person takes improper advantage of his

power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. While petitioners were allegedly financially distressed, it must be proven that there is deprivation of their free agency. In other words, for undue influence to be present, the influence exerted must have so overpowered or subjugated the mind of

a contracting party as to destroy his free agency, making him express the will of another rather than his own.[21] The alleged lingering financial woes of petitioners per se cannot be equated with the presence of undue influence.

The RTC had likewise concluded that petitioners were barred by laches

from assailing the validity of the real estate mortgage. We wholeheartedly agree. If indeed petitioners unwillingly gave their consent to the agreement, they should have raised this issue as early as in the foreclosure proceedings. It was only when the writ of possession was issued did petitioners challenge the stipulations in the loan contract in their action for annulment of mortgage. Evidently, petitioners slept on their rights. The Court of Appeals succinctly made the following observations:

In all these proceedings starting from the foreclosure, followed by the

issuance of a provisional certificate of sale; then the definite certificate of sale; then the issuance of TCT No. 29338 in favor of the defendants and finally the petition for the issuance of the writ of possession in favor of the defendants, there is no showing that plaintiffs questioned the validity of these proceedings. It was only after the issuance of the writ of possession in favor of the defendants, that plaintiffs allegedly tendered to the defendants the amount of P260,000.00 which the defendants refused. In all these proceedings, why did plaintiffs sleep on their rights?[22] Clearly then, with the absence of undue influence, petitioners have no cause of action. Even assuming undue influence vitiated their consent to the loan contract, their action would already be barred by prescription when they filed it. Moreover, petitioners had clearly slept on their rights as they failed to timely assail the validity of the mortgage agreement. The denial of the petition in G.R. No. 150773 is warranted. We now resolve the petition in G.R. No. 153599. Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January 2000 could no longer be questioned in a special civil action for certiorari and mandamus as the reglementary period for such action had already elapsed. It must be noted that the Order dated 3 August 1999 suspending the enforcement of the writ of possession had a period of effectivity of only twenty (20) days from 3 August 1999, or until 23 August 1999. Thus, upon the expiration of the twenty (20)-day period, the said Order became functus officio. Thus, there is really no sense in assailing the validity of this Order, mooted as it was. For the same reason, the validity of the order need not have been assailed by respondents in their special civil action before the Court of Appeals. On the other hand, the Order dated 6 January 2000 is in the nature of a writ of injunction whose period of efficacy is indefinite. It may be properly assailed by way of the special civil action for certiorari, as it is interlocutory in nature. As a rule, the special civil action for certiorari under Rule 65 must be filed not later than sixty (60) days from notice of the judgment or order.[23] Petitioners argue that the 3 August 1999 Order could no longer be assailed by respondents in a special civil action for certiorari before the Court of Appeals, as the petition was filed beyond sixty (60) days following respondents’ receipt of the Order. Considering that

the 3 August 1999 Order had become functus officio in the first place, this argument deserves scant consideration. Petitioners further claim that the 6 January 2000 Order could not have likewise been the subject of a special civil action for certiorari, as it is according to them a final order, as opposed to an interlocutory order. That the 6 January 2000 Order is interlocutory in nature should be beyond doubt. An order is interlocutory if its effects would only be provisional in character and would still leave substantial proceedings to be further had by the issuing court in order to put the controversy to rest.[24] The injunctive relief granted by the order is definitely final, but merely provisional, its effectivity hinging on the ultimate outcome of the then pending action for annulment of real estate mortgage. Indeed, an interlocutory order hardly puts to a close, or disposes of, a case or a disputed issue leaving nothing else to be done by the court in respect thereto, as is characteristic of a final order. Since the 6 January 2000 Order is not a final order, but rather interlocutory in nature, we cannot agree with petitioners who insist that it may be assailed only through an appeal perfected within fifteen (15) days from receipt thereof by respondents. It is axiomatic that an interlocutory order cannot be challenged by an appeal,

but is susceptible to review only through the special civil action of certiorari.[25] The sixty (60)-day reglementary period for special civil actions under Rule 65 applies, and respondents’ petition was filed with the Court of Appeals well within the period. Accordingly, no error can be attributed to the Court of Appeals in granting the petition for certiorari and mandamus. As pointed out by respondents, the remedy of mandamus lies to compel the performance of a ministerial duty. The issuance of a writ of possession to a purchaser in an extrajudicial foreclosure is merely a ministerial function.[26]

Thus, we also affirm the Court of Appeals’ ruling to set aside the RTC orders enjoining the enforcement of the writ of possession.[27] The purchaser in a foreclosure sale is entitled as a matter of right to a writ of possession, regardless of whether or not there is a pending suit for annulment of the mortgage or the foreclosure proceedings. An injunction to prohibit the issuance or enforcement of the writ is entirely out of place.[28]

One final note. The issue on the validity of the stipulated interest rates,

regrettably for petitioners, was not raised at the earliest possible opportunity. It should be pointed out though that since an excessive stipulated interest rate may be void for being contrary to public policy, an action to annul said interest rate does not prescribe. Such indeed is the remedy; it is not the action for annulment of the ancillary real estate mortgage. Despite the nullity of the stipulated interest rate, the principal loan obligation subsists, and along with it the mortgage that serves as collateral security for it. WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against petitioners.

SO ORDERED.

2[G.R. No. 154129. July 8, 2005]TERESITA DIO, petitioner, vs. SPOUSES VIRGILIO and LUZ ROCES JAPOR

and MARTA[1] JAPOR, respondents.D E C I S I O NQUISUMBING, J.:

For review on certiorari is the Decision,[2] dated February 22, 2002, of the Court of Appeals, in the consolidated cases CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457. The decretal portion read:WHEREFORE, premises considered, in CA-G.R. CV No. 51521, the decision of the trial court is AFFIRMED with MODIFICATION. Judgment is rendered as follows:1. Declaring the Real Estate Mortgage to be valid;2. Fixing the interest at 12% per annum and an additional 1% penalty charge per

month such that plaintiffs-appellants’ contractual obligation under the deed of real estate mortgage would amount to P1,252,674.00;

3. Directing defendant-appellee Dio to give the surplus of P2,247,326.00 to plaintiffs-appellants; and

4. Affirming the dissolution of the writ of preliminary injunction previously issued by the trial court.

No pronouncement as to costs.The Petition in CA-G.R. SP No. 40457 is DENIED for being moot and academic.SO ORDERED.[3]

Equally assailed in this petition is the Resolution,[4] dated July 2, 2002, of the appellate court, denying Teresita Dio’s Motion for Partial Reconsideration of March 19, 2002 and the Spouses Japor and Marta Japor’s Motion for Reconsideration dated March 20, 2002.

The antecedent facts are as follows:Herein respondents Spouses Virgilio Japor and Luz Roces Japor were the

owners of an 845.5 square-meter residential lot including its improvements, situated in Barangay Ibabang Mayao, Lucena City, as shown by Transfer Certificate of Title (TCT) No. T-39514. Adjacent to the Japor’s lot is another lot owned by respondent Marta Japor, which consisted of 325.5 square meters and titled under TCT No. T-15018.

On August 23, 1982, the respondents obtained a loan of P90,000 from the Quezon Development Bank (QDB), and as security therefor, they mortgaged the lots covered by TCT Nos. T-39514 and T-15018 to QDB, as evidenced by a Deed of Real Estate Mortgage duly executed by and between the respondents and QDB.

On December 6, 1983, respondents and QDB amended the Deed of Real Estate Mortgage increasing respondents’ loan to P128,000.

The respondents failed to pay their aforesaid loans. However, before the bank could foreclose on the mortgage, respondents, thru their broker, one Lucia G. Orian, offered to mortgage their properties to petitioner Teresita Dio. Petitioner prepared a Deed of Real Estate Mortgage, whereby respondents mortgaged anew the two properties already mortgaged with QDB to secure the timely payment of a P350,000 loan that respondents had from petitioner Dio. The Deed of Real Estate Mortgage, though dated January 1989, was actually executed on February 13, 1989 and notarized on February 17, 1989.

Under the terms of the deed, respondents agreed to pay the petitioner interest at the rate of five percent (5%) a month, within a period of two months or until April 14, 1989. In the event of default, an additional interest equivalent to five percent (5%) of the amount then due, for every month of delay, would be charged on them.

The respondents failed to settle their obligation to petitioner on April 14, 1989, the agreed deadline for settlement.

On August 27, 1991, petitioner made written demands upon the respondents to pay their debt.

Despite repeated demands, respondents did not pay, hence petitioner applied for extrajudicial foreclosure of the mortgage. The auction of the unredeemed properties was set for February 26, 1992.

Meanwhile, on February 24, 1992, respondents filed an action for Fixing of Contractual Obligation with Prayer for Preliminary Mandatory Injunction/Restraining Order, docketed as Civil Case No. 92-26, with the Regional Trial Court (RTC) of Lucena City. Respondents prayed that “judgment be rendered fixing the contractual obligations of plaintiffs with the defendant Dio plus legal or allowable interests thereon.”[5]

The trial court issued an Order enjoining the auction sale of the aforementioned mortgaged properties.

On June 15, 1992, the Japors filed a Motion to Admit Amended Complaint with an attached copy of their Amended Complaint praying that the Deed of Real Estate Mortgage dated February 13, 1989 be declared null and void, but reiterating the plea that the trial court fix the contractual obligations of the Japors with Dio. The trial court denied the motion.

On September 27, 1994, respondents filed with the appellate court, a petition for certiorari, docketed as CA-G.R. SP No. 35315, praying that the Court of Appeals direct the trial court to admit their Amended Complaint. The appellate court denied said petition.[6]

On December 11, 1995, the trial court handed down the following judgment:WHEREFORE, in view of the foregoing considerations, judgment is rendered:1. Dismissing the complaint for failure of the plaintiffs to substantiate their affirmative

allegations;2. Declaring the Real Estate Mortgage (Exhs. “A” to “A-13”/Exhs. “3” to “3-D”) to be

valid and binding as between the parties, more particularly the plaintiffs Virgilio Japor, Luz Japor and Marta Japor or the latter’s substituted heir or heirs, as the case may be;

3. Dissolving the writ of preliminary injunction previously issued by this Court; and4. To pay the cost of this suit.SO ORDERED.[7]

On January 17, 1996, respondents filed their notice of appeal. On April 26, 1996, they also filed a Petition for Temporary Restraining Order And/Or Mandatory Injunction in Aid of Appellate Jurisdiction with the Court of Appeals.

On May 8, 1996, petitioner Dio as the sole bidder in an auction purchased the properties for P3,500,000.

On May 9, 1996, the Court of Appeals denied respondents’ application for a temporary restraining order.[8]

On October 9, 1996, the appellate court consolidated CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457.

As stated at the outset, the appellate court affirmed the decision of the trial court with respect to the validity of the Deed of Real Estate Mortgage, but modified

the interest and penalty rates for being unconscionable and exorbitant.Before us, petitioner assigns the following errors allegedly committed by the

appellate court:I

THE ALLEGED INIQUITY OF THE STIPULATED INTEREST AND PENALTY WAS NOT RAISED BEFORE THE TRIAL COURT NOR ASSIGNED AS AN ERROR IN RESPONDENTS’ APPEAL.II

THE STIPULATED INTEREST AND PENALTY ARE NOT “EXCESSIVE, INIQUITOUS, UNCONSCIONABLE, EXORBITANT AND CONTRARY TO MORAL[S]”.III

PAYMENT OF THE “SURPLUS” OF P2,247,326.00 TO RESPONDENTS WOULD RESULT IN THEIR UNJUST ENRICHMENT.IV

RESPONDENTS’ APPEAL SHOULD HAVE BEEN DISMISSED DUE TO FORUM SHOPPING.[9]

Simply stated, the issue is: Did the Court of Appeals err when it held that the stipulations on interest and penalty in the Deed of Real Estate Mortgage is contrary to morals, if not illegal? Corollarily, were respondents entitled to any “surplus” on the auction sale price?

On the main issue, petitioner contends that The Usury Law[10] has been rendered ineffective by Central Bank Circular No. 905, series of 1982 and accordingly, usury has become legally non-existent in this jurisdiction, thus, interest rates may accordingly be pegged at such levels or rates as the lender and the borrower may agree upon. Petitioner avers she has not violated any law considering she is not engaged in the business of money-lending. Moreover, she claims she has suffered inconveniences and incurred expenses for some 13 years now as a result of respondents’ failure to pay her. Petitioner further points out that the 5% interest rate was proposed by the respondents and have only themselves to blame if the interests and penalties ballooned to its present amount due to their willful delay and default in payment. The appellate court thus erred, petitioner now insists, in applying Sps. Almeda v. Court of Appeals[11] and Medel v. Court of Appeals[12] to reduce the interest rate to 12% per annum and the penalty to 1% per month.

Respondents admit they owe petitioner P350,000 and do not question any lawful interest on their loan but they maintain that the Deed of Real Estate Mortgage is null and void since it did not state the true intent of the parties, which limited the 5% interest rate to only two (2) months from the date of the loan and which did not provide for penalties and other charges in the event of default or delay. Respondents vehemently contend that they never consented to the said stipulations and hence, should not be bound by them.

On the first issue, we are constrained to rule against the petitioner’s contentions.

Central Bank Circular No. 905, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity. However, nothing in said Circular grants lenders carte blanche authority to impose interest rates which would result in the enslavement of their borrowers or to the hemorrhaging of their assets.[13] While a stipulated rate of interest may not technically and necessarily be usurious under Circular No. 905, usury now being legally non-existent in our jurisdiction,[14] nonetheless, said rate

may be equitably reduced should the same be found to be iniquitous, unconscionable, and exorbitant, and hence, contrary to morals (contra bonos mores), if not against the law.[15] What is iniquitous, unconscionable, and exorbitant shall depend upon the factual circumstances of each case.

In the instant case, the Court of Appeals found that the 5% interest rate per month and 5% penalty rate per month for every month of default or delay is in reality interest rate at 120% per annum. This Court has held that a stipulated interest rate of 5.5% per month or 66% per annum is void for being iniquitous or unconscionable.[16] We have likewise ruled that an interest rate of 6% per month or 72% per annum is outrageous and inordinate.[17] Conformably to these precedent cases, a combined interest and penalty rate at 10% per month or 120% per annum, should be deemed iniquitous, unconscionable, and inordinate. Hence, we sustain the appellate court when it found the interest and penalty rates in the Deed of Real Estate Mortgage in the present case excessive, hence legally impermissible. Reduction is legally called for now in rates of interest and penalty stated in the mortgage contract.

What then should the interest and penalty rates be?The evidence shows that it was indeed the respondents who proposed the 5%

interest rate per month for two (2) months. Having agreed to said rate, the parties are now estopped from claiming otherwise. For the succeeding period after the two months, however, the Court of Appeals correctly reduced the interest rate to 12% per annum and the penalty rate to 1% per month, in accordance with Article 2227[18] of the Civil Code.

But were respondents entitled to the “surplus” of P2,247,326[19] as a result of the “overpricing” in the auction?

We note that the “surplus” was the result of the computation by the Court of Appeals of respondents’ outstanding liability based on a reduced interest rate of 12% per annum and the reduced penalty rate of 1% per month. The court a quo then proceeded to apply our ruling in Sulit v. Court of Appeals,[20] to the effect that in case of surplus in the purchase price, the mortgagee is liable for such surplus as actually comes into his hands, but where he sells on credit instead of cash, he must still account for the proceeds as if the price were paid in cash, for such surplus stands in the place of the land itself with respect to liens thereon or vested rights therein particularly those of the mortgagor or his assigns.

In the instant case, however, there is no “surplus” to speak of. In adjusting the interest and penalty rates to equitable and conscionable levels, what the Court did was merely to reflect the true price of the land in the foreclosure sale. The amount of the petitioner’s bid merely represented the true amount of the mortgage debt. No surplus in the purchase price was thus created to which the respondents as the mortgagors have a vested right.

WHEREFORE, the Decision dated February 22, 2002, of the Court of Appeals in the consolidated cases CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457 is hereby AFFIRMED with MODIFICATION. The interest rate for the subject loan owing to QDB, or whoever is now the party mortgagee, is hereby fixed at five percent (5%) for the first two (2) months following the date of execution of the Deed of Real Estate Mortgage, and twelve percent (12%) for the succeeding period. The penalty rate thereafter shall be fixed at one percent (1%) per month. Petitioner Teresita Dio is declared free of any obligation to return to the respondents, the Spouses Virgilio Japor and Luz Roces Japor and Marta Japor, any surplus in the foreclosure sale price. There being no surplus, after the court below had applied our ruling in Sulit,[21] respondents could not legally claim any overprice from the petitioner, much less

the amount of P2,247,326.00.SO ORDERED.

3Constantino v. Cuisia

D E C I S I O N TINGA, J.:

The quagmire that is the foreign debt problem has especially confounded developing nations around the world for decades. It has defied easy solutions acceptable both to debtor countries and their creditors. It has also emerged as cause celebre for various political movements and grassroots activists and the wellspring of much scholarly thought and debate.

The present petition illustrates some of the ideological and functional

differences between experts on how to achieve debt relief. However, this being a court of law, not an academic forum or a convention on development economics, our resolution has to hinge on the presented legal issues which center on the appreciation of the constitutional provision that empowers the President to contract and guarantee foreign loans. The ultimate choice is between a restrictive reading of the constitutional provision and an alimentative application thereof consistent with time-honored principles on executive power and the alter ego doctrine.

