NACU vs. CA

The pith of the issues in this petition is the question of whether or not the real estate mortgage undertaken by Spouses Ramon R. Nacu and Lourdes Nacu, in favor of Home Construction — Joint Venture was extended, amplified or modified to cover the loan transaction of Ramon R. Nacu, in his capacity as one of the executive officers of the Joint Venture of JBS Construction, Inc. and P.I. Construction and Services Co., Inc., by virtue alone of the comprehensive provision in the mortgage contract that:

. . . it shall also stand as security for the payment of the said promissory note or notes, and/or accommodations without the necessity of executing a new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing as of the date thereof. . . . 1

Briefly, the facts established below show that petitionerse spouses are the registered owners of the subject property covered by Transfer Certificate of Title No. 276891 of the Registry of Deeds for Quezon City, located at 12 Yakan Street, La Vista Subdivision, Quezon City.

On July 12, 1982, respondent Pilipinas Bank extended to Home Construction-Joint venture, represented by Horacio Mendoza, Julio Matias and Ramon Nacu, Irrevocable Stand-by LC No. 82/408-HO in the amount of P4,400,000.00 to guarantee the ten per cent (10%) mobilization fund to be released by the Ministry of Public Works and Highways in connection with a Lucana Fishing Port and Construction Project.

To secure this Home Construction-Joint Venture credit accommodation, petitioners spouses, together with Spouses Horacio S. Mendoza and Leonisa D. Mendoza and Spouses Julio D. Matias and Lydia Sison constituted real estate mortgages on five (5) distinct properties in favor of respondent Bank.

The subject deed of real estate mortgage dated June 7, 1982 executed by petitioner spouses, together with the aforementioned co-mortgagors, provides, among other things, that the mortgage shall secure the payment of the said loan and those others that the mortgagee may extend to the mortgagor including interest thereon and expenses incurred incidental thereto and other obligations owing by the mortgagor to the mortgagee, whether direct or indirect, principal or secondary as appearing in the accounts, books and records of the mortgagee.

In due time, the principal obligation mentioned in the said real estate mortgage extended to the Home Construction — Joint Venture was fully paid and extinguished.

Upon request, respondent Bank effected the cancellation/release of the titles subject of the said real estate mortgage, particularly the properties of the co-mortgagors, Horacio Mendoza and Julio Matias.

Petitioners spouses did not immediately request for the issuance of the corresponding certificate of cancellation/release of mortgage of TCT No. 276891 from respondent Bank.

On February 24, 1983, two (2) corporations under the Joint Venture — JBS Construction, Inc., represented by its president, Jose B. Sahagun and P.I. Construction and Services Co., Inc., represented by its president, petitioner Nacu secured from respondent Bank, under letters of credit (L/C) Nos. 83/13786-HO and 83/13801-HO, a loan accommodation for the importation of several pieces of construction machinery and equipment to be used by said joint venture in a construction project, located at Mindanao.

In consideration of this JBS and PI Construction Joint Venture credit accommodation, Jose Sahagun and petitioner Nacu executed in their capacities as executive officers thereof, a Continuing Security Agreement in favor of respondent Bank. Said debtor corporations, represented by their respective presidents, were also made to sign trust receipts in favor of respondent Bank.

Later, petitioner spouses requested from respondent Bank the issuance of the Certificate of Cancellation/Release of the Real Estate Mortgage on TCT No. 276891. The respondent Bank refused despite its admission that the Home Construction loan had been fully paid and despite the release of the properties of the co-mortgagors, Horacio Mendoza and Julio Matias.

The demands in writing for the release of the questioned encumbrance were not heeded. Petitioners spouses thereby decided to file an action against respondent bank before the Regional Trial Court of Quezon City docketed as Civil Case No. 49233 for cancellation of the encumbrance on TCT No. 276891

After trial on the merits, the trial court, through Presiding Judge Ignacio L. Salvador, rendered its decision in Civil Case No. 49233, the pertinent portions of which, are quoted herein:

. . . as correctly pointed out by the plaintiffs, this loan accommodation which was subsequently contracted by J.B.S. Construction Corporation on April 19, 1983 and in which TCT 272689 is allegedly made to answer is not duly annotated on said title. And it is fundamental that real property constituted to secure an obligation by way of mortgage, must be registered and shall take effect upon the title only from the time of registration. (Sec. 60, Act 496)

Furthermore co-plaintiff, Lourdes Nacu (co-owner of the property covered by TCT No. 276891) was not privy to the subsequent transactions aforesaid.

Since the principal obligation covered by LC No. 82/408-HO in the amount of P4,400,000.00 had subsequently been fully paid and the obligation extinguised, as expressly admitted by defendant bank the real estate mortgage is discharged, (Art. 2135) and consequently the defendant bank may now be compelled to release . . . plaintiffs Transfer Certificate of Title No. 276891.

PREMISES CONSIDERED", judgment is hereby rendered in favor of the plaintiffs and against the defendant, ordering said defendant bank to immediately release/discharge the second encumbrance annotated on TCT No. 276891-Registry of Deeds of Quezon City and ordering said defendant bank to pay plaintiffs attorney's fees in the amount of P5,000.00. 2

The respondent Bank appealed from the aforesaid decision of the trial court before respondent Court of Appeals on June 15, 1990.

On October 28, 1992, respondent Court rendered its decision reversing the judgment of the trial court, the pertinent portions stating, thus:

Everything considered, plaintiffs' property stands as continuing security for the subject credit accommodations guaranteed by plaintiff Ramon Nacu, and the mortgage lien thereon cannot be discharged until these obligations are fully settled.

WHEREFORE, judgment is hereby rendered reversing the appealed decision and dismissing the complaint. Costs against appellees. 3

On November 18, 1992, petitioner spouses seasonably filed a motion for reconsideration of the said assailed decision.

On January 25, 1993, respondent Court promulgated its resolution denying petitioner spouses' motion for reconsideration. Hence, this instant petition of petitioners spouses assigning the following as errors:

ATHE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT PETITIONERS SPOUSES' LA VISTA PROPERTY WAS ENCUMBERED AS SECURITY NOT ONLY FOR THE (1982) HOME CONSTRUCTION LOAN, BUT ALSO FOR THE (1983) JBS AND PIC JOINT VENTURE LOAN;

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BTHE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT JBS CONSTRUCTION, INC. IS THE ONLY DEBTOR CORPORATION, AND AS SUCH, IT COULD NOT HAVE SIMULTANEOUSLY ASSUMED THE ROLE OF A SURETY/GUARANTOR OF THE LOAN OBLIGATION WHICH ITSELF CONTRACTED;CTHE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT EXHIBIT "C"; "5"; "9"; AND, "10" CLEARLY REVEAL THAT PETITIONER RAMON NACU SIGNED SAID DOCUMENTS IN HIS PERSONAL CAPACITY AND NOT AS A REPRESENTATIVE OR EXECUTIVE OFFICER OF THE DEBTOR CORPORATIONS;DTHE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN GIVING WEIGHT AND CREDENCE TO EXHIBIT "4"; MINUTES OF THE MEETING OF RESPONDENT BANK'S BOARD OF DIRECTORS AND THE REPORT SUBMITTED BY THE BANK'S PRESIDENT PERTAINING TO THE APPLICATION FOR LETTERS OF CREDIT BY THE DEBTOR CORPORATIONS SHOWING THAT A SECOND REAL ESTATE MORTGAGE ON PETITIONERS' LA VISTA PROPERTY WAS INTENDED TO SECURE SAID (1983) JBS AND PIC JOINT VENTURE OBLIGATION;ERESPONDENT HONORABLE COURT OF APPEALS ERRED IN NOT SUSTAINING THE TRIAL COURTS DECISION THAT PETITIONERS SPOUSES ARE NOT PRIVY TO THE SUBSEQUENT TRANSACTIONS, PARTICULARLY THE CONTRACTS ENTERED INTO BY (1983) JBS-PIC CONSTRUCTION — JOINT VENTURE, THE DEBTOR CORPORATIONS (JBS AND PIC) BEING SEPARATE AND DISTINCT JURIDICAL PERSONALITIES FROM PETITIONERS SPOUSES;FRESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT PETITIONER RAMON NACU SIGNED THE CONTINUING SURETY AGREEMENT AND TRUST RECEIPTS IN HIS PERSONAL CAPACITY;GRESPONDENT HONORABLE COURT ERRED IN FINDING THAT THE (1983) JBS-PIC JOINT VENTURE BOUND THE JUNE 7, 1982 REAL ESTATE MORTGAGE DESPITE THE FACT THAT PETITIONER LOURDES NACU DID NOT GIVE HER CONSENT THERETO;HRESPONDENT HONORABLE COURT OF APPEALS ERRED IN FINDING THAT THERE WAS NO NEED TO ANNOTATE THE JULY 1983 LOAN ACCOMMODATION ALLEGEDLY GUARANTEED BY PETITIONER RAMON NACU ON TCT NO. 276891 SINCE THE SAME HAVE BEEN EXPRESSLY COVERED BY THE MORTGAGE CONTRACT; AND,IRESPONDENT HONORABLE COURT OF APPEALS ERRED AND ACTED IN GRAVE ABUSE OF DISCRETION WHEN IT "CREATED" AN OBLIGATION ON THE PART OF PETITIONERS WHERE NONE EXISTED. 4

Arising from the foregoing assignments of errors are the following issues:

1) Whether or not the (1983) JBS and PIC JOINT VENTURE loan transaction is another direct or indirect, principal or secondary obligation owing by the MORTGAGOR (HOME CONSTRUCTION — JOINT VENTURE to the MORTGAGEE (RESPONDENT BANK);

2) Whether or not the 1983 LOAN DOCUMENTS, Surety Agreement and Trust Receipts were executed by Petitioner Ramon Nacu in his personal capacity or in behalf of a corporate entity;

3) Whether or not the TRUST RECEIPT is an extension of the Real Estate Mortgage dated June 7, 1982;

4) Whether or not the JBS CONSTRUCTION, INC. is the only DEBTOR CORPORATION in the 1983 loan transaction, and as such, it could not have simultaneously assumed the role of a surety/guarantor of the loan obligation which itself contracted;

5) Whether or not weight and credence to Exhibit "4", the minutes of the meeting of Respondent Bank's Board of Directors and the Report submitted by the bank's president pertaining to the application for letters of credit by the debtor corporation, showing that a second real estate mortgage on Petitioners' La Vista property was intended to secure said obligation, could be given evidentiary weight and credence;

6) Whether or not the July 1983 loan accommodation allegedly guaranteed by Petitioner Ramon Nacu should have been annotated on Petitioners' TCT to bind their subject property;

7) Whether or not the want of Petitioner Lourdes Nacu's consent in the 1983 loan agreements signed by Petitioner Ramon Nacu renders the same voidable;

8) Whether or not Petitioner Spouses are privy to the 1983 loan transactions entered into by JBS-PI CONSTRUCTION JOINT VENTURE, the debtor corporations being separate and distinct juridical personalities from that of Spouses Petitioner; and,

9) Whether or not the ambiguity in the interpretation of the intention of the parties in the case at bar should be resolved in favor of the Petitioners Spouses. 5

The assailed decision of respondent Court held that in view of the provisions of the real estate mortgage more particularly that which provides that the real estate mortgage secures ". . . other obligations owing by the Mortgagor to the Mortgagee, whether direct or indirect, principal or secondary, as appearing in the accounts, books and records of the Mortgagee," the bank may legally refuse to release the second mortgage on TCT No. 276891 considering that the same was used as security for another loan accommodation extended to P.I. Construction and Services Co., Inc., headed by plaintiff Ramon R. Nacu, and J.B.S. Construction, Inc., headed by Jose B. Sahagun, a joint venture.

True, the real estate mortgage categorically provides that it shall also stand as security for the payment of the said promissory note or notes; and/or accommodations without the necessity of executing a new contract and that the mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing on the date thereof.

However, the July 12, 1982 Home Construction loan transaction and the February 24, 1983 JBS and P.I. Construction — Joint Venture loan transaction are totally alien to each other. Noteworthy is the fact that the 1982 loan transaction was extended to Home Construction — Joint Venture, represented by Spouses Horacio S. Mendoza and Leonisia D. Mendoza; Spouses Julio D. Matias and Lydia Sison and Spouses Ramon R. Nacu and Lourdes I. Nacu. On the other hand, the 1983 loan transaction was applied for and extended to the Joint Venture-JBS Construction, Inc., represented by its president, Ramon Nacu.

Clearly, the two (2) loan transaction involved different sets of parties. While it is true that petitioner Nacu is a party in both transactions, he acted in totally different capacities.

Thus, we find the findings of facts of the trial court accurate as they are positively supported by documentary evidence, to wit:

. . . A carefully reading of the Continuing Surety Agreement (Exhibit "5") will reveal the fact that plaintiff Ramon R. Nacu, and Jose B. Sahagun signed said Continuing Surety Agreement in their capacities as Executive Officer of the J.B.S. Construction Corporation. It is therefore the J.B.S. Construction Corporation that is the Surety. The plaintiff Ramon N. Nacu, and/or Jose B. Sahagun cannot be made answerable for the liability or obligation or the corporation. If at all said Ramon R. Nacu and Jose B. Sahagun can be liable only to the extent of their stocks in the corporation. In other words, this contract (Exhibit "5") entered into by J.B.S. Construction Corporation with defendant bank is a distinct contract and cannot in any way be related to the provisions of the Real Estate Mortgage (Exhibit "C" and Exhibit "6") because the parties thereto are different. 6

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To allow the 1982 mortgage contract to be amplified to include the 1983 Continuing Surety Agreement would be stretching too far the former contract's extent. Interpreting the same as respondent Bank would want us to do would make the provision too comprehensive and all-encompassing as to amount to absurdity.

Besides, there is nothing in the loan accommodation subsequently contracted that TCT 276891 is mortgaged. Said loan was not even duly annotated on said title. Under Section 60 of Act No. 496, a mortgage deed and all instruments assigning discharging and otherwise dealing with the mortgage are required to be registered. Without registration, they cannot have any effect on the title.

The respondent Court in reversing the decision of the trial court, linked the trust receipts, signed by petitioner Nacu, together with Jose Sahagun, with the real estate mortgage dated June 7, 1982 by finding that under the express terms of the trust receipts in favor of respondent Bank, petitioner Nacu again bound himself "jointly and severally" with the Trustees (JBS Corporation and PI Construction) for the value of the goods covered by the instruments.

Rather than support the position of respondent Bank, the trust receipt agreement shows that the 1982 real estate mortgage is no longer operative because otherwise, there would have been no need for the execution of said trust agreement to secure the second loan.

Under pertinent laws, the trust receipt is a separate and independent security transaction intended to aid in financing importers whereby the imported goods are held as security by the lending institution for the loan obligation.

In the case and Vintola v. Insular bank of Asia and America 7 this Court explained the nature and usage of trust receipts as follows:

. . . A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the letter of credit, with the trust receipt as a security for the loan. In other words, the transaction involved a loan feature represented by the letter of credit, and security feature which is in the covering trust receipt. . . .

A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a security interest in the goods. It secures an indebtedness and there can be no such thing as security interest that secures no obligation.

. . . A trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase or merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased. . . .

Moreover, by virtue of the trust receipt agreement, respondent Bank should proceed against the same because the trust receipt theoretically transferred the ownership of the imported personal property to respondent Bank.

Worth mentioning is also the fact that the trust receipts and the Continuing Surety Agreement were signed only by petitioner Nacu. Assuming that both documents duly constituted a real estate mortgage on the property of petitioners spouses, they are voidable for want of petitioner Lourdes Nacu's acquiescence and/or consent thereto. Article 166 of the Civil Code, the law then applicable, provides that unless the wife has been declared a non compos mentis, a spendthrift, is under civil interdiction or is confined in a leprosarium, the husband cannot alienate or encumber any real property of the conjugal partnership without the wife's consent.