This Petition for Certiorari, Prohibition and Mandamus assails said contracts

which were entered into pursuant to the Philippine Comprehensive Financing Program for 1992 (“Financing Program” or “Program”). It seeks to enjoin respondents from executing additional debt-relief contracts pursuant thereto. It also urges the Court to issue an order compelling the Secretary of Justice to institute criminal and administrative cases against respondents for acts which circumvent or negate the provisions Art. XII of the Constitution.[1]

Parties and Facts The petition was filed on 17 July 1992 by petitioners spouses Renato

Constantino, Jr. and Lourdes Constantino and their minor children, Renato Redentor, Anna Marika Lissa, Nina Elissa, and Anna Karmina, Filomeno Sta. Ana III, and the Freedom from Debt Coalition, a non-stock, non-profit, non-government organization that advocates a “pro-people and just Philippine debt policy.”[2] Named respondents were the then Governor of the Bangko Sentral ng Pilipinas, the Secretary of Finance, the National Treasurer, and the Philippine Debt Negotiation Chairman Emmanuel V. Pelaez.[3] All respondents were members of the Philippine panel tasked to negotiate with the country’s foreign creditors pursuant to the Financing Program.

The operative facts are sparse and there is little need to elaborate on them. The Financing Program was the culmination of efforts that began during the

term of former President Corazon Aquino to manage the country’s external debt problem through a negotiation-oriented debt strategy involving cooperation and negotiation with foreign creditors.[4] Pursuant to this strategy, the Aquino government entered into three restructuring agreements with representatives of foreign creditor governments during the period of 1986 to 1991.[5] During the same period, three similarly-oriented restructuring agreements were executed with commercial bank creditors.[6]

On 28 February 1992, the Philippine Debt Negotiating Team, chaired by

respondent Pelaez, negotiated an agreement with the country’s Bank Advisory Committee, representing all foreign commercial bank creditors, on the Financing Program which respondents characterized as “a multi-option financing

package.”[7] The Program was scheduled to be executed on 24 July 1992 by respondents in behalf of the Republic. Nonetheless, petitioners alleged that even prior to the execution of the Program respondents had already implemented its “buyback component” when on 15 May 1992, the Philippines bought back P1.26 billion of external debts pursuant to the Program.[8]

The petition sought to enjoin the ratification of the Program, but the Court

did not issue any injunctive relief. Hence, it came to pass that the Program was signed in London as scheduled. The petition still has to be resolved though as petitioners seek the annulment “ofany and all acts done by respondents, their subordinates and any other public officer pursuant to the agreement and program in question.”[9] Even after the signing of the Program, respondents themselves acknowledged that the remaining principal objective of the petition is to set aside respondents’ actions.[10]

Petitioners characterize the Financing Program as a package offered to the country’s foreign creditors consisting of two debt-relief options.[11] The first option was a cash buyback of portions of the Philippine foreign debt at a discount.[12] The second option allowed creditors to convert existing Philippine debt instruments into any of three kinds of bonds/securities: (1) new money bonds with a five-year grace period and 17 years final maturity, the purchase of which would allow the creditors to convert their eligible debt papers into bearer bonds with the same terms; (2) interest-reduction bonds with a maturity of 25 years; and (3) principal-collateralized interest-reduction bonds with a maturity of 25 years.[13] On the other hand, according to respondents the Financing Program would cover about U.S. $5.3 billion of foreign commercial debts and it was expected to deal comprehensively with the commercial bank debt problem of the country and pave the way for the country’s access to capital markets.[14] They add that the Program carried three basic options from which foreign bank lenders could choose, namely: to lend money, to exchange existing restructured Philippine debts with an interest reduction bond; or to exchange the same Philippine debts with a principal collateralized interest reduction bond.[15]

Issues for Resolution

Petitioners raise several issues before this Court. First, they object to the debt-relief contracts entered into pursuant to the

Financing Program as beyond the powers granted to the President under Section 20,Article VII of the Constitution.[16] The provision states that the President may contract or guarantee foreign loans in behalf of the Republic. It is claimed that the buyback and securitization/bond conversion schemes are neither “loans” nor “guarantees,” and hence beyond the power of the President to execute.

Second, according to petitioners even assuming that the contracts under

the Financing Program are constitutionally permissible, yet it is only the President who may exercise the power to enter into these contracts and such power may not be delegated to respondents.

Third, petitioners argue that the Financing Program violates several

constitutional policies and that contracts executed or to be executed pursuant thereto were or will be done by respondents with grave abuse of discretion amounting to lack or excess of jurisdiction.

Petitioners contend that the Financing Program was made available for

debts that were either fraudulently contracted or void. In this regard, petitioners rely on a 1992 Commission on Audit (COA) report which identified several “behest” loans as either contracted or guaranteed fraudulently during the Marcos regime.[17] They posit that since these and other similar debts, such as the ones pertaining to the Bataan Nuclear Power Plant,[18] were eligible for buyback or conversion under the Program, the resultant relief agreements pertaining thereto would be void for being waivers of the Republic’s right to repudiate the void or fraudulently contracted loans. For their part, respondents dispute the points raised by petitioners. They also question the standing of petitioners to institute the present petition and the justiciability of the issues presented. The Court shall tackle the procedural questions ahead of the substantive issues.

The Court’s Rulings

Standing of Petitioners

The individual petitioners are suing as citizens of the Philippines; those among them who are of age are suing in their additional capacity as taxpayers.[19] It is not indicated in what capacity the Freedom from Debt Coalition is suing.

Respondents point out that petitioners have no standing to file the present

suit since the rule allowing taxpayers to assail executive or legislative acts has been applied only to cases where the constitutionality of a statute is involved. At the same time, however, they urge this Court to exercise its wide discretion and waive

petitioners’ lack of standing. They invoke the transcendental importance of resolving the validity of the questioned debt-relief contracts and others of similar import.

The recent trend on locus standi has veered towards a liberal treatment in taxpayer’s suits. In Tatad v. Garcia Jr.,[20] this Court reiterated that the “prevailing doctrines in taxpayer’s suits are to allow taxpayers to question contracts entered into by the national government or government owned and controlled corporations allegedly in contravention of law.”[21] A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law.[22]

Moreover, a ruling on the issues of this case will not only determine the validity or invalidity of the subject pre-termination and bond-conversion of foreign debts but also create a precedent for other debts or debt-related contracts executed or to be executed in behalf of the President of the Philippines by the Secretary of Finance. Considering the reported Philippine debt of P3.80 trillion as of November 2004, the foreign public borrowing component of which reached P1.81 trillion in November, equivalent to 47.6% of total government borrowings,[23] the importance of the issues raised and the magnitude of the public interest involved are indubitable.

Thus, the Court’s cognizance of this petition is also based on the

consideration that the determination of the issues presented will have a bearing on the state of the country’s economy, its international financial ratings, and perhaps even the Filipinos’ way of life. Seen in this light, the transcendental importance of the issues herein presented cannot be doubted.

Where constitutional issues are properly raised in the context of alleged

facts, procedural questions acquire a relatively minor significance.[24] We thus hold that by the very nature of the power wielded by the President, the effect of using this power on the economy, and the well-being in general of the Filipino nation, the Court must set aside the procedural barrier of standing and rule on the justiciable issues presented by the parties.

Ripeness/Actual Case Dimension

Even as respondents concede the transcendental importance of the issues

at bar, in their Rejoinder they ask this Court to dismiss the Petition. Allegedly, petitioners’ arguments are mere attempts at abstraction.[25] Respondents are correct to some degree. Several issues, as shall be discussed in due course, are not ripe for adjudication.

The allegation that respondents waived the Philippines’ right to repudiate

void and fraudulently contracted loans by executing the debt-relief agreements is, on many levels, not justiciable.

In the first place, records do not show whether the so-called behest loans–or other allegedly void or fraudulently contracted loans for that matter–were subject of the debt-relief contracts entered into under the Financing Program.

Moreover, asserting a right to repudiate void or fraudulently contracted loans begs the question of whether indeed particular loans are void or fraudulently contracted. Fraudulently contracted loans are voidable and, as such, valid and enforceable until annulled by the courts. On the other hand, void contracts that have already been fulfilled must be declared void in view of the maxim that no one is allowed to take the law in his own hands.[26] Petitioners’ theory depends on a prior annulment or declaration of nullity of the pre-existing loans, which thus far have not been submitted to this Court. Additionally, void contracts are unratifiable by their very nature; they are null and void ab initio. Consequently, from the viewpoint of civil law, what petitioners present as the Republic’s “right to repudiate” is yet a contingent right, one which cannot be allowed as an anticipatory basis for annulling the debt-relief contracts. Petitioners’ contention that the debt-relief agreements are tantamount to waivers of the Republic’s “right to repudiate” so-called behest loans is without legal foundation.

It may not be amiss to recognize that there are many advocates of the

position that the Republic should renege on obligations that are considered as “illegitimate.” However, should the executive branch unilaterally, and possibly even without prior court determination of the validity or invalidity of these contracts, repudiate or otherwise declare to the international community its resolve not to recognize a certain set of “illegitimate” loans, adverse repercussions[27] would come into play. Dr. Felipe Medalla, former Director General of the National Economic Development Authority, has warned, thus:

One way to reduce debt service is to repudiate debts,

totally or selectively. Taken to its limit, however, such a strategy would put the Philippines at such odds with too many enemies. Foreign commercial banks by themselves and without the cooperation of creditor governments, especially the United States, may not be in a position to inflict much damage, but concerted sanctions from commercial banks, multilateral financial institutions and creditor governments would affect not only our sources of credit but also our access to markets for our exports and the level of development assistance. . . . [T]he country might face concerted sanctions even if debts were repudiated only selectively.

The point that must be stressed is that repudiation is not

an attractive alternative if net payments to creditors in the short and medium-run can be reduced through an agreement (as opposed to a unilaterally set ceiling on debt service payments) which provides for both rescheduling of principal and capitalization of interest, or its equivalent in new loans, which would make it easier for the country to pay interest.[28] Sovereign default is not new to the Philippine setting. In October 1983, the

Philippines declared a moratorium on principal payments on its external debts that eventually

lasted four years,[29] that virtually closed the country’s access to new foreign

money[30] and drove investors to leave the Philippine market, resulting in some devastating consequences.[31] It would appear then that this beguilingly attractive and dangerously simplistic solution deserves the utmost circumspect cogitation before it is resorted to.

In any event, the discretion on the matter lies not with the courts but with

the executive. Thus, the Program was conceptualized as an offshoot of the decision made by then

President Aquino that the Philippines should recognize its sovereign debts[32] despite the controversy that engulfed many debts incurred during the Marcos era. It is a scheme whereby the Philippines restructured its debts following a negotiated approach instead of a default approach to manage the bleak Philippine debt situation.

As a final point, petitioners have no real basis to fret over a possible waiver

of the right to repudiate void contracts. Even assuming that spurious loans had become the subject of debt-relief contracts, respondents unequivocally assert that the Republic did not waive any right to repudiate void or fraudulently contracted loans, it having incorporated a “no-waiver” clause in the agreements.[33]

Substantive Issues It is helpful to put the matter in perspective before moving on to the merits. The Financing Program extinguished portions of the country’s pre-existing loans through either debt buyback or bond-conversion. The buyback approach essentially pre-terminated portions of public debts while the bond-conversion scheme extinguished public debts through the obtention of a new loan by virtue of a sovereign bond issuance, the proceeds of which in turn were used for terminating the original loan.

First Issue: The Scope of Section 20, Article VII For their first constitutional argument, petitioners submit that the buyback

and bond-conversion schemes do not constitute the loan “contract” or “guarantee” contemplated in the Constitution and are consequently prohibited. Sec. 20, Art. VII of the Constitution provides, viz:

The President may contract or guarantee foreign loans in

behalf of the Republic of the Philippines with the prior concurrence of the Monetary Board and subject to such limitations as may be provided under law. The Monetary Board shall, within thirty days from the end of every quarter of the calendar year, submit to the Congress a complete report of its decisions on applications for loans to be contracted or guaranteed by the government or government-owned and controlled corporations which would have

the effect of increasing the foreign debt, and containing other matters as may be provided by law.

On Bond-conversion

Loans are transactions wherein the owner of a property allows another party to use the property and where customarily, the latter promises to return the property after a specified period with payment for its use, called interest.[34] On the other hand, bonds are interest-bearing or discounted government or corporate securities that obligate the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity.[35] The word “bond” means contract, agreement, or guarantee. All of these terms are applicable to the securities known as bonds. An investor who purchases a bond is lending money to the issuer, and the bond represents the issuer’s contractual promise to pay interest and repay principal according to specific terms. A short-term bond is often called a note.[36]

The language of the Constitution is simple and clear as it is broad. It allows the President to contract and guarantee foreign loans. It makes no prohibition on the issuance of certain kinds of loans or distinctions as to which kinds of debt instruments are more onerous than others. This Court may not ascribe to the Constitution meanings and restrictions that would unduly burden the powers of the President. The plain, clear and unambiguous language of the Constitution should be construed in a sense that will allow the full exercise of the power provided therein. It would be the worst kind of judicial legislation if the courts were to misconstrue and change the meaning of the organic act.

The only restriction that the Constitution provides, aside from the prior concurrence of the Monetary Board, is that the loans must be subject to limitations provided by law. In this regard, we note that Republic Act (R.A.) No. 245 as amended by Pres. Decree (P.D.) No. 142, s. 1973, entitled An Act Authorizing the Secretary of Finance to Borrow to Meet Public Expenditures Authorized by Law, and for Other Purposes, allows foreign loans to be contracted in the form of, inter alia, bonds. Thus:

Sec. 1. In order to meet public expenditures authorized by law or to provide for the purchase, redemption, or refunding of any obligations, either direct or guaranteed of the Philippine Government, the Secretary of Finance, with the approval of the President of the Philippines, after consultation with the Monetary Board, is authorized to borrow from time to time on the credit of the Republic of the Philippines such sum or sums as in his judgment may be necessary, and to issue therefor evidences of indebtedness of the Philippine Government." Such evidences of indebtedness may be of the following types:

. . . . c. Treasury bonds, notes, securities or other evidences of indebtedness having maturities of one year or more but not exceeding twenty-five years from the date of issue. (Emphasis supplied.)

Under the foregoing provisions, sovereign bonds may be issued not only to supplement government expenditures but also to provide for the purchase,[37] redemption,[38] or refunding[39] of any obligation, either direct or guaranteed, of the Philippine Government.

Petitioners, however, point out that a supposed difference between contracting a loan and issuing bonds is that the former creates a definite creditor-debtor relationship between the parties while the latter does not.[40] They explain that a contract of loan enables the debtor to restructure or novate the loan, which benefit is lost upon the conversion of the debts to bearer bonds such that “the Philippines surrenders the novatable character of a loan contract for the irrevocable and unpostponable demandability of a bearer bond.”[41] Allegedly, the Constitution prohibits the President from issuing bonds which are “far more onerous” than loans.[42]

This line of thinking is flawed to say the least. The negotiable character of

the subject bonds is not mutually exclusive with the Republic’s freedom to negotiate with bondholders for the revision of the terms of the debt. Moreover, the securities market provides some flexibility–if the Philippines wants to pay in advance, it can buy out its bonds in the market; if interest rates go down but the Philippines does not have money to retire the bonds, it can replace the old bonds with new ones; if it defaults on the bonds, the bondholders shall organize and bring about a re-negotiation or settlement.[43] In fact, several countries have restructured their sovereign bonds in view either of

inability and/or unwillingness to pay the indebtedness.[44] Petitioners have not presented a plausible reason that would preclude the Philippines from acting in a similar fashion, should it so opt.

This theory may even be dismissed in a perfunctory manner since petitioners are merely expecting that the Philippines would opt to restructure the bonds but with the negotiable character of the bonds, would be prevented from so doing. This is a contingency which petitioners do not assert as having come to pass or even imminent. Consummated acts of the executive cannot be struck down by this Court merely on the basis of petitioners’ anticipatory cavils. On the Buyback Scheme

In their Comment, petitioners assert that the power to pay public debts

lies with Congress and was deliberately

withheld by the Constitution from the President.[45] It is true that in the balance of power between the three branches of government, it is Congress that manages the country’s coffers by virtue of its taxing and spending powers. However, the law-making authority has promulgated a law ordaining an automatic appropriations provision for debt servicing[46] by virtue of which the President is empowered to execute debt payments without the need for further appropriations. Regarding these legislative enactments, this Court has held, viz:

Congress … deliberates or acts on the budget proposals of the President, and Congress in the exercise of its own judgment and wisdom formulates an appropriation act precisely following the process established by the Constitution, which specifies that no money may be paid from the Treasury except in accordance with an appropriation made by law. Debt service is not included in the General Appropriation Act, since authorization therefor already exists under RA Nos. 4860 and 245, as amended, and PD 1967. Precisely in the light of this subsisting authorization as embodied in said Republic Acts and PD for debt service, Congress does not concern itself with details for implementation by the Executive, but largely with annual levels and approval thereof upon due deliberations as part of the whole obligation program for the year. Upon such approval, Congress has spoken and cannot be said to have delegated its wisdom to the Executive, on whose part lies the implementation or execution of the legislative wisdom.[47]

Specific legal authority for the buyback of loans is established under Section 2 of Republic Act (R.A.) No. 240, viz:

Sec. 2. The Secretary of Finance shall cause to be paid out of any moneys in the National Treasury not otherwise appropriated, or from any sinking funds provided for the purpose by law, any interest falling due, or accruing, on any portion of the public debt authorized by law. He shall also cause to be paid out of any such money, or from any such sinking funds the principal amount of any obligations which have matured, or which have been called for redemption or for which redemption has been demanded in accordance with terms prescribed by him prior to date of issue: Provided, however, That he may, if he so chooses and if the holder is willing, exchange any such obligation with any other direct or guaranteed obligation or

obligations of the Philippine Government of equivalent value. In the case of interest-bearing obligations, he shall pay not less than their face value; in the case of obligations issued at a discount he shall pay the face value at maturity; or, if redeemed prior to maturity, such portion of the face value as is prescribed by the terms and conditions under which such obligations were originally issued. (Emphasis supplied.)

The afore-quoted provisions of law specifically allow the President to pre-terminate debts without further action from Congress.