In resolving in favor of respondent Bank, respondent Court likewise appreciated the weight of Exhibit "4," the purported minutes of the meeting of respondent Bank's Board of Directors and Report

pertaining to the application for letters of credit by the JBS and P.I. Construction Joint Venture. In giving evidentiary weight thereto, the decision of respondent Court said:

Still another important consideration negates the trial court's finding that plaintiffs' property could not be held as continuing security for the obligations of the debtor corporation. The minutes of the meeting of defendant bank's Board of Directors (Exhibit 4) and the report submitted by the bank's president pertaining to the application for letters of credit by the debtor corporation show that a second real estate mortgage on plaintiffs' La Vista property was intended to secure such obligation. From the evidence adduced, there is ample basis to hold plaintiff Ramon Nacu liable as surety for the accommodation extended to the debtor corporation, and consequently gives defendant bank reason to hold on to the subject mortgaged property until the obligations are fully settled. 8

However, petitioner spouses were not privy to Exhibit "4" as these documents are internal to respondent Bank. Whether or not they gave their consent thereto cannot be ascertained.

Finally, if the parties intended the 1982 real estate mortgage to apply to the 1983 loan transaction, respondent Bank should have required petitioners spouses to execute the proper loan documents clearly and categorically constituting upon the same property a real estate mortgage. The respondent Ba nk failed in this regard and must therefore suffer the consequences. In Orient Air Services and Hotel Representatives v. Court of Appeals, 9 this Court upheld the doctrine that any ambiguity in a contract whose terms are susceptible of different interpretation, must be read against the party who drafted it.

Indisputably, respondent Bank was the party responsible for the preparation of the, 1982 and 1983 loan agreement which are contracts of adhesion. Consequently, any ambiguity in the loan agreement should be construed against it on the assumption that it could have avoided it by the exercise of a little more care.

More emphatic and appropriate is our pronouncement in La Insular v. Machuca Go Tanco, et al. 10 where we held:

It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligation of the surety cannot be extended by implication beyond specified limits.

It is crystal clear from the foregoing that respondent Bank's actuation in refusing to cancel the encumbrance annotated on petitioners spouses' Transfer Certificate of Title on the ground that the latter's property is still liable for an unpaid loan obligation of J.B.S. Construction, Inc. and P.I. Construction and Services Co., Inc. was a clever attempt to extend by implication, beyond the terms of the real estate mortgage contract, the latter's force and effect. Respondent Bank should not be allowed to take this "short-cut" to collect an indebtedness due it. Principles of fair play demand that it should not resort to the expedience of enforcing a real estate mortgage when there is none duly constituted.

WHEREFORE, the petition is GRANTED. The assailed decision of the respondent Court of Appeals in CA-G.R. No. CV 276693 is hereby REVERSED and the decision of the trial court in Civil Case No. Q-49223 ordering, among other things, respondent Pilipinas Bank to release and/or discharge the encumbrance on Transfer Certificate of Title No. 276891 of the Registry of Deeds of Quezon City is hereby REINSTATED in toto.

SO ORDERED.

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G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner, vs.INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI, respondents.

DAVIDE, JR., J.:

Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by the petitioner for the recovery of a sum of money representing the amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the defendant, now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi.

The facts which gave rise to the instant controversy are summarized by the public respondent as follows:

On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To effect payment for said machineries, the defendant-appellant applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibit X and X-1, Ibid., pp. 65-66) were accepted by the defendant-appellant through its president, Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).

Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the defendant-appellant which accepted delivery of the same. To enable the defendant-appellant to take delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).

At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the defendant-appellant fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. The defendant-appellant was able to take delivery of the textile machineries and installed the same at its factory site at 69 Obudan Street, Quezon City.

Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29, 1969, defendant-appellant's factory was leased by Yupangco Cotton Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the defendant-appellant's factory were sold to AIC Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).

The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result Hence, the present action for the collection of the principal amount of P956,384.95 was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In their respective answers, the defendants interposed identical special defenses, viz.,

the complaint states no cause of action; if there is, the same has prescribed; and the plaintiff is guilty of laches. 2

On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15, 1974 until fully paid.

Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's cause of action thereon has not accrued, hence, the instant case is premature.

Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees.

With costs against defendant Philippine Rayon Mills, Inc.

SO ORDERED. 3

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in (a) disregarding its right to reimbursement from the private respondents for the entire unpaid balance of the imported machines, the total amount of which was paid to the Nissho Company Ltd., thereby violating the principle of the third party payor's right to reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of defendant corporation, liable under Section 13 of P.D No 115 for the entire unpaid balance of the imported machines covered by the bank's trust receipt (Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence which provide that such liability had already attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the petitioner the amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held liable thereon. 4

In its decision, public respondent sustained the trial court in all respects. As to the first and last assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil Code, applies only if there is no express contract between the parties and there is a clear showing that the payment is justified. In the instant case, the relationship existing between the petitioner and Philippine Rayon is governed by specific contracts, namely the application for letters of credit, the promissory note, the drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts stated therein. The public respondent did not agree with the petitioner's claim that the drafts were sight drafts which did not require presentment for acceptance to Philippine Rayon because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented and accepted, no valid demand for payment can be made.

Public respondent also disagreed with the petitioner's contention that private respondent Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the first contention, the public respondent ruled that the civil liability provided for in said Section 13 attaches only after conviction. As to the second, it expressed misgivings as to whether Chi's signature on the trust receipt made the latter automatically liable thereon because the so-called solidary guaranty clause at the dorsal portion of the

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trust receipt is to be signed not by one (1) person alone, but by two (2) persons; the last sentence of the same is incomplete and unsigned by witnesses; and it is not acknowledged before a notary public. Besides, even granting that it was executed and acknowledged before a notary public, Chi cannot be held liable therefor because the records fail to show that petitioner had either exhausted the properties of Philippine Rayon or had resorted to all legal remedies as required in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is merely accessory and subsidiary, respectively. Chi's liability would therefore arise only when the principal debtor fails to comply with his obligation. 5

Its motion to reconsider the decision having been denied by the public respondent in its Resolut ion of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following legal issues:

I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;

II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT (EXH. C);

III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EXTENT;

IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY ATTACHED;

V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115;

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C);

VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;

VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER. 7

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the latter by the petitioner; both parties were also required to submit their respective memoranda which they subsequently complied with.

As We see it, the issues may be reduced as follows:

1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon;

2. Whether Philippine Rayon is liable on the basis of the trust receipt;

3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be enforced and if not, whether he may be considered a guarantor; in the latter

situation, whether the case should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon's properties.

Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the latter after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable thereon. We are unable to agree with this proposition. The transaction in the case at bar stemmed from Philippine Rayon's application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the former's contract to purchase and import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. As correctly ruled by the trial court in its Order of 6 March 1975: 9

. . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under obligation to pay through its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of credit from 1963 to 1968, pursuant to plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any accruing commercial charges, interest, etc. pursuant to the terms and conditions stipulated in the Application and Agreement of Commercial Letter of Credit Annex "A".

A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. 11 Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. 12 In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of t he Negotiable Instruments Law (NIL). 13 The said section reads:

Sec. 143. When presentment for acceptance must be made. — Presentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or

(b) Where the bill expressly stipulates that it shall be presented for acceptance; or

(c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable.

Obviously then, sight drafts do not require presentment for acceptance.

The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate instrument. 15

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts. Said the latter:

. . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two

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drafts (Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their face (sic), and upon such acceptance should have been paid forthwith. These two drafts were not paid and although Philippine Rayon Millsought to have paid the same, the fact remains that until now they are still unpaid. 16

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:

Sec. 7. When payable on demand. — An instrument is payable on demand —

(a) When so it is expressed to be payable on demand, or at sight, or on presentation; or

(b) In which no time for payment in expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. (emphasis supplied)

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of exchange or indebtedness shall not be extinguished or modified" 17 does not, contrary to the holding of the public respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued were sight drafts And even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner — and not Philippine Rayon — which had to accept the same for the latter was not the drawee. Presentment for acceptance is defined an the production of a bill of exchange to a drawee for acceptance. 18 The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance was an indispensable requisite for Philippine Rayon's liability on the drafts to attach. Contrary to both courts' pronouncements, Philippine Rayon immediately became liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. The typical setting and purpose of a letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., 19 thus:

Commercial letters of credit have come into general use in international sales transactions where much time necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which interval great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller is desirous of being paid as surely and as soon as possible, realizing that the vendee at a distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of credit meet this condition by affording celerity and certainty of payment. Their purpose is to insure to a seller payment of a definite amount upon presentation of documents. The bank deals only with documents. It has nothing to do with the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the proper documents are presented.