Petitioners claim that the buyback scheme is neither a guarantee nor a loan since its underlying intent is to extinguish debts that are not yet due and demandable.[48] Thus, they suggest that contracts entered pursuant to the buyback scheme are unconstitutional for not being among those contemplated in Sec. 20, Art. VII of the Constitution.

Buyback is a necessary power which springs from the grant of the foreign

borrowing power. Every statute is understood, by implication, to contain all such provisions as may be necessary to effectuate its object and purpose, or to make effective rights, powers, privileges or jurisdiction which it grants, including all such collateral and subsidiary consequences as may be fairly and logically inferred from its terms.[49] The President is not empowered to borrow money from foreign banks and governments on the credit of the Republic only to be left bereft of authority to implement the payment despite appropriations therefor.

Even petitioners concede that “[t]he Constitution, as a rule, does not

enumerate–let alone enumerate all–the acts which the President (or any other public officer) may not

do,”[50] and “[t]he fact that the Constitution does not explicitly bar the President from exercising a power does not mean that he or she does not have that power.”[51] It is inescapable from the standpoint of reason and necessity that the authority to contract foreign loans and guarantees without restrictions on payment or manner thereof coupled with the availability of the corresponding appropriations, must include the power to effect payments or to make payments unavailing by either restructuring the loans or even refusing to make any payment altogether.

More fundamentally, when taken in the context of sovereign debts, a

buyback is simply the purchase by the sovereign issuer of its own debts at a discount. Clearly then, the objection to the validity of the buyback scheme is without basis.

Second Issue: Delegation of Power

Petitioners stress that unlike other powers which may be validly delegated

by the President, the power to incur foreign debts is expressly reserved by the Constitution in the person of the President. They argue that the gravity by which the exercise of the power will affect the Filipino nation requires that the President alone must exercise this power. They submit that the requirement of prior concurrence of an entity specifically named by the Constitution–the Monetary Board–reinforces the submission that not respondents but the President “alone and personally” can validly bind the country.

Petitioners’ position is negated both by explicit constitutional[52] and

legal[53] imprimaturs, as well as the doctrine of qualified political agency.

The evident exigency of having the Secretary of Finance implement the decision of the President to execute the debt-relief contracts is made manifest by the fact that the process of establishing and executing a strategy for managing the government’s debt is deep within the realm of the expertise of the Department of Finance, primed as it is to raise the required amount of funding, achieve its risk and cost objectives, and meet any other sovereign debt management goals.[54]

If, as petitioners would have it, the President were to personally exercise

every aspect of the foreign borrowing power, he/she would have to pause from running the country long enough to focus on a welter of time-consuming detailed activities–the propriety of incurring/guaranteeing loans, studying and choosing among the many methods that may be taken toward this end, meeting countless times with creditor representatives to negotiate, obtaining the concurrence of the Monetary Board, explaining and defending the negotiated deal to the public, and more often than not, flying to the agreed place of execution to sign the documents. This sort of constitutional interpretation would negate the very existence of cabinet positions and the respective expertise which the holders thereof are accorded and would unduly hamper the President’s effectivity in running the government.

Necessity thus gave birth to the doctrine of qualified political agency, later adopted in Villena v. Secretary of the Interior[55] from American jurisprudence, viz:

With reference to the Executive Department of the government, there is one purpose which is crystal-clear and is readily visible without the projection of judicial searchlight, and that is the establishment of a single, not plural, Executive. The first section of Article VII of the Constitution, dealing with the Executive Department, begins with the enunciation of the principle that "The executive power shall be vested in a President of the Philippines." This means that the President of the Philippines is the Executive of the Government of the Philippines, and no other. The heads of the executive departments occupy political positions and hold office in an advisory capacity, and, in the language of Thomas Jefferson, "should be of the President's bosom confidence" (7 Writings, Ford ed., 498), and, in the language of Attorney-General Cushing (7 Op., Attorney-General, 453), "are subject to the direction of the President." Without minimizing the importance of the heads of the various departments, their personality is in reality but the projection of that of the President. Stated otherwise, and as

forcibly characterized by Chief Justice Taft of the Supreme Court of the United States, "each head of a department is, and must be, the President's alter ego in the matters of that department where the President is required by law to exercise authority" (Myers vs. United States, 47 Sup. Ct. Rep., 21 at 30; 272 U. S., 52 at 133; 71 Law. ed., 160).[56] As it was, the backdrop consisted of a major policy determination made by

then President Aquino that sovereign debts have to be respected and the concomitant reality that the Philippines did not have enough funds to pay the debts. Inevitably, it fell upon the Secretary of Finance, as the alter ego of the President regarding “the sound and efficient management of the financial resources of the Government,”[57] to formulate a scheme for the implementation of the policy publicly expressed by the President herself.

Nevertheless, there are powers vested in the President by the Constitution

which may not be delegated to or exercised by an agent or alter ego of the President. Justice Laurel, in his ponencia in Villena, makes this clear:

Withal, at first blush, the argument of ratification may seem plausible under the circumstances, it should be observed that there are certain acts which, by their very nature, cannot be validated by subsequent approval or ratification by the President. There are certain constitutional powers and prerogatives of the Chief Executive of the Nation which must be exercised by him in person and no amount of approval or ratification will validate the exercise of any of those powers by any other person. Such, for instance, in his power to suspend the writ of habeas corpus and proclaim martial law (PAR. 3, SEC. 11, Art. VII) and the exercise by him of the benign prerogative of mercy (par. 6, sec. 11, idem).[58]

These distinctions hold true to this day. There are certain presidential powers which arise out of exceptional circumstances, and if exercised, would involve the suspension of fundamental freedoms, or at least call for the supersedence of executive prerogatives over those exercised by co-equal branches of government. The declaration of martial law, the suspension of the writ of habeas corpus, and the exercise of the pardoning power notwithstanding the judicial determination of guilt of the accused, all fall within this special class that demands the exclusive exercise by the President of the constitutionally vested power. The list is by no means exclusive, but there must be a showing that the executive power in question is of similar gravitas and exceptional import.

We cannot conclude that the power of the President to contract or guarantee foreign debts falls within the same exceptional class. Indubitably, the decision to contract or guarantee foreign debts is of vital public interest, but only

akin to any contractual obligation undertaken by the sovereign, which arises not from any extraordinary incident, but from the established functions of governance.

Another important qualification must be made. The Secretary of Finance or

any designated alter ego of the President is bound to secure the latter’s prior consent to or subsequent ratification of his acts. In the matter of contracting or guaranteeing foreign loans, the repudiation by the President of the very acts performed in this regard by the alter ego will definitely have binding effect. Had petitioners herein succeeded in demonstrating that the President actually withheld approval and/or repudiated the Financing Program, there could be a cause of action to nullify the acts of respondents. Notably though, petitioners do not assert that respondents pursued the Program without prior authorization of the President or that the terms of the contract were agreed upon without the President’s authorization. Congruent with the avowed preference of then President Aquino to honor and restructure existing foreign debts, the lack of showing that she countermanded the acts of respondents leads us to conclude that said acts carried presidential approval.

With constitutional parameters already established, we may also note, as a

source of suppletory guidance, the provisions of R.A. No. 245. The afore-quoted Section 1 thereof empowers the Secretary of Finance with the approval of the President and after consultation[59] of the Monetary Board, “to borrow from time to time on the credit of the Republic of the Philippines such sum or sums as in his judgment may be necessary, and to issue therefor evidences of indebtedness of the Philippine Government.” Ineluctably then, while the President wields the borrowing power it is the Secretary of Finance who normally carries out its thrusts.

In our recent rulings in Southern Cross Cement Corporation v. The Philippine Cement Manufacturers Corp.,[60] this Court had occasion to examine the authority granted by Congress to the Department of Trade and Industry (DTI) Secretary to impose safeguard measures pursuant to the Safeguard Measures Act. In doing so, the Court was impelled to construe Section 28(2), Article VI of the Constitution, which allowed Congress, by law, to authorize the President to “fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.”[61]

While the Court refused to uphold the broad construction of the grant of

power as preferred by the DTI Secretary, it nonetheless tacitly acknowledged that Congress could designate the DTI Secretary, in his capacity as alter ego of the President, to exercise the authority vested on the chief executive under Section 28(2), Article VI.[62] At the same time, the Court emphasized that since Section 28(2), Article VI authorized Congress to impose limitations and restrictions on the authority of the President to impose tariffs and imposts, the DTI Secretary was

necessarily subjected to the same restrictions that Congress could impose on the President in the exercise of this taxing power.

Similarly, in the instant case, the Constitution allocates to the President the

exercise of the foreign borrowing power “subject to such limitations as may be provided under law.” Following Southern Cross, but in line with the limitations as defined in Villena, the presidential prerogative may be exercised by the President’s alter ego, who in this case is the Secretary of Finance.

It bears emphasis that apart from the Constitution, there is also a relevant

statute, R.A. No. 245, that establishes the parameters by which the alter ego may act in behalf of the President with respect to the borrowing power. This law expressly provides that the Secretary of Finance may enter into foreign borrowing contracts. This law neither amends nor goes contrary to the Constitution but merely implements the subject provision in a manner consistent with the structure of the Executive Department and the alter ego doctine. In this regard, respondents have declared that they have followed the restrictions provided under R.A. No. 245,[63] which include the requisite presidential authorization and which, in the absence of proof and even allegation to the contrary, should be regarded in a fashion congruent with the presumption of regularity bestowed on acts done by public officials.

Moreover, in praying that the acts of the respondents, especially that of the

Secretary of Finance, be nullified as being in violation of a restrictive constitutional interpretation, petitioners in effect would have this Court declare R.A. No. 245 unconstitutional. We will not strike

down a law or provisions thereof without so much as a direct attack thereon when simple and logical statutory construction would suffice.

Petitioners also submit that the unrestricted character of the Financing Program violates the framers’ intent behind Section 20, Article VII to restrict the power of the President. This intent, petitioners note, is embodied in the proviso in Sec. 20, Art. VII, which states that said power is “subject to such limitations as may be provided under law.” However, as previously discussed, the debt-relief contracts are governed by the terms of R.A. No. 245, as amended by P.D. No. 142 s. 1973, and therefore were not developed in an unrestricted setting.

Third Issue: Grave Abuse of Discretion andViolation of Constitutional Policies

We treat the remaining issues jointly, for in view of the foregoing determination, the general allegation of grave abuse of discretion on the part of respondents would arise from the purported violation of various state policies as expressed in the Constitution. Petitioners allege that the Financing Program violates the constitutional state policies to promote a social order that will “ensure the prosperity and independence

of the nation” and free “the people from poverty,[64] foster “social justice in all phases of national development,”[65] and develop a self-reliant and independent national economy effectively controlled by Filipinos;”[66] thus, the contracts executed or to be executed pursuant thereto were or would be tainted by a grave abuse of discretion amounting to lack or excess of jurisdiction. Respondents cite the following in support of the propriety of their acts:[67] (1) a Department of Finance study showing that as a result of the implementation of voluntary debt reductions schemes, the country’s debt stock was reduced by U.S. $4.4 billion as of December 1991;[68] (2) revelations made by independent individuals made in a hearing before the Senate Committee on Economic Affairs indicating that the assailed agreements would bring about substantial benefits to the country;[69] and (3) the Joint Legislative-Executive Foreign Debt Council’s endorsement of the approval of the financing package containing the debt-

relief agreements and issuance of a Motion to Urge the Philippine Debt Negotiating Panel to continue with the negotiation on the aforesaid package.[70] Even with these justifications, respondents aver that their acts are within the arena of political questions which, based on the doctrine of separation of powers,[71] the judiciary must leave without interference lest the courts substitute their judgment for that of the official concerned and decide a matter which by its nature or law is for the latter alone to decide.[72] On the other hand, in furtherance of their argument on respondents’ violation of constitutional policies, petitioners cite an article of Jude Esguerra, The 1992 Buyback and Securitization Agreement with Philippine Commercial Bank Creditors,[73] in illustrating a best-case scenario in entering the subject debt-relief agreements. The computation results in a yield of $218.99 million, rather

than the $2,041.00 million claimed by the debt negotiators.[74] On the other hand, the worst-case scenario allegedly is that a net amount of $1.638 million will flow out of the country as a result of the debt package.[75] Assuming the accuracy of the foregoing for the nonce, despite the watered-down parameters of petitioners’ computations, we can make no conclusion other than that respondents’ efforts were geared towards debt-relief with marked positive results and towards achieving the constitutional policies which petitioners so hastily declare as having been violated by respondents. We recognize that as with other schemes dependent on volatile market and economic structures, the contracts entered into by respondents may possibly have a net outflow and therefore negative result. However, even petitioners call this latter event the worst-case scenario. Plans are seldom foolproof. To ask the Court to strike down debt-relief contracts, which, according to independent third party evaluations using historically-suggested rates would result in “substantial debt-relief,”[76] based merely on the possibility of petitioners’ worst-case scenario projection, hardly seems reasonable.

Moreover, the policies set by the Constitution as litanized by petitioners are not a panacea that can annul every governmental act sought to be struck down. The gist of petitioners’ arguments on violation of constitutional policies and grave abuse of discretion boils down to their allegation that the debt-relief agreements entered into by respondents do not deliver the kind of debt-relief that petitioners would want. Petitioners cite the aforementioned article in stating that that “the agreement achieves little that cannot be gained through less complicated means like postponing (rescheduling) principal payments,”[77] thus:

[T]he price of success in putting together this “debt-relief package” (indicates) the possibility that a simple rescheduling agreement may well turn out to be less expensive than this comprehensive “debt-relief” package. This means that in the next six years the humble and simple rescheduling process may well be the lesser evil because there is that distinct possibility that less money will flow out of the country as a result.

Note must be taken that from these citations, petitioners submit that there is possibly a better way to go about debt rescheduling and, on that basis, insist that the acts of respondents must be struck down. These are rather tenuous grounds to condemn the subject agreements as violative of constitutional principles.

Conclusion

The raison d’ etre of the Financing Program is to manage debts incurred by the Philippines in a manner that will lessen the burden on the Filipino taxpayers–thus the term “debt-relief agreements.” The measures objected to by petitioners were not aimed at incurring more debts but at terminating pre-existing debts and were backed by the know-how of the country’s economic managers as affirmed by third party empirical analysis.

That the means employed to achieve the goal of debt-relief do not sit well with petitioners is beyond the power of this Court to remedy. The exercise of the power of judicial review is merely to check–not supplant–the Executive, or to simply ascertain whether he has gone beyond the constitutional limits of his jurisdiction but not to exercise the power vested in him or to determine the wisdom of his act.[78] In cases where the main purpose is to nullify governmental acts whether as unconstitutional or done with grave abuse of discretion, there is a strong presumption in favor of the validity of the assailed acts. The heavy onus is in on petitioners to overcome the presumption of regularity.

We find that petitioners have not sufficiently established any basis for the

Court to declare the acts of respondents as unconstitutional. WHEREFORE the petition is hereby DISMISSED. No costs.

SO ORDERED.

4G.R. No. 148491 February 8, 2007SPOUSES ZACARIAS BACOLOR and CATHERINE BACOLOR, Petitioners, vs.BANCO FILIPINO SAVINGS AND MORTGAGE BANK, DAGUPAN CITY BRANCH and MARCELINO C. BONUAN, Respondents.D E C I S I O NSANDOVAL-GUTIERREZ, J.:Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the Decision 1 of the Court of Appeals in CA-G.R. CV No. 47732 promulgated on February 23, 2001 and its Resolution dated May 30, 2001.On February 11, 1982, spouses Zacarias and Catherine Bacolor, herein petitioners, obtained a loan of P244,000.00 from Banco Filipino Savings and Mortgage Bank, Dagupan City Branch, respondent. They executed a promissory note providing that the amount shall be payable within a period of ten (10) years with a monthly amortization of P5,380.00 beginning March 11, 1982 and every 11th day of the month thereafter; that the interest rate shall be twenty-four percent (24%) per annum, with a penalty of three percent (3%) on any unpaid monthly amortization; that there shall be a service charge of three percent (3%) per annum on the loan; and that in case respondent bank seeks the assistance of counsel to enforce the collection of the loan, petitioners shall be liable for ten percent (10%) of the amount due as attorney’s fees and fifteen percent (15%) of the amount due as liquidated damages.As security for the loan, petitioners mortgaged with respondent bank their parcel of land located in Dagupan City, Pangasinan, registered under Transfer Certificate of Title No. 40827.From March 11, 1982 to July 10, 1991, petitioners paid respondent bank P412, 199.36. Thereafter, they failed to pay the remaining balance of the loan.On August 7, 1992, petitioners received from respondent bank a statement of account stating that their indebtedness as of July 31, 1992 amounts to P840,845.61.In its letter dated January 13, 1993, respondent bank informed petitioners that should they fail to pay their loan within fifteen (15) days from notice, appropriate action shall be taken against them.Due to petitioners’ failure to settle their obligation, respondent instituted, on March 5, 1993, an action for extra-judicial foreclosure of mortgage.Prior thereto, or on February 1, 1993, petitioners filed with Branch 40 of the same RTC, a complaint for violation of the Usury Law against respondent, docketed as Civil Case No. D-10480. They alleged that the provisions of the promissory note constitute a usurious transaction considering the (1) rate of interest, (2) the rate of penalties, service charge, attorney’s fees and liquidated damages, and (3) deductions for surcharges and insurance premium. In their amended complaint, petitioners further alleged that, during the closure of respondent bank, it ceased to be a banking institution and, therefore, could not charge interests and institute foreclosure proceeding.On August 25, 1994, the RTC rendered its decision dismissing petitioners’ complaint, holding that:(1) The terms and conditions of the Deed of Mortgage and the Promissory Note are legal and not usurious.The plaintiff freely signed the Deed of Mortgage and the Promissory Note with full knowledge of its terms and conditions.

The interest rate of 24% per annum is not usurious and does not violate the Usury Law (Act 2655) as amended by P.D. No. 166.The rate of interest, including commissions, premiums, fees and other charges, on a loan or forbearance of any money etc., regardless of maturity x x x, shall not be subject to any ceiling under or pursuant to the Usury Law, as amended (CB Circular no. 905). Hence, the 24% interest per annum is allowed under P.D. No. 166.For sometime now, usury has been legally non-existent. Interest can now be as lender and borrower may agree upon (Verdejo v. CA, Jan. 29, 1988. 157 SCRA 743).The imposition of penalties in case the obligation is not fulfilled is not prohibited by the Usury Law. Parties to a contract of loan may validly agree upon the imposition of penalty charges in case of delay or non-payment of the loan. The purpose is to compel the debtor to pay his debt on time (Go Chioco v. Martinez, 45 Phil. 256, 265).(2) The closure of Banco Filipino did not suspend or stop its usual and normal banking operations like the collection of loan receivables and foreclosures of mortgages.In view of the foregoing, plaintiffs failed to substantiate their cause of action against the defendant. 2

On appeal, the Court of Appeals rendered its Decision affirming the Decision of the trial court. Petitioner’s subsequent motion for reconsideration was denied.Hence, this present petition for review on certiorari raising this lone issue: whether the interest rate is "excessive and unconscionable."It is the petitioners’ contention that while the Usury Law ceiling on interest rates was lifted by Central Bank Circular No. 905, there is nothing in the said circular which grants respondent bank carte blanche authority to raise interest rates to levels which "either enslave the borrower or lead to a hemorrhaging of their assets." 3

In its comment 4 , respondent bank maintained that petitioner, by signing the Deed of Mortgage and Promissory Note, knowingly and freely consented to its terms and conditions. A contract between the parties must not be impaired. The interest rate of 24% per annum is not usurious and does not violate the Usury Law. 5

The petition lacks merit.Article 1956 of the Civil Code provides that no interest shall be due unless it has been expressly stipulated in writing. Here, the parties agreed in writing on February 11, 1982 that the rate of interest on the petitioners’ loan shall be 24% per annum.At the time the parties entered into the loan transaction, the applicable law was the Usury Law (Act 2655), as amended by P.D. No. 166, which provides that the rate of interest for the forbearance of money when secured by a mortgage upon real estate, should not be more than 6% per annum or the maximum rate prescribed by the Monetary Board of the Central Bank of the Philippines in force at the time the loan was granted. Central Bank Circular No. 783, which took effect on July 1, 1981, removed the ceiling on interest rates on a certain class of loans, thus:SECTION 2. The interest rate on a loan forbearance of any money, goods, or credits with a maturity of more than seven hundred thirty (730) days shall not be subject to any ceiling. 6

In the present case, the term of the subject loan is for a period of 10 years. Considering that its maturity is more than 730 days, the interest rate is not subject to any ceiling following the above provision. Therefore, the 24% interest rate agreed upon by parties does not violate the Usury Law, as amended by P.D. 116.This Court has consistently held that for sometime now, usury has been legally non-inexistent and that interest can now be charged as lender and borrower may agree

upon. 7 As a matter of fact, Section 1 of Central Bank Circular No. 905 states that:SECTION 1. The rate of interest, including commissions, premiums, fees and other charges , on a loan or forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person, whether natural or judicial, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended. 8

Moreover, in Trade & Investment Development Corporation of the Philippines v. Roblett Industrial Construction Corporation, 9 this Court has ruled that:With the suspension of the Usury Law and the removal of interest ceiling, the parties are free to stipulate the interest to be imposed on monetary obligations. Absent any evidence of fraud, undue influence, or any vice of consent exercised by one party against the other, the interest rate agreed upon is binding upon them.There is no indication in the records that any of the incidents which vitiate consent on the part of petitioners is present. Indeed, the interest rate agreed upon is binding on them. With respect to the penalty and service charges, the same are unconscionable or excessive.Petitioners invoke this Court’s rulings in Almeda vs. Court of Appeals 10 and Medel vs. Court of Appeals 11 to show that the interest rate in the subject promissory note is unconscionable. Their reliance on these cases is misplaced. In Almeda, what this Court struck down as being unconscionable and excessive was the unilateral increase in the interest rates from 18% to 68%. This Court ruled thus:It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the terms of its contract by increasing the interest rates of the loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956, that "No interest shall be due unless it has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal of the interest rate provision of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest x x x.Petitioners also cannot find refuge in Medel. In this case, what this Court declared as unconscionable was the imposition of a 66% interest rate per annum. In the instant case, the interest rate is only 24% per annum, agreed upon by both parties. By no means can it be considered unconscionable or excessive.1awphi1.netVerily, petitioners cannot now renege on their obligation to comply with what is incumbent upon them under the loan agreement. A contract is the law between the parties and they are bound by its stipulations. 12

Petitioners further contend that during the closure of respondent bank (from January 1, 1985 to July 1, 1994), it lost its function as a banking institution and, therefore, could no longer charge interests and institute foreclosure proceedings.In the case of Banco Filipino Savings & Mortgage Bank vs. Monetary Board, Central Bank of the Philippines, 13 this Court ruled that the bank’s closure did not diminish the authority and powers of the designated liquidator to effectuate and carry on the administration of the bank, thus:x x x. We did not prohibit however acts such as receiving collectibles and receivables or paying off creditors’ claims and other transactions pertaining to the normal operations of a bank. There is no doubt that that the prosecution of suits for collection and the foreclosure of mortgages against debtors of the bank by the liquidator are among the usual and ordinary transactions pertaining to the administration of a bank. x x x.Likewise, in Banco Filipino Savings and Mortgage Bank vs. Ybañez, 14 where one of

the issues was whether respondent bank can collect interest on its loans during its period of liquidation and closure, this Court held:In Banco Filipino Savings and Mortgage Bank v. Monetary Board, the validity of the closure and receivership of Banco Filipino was put in issue. But the pendency of the case did not diminish the authority of the designated liquidator to administer and continue the bank’s transactions. The Court allowed the bank liquidator to continue receiving collectibles and receivables or paying off creditor’s claims and other transactions pertaining to normal operations of a bank. Among these transactions were the prosecution of suits against debtors for collection and for foreclosure of mortgages. The bank was allowed to collect interests on its loans while under liquidation, provided that the interests were legal.In fine, we hold that the interest rate on the loan agreed upon between the parties is not excessive or unconscionable; and that during the closure of respondent bank, it could still function as a bonding institution, hence, could continue collecting interests from petitioners.WHEREFORE, we DENY the petition and AFFIRM the challenged Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 47732. Costs against petitioners.SO ORDERED.

5G.R. No. 161319 January 23, 2007SPS. EDGAR AND DINAH OMENGAN, Petitioners, vs.PHILIPPPINE NATIONAL BANK, HENRY M. MONTALVO AND MANUEL S. ACIERTO,* Respondents.

D E C I S I O NCORONA, J.:This petition for review on certiorari1 seeks a review and reversal of the Court of Appeals (CA) decision2 and resolution3 in CA-G.R. CV No. 71302.In October 1996, the Philippine National Bank (PNB) Tabuk (Kalinga) Branch approved petitioners-spouses’ application for a revolving credit line of P3 million. The loan was secured by two residential lots in Tabuk, Kalinga-Apayao covered by Transfer Certificate of Title (TCT) Nos. 12954 and 12112. The certificates of title, issued by the Registry of Deeds of the Province of Kalinga-Apayao, were in the name of Edgar4 Omengan married to Dinah Omengan.The first P2.5 million was released by Branch Manager Henry Montalvo on three separate dates. The release of the final half million was, however, withheld by Montalvo because of a letter allegedly sent by Edgar’s sisters. It read:Appas, Tabuk Kalinga7 November 1996The ManagerPhilippine National BankTabuk BranchPoblacion, TabukKalingaSir:This refers to the land at Appas, Tabuk in the name of our brother, Edgar Omengan, which was mortgaged to [the] Bank in the amount of Three Million Pesos (P3,000,000.00), the sum of [P2.5 Million] had already been released and received by our brother, Edgar.In this connection, it is requested that the remaining unreleased balance of [half a million pesos] be held in abeyance pending an understanding by the rest of the brothers and sisters of Edgar. Please be informed that the property mortgaged, while in the name of Edgar Omengan, is owned in co-ownership by all the children of the late Roberto and Elnora Omengan. The lawyer who drafted the

document registering the subject property under Edgar’s name can attest to this fact. We had a prior understanding with Edgar in allowing him to make use of the property as collateral, but he refuses to comply with such arrangement . Hence, this letter. (emphasis ours)Very truly yours,(Sgd.) Shirley O. Gamon (Sgd.) Imogene O. Bangao(Sgd.) Caroline O. Salicob (Sgd.) Alice O. Claver5

Montalvo was eventually replaced as branch manager by Manuel Acierto who released the remaining half million pesos to petitioners on May 2, 1997. Acierto also recommended the approval of a P2 million increase in their credit line to the Cagayan Valley Business Center Credit Committee in Santiago City.The credit committee approved the increase of petitioners’ credit line (from P3 million to P5 million), provided Edgar’s sisters gave their conformity. Acierto informed petitioners of the conditional approval of their credit line.But petitioners failed to secure the consent of Edgar’s sisters; hence, PNB put on hold the release of the additional P2 million.On October 7, 1998, Edgar Omengan demanded the release of the P2 million. He claimed that the condition for its release was not part of his credit line agreement with PNB because it was added without his consent. PNB denied his request.On March 3, 1999, petitioners filed a complaint for breach of contract and damages against PNB with the Regional Trial Court (RTC), Branch 25 in Tabuk, Kalinga. After trial, the court decided in favor of petitioners.Accordingly, judgment is hereby rendered finding in favor of [petitioners.] [PNB is ordered]:1) To release without delay in favor of [petitioners] the amount of P2,000,000.00 to complete the P5,000,000.00 credit line agreement;2) To pay [petitioners] the amount of P2,760,000.00 representing the losses and/or expected income of the [petitioners] for three years;3) To pay lawful interest, until the amount aforementioned on paragraphs 1 and 2 above are fully paid; and4) To pay the costs.1awphi1.netSO ORDERED.6

The CA, however, on June 18, 2003, reversed and set aside the RTC decision dated April 21, 2001.7

Petitioners now contend that the CA erred when it did not sustain the finding of breach of contract by the RTC. 8

The existence of breach of contract is a factual matter not usually reviewed in a petition filed under Rule 45. But since the RTC and the CA had contradictory findings, we are constrained to rule on this issue.Was there a breach of contract? There was none.Breach of contract is defined as follows:[It] is the "failure without legal reason to comply with the terms of a contract." It is also defined as the "[f]ailure, without legal excuse, to perform any promise which forms the whole or part of the contract."9

In this case, the parties agreed on a P3 million credit line. This sum was completely released to petitioners who subsequently applied10 for an increase in their credit line. This was conditionally approved by PNB’s credit committee. For all intents and purposes, petitioners sought an additional loan.The condition attached to the increase in credit line requiring petitioners to acquire the conformity of Edgar’s sisters was never acknowledged and accepted by

petitioners. Thus, as to the additional loan, no meeting of the minds actually occurred and no breach of contract could be attributed to PNB. There was no perfected contract over the increase in credit line."[T]he business of a bank is one affected with public interest, for which reason the bank should guard against loss due to negligence or bad faith. In approving the loan of an applicant, the bank concerns itself with proper [information] regarding its debtors."11 Any investigation previously conducted on the property offered by petitioners as collateral did not preclude PNB from considering new information on the same property as security for a subsequent loan. The credit and property investigation for the original loan of P3 million did not oblige PNB to grant and release any additional loan. At the time the original P3 million credit line was approved, the title to the property appeared to pertain exclusively to petitioners. By the time the application for an increase was considered, however, PNB already had reason to suspect petitioners’ claim of exclusive ownership.1avvphi1.netA mortgagee can rely on what appears on the certificate of title presented by the mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title. This rule is strictly applied to banking institutions. xxxBanks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, as their business is one affected with public interest. xxx Thus, this Court clarified that the rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.12 (emphasis supplied)Here, PNB had acquired information sufficient to induce a reasonably prudent person to inquire into the status of the title over the subject property. Instead of defending their position, petitioners merely insisted that reliance on the face of the certificate of title (in their name) was sufficient. This principle, as already mentioned, was not applicable to financial institutions like PNB.In truth, petitioners had every chance to turn the situation in their favor if, as they said, they really owned the subject property alone, to the exclusion of any other owner(s). Unfortunately, all they offered were bare denials of the co-ownership claimed by Edgar’s sisters.PNB exercised reasonable prudence in requiring the above-mentioned condition for the release of the additional loan. If the condition proved unacceptable to petitioners, the parties could have discussed other terms instead of making an obstinate and outright demand for the release of the additional amount. If the alleged co-ownership in fact had no leg to stand on, petitioners could have introduced evidence other than a simple denial of its existence.Since PNB did not breach any contract and since it exercised the degree of diligence expected of it, it cannot be held liable for damages.WHEREFORE, the decision and resolution of the Court of Appeals in CA-G.R. CV No. 71302 are hereby AFFIRMED.Costs against petitioners.SO ORDERED.

7UNITED COCONUT PLANTERS BANK, Petitioner, - versus - SPOUSES SAMUEL and ODETTE BELUSO, Respondents.D E C I S I O N

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of

Court, which seeks to annul the Court of Appeals Decision[1] dated 21 January 2003 and its Resolution[2] dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed Court of Appeals Decision and Resolution affirmed in turn the Decision[3] dated 23 March 2000 and Order[4] dated 8 May 2000 of the Regional Trial Court (RTC), Branch 65 of Makati City, in Civil Case No. 99-314, declaring void the interest rate provided in the promissory notes executed by the respondents Spouses Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United Coconut Planters Bank (UCPB).

The procedural and factual antecedents of this case are as follows: On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes

Line under a Credit Agreement whereby the latter could avail from the former credit of up to a maximum amount of P1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso constituted, other than their promissory notes, a real estate mortgage over parcels of land in Roxas City, covered by Transfer Certificates of Title No. T-31539 and T-27828, as additional security for the obligation. The Credit Agreement was subsequently amended to increase the amount of the Promissory Notes Line to a maximum of P2.35 Million pesos and to extend the term thereof to 28 February 1998.

The spouses Beluso availed themselves of the credit line under the

following Promissory Notes:

PN # Date of PN Maturity Date Amount Secured

8314-96-00083-3 29 April 1996 27 August 1996 P 700,000

8314-96-00085-0 2 May 1996 30 August 1996 P 500,000

8314-96-000292-2 20 November 1996 20 March 1997 P 800,000 The three promissory notes were renewed several times. On 30 April 1997,

the payment of the principal and interest of the latter two promissory notes were debited from the spouses Beluso’s account with UCPB; yet, a consolidated loan for P1.3 Million was again released to the spouses Beluso under one promissory note with a due date of 28 February 1998.

To completely avail themselves of the P2.35 Million credit line extended to

them by UCPB, the spouses Beluso executed two more promissory notes for a total of P350,000.00:

PN # Date of PN Maturity Date Amount Secured

97-00363-1 11 December 1997 28 February 1998 P 200,000

98-00002-4 2 January 1998 28 February 1998 P 150,000

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

In any case, UCPB applied interest rates on the different promissory notes

ranging from 18% to 34%. From 1996 to February 1998 the spouses Beluso were able to pay the total sum of P763,692.03.

From 28 February 1998 to 10 June 1998, UCPB continued to charge

interest and penalty on the obligations of the spouses Beluso, as follows:

PN # Amount Secured Interest Penalty Total

97-00363-1 P 200,000 31% 36% P 225,313.24

97-00366-6 P 700,000 30.17%(7 days)

32.786% (102 days)

P 795,294.72

97-00368-2 P 1,300,000 28%(2 days)

30.41% (102 days)

P 1,462,124.54

98-00002-4 P 150,000 33%(102 days)

36% P 170,034.71

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

amounts. On 2 September 1998, UCPB demanded that the spouses Beluso pay their

total obligation of P2,932,543.00 plus 25% attorney’s fees, but the spouses Beluso failed to comply therewith. On 28 December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to secure their credit line, which, by that time, already ballooned to P3,784,603.00.

On 9 February 1999, the spouses Beluso filed a Petition for Annulment,

Accounting and Damages against UCPB with the RTC of Makati City. On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing

of the case as follows: PREMISES CONSIDERED, judgment is hereby rendered declaring the

interest rate used by [UCPB] void and the foreclosure and Sheriff’s Certificate of Sale void. [UCPB] is hereby ordered to return to [the spouses Beluso] the properties subject of the foreclosure; to pay [the spouses Beluso] the amount of P50,000.00 by way of attorney’s fees; and to pay the costs of suit. [The spouses Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00.[5]

On 8 May 2000, the RTC denied UCPB’s Motion for Reconsideration,[6]

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

WHEREFORE, premises considered, the decision dated March 23, 2000 of

the Regional Trial Court, Branch 65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED subject to the modification that defendant-appellant UCPB is not liable for attorney’s fees or the costs of suit.[7]

On 9 September 2003, the Court of Appeals denied UCPB’s Motion for

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

I WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH DECLARED VOID THE PROVISION ON INTEREST RATE AGREED UPON BETWEEN PETITIONER AND RESPONDENTS II WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF RESPONDENTS’ INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY PETITIONER THE AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY THOUSAND THREE HUNDRED EIGHT PESOS (P1,560,308.00) III WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH ANNULLED THE FORECLOSURE BY PETITIONER OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED “INCORRECT COMPUTATION” OF RESPONDENTS’ INDEBTEDNESS IV WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN LENDING ACT V WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED

SERIOUS AND REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS ARE GUILTY OF FORUM SHOPPING[8] Validity of the Interest Rates

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

FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS.