The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:

By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade could hardly be carried on by any other means, and therefore it is of the first importance that the fundamental factor in the transaction, the banker's advance of money and credit, should receive the amplest protection. Accordingly, in order to secure that the banker shall be repaid at the critical point — that is, when the imported goods finally reach the hands of the intended vendee —

the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold in the United States and the vendee is called upon to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the possession; but the security is the complete title vested originally in the bankers, and this characteristic of the transaction has again and again been recognized and protected by the courts. Of course, the title is at bottom a security title, as it has sometimes been called, and the banker is always under the obligation to reconvey; but only after his advances have been fully repaid and after the importer has fulfilled the other terms of the contract.

As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:

. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon an he has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest.

Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests' over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called the "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trusts receipt, or for other purposes substantially equivalent to any one of the following: . . ."

It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use and have profited by its operation and/or disposition but very recent information that (sic) reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty to account for the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease, sale or other disposition of the same that they may have made, notwithstanding demands therefor; defendants have fraudulently misapplied or converted to their own use any money realized from the lease, sale, and other disposition of said machinery." 23 While there is no specific prayer for the delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such relief is covered by the general prayer for "such further and o ther relief as may be just and equitable on the premises." 24 And although it is true that the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust, receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appear in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls under fraud.

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We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads:

In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in any event connected with the default of and/or non-fulfillment in any respect of the undertaking of the aforesaid:

PHILIPPINE RAYON MILLS, INC.

We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or exhaust its remedy against aforesaid:

before making demand on me/us.

(Sgd.) Anacleto R. ChiANACLETO R. CHI 26

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi's liability therein is solidary.

In holding otherwise, the public respondent ratiocinates as follows:

With respect to the second argument, we have our misgivings as to whether the mere signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will make it an actionable document. It should be noted that Exhibit "C-1" was prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was to be signed and executed by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in that capacity. The last sentence of the guaranty clause is incomplete. Furthermore, the plaintiff-appellant also failed to have the purported guarantee clause acknowledged before a notary public. All these show that the alleged guaranty provision was disregarded and, therefore, not consummated.

But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged still defendant-appellee Chi cannot be held liable thereunder because the records show that the plaintiff-appellant had neither exhausted the property of the defendant-appellant nor had it resorted to all legal remedies against the said defendant-appellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the defendant-appellee arises only when the principal debtor fails to comply with his obligation. 27

Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability

described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them.

Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; 28 as such, it must be strictly construed against the party responsible for its preparation. 29

Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively disregarded simply because it was not signed and witnessed by two (2) persons and acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi became the sole guarantor. The attestation by witnesses and the acknowledgement before a notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present; however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. 32 While the acknowledgement of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document.

And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi would be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because such civil liability presupposes prior conviction as can be gleaned from the phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong. The said section reads:

Sec. 13. Penalty Clause. — The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.

A close examination of the quoted provision reveals that it is the last sentence which provides for the correct solution. It is clear that if the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense. The penalty referred to is imprisonment, the duration of which would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier, since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce the civil liability arising therefrom against Philippine Rayon.

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The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent Chi. The trial court based the dismissal, and the respondent Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity — either as surety or as guarantor — because his signature at the dorsal portion thereof was useless; and even if he could be bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay untilafter petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon. The records fail to show that petitioner had done so 33 Reliance is thus placed on Article 2058 of the Civil Code which provides:

Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor.

Simply stated, there is as yet no cause of action against Chi.

We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:

4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case.

There was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:

Sec. 6. Permissive joinder of parties. — All persons in whom or against whom any right to relief in respect to or arising out of the same transaction or series of transactions is alleged to exist, whether jointly, severally, or in the alternative, may, except as otherwise provided in these rules, join as plaintiffs or be joined as defendants in one complaint, where any question of law or fact common to all such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as may be just to prevent any plaintiff or defendant from being embarrassed or put to expense in connection with any proceedings in which he may have no interest.

This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense. 35

However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay. 36 Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the date of th e filing of the complaint. Attorney's fees may even be allowed in appropriate cases. 37

In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the full extent of the latter's liability. All things considered, he can be held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner.

Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against private respondent Chi and condemning petitioner to pay him P20,000.00 as attorney's fees.

In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the petitioner

WHEREFORE, the instant Petition is hereby GRANTED.

The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered:

1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C"), and ordering it to pay petitioner: (a) the amounts due thereon in the total sum of P956,384.95 as of 15 September 1974, with interest thereon at six percent (6%) per annum from 16 September 1974 until it is fully paid, less whatever may have been applied thereto by virtue of foreclosure of mortgages, if any; (b) a sum equal to ten percent (10%) of the aforesaid amount as attorney's fees; and (c) the costs.

2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and ordering him to pay the face value thereof, with interest at the legal rate, commencing from the date of the filing of the complaint in Civil Case No. Q-19312 until the same is fully paid as well as the costs and attorney's fees in the sum of P10,000.00 if the writ of execution for the enforcement of the above awards against Philippine Rayon Mills, Inc. is returned unsatisfied.

Costs against private respondents.

SO ORDERED.

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Phil Blooming Mills Inc vs CA

The Case

This is a petition for review on certiorari[1] to annul the Decision[2] dated 16 July 1999 of the Court of Appeals in CA-G.R. CV No. 39690, as well as its Resolution dated 17 February 2000 denying the motion for reconsideration. The Court of Appeals affirmed with modification the Decision[3] dated 31 August 1992 rendered by Branch 113 of the Regional Trial Court of Pasay City (trial court). The trial courts Decision declared petitioner Alfredo Ching (Ching) liable to respondent Traders Royal Bank (TRB) for the payment of the credit accommodations extended to Philippine Blooming Mills, Inc. (PBM).

Antecedent Facts

This case stems from an action to compel Ching to pay TRB the following amounts:

1. P959,611.96 under Letter of Credit No. 479 AD covered by Trust Receipt No. 106;[4]

2. P1,191,137.13 under Letter of Credit No. 563 AD covered by Trust Receipt No. 113;[5] and

3. P3,500,000 under the trust loan covered by a notarized Promissory Note.[6]

Ching was the Senior Vice President of PBM. In his personal capacity and not as a corporate officer, Ching signed a Deed of Suretyship dated 21 July 1977 binding himself as follows:

xxx as primary obligor(s) and not as mere guarantor(s), hereby warrant to the TRADERS ROYAL BANK, its successors and assigns, the due and punctual payment by the following individuals and/or companies/firms, hereinafter called the DEBTOR(S), of such amounts whether due or not, as indicated opposite their respective names, to wit:

NAME OF DEBTOR(S) AMOUNT OF OBLIGATION

PHIL. BLOOMING MILLS CORP. TEN MILLION PESOS

(P 10,000,000.00)

owing to said TRADERS ROYAL BANK, hereafter called the CREDITOR, as evidenced by all notes, drafts, overdrafts and other credit obligations of every kind and nature contracted/incurred by said DEBTOR(S) in favor of said CREDITOR.

In case of default by any and/or all of the DEBTOR(S) to pay the whole or part of said indebtedness herein secured at maturity, I/We, jointly and severally, agree and engage to the CREDITOR, its successors and assigns, the prompt payment, without demand or notice from said CREDITOR, of such notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted or may hereafter become indebted to the CREDITOR, together with all interests, penalty and other bank charges as may accrue thereon and all expenses which may be incurred by the latter in collecting any or all such instruments.

I/WE further warrant the due and faithful performance by the DEBTOR(S) of all the obligations to be performed under any contracts, evidencing indebtedness/obligations and any supplements, amendments, charges or modifications made thereto, including but not limited to, the due and punctual payment by the said DEBTOR(S).

I/WE hereby expressly waive notice of acceptance of this suretyship, and also presentment, demand, protest and notice of dishonor of any and all such instruments, loans, advances, credits, or other indebtedness or obligations hereinbefore referred to.

MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not contingent upon the pursuit by the CREDITOR, its successors or assigns, of whatever remedies it or they may have against the DEBTOR(S) or the securities or liens it or they may possess; and I/WE hereby agree to be and remain bound upon this suretyship, irrespective of the existence, value or condition of any collateral, and notwithstanding also that all obligations of the DEBTOR(S) to you outstanding and unpaid at any time may exceed the aggregate principal sum herein above stated.