SAMUEL AND ODETTE BELUSO (BORROWER), jointly and severally promise to pay to UNITED COCONUT PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of ______________ PESOS, (P_____), Philippine Currency, with interest thereon at the rate indicative of DBD retail rate or as determined by the Branch Head.[9]

UCPB asserts that this is a reversible error, and claims that while the

interest rate was not numerically quantified in the face of the promissory notes, it was nonetheless categorically fixed, at the time of execution thereof, at the “rate indicative of the DBD retail rate.” UCPB contends that said provision must be read with another stipulation in the promissory notes subjecting to review the interest rate as fixed:

The interest rate shall be subject to review and may be increased or

decreased by the LENDER considering among others the prevailing financial and monetary conditions; or the rate of interest and charges which other banks or financial institutions charge or offer to charge for similar accommodations; and/or the resulting profitability to the LENDER after due consideration of all dealings with the BORROWER.[10]

In this regard, UCPB avers that these are valid reference rates akin to a

“prevailing rate” or “prime rate” allowed by this Court in Polotan v. Court of Appeals.[11] Furthermore, UCPB argues that even if the proviso “as determined by the branch head” is considered void, such a declaration would not ipso facto render the connecting clause “indicative of DBD retail rate” void in view of the separability clause of the Credit Agreement, which reads:

Section 9.08 Separability Clause. If any one or more of the provisions

contained in this AGREEMENT, or documents executed in connection herewith shall be declared invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired.[12]

According to UCPB, the imposition of the questioned interest rates did not

infringe on the principle of mutuality of contracts, because the spouses Beluso had the liberty to choose whether or not to renew their credit line at the new interest rates pegged by petitioner.[13] UCPB also claims that assuming there was any defect in

the mutuality of the contract at the time of its inception, such defect was cured by the subsequent conduct of the spouses Beluso in availing themselves of the credit line from April 1996 to February 1998 without airing any protest with respect to the interest rates imposed by UCPB. According to UCPB, therefore, the spouses Beluso are in estoppel.[14]

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

UCPB. Article 1308 of the Civil Code provides:

Art. 1308. The contract must bind both contracting parties; its validity or

compliance cannot be left to the will of one of them. We applied this provision in Philippine National Bank v. Court of Appeals,

[15] where we held: In order that obligations arising from contracts may have the force of law

between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

The provision stating that the interest shall be at the “rate indicative of DBD

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

Not just one, but rather both, of these choices are dependent solely on the

will of UCPB. Clearly, a rate “as determined by the Branch Head” gives the latter unfettered discretion on what the rate may be. The Branch Head may choose any rate he or she desires. As regards the rate “indicative of the DBD retail rate,” the same cannot be considered as valid for being akin to a “prevailing rate” or “prime rate” allowed by this Court in Polotan. The interest rate in Polotan reads:

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

In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties can easily determine the interest rate by applying simple arithmetic. On the other hand, the provision in the case at bar does not specify any margin above or below the DBD retail rate. UCPB can peg the interest at any percentage above or below the DBD retail rate, again giving it unfettered discretion in determining the interest rate. The stipulation in the promissory notes subjecting the interest rate to review does not render the imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According to said stipulation:

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

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

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

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

estoppel. Estoppel cannot be predicated on an illegal act. As between the parties to

a contract, validity cannot be given to it by estoppel if it is prohibited by law or is against public policy.[18]

The interest rate provisions in the case at bar are illegal not only because of

the provisions of the Civil Code on mutuality of contracts, but also, as shall be discussed later, because they violate the Truth in Lending Act. Not disclosing the true finance charges in connection with the extensions of credit is, furthermore, a form of deception which we cannot countenance. It is against the policy of the State as stated in the Truth in Lending Act:

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

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

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

Error in Computation

UCPB asserts that while both the RTC and the Court of Appeals voided the

interest rates imposed by UCPB, both failed to include in their computation of the outstanding obligation of the spouses Beluso the legal rate of interest of 12% per annum. Furthermore, the penalty charges were also deleted in the decisions of the RTC and the Court of Appeals. Section 2.04, Article II on “Interest and other Bank Charges” of the subject Credit Agreement, provides:

Section 2.04 Penalty Charges. In addition to the interest provided for in

Section 2.01 of this ARTICLE, any principal obligation of the CLIENT hereunder which is not paid when due shall be subject to a penalty charge of one percent (1%) of the amount of such obligation per month computed from due date until the obligation is paid in full. If the bank accelerates teh (sic) payment of availments hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall be used on the total principal amount outstanding and unpaid computed from the date of acceleration until the obligation is paid in full.[20]

Paragraph 4 of the promissory notes also states: In case of non-payment of this Promissory Note (Note) at maturity, I/We,

jointly and severally, agree to pay an additional sum equivalent to twenty-five percent (25%) of the total due on the Note as attorney’s fee, aside from the expenses and costs of collection whether actually incurred or not, and a penalty charge of one percent (1%) per month on the total amount due and unpaid from date of default until fully paid.[21]

Petitioner further claims that it is likewise entitled to attorney’s fees,

pursuant to Section 9.06 of the Credit Agreement, thus:

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

Another alleged computational error pointed out by UCPB is the negation of the Compounding Interest agreed upon by the parties under Section 2.02 of the Credit Agreement: Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal and shall be subject to the same interest rate as herein stipulated.[23] and paragraph 3 of the subject promissory notes:

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

UCPB lastly avers that the application of the spouses Beluso’s payments in the disputed computation does not reflect the parties’ agreement. The RTC deducted the payment made by the spouses Beluso amounting to P763,693.00 from the principal of P2,350,000.00. This was allegedly inconsistent with the Credit Agreement, as well as with the agreement of the parties as to the facts of the case. In paragraph 7 of the spouses Beluso’s Manifestation and Motion on Proposed Stipulation of Facts and Issues vis-à-vis UCPB’s Manifestation, the parties agreed that the amount of P763,693.00 was applied to the interest and not to the principal, in accord with Section 3.03, Article II of the Credit Agreement on “Order of the Application of Payments,” which provides:

Section 3.03 Application of Payment. Payments made by the CLIENT shall

be applied in accordance with the following order of preference:

1. Accounts receivable and other out-of-pocket expenses2. Front-end Fee, Origination Fee, Attorney’s Fee and other expenses of

collection;3. Penalty charges;4. Past due interest;5. Principal amortization/Payment in arrears;6. Advance interest;7. Outstanding balance; and8. All other obligations of CLIENT to the BANK, if any.[25]

Thus, according to UCPB, the interest charges, penalty charges, and attorney’s fees had been erroneously excluded by the RTC and the Court of Appeals from the computation of the total amount due and demandable from spouses Beluso.

The spouses Beluso’s defense as to all these issues is that the demand

made by UCPB is for a considerably bigger amount and, therefore, the demand should be considered void. There being no valid demand, according to the spouses Beluso, there would be no default, and therefore the interests and penalties would not commence to run. As it was likewise improper to foreclose the mortgaged properties or file a case against the spouses Beluso, attorney’s fees were not warranted.

We agree with UCPB on this score. Default commences upon judicial or

extrajudicial demand.[26] The excess amount in such a demand does not nullify the demand itself, which is valid with respect to the proper amount. A contrary ruling would put commercial transactions in disarray, as validity of demands would be dependent on the exactness of the computations thereof, which are too often contested.

There being a valid demand on the part of UCPB, albeit excessive, the

spouses Beluso are considered in default with respect to the proper amount and, therefore, the interests and the penalties began to run at that point.

As regards the award of 12% legal interest in favor of petitioner, the RTC

actually recognized that said legal interest should be imposed, thus: “There being no valid stipulation as to interest, the legal rate of interest shall be charged.”[27] It seems that the RTC inadvertently overlooked its non-inclusion in its computation.

The spouses Beluso had even originally asked for the RTC to impose this

legal rate of interest in both the body and the prayer of its petition with the RTC:

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

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

order: x x x x 2. By way of example for the public good against the Bank’s taking unfair

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

All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay a 12% legal interest on their loans. When the RTC failed to include the 12% legal interest in its computation, however, the spouses Beluso merely defended in the appellate courts this non-inclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a 12% legal interest in favor of petitioner in the case at bar, as what we have voided is merely the stipulated rate of interest and not the stipulation that the loan shall earn interest.

We must likewise uphold the contract stipulation providing the

compounding of interest. The provisions in the Credit Agreement and in the promissory notes providing for the compounding of interest were neither nullified by the RTC or the Court of Appeals, nor assailed by the spouses Beluso in their petition

with the RTC. The compounding of interests has furthermore been declared by this Court to be legal. We have held in Tan v. Court of Appeals,[29] that:

Without prejudice to the provisions of Article 2212, interest due and unpaid

shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.

As regards the imposition of penalties, however, although we are likewise

upholding the imposition thereof in the contract, we find the rate iniquitous. Like in the case of grossly excessive interests, the penalty stipulated in the contract may also be reduced by the courts if it is iniquitous or unconscionable.[30]

We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be

iniquitous considering the fact that this penalty is already over and above the compounded interest likewise imposed in the contract. If a 36% interest in itself has been declared unconscionable by this Court,[31] what more a 30.41% to 36% penalty, over and above the payment of compounded interest? UCPB itself must have realized this, as it gave us a sample computation of the spouses Beluso’s obligation if both the interest and the penalty charge are reduced to 12%.

As regards the attorney’s fees, the spouses Beluso can actually be liable

therefor even if there had been no demand. Filing a case in court is the judicial demand referred to in Article 1169[32] of the Civil Code, which would put the obligor in delay.

The RTC, however, also held UCPB liable for attorney’s fees in this case,

as the spouses Beluso were forced to litigate the issue on the illegality of the interest rate provision of the promissory notes. The award of attorney’s fees, it must be recalled, falls under the sound discretion of the court.[33] Since both parties were forced to litigate to protect their respective rights, and both are entitled to the award of attorney’s fees from the other, practical reasons dictate that we set off or compensate both parties’ liabilities for attorney’s fees. Therefore, instead of awarding attorney’s fees in favor of petitioner, we shall merely affirm the deletion of the award of attorney’s fees to the spouses Beluso.

In sum, we hold that spouses Beluso should still be held liable for a

compounded legal interest of 12% per annum and a penalty charge of 12% per annum. We also hold that, instead of awarding attorney’s fees in favor of petitioner, we shall merely affirm the deletion of the award of attorney’s fees to the spouses Beluso.

Annulment of the Foreclosure Sale

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

already been consolidated on 19 February 2001 and 20 March 2001 in the name of UCPB, as the spouses Beluso failed to exercise their right of redemption which expired on 25 March 2000. The RTC, however, annulled the foreclosure of mortgage based on an alleged incorrect computation of the spouses Beluso’s

indebtedness.

UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in the case at bar. Furthermore, the annulment of the foreclosure proceedings and the certificates of sale were mooted by the subsequent issuance of new certificates of title in the name of said bank. UCPB claims that the spouses Beluso’s action for annulment of foreclosure constitutes a collateral attack on its certificates of title, an act proscribed by Section 48 of Presidential Decree No. 1529, otherwise known as the Property Registration Decree, which provides:

Section 48. Certificate not subject to collateral attack. – A certificate of title

shall not be subject to collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in accordance with law.

The spouses Beluso retort that since they had the right to refuse payment

of an excessive demand on their account, they cannot be said to be in default for refusing to pay the same. Consequently, according to the spouses Beluso, the “enforcement of such illegal and overcharged demand through foreclosure of mortgage” should be voided.

We agree with UCPB and affirm the validity of the foreclosure

proceedings. Since we already found that a valid demand was made by UCPB upon the spouses Beluso, despite being excessive, the spouses Beluso are considered in default with respect to the proper amount of their obligation to UCPB and, thus, the property they mortgaged to secure such amounts may be foreclosed. Consequently, proceeds of the foreclosure sale should be applied to the extent of the amounts to which UCPB is rightfully entitled.

As argued by UCPB, none of the grounds for the annulment of a foreclosure

sale are present in this case. The grounds for the proper annulment of the foreclosure sale are the following: (1) that there was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser; (2) that the sale had not been fairly and regularly conducted; or (3) that the price was inadequate and the inadequacy was so great as to shock the conscience of the court.[34]

Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPB’s alleged violation of Republic Act No. 3765, otherwise known as the Truth in Lending Act.

UCPB challenges this imposition, on the argument that Section 6(a) of the

Truth in Lending Act which mandates the filing of an action to recover such penalty must be made under the following circumstances:

Section 6. (a) Any creditor who in connection with any credit transaction

fails to disclose to any person any information in violation of this Act or any

regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance charge required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. x x x (Emphasis ours.)

According to UCPB, the Court of Appeals even stated that “[a]dmittedly the

original complaint did not explicitly allege a violation of the ‘Truth in Lending Act’ and no action to formally admit the amended petition [which expressly alleges violation of the Truth in Lending Act] was made either by [respondents] spouses Beluso and the lower court. x x x.”[35]

UCPB further claims that the action to recover the penalty for the violation

of the Truth in Lending Act had been barred by the one-year prescriptive period provided for in the Act. UCPB asserts that per the records of the case, the latest of the subject promissory notes had been executed on 2 January 1998, but the original petition of the spouses Beluso was filed before the RTC on 9 February 1999, which was after the expiration of the period to file the same on 2 January 1999.

On the matter of allegation of the violation of the Truth in Lending Act, the

Court of Appeals ruled:

Admittedly the original complaint did not explicitly allege a violation of the ‘Truth in Lending Act’ and no action to formally admit the amended petition was made either by [respondents] spouses Beluso and the lower court. In such transactions, the debtor and the lending institutions do not deal on an equal footing and this law was intended to protect the public from hidden or undisclosed charges on their loan obligations, requiring a full disclosure thereof by the lender. We find that its infringement may be inferred or implied from allegations that when [respondents] spouses Beluso executed the promissory notes, the interest rate chargeable thereon were left blank. Thus, [petitioner] UCPB failed to discharge its duty to disclose in full to [respondents] Spouses Beluso the charges applicable on their loans.[36]

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

b.) In unilaterally imposing an increased interest rates (sic) respondent bank

has relied on the provision of their promissory note granting respondent bank the power to unilaterally fix the interest rates, which rate was not determined in the promissory note but was left solely to the will of the Branch Head of the respondent Bank, x x x.[37]

The allegation that the promissory notes grant UCPB the power to

unilaterally fix the interest rates certainly also means that the promissory notes do

not contain a “clear statement in writing” of “(6) the finance charge expressed in terms of pesos and centavos; and (7) the percentage that the finance charge bears to the amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.”[38] Furthermore, the spouses Beluso’s prayer “for such other reliefs just and equitable in the premises” should be deemed to include the civil penalty provided for in Section 6(a) of the Truth in Lending Act.

UCPB’s contention that this action to recover the penalty for the violation of

the Truth in Lending Act has already prescribed is likewise without merit. The penalty for the violation of the act is P100 or an amount equal to twice the finance charge required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed P2,000.00 on any credit transaction.[39] As this penalty depends on the finance charge required of the borrower, the borrower’s cause of action would only accrue when such finance charge is required. In the case at bar, the date of the demand for payment of the finance charge is 2 September 1998, while the foreclosure was made on 28 December 1998. The filing of the case on 9 February 1999 is therefore within the one-year prescriptive period.

UCPB argues that a violation of the Truth in Lending Act, being a criminal

offense, cannot be inferred nor implied from the allegations made in the complaint.[40] Pertinent provisions of the Act read:

Sec. 6. (a) Any creditor who in connection with any credit transaction fails

to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance charge required by such creditor in connection with such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any action under this subsection in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorney’s fees and court costs as determined by the court.

x x x x (c) Any person who willfully violates any provision of this Act or

any regulation issued thereunder shall be fined by not less than P1,000 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both. As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said Act gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense the willful violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section 6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any information of the required information to any person in violation of the Act. The penalty therefor is an amount of P100 or in an amount equal to twice the finance charge required by the creditor in connection with such transaction, whichever is greater, except that the liability shall not exceed P2,000.00 on any credit transaction. The action to recover such penalty may be

instituted by the aggrieved private person separately and independently from the criminal case for the same offense.

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

SEC. 5. Joinder of causes of action.—A party may in one pleading assert,

in the alternative or otherwise, as many causes of action as he may have against an opposing party, subject to the following conditions:

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

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

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

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

In attacking the RTC’s disposition on the violation of the Truth in Lending

Act since the same was not alleged in the complaint, UCPB is actually asserting a violation of due process. Indeed, due process mandates that a defendant should be sufficiently apprised of the matters he or she would be defending himself or herself against. However, in the 1 July 1999 pre-trial brief filed by the spouses Beluso before the RTC, the claim for civil sanctions for violation of the Truth in Lending Act was expressly alleged, thus:

Moreover, since from the start, respondent bank violated the Truth in Lending Act in not informing the borrower in writing before the execution of the Promissory Notes of the interest rate expressed as a percentage of the total loan, the respondent bank instead is liable to pay petitioners double the amount the bank is charging petitioners by way of sanction for its violation.[41]

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

b.) Does the expression indicative rate of DBD retail (sic) comply with the

Truth in Lending Act provision to express the interest rate as a simple annual percentage of the loan?[42]

These assertions are so clear and unequivocal that any attempt of UCPB to

feign ignorance of the assertion of this issue in this case as to prevent it from putting up a defense thereto is plainly hogwash.

Petitioner further posits that it is the Metropolitan Trial Court which has

jurisdiction to try and adjudicate the alleged violation of the Truth in Lending Act, considering that the present action allegedly involved a single credit transaction as there was only one Promissory Note Line.