In the event of judicial proceedings, I/WE hereby expressly agree to pay the creditor for and as attorneys fees a sum equivalent to TEN PER CENTUM (10%) of the total indebtedness (principal and interest) then unpaid, exclusive of all costs or expenses for collection allowed by law.[7] (Emphasis supplied)

On 24 March and 6 August 1980, TRB granted PBM letters of credit on application of Ching in his capacity as Senior Vice President of PBM. Ching later accomplished and delivered to TRB trust receipts, which acknowledged receipt in trust for TRB of the merchandise subject of the letters of credit. Under the trust receipts, PBM had the right to sell the merchandise for cash with the obligation to turn over the entire proceeds of the sale to TRB as payment of PBMs indebtedness. Letter of Credit No. 479 AD, covered by Trust Receipt No. 106, has a face value of US$591,043, while Letter of Credit No. 563 AD, covered by Trust Receipt No. 113, has a face value of US$155,460.34.

Ching further executed an Undertaking for each trust receipt, which uniformly provided that:

x x x

6. All obligations of the undersigned under the agreement of trusts shall bear interest at the rate of __ per centum ( __%) per annum from the date due until paid.

7. [I]n consideration of the Trust Receipt, the undersigned hereby jointly and severally undertake and agree to pay on demand on the said BANK, all sums and amounts of money which said BANK may call upon them to pay arising out of, pertaining to, and/or in any manner connected with this receipt. In case it is necessary to collect the draft covered by the Trust Receipt by or through an attorney-at-law, the undersigned hereby further agree(s) to pay an additional of 10% of the total amount due on the draft as attorneys fees, exclusive of all costs, fees and other expenses of collection but shall in no case be less than P200.00[8] (Emphasis supplied)

On 27 April 1981, PBM obtained a P3,500,000 trust loan from TRB. Ching signed as co-maker in the notarized Promissory Note evidencing this trust loan. The Promissory Note reads:

FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and severally, promise to pay the TRADERS ROYAL BANK or order, at its Office in 4th Floor, Kanlaon Towers Bldg., Roxas Blvd., Pasay City, the sum of Pesos: THREE MILLION FIVE HUNDRED THOUSAND ONLY (P3,500,000.00), Philippine Currency, with the interest rate of Eighteen Percent (18%) per annum until fully paid.

In case of non-payment of this note at maturity, I/We, jointly and severally, agree to pay an additional amount equivalent to two per cent (2%) of the principal sum per annum, as penalty and collection charges in the form of liquidated damages until fully paid, and the further sum of ten percent (10%) thereof in full, without any deduction, as and for attorneys fees whether actually incurred or not, exclusive of costs and other judicial/extrajudicial expenses; moreover, I/We jointly and severally, further empower and authorize the TRADERS ROYAL BANK at its option, and without notice to set off or to apply to the payment of this note any and all funds, which may be in its hands on deposit or otherwise belonging to anyone or all of us, and to hold as security therefor any real or personal property which may be in its possession or control by virtue of any other contract.[9] (Emphasis supplied)

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PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD) for P959,611.96, and of Trust Receipt No. 113 (Letter of Credit No. 563 AD) for P1,191,137.13. PBM also defaulted on its P3,500,000 trust loan.

On 1 April 1982, PBM and Ching filed a petition for suspension of payments with the Securities and Exchange Commission (SEC), docketed as SEC Case No. 2250.[10] The petition sought to suspend payment of PBMs obligations and prayed that the SEC allow PBM to continue its normal business operations free from the interference of its creditors. One of the listed creditors of PBM was TRB.[11]

On 9 July 1982, the SEC placed all of PBMs assets, liabilities, and obligations under the rehabilitation receivership of Kalaw, Escaler and Associates.[12]

On 13 May 1983, ten months after the SEC placed PBM under rehabilitation receivership, TRB filed with the trial court a complaint for collection against PBM and Ching. TRB asked the trial court to order defendants to pay solidarily the following amounts:

(1) P6,612,132.74 exclusive of interests, penalties, and bank charges [representing its indebtedness arising from the letters of credit issued to its various suppliers];

(2) P4,831,361.11, exclusive of interests, penalties, and other bank charges [due and owing from the trust loan of 27 April 1981 evidenced by a promissory note];

(3) P783,300.00 exclusive of interests, penalties, and other bank charges [due and owing from the money market loan of 1 April 1981 evidenced by a promissory note];

(4) To order defendant Ching to pay P10,000,000.00 under the Deed of Suretyship in the event plaintiff can not recover the full amount of PBMs indebtedness from the latter;

(5) The sum equivalent to 10% of the total sum due as and for attorneys fees;

(6) Such other amounts that may be proven by the plaintiff during the trial, by way of damages and expenses for litigation.[13]

On 25 May 1983, TRB moved to withdraw the complaint against PBM on the ground that the SEC had already placed PBM under receivership.[14] The trial court thus dismissed the complaint against PBM.[15]

On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the ground that the trial court had no jurisdiction over the subject matter of the case. PBM and Ching invoked the assumption of jurisdiction by the SEC over all of PBMs assets and liabilities.[16]

TRB filed an opposition to the Motion to Dismiss. TRB argued that (1) Ching is being sued in his personal capacity as a surety for PBM; (2) the SEC decision declaring PBM in suspension of payments is not binding on TRB; and (3) Presidential Decree No. 1758 (PD No. 1758),[17] which Ching relied on to support his assertion that all claims against PBM are suspended, does not apply to Ching as the decree regulates corporate activities only.[18]

In its order dated 15 August 1983,[19] the trial court denied the motion to dismiss with respect to Ching and affirmed its dismissal of the case with respect to PBM. The trial court stressed that TRB was holding Ching liable under the Deed of Suretyship. As Chings obligation was solidary, the trial court ruled that TRB could proceed against Ching as surety upon default of the principal debtor PBM. The trial court also held that PD No. 1758 applied only to corporations, partnerships and associations and not to individuals.

Upon the trial courts denial of his Motion for Reconsideration, Ching filed a Petition for Certiorari and Prohibition[20] before the Court of Appeals. The appellate court granted Chings petition and ordered the dismissal of the case. The appellate court ruled that the SEC assumed jurisdiction over Ching and PBM to the exclusion of courts or tribunals of coordinate rank.

TRB assailed the Court of Appeals Decision[21] before this Court. In Traders Royal Bank v. Court of Appeals,[22] this Court upheld TRB and ruled that Ching was merely a nominal party in SEC Case No. 2250. Creditors may sue individual sureties of debtor corporations, like Ching, in a separate proceeding before regular courts despite the pendency of a case before the SEC involving the debtor corporation.

In his Answer dated 6 November 1989, Ching denied liability as surety and accommodation co-maker of PBM. He claimed that the SEC had already issued a decision[23] approving a revised rehabilitation plan for PBMs creditors, and that PBM obtained the credit accommodations for corporate purposes that did not redound to his personal benefit. He further claimed that even as a surety, he has the right to the defenses personal to PBM. Thus, his liability as surety would attach only if, after the implementation of payments scheduled under the rehabilitation plan, there would remain a balance of PBMs debt to TRB.[24] Although Ching admitted PBMs availment of the credit accommodations, he did not show any proof of payment by PBM or by him.

TRB admitted certain partial payments on the PBM account made by PBM itself and by the SEC-appointed receiver.[25] Thus, the trial court had to resolve the following remaining issues:

1. How much exactly is the corporate defendants outstanding obligation to the plaintiff?

2. Is defendant Alfredo Ching personally answerable, and for exactly how much?[26]

TRB presented Mr. Lauro Francisco, loan officer of the Remedial Management Department of TRB, and Ms. Carla Pecson, manager of the International Department of TRB, as witnesses. Both witnesses testified to the following:

1. The existence of a Deed of Suretyship dated 21 July 1977 executed by Ching for PBMs liabilities to TRB up to P10,000,000;[27]

2. The application of PBM and grant by TRB on 13 March 1980 of Letter of Credit No. 479 AD for US$591,043, and the actual availment by PBM of the full proceeds of the credit accommodation;[28]

3. The application of PBM and grant by TRB on 6 August 1980 of Letter of Credit No. 563 AD for US$156,000, and the actual availment by PBM of the full proceeds of the credit accommodation;[29] and

4. The existence of a trust loan of P3,500,000 evidenced by a notarized Promissory Note dated 27 April 1981 wherein Ching bound himself solidarily with PBM;[30] and

5. Per TRBs computation, Ching is liable for P19,333,558.16 as of 31 October 1991.[31]

Ching presented Atty. Vicente Aranda, corporate secretary and First Vice President of the Human Resources Department of TRB, as witness. Ching sought to establish that TRBs Board of Directors adopted a resolution fixing the PBM account at an amount lower than what TRB wanted to collect from Ching. The trial court allowed Atty. Aranda to testify over TRBs manifestation that the Answer failed to plead the subject matter of his testimony. Atty. Aranda produced TRB Board Resolution No. 5935, series of 1990, which contained the minutes of the special meeting of TRBs Board of Directors held on 8 June 1990.[32] In the resolution, the Board of Directors advised TRBs Management not to release Alfredo Ching from his JSS liability to the bank.[33] The resolution also stated the following:

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a) Accept the P1.373 million deposits remitted over a period of 17 years or until 2006 which shall be applied directly to the account (as remitted per hereto attached schedule). The amount of P1.373 million shall be considered as full payment of PBMs account. (The receiver is amenable to this alternative)

The initial deposit/remittance which amounts to P150,000.00 shall be remitted upon approval of the above and conforme to PISCOR and PBM. Subsequent deposits shall start on the 3rd year and annually thereafter (every June 30th of the year) until June 30, 2006.

Failure to pay one annual installment shall make the whole obligation due and demandable.

b) Write-off immediately P4.278 million. The balance [of] P1.373 million to remain outstanding in the books of the Bank. Said balance will equal the deposits to be remitted to the Bank for a period of 17 years.[34]

However, Atty. Aranda himself testified that both items (a) and (b) quoted above were never complied with or implemented. Not only was there no initial deposit of P150,000 as required in the resolution, TRB also disapproved the document prepared by the receiver, which would have released Ching from his suretyship.[35]

The Ruling of the Trial Court

The trial court found Ching liable to TRB for P19,333,558.16 under the Deed of Suretyship. The trial court explained:

[T]he liability of Ching as a surety attaches independently from his capacity as a stockholder of the Philippine Blooming Mills. Indisputably, under the Deed of Suretyship defendant Ching unconditionally agreed to assume PBMs liability to the plaintiff in the event PBM defaulted in the payment of the said obligation in addition to whatever penalties, expenses and bank charges that may occur by reason of default. Clear enough, under the Deed of Suretyship (Exh. J), defendant Ching bound himself jointly and severally with PBM in the payment of the latters obligation to the plaintiff. The obligation being solidary, the plaintiff Bank can hold Ching liable upon default of the principal debtor. This is explicitly provided in Article 1216 of the New Civil Code already quoted above.[36]

The dispositive portion of the trial courts Decision reads:

WHEREFORE, judgment is hereby rendered declaring defendant Alfredo Ching liable to plaintiff bank in the amount of P19,333,558.16 (NINETEEN MILLION THREE HUNDRED THIRTY THREE THOUSAND FIVE HUNDRED FIFTY EIGHT & 16/100) as of October 31, 1991, and to pay the legal interest thereon from such date until it is fully paid. To pay plaintiff 5% of the entire amount by way of attorneys fees.

SO ORDERED.[37]

The Ruling of the Court of Appeals

On appeal, Ching stated that as surety and solidary debtor, he should benefit from the changed nature of the obligation as provided in Article 1222 of the Civil Code, which reads:

Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible.

Ching claimed that his liability should likewise be reduced since the equitable apportionment of PBMs remaining assets among its creditors under the rehabilitation proceedings would have the effect of reducing PBMs liability. He also claimed that the amount for which he was being held liable was

excessive. He contended that the outstanding principal balance, as stated in TRB Board Resolution No. 5893-1990, was only P5,650,749.09.[38] Ching also contended that he was not liable for interest, as the loan documents did not stipulate the interest rate, pursuant to Article 1956 of the Civil Code.[39] Finally, Ching asserted that the Deed of Suretyship executed on 21 July 1977 could not guarantee obligations incurred after its execution.[40]

TRB did not file its appellees brief. Thus, the Court of Appeals resolved to submit the case for decision.[41]

The Court of Appeals considered the following issues for its determination:

1. Whether the Answer of Ching amounted to an admission of liability.

2. Whether Ching can still be sued as a surety after the SEC placed PBM under rehabilitation receivership, and if in the affirmative, for how much.[42]

The Court of Appeals resolved the first two questions in favor of TRB. The appellate court stated:

Ching did not deny under oath the genuineness and due execution of the L/Cs, Trust Receipts, Undertaking, Deed of Surety, and the 3.5 Million Peso Promissory Note upon which TRBs action rested. He is, therefore, presumed to be liable unless he presents evidence showing payment, partially or in full, of these obligations (Investment and Underwriting Corporation of the Philippines v. Comptronics Philippines, Inc. and Gene v. Tamesis, 192 SCRA 725 [1990]).

As surety of a corporation placed under rehabilitation receivership, Ching can answer separately for the obligations of debtor PBM (Rizal Banking Corporation v. Court of Appeals, Philippine Blooming Mills, Inc., and Alfredo Ching, 178 SCRA 738 [1990], and Traders Royal Bank v. Philippine Blooming Mills and Alfredo Ching, 177 SCRA 788 [1989]).

Even a[n] SEC injunctive order cannot suspend payment of the suretys obligation since the rehabilitation receivers are limited to the existing assets of the corporation.[43]

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, the judgment of the lower court is hereby AFFIRMED but modified with respect to the amount of liability of defendant Alfredo Ching which is lowered from P19,333,558.16 to P15,773,708.78 with legal interest of 12% per annum until it is fully paid.

SO ORDERED.[44]

The Court of Appeals denied Chings Motion for Reconsideration for lack of merit.

Hence, this petition.

Issues

Ching assigns the following as errors of the Court of Appeals:

1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT PETITIONER ALFREDO CHING WAS LIABLE FOR OBLIGATIONS CONTRACTED BY PBM LONG AFTER THE EXECUTION OF THE DEED OF SURETYSHIP.

2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT THE PETITIONERS WERE LIABLE FOR THE TRUST RECEIPTS DESPITE THE FACT THAT PRIVATE RESPONDENT HAD PREVENTED THEIR FULFILLMENT.

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3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT FOUND PETITIONER ALFREDO CHING LIABLE FOR P15,773,708.78 WITH LEGAL INTEREST AT 12% PER ANNUM UNTIL FULLY PAID DESPITE THE FACT THAT UNDER THE REHABILITATION PLAN OF PETITIONER PBM, WHICH WAS APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, PRIVATE RESPONDENT IS ONLY ENTITLED TO P1,373,415.00.[45]

Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for obligations not yet in existence at the time of its execution. Specifically, Ching maintained that the Deed of Suretyship could not answer for debts contracted by PBM in 1980 and 1981. Ching contended that no accessory contract of suretyship could arise without an existing principal contract of loan. Ching likewise argued that TRB could no longer claim on the trust receipts because TRB had already taken the properties subject of the trust receipts. Ching likewise maintained that his obligation as surety could not exceed the P1,373,415 apportioned to PBM under the SEC-approved rehabilitation plan.

In its Comment, TRB asserted that the first two assigned errors raised factual issues not brought before the trial court. Furthermore, TRB pointed out that Ching never presented PBMs rehabilitation plan before the trial court. TRB also stated that the Supreme Court ruling in Traders Royal Bank v. Court of Appeals[46] constitutes res judicata between the parties. Therefore, TRB could proceed against Ching separately from PBM to enforce in full Chings liability as surety.[47]

The Ruling of the Court

The petition has no merit.

The case before us is an offshoot of the trial courts denial of Chings motion to have the case dismissed against him. The petition is a thinly veiled attempt to make this Court reconsider its decision in the prior case of Traders Royal Bank v. Court of Appeals.[48] This Court has already resolved the issue of Chings separate liability as a surety despite the rehabilitation proceedings before the SEC. We held in Traders Royal Bank that:

Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the SEC could not assume jurisdiction over his person and properties. The Securities and Exchange Commission was empowered, as rehabilitation receiver, to take custody and control of the assets and properties of PBM only, for the SEC has jurisdiction over corporations only [and] not over private individuals, except stockholders in an intra-corporate dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D. 1758). Being a nominal party in SEC Case No. 2250, Chings properties were not included in the rehabilitation receivership that the SEC constituted to take custody of PBMs assets. Therefore, the petitioner bank was not barred from filing a suit against Ching, as a surety for PBM. An anomalous situation would arise if individual sureties for debtor corporations may escape liability by simply co-filing with the corporation a petition for suspension of payments in the SEC whose jurisdiction is limited only to corporations and their corporate assets.

x x x

Ching can be sued separately to enforce his liability as surety for PBM, as expressly provided by Article 1216 of the New Civil Code.

x x x

It is elementary that a corporation has a personality distinct and separate from its individual stockholders and members. Being an officer or stockholder of a corporation does not make ones property the property also of the corporation, for they are separate entities (Adelio Cruz vs. Quiterio Dalisay, 152 SCRA 482).