We disagree. We have already ruled that the action to recover the penalty

under Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in the promissory notes void, and (2) the action to declare the foreclosure void. There had been no question that the above actions belong to the jurisdiction of the RTC. Subsection (c) of the above-quoted Section 5 of the Rules of Court on Joinder of Causes of Action provides:

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

Furthermore, opening a credit line does not create a credit transaction of

loan or mutuum, since the former is merely a preparatory contract to the contract of loan or mutuum. Under such credit line, the bank is merely obliged, for the considerations specified therefor, to lend to the other party amounts not exceeding the limit provided. The credit transaction thus occurred not when the credit line was opened, but rather when the credit line was availed of. In the case at bar, the violation of the Truth in Lending Act allegedly occurred not when the parties executed the Credit Agreement, where no interest rate was mentioned, but when the parties executed the promissory notes, where the allegedly offending interest rate was stipulated.

UCPB further argues that since the spouses Beluso were duly given copies

of the subject promissory notes after their execution, then they were duly notified of the terms thereof, in substantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly

provides that the disclosure statement must be furnished prior to the consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is

extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be acquired; (2) the amounts, if any, to be credited as down payment and/or trade-in; (3) the difference between the amounts set forth under clauses (1) and (2) (4) the charges, individually itemized, which are paid or to be paid by such person

in connection with the transaction but which are not incident to the extension of credit;

(5) the total amount to be financed; (6) the finance charge expressed in terms of pesos and centavos; and (7) the percentage that the finance bears to the total amount to be financed

expressed as a simple annual rate on the outstanding unpaid balance of the obligation.

The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their loan, to enable them to give full consent to the contract, and to properly evaluate their options in arriving at business decisions. Upholding UCPB’s claim of substantial compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit will too often not be able to reverse the ill effects of an already consummated business decision.

In addition, the promissory notes, the copies of which were presented to

the spouses Beluso after execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate provision therein does not sufficiently indicate with particularity the interest rate to be applied to the loan covered by said promissory notes.

Forum Shopping

UCPB had earlier moved to dismiss the petition (originally Case No. 99-314

in RTC, Makati City) on the ground that the spouses Beluso instituted another case (Civil Case No. V-7227) before the RTC of Roxas City, involving the same parties and issues. UCPB claims that while Civil Case No. V-7227 initially appears to be a different action, as it prayed for the issuance of a temporary restraining order and/or injunction to stop foreclosure of spouses Beluso’s properties, it poses issues which are similar to those of the present case.[43] To prove its point, UCPB cited the spouses Beluso’s Amended Petition in Civil Case No. V-7227, which contains similar allegations as those in the present case. The RTC of Makati denied UCPB’s Motion to Dismiss Case No. 99-314 for lack of merit. Petitioner UCPB raised the same issue with the Court of Appeals, and is raising the same issue with us now.

The spouses Beluso claim that the issue in Civil Case No. V-7227 before

the RTC of Roxas City, a Petition for Injunction Against Foreclosure, is the propriety of the foreclosure before the true account of spouses Beluso is determined. On the other hand, the issue in Case No. 99-314 before the RTC of Makati City is the validity of the interest rate provision. The spouses Beluso claim that Civil Case No. V-7227 has become moot because, before the RTC of Roxas City could act on the restraining order, UCPB proceeded with the foreclosure and auction sale. As the act

sought to be restrained by Civil Case No. V-7227 has already been accomplished, the spouses Beluso had to file a different action, that of Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC, Makati City.

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

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

the following instances: SEC. 5. Effect of dismissal.—Subject to the right of appeal, an order

granting a motion to dismiss based on paragraphs (f), (h) and (i) of section 1 hereof shall bar the refiling of the same action or claim. (n)

Improper venue as a ground for the dismissal of an action is found in

paragraph (c) of Section 1, not in paragraphs (f), (h) and (i):

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

(a) That the court has no jurisdiction over the person of the defending party; (b) That the court has no jurisdiction over the subject matter of the claim; (c) That venue is improperly laid; (d) That the plaintiff has no legal capacity to sue; (e) That there is another action pending between the same parties for the

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

statute of limitations; (g) That the pleading asserting the claim states no cause of action; (h) That the claim or demand set forth in the plaintiff’s pleading has

been paid, waived, abandoned, or otherwise extinguished; (i) That the claim on which the action is founded is unenforceable

under the provisions of the statute of frauds; and (j) That a condition precedent for filing the claim has not been complied with.

[44] (Emphases supplied.)

When an action is dismissed on the motion of the other party, it is only

when the ground for the dismissal of an action is found in paragraphs (f), (h) and (i) that the action cannot be refiled. As regards all the other grounds, the complainant is allowed to file same action, but should take care that, this time, it is filed with the proper court or after the accomplishment of the erstwhile absent condition precedent, as the case may be.

UCPB, however, brings to the attention of this Court a Motion for

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

In these cases, it is evident that the first action was filed in anticipation of the

filing of the later action and the purpose is to preempt the later suit or provide a basis for seeking the dismissal of the second action.

Even if this is not the purpose for the filing of the first action, it may

nevertheless be dismissed if the later action is the more appropriate vehicle for the ventilation of the issues between the parties. Thus, in Ramos v. Peralta, it was held:

[T]he rule on litis pendentia does not require that the later case should yield

to the earlier case. What is required merely is that there be another pending action, not a prior pending action. Considering the broader scope of inquiry involved in Civil Case No. 4102 and the location of the property involved, no error was committed by the lower court in deferring to the Bataan court's jurisdiction.

Given, therefore, the pendency of two actions, the following are the relevant

considerations in determining which action should be dismissed: (1) the date of filing, with preference generally given to the first action filed to be retained; (2) whether the action sought to be dismissed was filed merely to preempt the later action or to anticipate its filing and lay the basis for its dismissal; and (3) whether the action is the appropriate vehicle for litigating the issues between the parties.

In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City

was an action for injunction against a foreclosure sale that has already been held, while Civil Case No. 99-314 before the RTC of Makati City includes an action for the annulment of said foreclosure, an action certainly more proper in view of the execution of the foreclosure sale. The former case was improperly filed in Roxas City, while the latter was filed in Makati City, the proper venue of the action as mandated by the Credit Agreement. It is evident, therefore, that Civil Case No. 99-

314 is the more appropriate vehicle for litigating the issues between the parties, as compared to Civil Case No. V-7227. Thus, we rule that the RTC of Makati City was not in error in not dismissing Civil Case No. 99-314.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED

with the following MODIFICATIONS:

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

a. Penalty of 12% per annum on the amount due[46] from the date of demand; andb. Compounded legal interest of 12% per annum on the amount due[47] from date

of demand;2. The following amounts shall be deducted from the liability of the

spouses Samuel and Odette Beluso:a. Payments made by the spouses in the amount of P763,692.00. These

payments shall be applied to the date of actual payment of the following in the order that they are listed, to wit:

i. penalty charges due and demandable as of the time of payment; ii. interest due and demandable as of the time of payment; iii. principal amortization/payment in arrears as of the time of

payment; iv. outstanding balance.

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

i. penalty charges due and demandable as of time of payment; ii. interest due and demandable as of the time of payment; iii. principal amortization/payment in arrears as of the time of

payment; iv. outstanding balance.

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

SO ORDERED.

8G.R. No. 148325 September 3, 2007REYNALDO P. FLOIRENDO, JR., petitioner, vs.METROPOLITAN BANK and TRUST COMPANY, respondent.D E C I S I O NSANDOVAL-GUTIERREZ, J.:For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the Decision1 dated February 22, 2001 and Order2 dated May 2, 2001 rendered by the Regional Trial Court (RTC), Branch 39, Cagayan de Oro City in Civil Case No. 98-476, entitled, "REYNALDO P.

FLOIRENDO, JR., plaintiff, v. METROPOLITAN BANK AND TRUST COMPANY, ET AL., defendants."Reynaldo P. Floirendo, Jr., petitioner, is the president and chairman of the Board of Directors of Reymill Realty Corporation, a domestic corporation engaged in real estate business. On March 20, 1996, he obtained a loan of P1,000,000.00 from the Metropolitan Bank and Trust Company, Cagayan de Oro City Branch, respondent, to infuse additional working capital for his company. As security for the loan, petitioner executed a real estate mortgage in favor of respondent bank over his four (4) parcels of land, all situated at Barangay Carmen, Cagayan de Oro City.The loan was renewed for another year secured by the same real estate mortgage. Petitioner signed a promissory note dated March 14, 1997 fixing the rate of interest at "15.446% per annum for the first 30 days, subject to upward/downward adjustment every 30 days thereafter"; and a penalty charge of 18% per annum "based on any unpaid principal to be computed from date of default until payment of the obligation." The promissory note likewise provides that:The rate of interest and/or bank charges herein stipulated, during the term of this Promissory Note, its extension, renewals or other modifications, may be increased, decreased, or otherwise changed from time to time by the Bank without advance notice to me/us in the event of changes in the interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines, in the rediscount rate of member banks with the Central Bank of the Philippines, in the interest rates on savings and time deposits, in the interest rates on the bank’s borrowings, in the reserve requirements, or in the overall costs of funding or money;I/We hereby expressly consent to any extension and/or renewal hereof in whole or in part and/or partial payment on account which may be requested by and/or granted to anyone of us for the payment of this note upon payment of the corresponding renewal or extension fee.On July 11, 1997, respondent bank started imposing higher interest rates on petitioner’s loan which varied through the months, in fact, as high as 30.244% in October 1997. As a result, petitioner could no longer pay the high interest rates charged by respondent bank. Thus, he negotiated for the renewal of his loan. Respondent bank agreed provided petitioner would pay the arrears in interest amounting to the total sum of P163,138.33. Despite payment by petitioner, respondent bank, instead of renewing the loan, filed with the Office of the Clerk of Court and Provincial Sheriff, RTC, Cagayan de Oro City a petition for foreclosure of mortgage which was granted. On August 17, 1998, the auction sale was set.Prior thereto or on August 11, 1998, petitioner filed with the RTC, Branch 39, same city, a complaint for reformation of real estate mortgage contract and promissory note, docketed as Civil Case No. 98-476. Referring to the real estate mortgage and the promissory note as "contracts of adhesion," petitioner alleged that the increased interest rates unilaterally imposed by respondent bank are scandalous, immoral, illegal and unconscionable. He also alleged that the terms and conditions of the real estate mortgage and the promissory note are such that they could be interpreted by respondent bank in whatever manner it wants, leaving petitioner at its mercy. Petitioner thus prayed for reformation of these documents and the issuance of a temporary restraining order (TRO) and a writ of preliminary injunction to enjoin the foreclosure and sale at public auction of his four (4) parcels of land.On August 14, 1998, the RTC issued a TRO and on September 3, 1998, a writ of preliminary injunction.In its answer to the complaint, respondent bank asserted that the interest stipulated

by the parties in the promissory note is not per annum but on a month to month basis. The 15.446% interest appearing therein was good only for the first 30 days of the loan, subject to upward and downward adjustment every 30 days thereafter. The terms of the real estate mortgage and promissory note voluntarily entered into by petitioner are clear and unequivocal. There is, therefore, no legal and factual basis for an action for reformation of instruments.On February 22, 2001, the RTC rendered a Judgment (1) dismissing the complaint for reformation of instruments, (2) dissolving the writ of preliminary injunction and (3) directing the sale at public auction of petitioner’s mortgaged properties. The RTC ruled:In order that an action for reformation of an instrument may prosper, the following requisites must occur:1.) There must have been a meeting of the minds upon the contract;2.) The instrument or document evidencing the contract does not express the true agreement between the parties; and3.) The failure of the instrument to express the agreement must be due to mistake, fraud, inequitable conduct or accident. (National Irrigation Administration v. Gamit, G.R. No. 85869, November 5, 1992)x x xA perusal further of the complaint and the evidences submitted by the parties convinced the court that there was certainly a meeting of the minds between the parties. Plaintiff and defendant bank entered into a contract of loan, the terms and conditions of which, especially on the rates of interest, are clearly and unequivocally spelled out in the promissory note. The court believes that there was absolutely no mistake, fraud or anything that could have prevented a meeting of the minds between the parties.The RTC upheld the validity of the escalation clause, thus:Escalation clauses are valid stipulations in commercial contract to maintain fiscal stability and to retain the value of money in loan term contracts, (Llorin v. CA, G.R. No. 103592, February 4, 1993).x x x x x x x x xx x x the Court has no other alternative to resolve Issue No. 1 that defendant bank is allowed to impose the interest rate questioned by plaintiff considering that Exhibit "B" and "B-1," which is Exhibit "1" and "1-A" of defendant bank is very clear that the rate of interest is 15.446% per annum for the first 30 days subject to upward/downward adjustment every 30 days thereafter.On the issue of the validity of the foreclosure of the real estate mortgage, the RTC ruled that:It is a settled rule that in a real estate mortgage when the obligation is not paid when due, the mortgagee has the right to foreclose the mortgage and to have the property seized and sold in view of applying the proceeds to the payment of the obligation (Estate Investment House v. CA, 215 SCRA 734).On May 2, 2001, petitioner filed a motion for reconsideration but it was denied for lack of merit.Hence, the instant petition.The fundamental issue for our resolution is whether the mortgage contract and the promissory note express the true agreement between the parties herein.Petitioner contends that the "escalation clause" in the promissory note imposing 15.446% interest on the loan "for the first 30 days subject to upward/downward adjustment every 30 days thereafter" is illegal, excessive and arbitrary. The

determination to increase or decrease such interest rate is primarily left to the discretion of respondent bank.We agree.We hold that the increases of interest rate unilaterally imposed by respondent bank without petitioner’s assent are violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code3 which provides:Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.The binding effect of any agreement between the parties to a contract is premised on two settled principles: (1) that obligations arising from contracts have the force of law between the contracting parties; and (2) that there must be mutuality between the parties based on their essential equality to which is repugnant to have one party bound by the contract leaving the other free therefrom.4 Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties is likewise invalid.5

The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise change from time to time the rate of interest and/or bank charges "without advance notice" to petitioner, "in the event of change in the interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines," does not give respondent bank unrestrained freedom to charge any rate other than that which was agreed upon. Here, the monthly upward/downward adjustment of interest rate is left to the will of respondent bank alone. It violates the essence of mutuality of the contract.In Philippine National Bank v. Court of Appeals,6 and in later cases,7 we held:In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia v. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party’s (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua v. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.In New Sampaguita Builders Construction, Inc. (NSBCI) v. Philippine National Bank,8

we ruled that while it is true that escalation clauses are valid in maintaining fiscal stability and retaining the value of money on long term contracts, however, giving respondent an unbridled right to adjust the interest independently and upwardly would completely take away from petitioner the right to assent to an important modification in their agreement, hence, would negate the element of mutuality in their contracts. Such escalation clause would make the fulfillment of the contracts dependent exclusively upon the uncontrolled will of respondent bank and is therefore void. In the present case, the promissory note gives respondent bank authority to increase the interest rate at will during the term of the loan. This stipulation violates the principle of mutuality between the parties. It would be converting the loan

agreement into a contract of adhesion where the parties do not bargain on equal footing, the weaker party’s (petitioner’s) participation being reduced to the alternative "to take it or leave it.9 While the Usury Law ceiling on interest rate was lifted by Central Bank Circular No. 905, nothing therein could possibly be read as granting respondent bank carte blanche authority to raise interest rate to levels which would either enslave its borrower (petitioner herein) or lead to hemorrhaging of his assets.10

In Philippine National Bank v. Court of Appeals¸11 we declared void the escalation clause in the Credit Agreement between petitioner bank and private respondents whereby the "Bank reserves the right to increase the interest rate within the limit allowed by law at any time depending on whatever policy it may adopt in the future xxx." We held:It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind.Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.We cannot countenance petitioner bank’s posturing that that escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents’ loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts.Under Article 1310 of the Civil Code, courts are granted authority to reduce/increase interest rates equitably, thus:Article 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances.In the other Philippine National Bank v. Court of Appeals12 case, we disauthorized petitioner bank from unilaterally raising the interest rate on the loan of private respondent from 18% to 32%, 41% and 48%. In Almeda v. Court of Appeals,13 where the interest rate was increased from 21% to as high as 68% per annum, we declared arbitrary "the galloping increases in interest rate imposed by respondent bank on petitioners’ loan, over the latter’s vehement protests." In Medel v. Court of Appeals,14

the stipulated interest of 5.5% per month or 66% per annum on a loan amounting to P500,000.00 was equitably reduced for being iniquitous, unconscionable and exorbitant. In Solangon v. Salazar,15 the stipulated interest rate of 6% per month or 72% per annum was found to be "definitely outrageous and inordinate" and was reduced to 12% per annum which we deemed fair and reasonable. In Imperial v. Jaucian,16 we ruled that the trial court was justified in reducing the stipulated interest rate from 16% to 1.167% or 14% per annum and the stipulated penalty charge from 5% to 1.167% per month or 14% per annum.In this case, respondent bank started to increase the agreed interest rate of 15.446% per annum to 24.5% on July 11, 1997 and every month thereafter; 27% on August 11, 1997; 26% on September 10, 1997; 33% on October 15, 1997; 26.5% on November 27, 1997; 27% on December 1997; 29% on January 13, 1998; 30.244% on February 7, 1998; 24.49% on March 9, 1998; 22.9% on April 18, 1998; and 18% on May 21, 1998. Obviously, the rate increases are excessive and arbitrary. It bears

reiterating that respondent bank unilaterally increased the interest rate without petitioner’s knowledge and consent.As mentioned earlier, petitioner negotiated for the renewal of his loan. As required by respondent bank, he paid the interests due. Respondent bank then could not claim that there was no attempt on his part to comply with his obligation. Yet, respondent bank hastily filed a petition to foreclose the mortgage to gain the upperhand in taking petitioner’s four (4) parcels of land at bargain prices. Obviously, respondent bank acted in bad faith.In sum, we find that the requisites for reformation of the mortgage contract and promissory note are present in this case. There has been meeting of minds of the parties upon these documents. However, these documents do not express the parties’ true agreement on interest rates. And the failure of these documents to express their agreement on interest rates was due to respondent bank’s inequitable conduct.WHEREFORE, we GRANT the petition. The Judgment dated February 22, 2001 of the RTC of Cagayan de Oro City, Branch 39 in Civil Case No. 98-476 is REVERSED. The real estate mortgage contract and the promissory note agreed upon by the parties are reformed in the sense that any increase in the interest rate beyond 15.446% per annum should not be imposed by respondent bank without the consent of petitioner. The interest he paid in excess of 15.446% should be applied to the payment of the principal obligation.SO ORDERED.

9G.R. No. 158382 January 27, 2004MANSUETO CUATON, petitioner, vs.REBECCA SALUD and COURT OF APPEALS (Special Fourteenth Division), respondents.D E C I S I O NYNARES-SANTIAGO, J.:Before the Court is a petition for review on certiorari assailing the August 31, 2001 Decision1 of the Court of Appeals in CA-G.R. CV No. 54715 insofar as it affirmed the Judgment2 of the Regional Trial Court of General Santos City, Branch 35, in SPL. Civil Case No. 359, imposing interest at the rate of 8% to 10% per month on the one-million-peso loan of petitioner.On January 5, 1993, respondent Rebecca Salud, joined by her husband Rolando Salud, instituted a suit for foreclosure of real estate mortgage with damages against petitioner Mansueto Cuaton and his mother, Conchita Cuaton, with the Regional Trial Court of General Santos City, Branch 35, docketed as SPL. Civil Case No. 359.3 The trial court rendered a decision declaring the mortgage constituted on October 31, 1991 as void, because it was executed by Mansueto Cuaton in favor of Rebecca Salud without expressly stating that he was merely acting as a representative of Conchita Cuaton, in whose name the mortgaged lot was titled. The court ordered petitioner to pay Rebecca Salud, inter alia, the loan secured by the mortgage in the amount of One Million Pesos plus a total P610,000.00 representing interests of 10% and 8% per month for the period February 1992 to August 1992, thus –

Original loan P1,000,000.00

10% interest for the month of February 1992 balance only 50,000.00

10% interest for the month of March 1992 100,000.00

10% interest for the month of April 1992 100,000.00

10% interest for the month of May 1992 100,000.00

10% interest for the month of June 1992 100,000.00

8% interest for the month of July 1992 80,000.00

8% interest for the month of August 1992 80,000.00

Total amount as of August 1992 P 1, 610,000.004

The dispositive portion of the trial court’s decision, reads:WHEREFORE, premises considered, judgment is hereby rendered:a) Declaring the mortgage executed by Mansueto Cuaton over the property owned by Conchita Cuaton, covered by TCT NO. T-34460, dated October 31, 1991, in favor of Rebecca Salud as unauthorized, void and unenforceable against defendant, Conchita Cuaton hence, the TRO issued against the foreclosure thereof is hereby made permanent. The annotation of the mortgage over said property is likewise cancelled;b) Ordering defendant Mansueto Cuaton to pay plaintiff, Rebecca Salud, the sum of One Million Six Hundred Ten Thousand (P1,610,000.00) Pesos, with legal interest thereon, from January 5, 1993 until fully paid;c) Ordering defendant, Mansueto Cuaton, to pay Attorney’s fees of P25,000.00 in favor of the plaintiff, Rebecca Salud and to pay the cost of this suit.Defendants’ counterclaims, being merely a result of the filing of plaintiff’s complaint are hereby DISMISSED.SO ORDERED.5

Both parties filed their respective notices of appeal.6

On August 31, 2001, the Court of Appeals rendered the assailed decision affirming the judgment of the trial court. Petitioner filed a motion for partial reconsideration of the trial court’s decision with respect to the award of interest in the amount of P610,000.00, arguing that the same was iniquitous and exorbitant.7 This was denied by the Court of Appeals on May 7, 2003.8

Hence, the instant petition on the sole issue of whether the 8% and 10% monthly interest rates imposed on the one-million-peso loan obligation of petitioner to respondent Rebecca Salud are valid.We find merit in the petition.In Ruiz v. Court of Appeals,9 we declared that the Usury Law was suspended by Central Bank Circular No. 905, s. 1982, effective on January 1, 1983, and that parties to a loan agreement have been given wide latitude to agree on any interest rate. However, nothing in the said Circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. The stipulated interest rates are illegal if they are unconscionable.Thus, in Medel v. Court of Appeals,10 and Spouses Solangon v. Salazar,11 the Court annulled a stipulated 5.5% per month or 66% per annum interest on a P500,000.00 loan and a 6% per month or 72% per annum interest on a P60,000.00 loan, respectively, for being excessive, iniquitous, unconscionable and exorbitant. In both

cases, the interest rates were reduced to 12% per annum.In the present case, the 10% and 8% interest rates per month on the one-million-peso loan of petitioner are even higher than those previously invalidated by the Court in the above cases. Accordingly, the reduction of said rates to 12% per annum is fair and reasonable.Stipulations authorizing iniquitous or unconscionable interests are contrary to morals (‘contra bonos mores’), if not against the law.12 Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived.13

Moreover, the contention regarding the excessive interest rates cannot be considered as an issue presented for the first time on appeal. The records show that petitioner raised the validity of the 10% monthly interest in his answer filed with the trial court.14 To deprive him of his right to assail the imposition of excessive interests would be to sacrifice justice to technicality. Furthermore, an appellate court is clothed with ample authority to review rulings even if they are not assigned as errors. This is especially so if the court finds that their consideration is necessary in arriving at a just decision of the case before it. We have consistently held that an unassigned error closely related to an error properly assigned, or upon which a determination of the question raised by the error properly assigned is dependent, will be considered by the appellate court notwithstanding the failure to assign it as an error.15 Since respondents pointed out the matter of interest in their Appellants’ Brief16 before the Court of Appeals, the fairness of the imposition thereof was opened to further evaluation. The Court therefore is empowered to review the same.The case of Eastern Shipping Lines, Inc. v. Court of Appeals,17 laid down the following guidelines on the imposition of interest, to wit:1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 23 of the Civil Code.x x x x x x x x x3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.Applying the foregoing rules, the interest of 12% per annum imposed by the Court (in lieu of the invalidated 10% and 8% per month interest rates) on the one-million-peso loan should be computed from the date of the execution of the loan on October 31, 1991 until finality of this decision. After the judgment becomes final and executory until the obligation is satisfied, the amount due shall further earn interest at 12% per year.WHEREFORE, in view of all the foregoing, the instant petition is GRANTED. The August 31, 2001 Decision of the Court of Appeals in CA-G.R. CV No. 54715, which affirmed the Decision of the Regional Trial Court of General Santos City, Branch 35, in SPL. Civil Case No. 359, is MODIFIED. The interest rates of 10% and 8% per month imposed by the trial court is reduced to 12% per annum, computed from the date of the execution of the loan on October 31, 1991 until finality of this decision.

After the judgment becomes final and executory until the obligation is satisfied, the amount due shall further earn interest at 12% per year.SO ORDERED.

10G.R. No. 144516 February 11, 2004DEVELOPMENT BANK OF THE PHILIPPINES, petitioner vs.COMMISSION ON AUDIT, respondent.D E C I S I O NCARPIO, J.:The CaseIn this special civil action for certiorari,1 the Development Bank of the Philippines ("DBP") seeks to set aside COA Decision No. 98-4032 dated 6 October 1998 ("COA Decision") and COA Resolution No. 2000-2123 dated 1 August 2000 issued by the Commission on Audit ("COA"). The COA affirmed Audit Observation Memorandum ("AOM") No. 93-2,4 which disallowed in audit the dividends distributed under the Special Loan Program ("SLP") to the members of the DBP Gratuity Plan.Antecedent FactsThe DBP is a government financial institution with an original charter, Executive Order No. 81,5 as amended by Republic Act No. 85236 ("DBP Charter"). The COA is a constitutional body with the mandate to examine and audit all government instrumentalities and investment of public funds.7

The COA Decision sets forth the undisputed facts of this case as follows:xxx [O]n February 20, 1980, the Development Bank of the Philippines (DBP) Board of Governors adopted Resolution No. 794 creating the DBP Gratuity Plan and authorizing the setting up of a retirement fund to cover the benefits due to DBP retiring officials and employees under Commonwealth Act No. 186, as amended. The Gratuity Plan was made effective on June 17, 1967 and covered all employees of the Bank as of May 31, 1977.On February 26, 1980, a Trust Indenture was entered into by and between the DBP and the Board of Trustees of the Gratuity Plan Fund, vesting in the latter the control and administration of the Fund. The trustee, subsequently, appointed the DBP Trust Services Department (DBP-TSD) as the investment manager thru an Investment Management Agreement, with the end in view of making the income and principal of the Fund sufficient to meet the liabilities of DBP under the Gratuity Plan.In 1983, the Bank established a Special Loan Program availed thru the facilities of the DBP Provident Fund and funded by placements from the Gratuity Plan Fund. This Special Loan Program was adopted as "part of the benefit program of the Bank to provide financial assistance to qualified members to enhance and protect the value of their gratuity benefits" because "Philippine retirement laws and the Gratuity Plan do not allow partial payment of retirement benefits." The program was suspended in 1986 but was revived in 1991 thru DBP Board Resolution No. 066 dated January 5, 1991.Under the Special Loan Program, a prospective retiree is allowed the option to utilize in the form of a loan a portion of his "outstanding equity" in the gratuity fund and to invest it in a profitable investment or undertaking. The earnings of the investment shall then be applied to pay for the interest due on the gratuity loan which was initially set at 9% per annum subject to the minimum investment rate resulting from the updated actuarial study. The excess or balance of the interest earnings shall then be distributed to the investor-members.

Pursuant to the investment scheme, DBP-TSD paid to the investor-members a total of P11,626,414.25 representing the net earnings of the investments for the years 1991 and 1992. The payments were disallowed by the Auditor under Audit Observation Memorandum No. 93-2 dated March 1, 1993, on the ground that the distribution of income of the Gratuity Plan Fund (GPF) to future retirees of DBP is irregular and constituted the use of public funds for private purposes which is specifically proscribed under Section 4 of P.D. 1445.8

AOM No. 93-2 did "not question the authority of the Bank to set-up the [Gratuity Plan] Fund and have it invested in the Trust Services Department of the Bank."9

Apart from requiring the recipients of the P11,626,414.25 to refund their dividends, the Auditor recommended that the DBP record in its books as miscellaneous income the income of the Gratuity Plan Fund ("Fund"). The Auditor reasoned that "the Fund is still owned by the Bank, the Board of Trustees is a mere administrator of the Fund in the same way that the Trust Services Department where the fund was invested was a mere investor and neither can the employees, who have still an inchoate interest [i]n the Fund be considered as rightful owner of the Fund."10

In a letter dated 29 July 1996,11 former DBP Chairman Alfredo C. Antonio requested then COA Chairman Celso D. Gangan to reconsider AOM No. 93-2. Chairman Antonio alleged that the express trust created for the benefit of qualified DBP employees under the Trust Agreement12 ("Agreement") dated 26 February 1980 gave the Fund a separate legal personality. The Agreement transferred legal title over the Fund to the Board of Trustees and all earnings of the Fund accrue only to the Fund. Thus, Chairman Antonio contended that the income of the Fund is not the income of DBP.Chairman Antonio also asked COA to lift the disallowance of the P11,626,414.25 distributed as dividends under the SLP on the ground that the latter was simply a normal loan transaction. He compared the SLP to loans granted by other gratuity and retirement funds, like the GSIS, SSS and DBP Provident Fund.The Ruling of the Commission on AuditOn 6 October 1998, the COA en banc affirmed AOM No. 93-2, as follows:The Gratuity Plan Fund is supposed to be accorded separate personality under the administration of the Board of Trustees but that concept has been effectively eliminated when the Special Loan Program was adopted. xxxThe Special Loan Program earns for the GPF an interest of 9% per annum, subject to adjustment after actuarial valuation. The investment scheme managed by the TSD accumulated more than that as evidenced by the payment of P4,568,971.84 in 1991 and P7,057,442,41 in 1992, to the member-borrowers. In effect, the program is grossly disadvantageous to the government because it deprived the GPF of higher investment earnings by the unwarranted entanglement of its resources under the loan program in the guise of giving financial assistance to the availing employees. xxxRetirement benefits may only be availed of upon retirement. It can only be demanded and enjoyed when the employee shall have met the last requisite, that is, actual retirement under the Gratuity Plan. During employment, the prospective retiree shall only have an inchoate right over the benefits. There can be no partial payment or enjoyment of the benefits, in whatever guise, before actual retirement. xxxPREMISES CONSIDERED, the instant request for reconsideration of the disallowance amounting to P11,626,414.25 has to be, as it is hereby, denied.13

In its Resolution of 1 August 2000, the COA also denied DBP’s second motion for

reconsideration. Citing the Court’s ruling in Conte v. COA,14 the COA concluded that the SLP was actually a supplementary retirement benefit in the guise of "financial assistance," thus:At any rate, the Special Loan Program is not just an ordinary and regular transaction of the Gratuity Plan Fund, as the Bank innocently represents. xxx It is a systematic investment mix conveniently implemented in a special loan program with the least participation of the beneficiaries, by merely filing an application and then wait for the distribution of net earnings. The real objective, of course, is to give financial assistance to augment the value of the gratuity benefits, and this has the same effect as the proscribed supplementary pension/retirement plan under Section 28 (b) of C(ommonwealth) A(ct) 186.This Commission may now draw authority from the case of Conte, et al. v. Commission on Audit (264 SCRA 19 [1996]) where the Supreme Court declared that "financial assistance" granted to retiring employees constitute supplementary retirement or pension benefits. It was there stated:"xxx Said Sec. 28 (b) as amended by R.A. 4968 in no uncertain terms bars the creation of any insurance or retirement plan – other than the GSIS – for government officers and employees, in order to prevent the undue and iniquitous proliferation of such plans. It is beyond cavil that Res. 56 contravenes the said provision of law and is therefore, invalid, void and of no effect. To ignore this and rule otherwise would be tantamount to permitting every other government office or agency to put up its own supplementary retirement benefit plan under the guise of such "financial assistance."15

Hence, the instant petition filed by DBP.The IssuesThe DBP invokes justice and equity on behalf of its employees because of prevailing economic conditions. The DBP reiterates that the income of the Fund should be treated and recorded as separate from the income of DBP itself, and charges that COA committed grave abuse of discretion:1. IN CONCLUDING THAT THE ADOPTION OF THE SPECIAL LOAN PROGRAM CONSTITUTES A CIRCUMVENTION OF PHILIPPINE RETIREMENT LAWS;2. IN CONCLUDING THAT THE SPECIAL LOAN PROGRAM IS GROSSLY DISADVANTAGEOUS TO THE GOVERNMENT;3. IN CONCLUDING THAT THE SPECIAL LOAN PROGRAM CONSTITUTES A SUPPLEMENTARY RETIREMENT BENEFIT.16

The Office of the Solicitor General ("OSG"), arguing on behalf of the COA, questions the standing of the DBP to file the instant petition. The OSG claims that the trustees of the Fund or the DBP employees themselves should pursue this certiorari proceeding since they would be the ones to return the dividends and not DBP.The central issues for resolution are: (1) whether DBP has the requisite standing to file the instant petition for certiorari; (2) whether the income of the Fund is income of DBP; and (3) whether the distribution of dividends under the SLP is valid.The Ruling of the CourtThe petition is partly meritorious.The standing of DBP to file this petition for certiorariAs DBP correctly argued, the COA en banc implicitly recognized DBP’s standing when it ruled on DBP’s request for reconsideration from AOM No. 93-2 and motion for reconsideration from the Decision of 6 October 1998. The supposed lack of standing of the DBP was not even an issue in the COA Decision or in the Resolution of 1 August 2000.