Chings act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest in the SEC jurisdiction over his person or property, for jurisdiction does not depend on the consent or acts of the parties but upon express provision of law (Tolentino vs. Social Security System, 138 SCRA 428; Lee vs. Municipal Trial Court of Legaspi City, Br. I, 145 SCRA 408). (Emphasis supplied)

Traders Royal Bank has fully resolved the issue regarding Chings liability as a surety of the credit accommodations TRB extended to PBM. The decision amounts to res judicata[49] which bars Ching from raising the same issue again. Hence, the only question that remains is the amount of Chings liability. Nevertheless, we shall resolve the issues Ching has raised in his attempt to escape liability under his surety.

Whether Ching is liable for obligations PBM contracted after execution of the Deed of Suretyship

Ching is liable for credit obligations contracted by PBM against TRB before and after the execution of the 21 July 1977 Deed of Suretyship. This is evident from the tenor of the deed itself, referring to amounts PBM may now be indebted or may hereafter become indebted to TRB.

The law expressly allows a suretyship for future debts. Article 2053 of the Civil Code provides:

A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (Emphasis supplied)

Furthermore, this Court has ruled in Dio v. Court of Appeals[50] that:

Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be known at the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period; especially if the right to recall the guaranty is expressly reserved. Hence, where the contract states that the guaranty is to secure advances to be made from time to time, it will be construed to be a continuing one.

In other jurisdictions, it has been held that the use of particular words and expressions such as payment of any debt, any indebtedness, or any sum, or the guaranty of any transaction, or money to be furnished the principal debtor at any time, or on such time that the principal debtor may require, have been construed to indicate a continuing guaranty.

Whether Chings liability is limited

to the amount stated in PBMs rehabilitation plan

Ching would like this Court to rule that his liability is limited, at most, to the amount stated in PBMs rehabilitation plan. In claiming this reduced liability, Ching invokes Article 1222 of the Civil Code which reads:

Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own

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share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible.

In granting the loan to PBM, TRB required Chings surety precisely to insure full recovery of the loan in case PBM becomes insolvent or fails to pay in full. This was the very purpose of the surety. Thus, Ching cannot use PBMs failure to pay in full as justification for his own reduced liability to TRB. As surety, Ching agreed to pay in full PBMs loan in case PBM fails to pay in full for any reason, including its insolvency.

TRB, as creditor, has the right under the surety to proceed against Ching for the entire amount of PBMs loan. This is clear from Article 1216 of the Civil Code:

ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. (Emphasis supplied)

Ching further claims a reduced liability under TRB Board Resolution No. 5935. This resolution states that PBMs outstanding loans may be reduced to P1.373 million subject to certain conditions like the payment of P150,000 initial payment.[51] The resolution also states that TRB should not release Chings solidary liability under his surety. The resolution even directs TRBs management to study Chings criminal liability under the trust documents.[52]

Chings own witness testified that Resolution No. 5935 was never implemented. For one, PBM or its receiver never paid the P150,000 initial payment to TRB. TRB also rejected the document that PBMs receiver presented which would have released Ching from his suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to escape liability under his suretyship.

Chings attempts to have this Court review the factual issues of the case are improper. It is not a function of the Supreme Court to assess and evaluate again the evidence, testimonial and evidentiary, adduced by the parties particularly where the findings of both the trial court and the appellate court coincide on the matter.[53]

Whether Ching is liable for the trust receipts

Ching is still liable for the amounts stated in the letters of credit covered by the trust receipts. O ther than his bare allegations, Ching has not shown proof of payment or settlement with TRB. Atty. Vicente Aranda, TRBs corporate secretary and First Vice President of its Human Resource Management Department, testified that the conditions in the TRB board resolution presented by Ching were not met or implemented, thus:

ATTY. AZURA

Q Going into the resolution itself. A certain stipulation ha[s] been outlined, and may I refer you to condition or step No. 1, which reads: a) Accept the P1.373 million deposits remitted over a period of 17 years or until 2006 which shall be applied directly to the account (as remitted per hereto attached schedule). The amount of P1.373 million shall be considered as full payment of PBMs account. (The receiver is amenable to this alternative.) The initial deposit/remittance which amounts to P150,000.00 shall be remitted upon approval of the above and conforme of PISCOR [xxx] and PBM. Subsequent deposits shall start on the 3rd year and annually thereafter (every June 30th of the year) until June 30, 2006.

Failure to pay one annual installment shall make the whole obligation due and demandable. Now Mr. Witness, would you be in a position to inform [the court] if these conditions listed in item (a) in Resolution No. 5935, series of 1990, were implemented or met?

A Yes. I know for a fact that the conditions, more particularly the initial deposit/remittance in the amount of P150,000.00 which have to be done with approval was not remitted or met.

Q Will you clarify your answer. Would you be in a position to inform the court if those conditions were met? Because your initial answer was yes.

A Yes sir, I am in a position to state that these conditions were not met.

Q Let me refer you to the condition listed as item (b) of the same resolution which I read and quote: Write off immediately P4.278 million. The balance of P1.373 million to remain outstanding in the books of the bank. Said balance will be remitted to the Bank for a period of 17 years. Mr. Witness, would you be in a position to inform the court if the bank implemented that particular condition?

A In the implementation of this settlement the receiver prepared a document for approval and conformity of the bank. The said document would in effect release the suretyship of Alfredo Ching and for that reason the bank refused or denied fixing its conformity and approval with the court.

xxx

ATTY. ATIENZA ON REDIRECT EXAMINATION

Q Mr. Witness you stated that the reason why the plaintiff bank did not implement these conditionalities [sic] was because the former defendant corporation requested that the suretyship of Alfredo Ching be released, is that correct?

A I did not say that. I said that in effect the document prepared by the lawyer of the receiver xxx the bank would release the suretyship of Alfredo Ching, that is why the bank is not amenable to such a document.

Q Despite this approved resolution the bank, because of said requirement or conformity did not seek to implement these conditionalities [sic]?

A Yes sir because the conditions imposed by the board is not being followed in that document because it was the condition of the board that the suretyship should not be released but the document being presented to the bank for signature and conformity in effect if signed would release the suretyship. So it would be a violation with the approval of the board so the bank did not sign the conformity.[54]

Ching also claims that TRB prevented PBM from fulfilling its obligations under the trust receipts when TRB, together with other creditor banks, took hold of PBMs inventories, including the goods covered by the trust receipts. Ching asserts that this act of TRB released him from liability under the suretyship. Ching forgets that he executed, on behalf of PBM, separate Undertakings for each trust receipt expressly granting to TRB the right to take possession of the goods at any time to protect TRBs interests. TRB may exercise such right without waiving its right to collect the full amount of the loan to PBM. The Undertakings also provide that any suspension of payment or any assignment by PBM for the benefit of creditors renders the loan due and demandable. Thus, the separate Undertakings uniformly provide:

2. That the said BANK may at any time cancel the foregoing trust and take possession of said merchandise with the right to sell and dispose of the same under such terms and conditions it may deem best, or of the proceeds of such of the same as may then have been sold, wherever the said merchandise or proceeds may then be found and all the provisions of the Trust Receipt shall apply to and be deemed to include said above-mentioned merchandise if the same shall have been made up or used in the manufacture of any other goods, or merchandise, and the said BANK shall have the same rights and remedies against the said merchandise in its manufactured state, or the product of said manufacture as it would have had in the event that such merchandise had remained [in] its original state and irrespective of the fact that other and different merchandise is used in completing such manufacture. In the event of

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any suspension, or failure or assignment for the benefit of creditors on the part of the undersigned or of the non-fulfillment of any obligation, or of the non-payment at maturity of any acceptance made under said credit, or any other credit issued by the said BANK on account of the undersigned or of the non-payment of any indebtedness on the part of the undersigned to the said BANK, all obligations, acceptances, indebtedness and liabilities whatsoever shall thereupon without notice mature and become due and payable and the BANK may avail of the remedies provided herein.[55] (Emphasis supplied)

Presidential Decree No. 115 (PD No. 115), otherwise known as the Trust Receipts Law, expressly allows TRB to take possession of the goods covered by the trust receipts. Thus, Section of 7 of PD No. 115 states:

SECTION 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree.