The OSG nevertheless contends that the DBP cannot question the decisions of the COA en banc since DBP is a government instrumentality. Citing Section 2, Article IX-D of the Constitution,17 the OSG argued that:Petitioner may ask the lifting of the disallowance by COA, since COA had not yet made a definitive and final ruling on the matter in issue. But after COA denied with finality the motion for reconsideration of petitioner, petitioner, being a government instrumentality, should accept COA’s ruling and leave the matter of questioning COA’s decision with the concerned investor-members.18

These arguments do not persuade us.Section 2, Article IX-D of the Constitution does not bar government instrumentalities from questioning decisions of the COA. Government agencies and government-owned and controlled corporations have long resorted to petitions for certiorari to question rulings of the COA.19 These government entities filed their petitions with this Court pursuant to Section 7, Article IX of the Constitution, which mandates that aggrieved parties may bring decisions of the COA to the Court on certiorari.20

Likewise, the Government Auditing Code expressly provides that a government agency aggrieved by a COA decision, order or ruling may raise the controversy to the Supreme Court on certiorari "in the manner provided by law and the Rules of Court."21 Rule 64 of the Rules of Court now embodies this procedure, to wit:SEC 2. Mode of review. – A judgment or final order or resolution of the Commission on Elections and the Commission on Audit may be brought by the aggrieved party to the Supreme Court on certiorari under Rule 65, except as hereinafter provided.The novel theory advanced by the OSG would necessarily require persons not parties to the present case – the DBP employees who are members of the Plan or the trustees of the Fund – to avail of certiorari under Rule 65. The petition for certiorari under Rule 65, however, is not available to any person who feels injured by the decision of a tribunal, board or officer exercising judicial or quasi-judicial functions. The "person aggrieved" under Section 1 of Rule 65 who can avail of the special civil action of certiorari pertains only to one who was a party in the proceedings before the court a quo,22 or in this case, before the COA. To hold otherwise would open the courts to numerous and endless litigations.23 Since DBP was the sole party in the proceedings before the COA, DBP is the proper party to avail of the remedy of certiorari.The real party in interest who stands to benefit or suffer from the judgment in the suit must prosecute or defend an action.24 We have held that "interest" means material interest, an interest in issue that the decision will affect, as distinguished from mere interest in the question involved, or a mere incidental interest.25

As a party to the Agreement and a trustor of the Fund, DBP has a material interest in the implementation of the Agreement, and in the operation of the Gratuity Plan and the Fund as prescribed in the Agreement. The DBP also possesses a real interest in upholding the legitimacy of the policies and programs approved by its Board of Directors for the benefit of DBP employees. This includes the SLP and its implementing rules, which the DBP Board of Directors confirmed.The income of the Gratuity Plan FundThe COA alleges that DBP is the actual owner of the Fund and its income, on the following grounds: (1) DBP made the contributions to the Fund; (2) the trustees of the Fund are merely administrators; and (3) DBP employees only have an inchoate right to the Fund.The DBP counters that the Fund is the subject of a trust, and that the Agreement transferred legal title over the Fund to the trustees. The income of the Fund does not

accrue to DBP. Thus, such income should not be recorded in DBP’s books of account.26

A trust is a "fiduciary relationship with respect to property which involves the existence of equitable duties imposed upon the holder of the title to the property to deal with it for the benefit of another."27 A trust is either express or implied. Express trusts are those which the direct and positive acts of the parties create, by some writing or deed, or will, or by words evincing an intention to create a trust.28

In the present case, the DBP Board of Governors’ (now Board of Directors) Resolution No. 794 and the Agreement executed by former DBP Chairman Rafael Sison and the trustees of the Plan created an express trust, specifically, an employees’ trust. An employees’ trust is a trust maintained by an employer to provide retirement, pension or other benefits to its employees.29 It is a separate taxable entity30 established for the exclusive benefit of the employees.31

Resolution No. 794 shows that DBP intended to establish a trust fund to cover the retirement benefits of certain employees under Republic Act No. 161632 ("RA 1616"). The principal and income of the Fund would be separate and distinct from the funds of DBP. We quote the salient portions of Resolution No. 794, as follows:2. Trust Agreement – designed for in-house trustees of three (3) to be appointed by the Board of Governors and vested with control and administration of the funds appropriated annually by the Board to be invested in selective investments so that the income and principal of said contributions would be sufficient to meet the required payments of benefits as officials and employees of the Bank retire under the Gratuity Plan; xxxThe proposed funding of the gratuity plan has decided advantages on the part of the Bank over the present procedure, where the Bank provides payment only when an employee retires or on "pay as you go" basis:1. It is a definite written program, permanent and continuing whereby the Bank provides contributions to a separate trust fund, which shall be exclusively used to meet its liabilities to retiring officials and employees; and2. Since the gratuity plan will be tax qualified under the National Internal Revenue Code and RA 4917, the Bank’s periodic contributions thereto shall be deductible for tax purposes and the earnings therefrom tax free.33 (Emphasis supplied)In a trust, one person has an equitable ownership in the property while another person owns the legal title to such property, the equitable ownership of the former entitling him to the performance of certain duties and the exercise of certain powers by the latter.34 A person who establishes a trust is the trustor. One in whom confidence is reposed as regards property for the benefit of another is the trustee. The person for whose benefit the trust is created is the beneficiary.35

In the present case, DBP, as the trustor, vested in the trustees of the Fund legal title over the Fund as well as control over the investment of the money and assets of the Fund. The powers and duties granted to the trustees of the Fund under the Agreement were plainly more than just administrative, to wit:1. The BANK hereby vests the control and administration of the Fund in the TRUSTEES for the accomplishment of the purposes for which said Fund is intended in defraying the benefits of the PLAN in accordance with its provisions, and the TRUSTEES hereby accept the trust xxx2. The TRUSTEES shall receive and hold legal title to the money and/or property comprising the Fund, and shall hold the same in trust for its beneficiaries, in accordance with, and for the uses and purposes stated in the provisions of the PLAN.

3. Without in any sense limiting the general powers of management and administration given to TRUSTEES by our laws and as supplementary thereto, the TRUSTEES shall manage, administer, and maintain the Fund with full power and authority:x x xb. To invest and reinvest at any time all or any part of the Fund in any real estate (situated within the Philippines), housing project, stocks, bonds, mortgages, notes, other securities or property which the said TRUSTEES may deem safe and proper, and to collect and receive all income and profits existing therefrom;c. To keep and maintain accurate books of account and/or records of the Fund xxx.d. To pay all costs, expenses, and charges incurred in connection with the administration, preservation, maintenance and protection of the Fund xxx to employ or appoint such agents or employees xxx.e. To promulgate, from time to time, such rules not inconsistent with the conditions of this Agreement xxx.f. To do all acts which, in their judgment, are needful or desirable for the proper and advantageous control and management of the Fund xxx.36

(Emphasis supplied)Clearly, the trustees received and collected any income and profit derived from the Fund, and they maintained separate books of account for this purpose. The principal and income of the Fund will not revert to DBP even if the trust is subsequently modified or terminated. The Agreement states that the principal and income must be used to satisfy all of the liabilities to the beneficiary officials and employees under the Gratuity Plan, as follows:5. The BANK reserves the right at any time and from time to time (1) to modify or amend in whole or in part by written directions to the TRUSTEES, any and all of the provisions of this Trust Agreement, or (2) to terminate this Trust Agreement upon thirty (30) days’ prior notice in writing to the TRUSTEES; provided, however, that no modification or amendment which affects the rights, duties, or responsibilities of the TRUSTEES may be made without the TRUSTEES’ consent; and provided, that such termination, modification, or amendment prior to the satisfaction of all liabilities with respect to eligible employees and their beneficiaries, does not permit any part of the corpus or income of the Fund to be used for, or diverted to, purposes other than for the exclusive benefit of eligible employees and workers as provided for in the PLAN. In the event of termination of this Trust Agreement, all cash, securities, and other property then constituting the Fund less any amounts constituting accrued benefits to the eligible employees, charges and expenses payable from the Fund, shall be paid over or delivered by the TRUSTEES to the members in proportion to their accrued benefits.37 (Emphasis supplied)The resumption of the SLP did not eliminate the trust or terminate the transfer of legal title to the Fund’s trustees. The records show that the Fund’s Board of Trustees approved the SLP upon the request of the DBP Career Officials Association.38 The DBP Board of Directors only confirmed the approval of the SLP by the Fund’s trustees.The beneficiaries or cestui que trust of the Fund are the DBP officials and employees who will retire under Commonwealth Act No. 18639 ("CA 186"), as amended by RA 1616. RA 1616 requires the employer agency or government instrumentality to pay for the retirement gratuity of its employees who rendered service for the required number of years.40 The Government Service Insurance System Act of 199741 still allows retirement under RA 1616 for certain employees.

As COA correctly observed, the right of the employees to claim their gratuities from the Fund is still inchoate. RA 1616 does not allow employees to receive their gratuities until they retire. However, this does not invalidate the trust created by DBP or the concomitant transfer of legal title to the trustees. As far back as in Government v. Abadilla,42 the Court held that "it is not always necessary that the cestui que trust should be named, or even be in esse at the time the trust is created in his favor." It is enough that the beneficiaries are sufficiently certain or identifiable.43

In this case, the GSIS Act of 1997 extended the option to retire under RA 1616 only to employees who had entered government service before 1 June 1977.44 The DBP employees who were in the service before this date are easily identifiable. As of the time DBP filed the instant petition, DBP estimated that 530 of its employees could still retire under RA 1616. At least 60 DBP employees had already received their gratuities under the Fund.45

The Agreement indisputably transferred legal title over the income and properties of the Fund to the Fund’s trustees. Thus, COA’s directive to record the income of the Fund in DBP’s books of account as the miscellaneous income of DBP constitutes grave abuse of discretion. The income of the Fund does not form part of the revenues or profits of DBP, and DBP may not use such income for its own benefit. The principal and income of the Fund together constitute the res or subject matter of the trust. The Agreement established the Fund precisely so that it would eventually be sufficient to pay for the retirement benefits of DBP employees under RA 1616 without additional outlay from DBP. COA itself acknowledged the authority of DBP to set up the Fund. However, COA’s subsequent directive would divest the Fund of income, and defeat the purpose for the Fund’s creation.The validity of the Special Loan Programand the disallowance of P11,626,414.25In disallowing the P11,626,414.25 distributed as dividends under the SLP, the COA relied primarily on Republic Act No. 4968 ("RA 4968") which took effect on 17 June 1967. RA 4968 added the following paragraph to Section 28 of CA 186, thus:(b) Hereafter no insurance or retirement plan for officers or employees shall be created by any employer. All supplementary retirement or pension plans heretofore in force in any government office, agency, or instrumentality or corporation owned or controlled by the government, are hereby declared inoperative or abolished: Provided, That the rights of those who are already eligible to retire thereunder shall not be affected.Even assuming, however, that the SLP constitutes a supplementary retirement plan, RA 4968 does not apply to the case at bar. The DBP Charter, which took effect on 14 February 1986, expressly authorizes supplementary retirement plans "adopted by and effective in" DBP, thus:SEC. 34. Separation Benefits. – All those who shall retire from the service or are separated therefrom on account of the reorganization of the Bank under the provisions of this Charter shall be entitled to all gratuities and benefits provided for under existing laws and/or supplementary retirement plans adopted by and effective in the Bank: Provided, that any separation benefits and incentives which may be granted by the Bank subsequent to June 1, 1986, which may be in addition to those provided under existing laws and previous retirement programs of the Bank prior to the said date, for those personnel referred to in this section shall be funded by the National Government; Provided, further, that, any supplementary retirement plan adopted by the Bank after the effectivity of this Chapter shall require the prior approval of the Minister of Finance.

x x x.SEC. 37. Repealing Clause. – All acts, executive orders, administrative orders, proclamations, rules and regulations or parts thereof inconsistent with any of the provisions of this charter are hereby repealed or modified accordingly.46 (Emphasis supplied)Being a special and later law, the DBP Charter47 prevails over RA 4968. The DBP originally adopted the SLP in 1983. The Court cannot strike down the SLP now based on RA 4968 in view of the subsequent DBP Charter authorizing the SLP.Nevertheless, the Court upholds the COA’s disallowance of the P11,626,414.25 in dividends distributed under the SLP.According to DBP Board Resolution No. 0036 dated 25 January 1991, the "SLP allows a prospective retiree to utilize in the form of a loan, a portion of their outstanding equity in the Gratuity Plan Fund and to invest [the] proceeds in a profitable investment or undertaking."48 The basis of the loanable amount was an employee’s gratuity fund credit,49 that is to say, what an employee would receive if he retired at the time he availed of the loan.In his letter dated 26 October 1983 proposing the confirmation of the SLP, then DBP Chairman Cesar B. Zalamea stated that:The primary objective of this proposal therefore is to counteract the unavoidable decrease in the value of the said retirement benefits through the following scheme:I. To allow a prospective retiree the option to utilize in the form of a loan, a portion of his standing equity in the Gratuity Fund and to invest it in a profitable investment or undertaking. The income or appreciation in value will be for his own account and should provide him the desired hedge against inflation or erosion in the value of the peso. This is being proposed since Philippine retirement laws and the Gratuity Plan do not allow partial payment of retirement benefits, even the portion already earned, ahead of actual retirement.50 (Emphasis supplied)As Chairman Zalamea himself noted, neither the Gratuity Plan nor our laws on retirement allow the partial payment of retirement benefits ahead of actual retirement. It appears that DBP sought to circumvent these restrictions through the SLP, which released a portion of an employee’s retirement benefits to him in the form of a loan. Certainly, the DBP did this for laudable reasons, to address the concerns of DBP employees on the devaluation of their retirement benefits. The remaining question is whether RA 1616 and the Gratuity Plan allow this scheme.We rule that it is not allowed.The right to retirement benefits accrues only upon certain prerequisites. First, the conditions imposed by the applicable law – in this case, RA 1616 – must be fulfilled.51 Second, there must be actual retirement.52 Retirement means there is "a bilateral act of the parties, a voluntary agreement between the employer and the employees whereby the latter after reaching a certain age agrees and/or consents to severe his employment with the former."53

Severance of employment is a condition sine qua non for the release of retirement benefits. Retirement benefits are not meant to recompense employees who are still in the employ of the government. That is the function of salaries and other emoluments.54 Retirement benefits are in the nature of a reward granted by the State to a government employee who has given the best years of his life to the service of his country.55

The Gratuity Plan likewise provides that the gratuity benefit of a qualified DBP employee shall only be released "upon retirement under th(e) Plan."56 As the COA correctly pointed out, this means that retirement benefits "can only be demanded and

enjoyed when the employee shall have met the last requisite, that is, actual retirement under the Gratuity Plan."57

There was thus no basis for the loans granted to DBP employees under the SLP. The rights of the recipient DBP employees to their retirement gratuities were still inchoate, if not a mere expectancy, when they availed of the SLP. No portion of their retirement benefits could be considered as "actually earned" or "outstanding" before retirement. Prior to retirement, an employee who has served the requisite number of years is only eligible for, but not yet entitled to, retirement benefits.The DBP contends that the SLP is merely a normal loan transaction, akin to the loans granted by the GSIS, SSS and the DBP Provident Fund.The records show otherwise.In a loan transaction or mutuum, the borrower or debtor acquires ownership of the amount borrowed.58 As the owner, the debtor is then free to dispose of or to utilize the sum he loaned,59 subject to the condition that he should later return the amount with the stipulated interest to the creditor.60

In contrast, the amount borrowed by a qualified employee under the SLP was not even released to him. The implementing rules of the SLP state that:The loan shall be available strictly for the purpose of investment in the following investment instruments:a. 182 or 364-day term – Time deposits with DBPb. 182 or 364-day T-bills /CB Billsc. 182 or 364-day term – DBP Blue Chip FundThe investment shall be registered in the name of DBP-TSD in trust for availee-investor for his sole risk and account. Choice of eligible terms shall be at the option of availee-investor. Investments shall be commingled by TSD and Participation Certificates shall be issued to each availee-investor.x x xIV. LOANABLE TERMSx x xe. Allowable Investment Instruments – Time – Deposit – DBP T-Bills/CB Bills and DBP Blue Chip Fund. TSD shall purchase new securities and/or allocate existing securities portfolio of GPF depending on liquidity position of the Fund xxx.x x xg. Security – The loan shall be secured by GS, Certificate of Time Deposit and/or BCF Certificate of Participation which shall be registered in the name of DBP-TSD in trust for name of availee-investor and shall be surrendered to the TSD for safekeeping.61 (Emphasis supplied)In the present case, the Fund allowed the debtor-employee to "borrow" a portion of his gratuity fund credit solely for the purpose of investing it in certain instruments specified by DBP. The debtor-employee could not dispose of or utilize the loan in any other way. These instruments were, incidentally, some of the same securities where the Fund placed its investments. At the same time the Fund obligated the debtor-employee to assign immediately his loan to DBP-TSD so that the amount could be commingled with the loans of other employees. The DBP-TSD – the same department which handled and had custody of the Fund’s accounts – then purchased or re-allocated existing securities in the portfolio of the Fund to correspond to the employees’ loans.Simply put, the amount ostensibly loaned from the Fund stayed in the Fund, and remained under the control and custody of the DBP-TSD. The debtor-employee never had any control or custody over the amount he supposedly borrowed.

However, DBP-TSD listed new or existing investments of the Fund corresponding to the "loan" in the name of the debtor-employee, so that the latter could collect the interest earned from the investments.In sum, the SLP enabled certain DBP employees to utilize and even earn from their retirement gratuities even before they retired. This constitutes a partial release of their retirement benefits, which is contrary to RA 1616 and the Gratuity Plan. As we have discussed, the latter authorizes the release of gratuities from the earnings and principal of the Fund only upon retirement.The Gratuity Plan will lose its tax-exempt status if the retirement benefits are released prior to the retirement of the employees. The trust funds of employees other than those of private employers are qualified for certain tax exemptions pursuant to Section 60(B) – formerly Section 53(b) – of the National Internal Revenue Code.62

Section 60(B) provides:Section 60. Imposition of Tax. –(A) Application of Tax. – The tax imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust, including:x x x(B) Exception. – The tax imposed by this Title shall not apply to employee’s trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees: xxx (Emphasis supplied)The Gratuity Plan provides that the gratuity benefits of a qualified DBP employee shall be released only "upon retirement under th(e) Plan." If the earnings and principal of the Fund are distributed to DBP employees prior to their retirement, the Gratuity Plan will no longer qualify for exemption under Section 60(B). To recall, DBP Resolution No. 794 creating the Gratuity Plan expressly provides that "since the gratuity plan will be tax qualified under the National Internal Revenue Code xxx, the Bank’s periodic contributions thereto shall be deductible for tax purposes and the earnings therefrom tax free." If DBP insists that its employees may receive the P11,626,414.25 dividends, the necessary consequence will be the non-qualification of the Gratuity Plan as a tax-exempt plan.Finally, DBP invokes justice and equity on behalf of its affected employees. Equity cannot supplant or contravene the law.63 Further, as evidenced by the letter of former DBP Chairman Zalamea, the DBP Board of Directors was well aware of the proscription against the partial release of retirement benefits when it confirmed the SLP. If DBP wants "to enhance and protect the value of xxx (the) gratuity benefits" of its employees, DBP must do so by investing the money of the Fund in the proper and sound investments, and not by circumventing restrictions imposed by law and the Gratuity Plan itself.We nevertheless urge the DBP and COA to provide equitable terms and a sufficient period within which the affected DBP employees may refund the dividends they received under the SLP. Since most of the DBP employees were eligible to retire within a few years when they availed of the SLP, the refunds may be deducted from their retirement benefits, at least for those who have not received their retirement

benefits.WHEREFORE, COA Decision No. 98-403 dated 6 October 1998 and COA Resolution No. 2000-212 dated 1 August 2000 are AFFIRMED with MODIFICATION. The income of the Gratuity Plan Fund, held in trust for the benefit of DBP employees eligible to retire under RA 1616, should not be recorded in the books of account of DBP as the income of the latter.SO ORDERED.

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