The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee, and the entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustees indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustees last known business address. (Emphasis supplied)

Thus, even though TRB took possession of the goods covered by the trust receipts, PBM and Ching remained liable for the entire amount of the loans covered by the trust receipts.

Absent proof of payment or settlement of PBM and Chings credit obligations with TRB, Chings liability is what the Deed of Suretyship stipulates, plus the applicable interest and penalties. The trust receipts, as well as the Letter of Undertaking dated 16 April 1980[56] executed by PBM, stipulate in writing the payment of interest without specifying the rate. In such a case, the applicable interest rate shall be the legal rate, which is now 12% per annum.[57] This is in accordance with Central Bank Circular No. 416, which states:

By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise known as the Usury Law, the Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve per cent (12%) per annum. (Emphasis supplied)

On the other hand, the Promissory Note evidencing the P3,500,000 trust loan provides for 18% interest per annum plus 2% penalty interest per annum in case of default. This stipulated interest should continue to run until full payment of the P3,500,000 trust loan. In addition, the accrued interest on all the credit accommodations should earn legal interest from the date of filing of the complaint pursuant to Article 2212 of the Civil Code.

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

The trial court found and the appellate court affirmed that the outstanding principal amounts as of the filing of the complaint with the trial court on 13 May 1983 were P959,611.96 under Trust Receipt No. 106, P1,191,137.13 under Trust Receipt No. 113, and P3,500,000 for the trust loan. As extracted from TRBs Statement of Account as of 31 October 1991,[58] the accrued interest on the trust receipts and the trust loan as of the filing of the complaint on 13 May 1983 were P311,387.51[59] under Trust Receipt No. 106, P338,739.81[60] under Trust Receipt No. 113, and P1,287,616.44[61] under the trust loan. The penalty interest on the trust loan amounted to P137,315.07.[62] Ching did not rebut this Statement of Account which TRB presented during trial.

Thus, the following is the summary of Chings liability under the suretyship as of 13 May 1983, the date of filing of TRBs complaint with the trial court:

1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)

Outstanding Principal P 959,611.96

Accrued Interest (12% per annum) 311,387.51

2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)

Outstanding Principal P 1,191,137.13

Accrued Interest (12% per annum) 338,739.82

3. On the Trust Loan (Promissory Note)

Outstanding Principal P 3,500,000.00

Accrued Interest (18% per annum) 1,287,616.44

Accrued Penalty Interest (2% per annum) 137,315.07

WHEREFORE, we AFFIRM the decision of the Court of Appeals with MODIFICATION. Petitioner Alfredo Ching shall pay respondent Traders Royal Bank the following (1) on the credit accommodations under the trust receipts, the total principal amount of P2,150,749.09 with legal interest at 12% per annum from 14 May 1983 until full payment; (2) on the trust loan evidenced by the Promissory Note, the principal sum of P3,500,000 with 20% interest per annum from 14 May 1983 until full payment; (3) on the total accrued interest as of 13 May 1983, P2,075,058.84 with 12% interest per annum from 14 May 1983 until full payment. Petitioner Alfredo Ching shall also pay attorneys fees to respondent Traders Royal Bank equivalent to 5% of the total principal and interest.

SO ORDERED.

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Rizal Commercial Banking Corp vs Alfa RTW Mnfg Corp Petition for review on certiorari assailing the decision of the Court of Appeals in CA-G.R. C.V. No. 42293.

On March 12, 1982, Rizal Banking Corporation (RCBC) filed with the Regional Trial Court of Makati, Branch 145, Civil Case No. 2624 for a sum of money against Alfa RTW Manufacturing Corporation, Johnny Teng, Ramon Lee, Antonio Lacdao, Ramon Luy and Alfa Integrated Textile Mills. Asserting a superior right over the property involved in the suit, North Atlantic Garments Corporation filed a complaint in intervention. BA Finance Corporation, claiming as mortgagee of the same property, filed an answer in intervention. After hearing, the trial court rendered judgment on August 19, 1991, the dispositive portion[1] of which reads:

WHEREFORE, judgment is rendered in favor of plaintiff as follows:

1. Ordering all defendants to pay, jointly and severally, to plaintiff the amount of Eighteen Million Nine Hundred Sixty-one Thousand Three Hundred Seventy-two Pesos and Forty-three Centavos (P18,961,372.43), Philippine Currency, (inclusive of interest, service charges, litigation expenses and attorneys fees), with interest thereon at the legal rate from February 15, 1988 until fully paid. The proceeds from the sale of defendant Alfas ready to wear apparel, in the sum of P73,133.70, should be deducted from the principal obligation of P18,961,372.43;

2. Declaring that the respective liens of intervenors BA Finance Corporation and North American Garments Corporation over the properties attached by the sheriff are inferior to that of plaintiff.

3. Ordering defendants and intervenors to pay the proportionate costs.

"SO ORDERED.

On appeal, the Court of Appeals affirmed with modification[2] the RTC decision, thus:

WHEREFORE, premises considered, the decision appealed from is hereby AFFIRMED, with the modification that instead of P18,961,372.43, all the defendants are hereby ordered to pay, jointly and severally to plaintiff the amount of P3,060,406.25, Philippine Currency, inclusive of stipulated interest, service charges, litigation expenses and attorneys fees, with interest thereon at the legal rate from February 15, 1988, until fully paid.

"All other disquisitions of the trial court are hereby AFFIRMED.

"SO ORDERED.

In this petition, RCBC questions the Court of Appeals decision insofar as it modified the RTC decision by decreasing the award in its favor from P18,961.372.43 to P3,060,406.25. In assailing the Court of Appeals decision, petitioner RCBC raises a question of law, that is, whether or not the Court of Appeals can deviate from the provisions of the contract between the parties, which contract is the law between them.

The facts as summarized by the Court of Appeals are:

From the records of the case, it appears that defendant Alfa RTW Manufacturing Corporation (Alfa RTW), on separate instances, had applied for and was granted by the plaintiff Rizal Commercial Banking Corporation (RCBC) four Letters of Credit (RO-80/2487, RO-80/2789, RO-80/D-1795 and RO-81/D-1800 marked as Exhibits A, D, G, and J, respectively) to facilitate its purchase of raw materials for its garments business. Upon such letters of credit, corresponding bills of exchange (Exhibits B, E, H, and K) of various amounts were drawn, and charged to the account of said defendants.

The defendant Alfa RTW, in turn, had executed four Trust Receipts (Exhibits C, F, I and L), stipulating that it had received in trust for the plaintiff bank the goods and merchandise described therein, and which were purchased with the drawings upon the letters of credit.

When the obligations upon the said commercial documents became due, the plaintiff demanded payment of the defendants undertakings, citing two documents allegedly executed by the individual defendants Johnny Teng, Ramon Lee, Antonio D. Lacdao and Ramon Uy and Alfa Integrated Textile Mills Inc. (Alfa ITM), labeled Comprehensive Surety Agreements (Exhibits N and M) dated September 8, 1978 and October 10, 1979.

Under such Comprehensive Surety Agreements, it was essentially agreed that for and in consideration of any existing indebtedness to plaintiff bank of defendant Alfa RTW and/or in order to induce the plaintiff bank at any time thereafter to make loans or advances or increases thereof or to extend credit in any other manner to or for the account of defendant, Alfa ITM and the signatory officers agreed to guarantee in joint and several capacity the punctual payment at maturity to plaintiff bank of any and all such indebtedness and/or other obligations and also any and all indebtedness of every kind which was then or may thereafter become due or owing to plaintiff bank by the defendant Alfa RTW, together with any and all expenses of collection, etc., provided, however, that the liability of individual defendants and defendant Alfa Integrated Textile Mills, Inc. thereunder shall not exceed the sum of P4,000,000.00 and P7,500,000.00 and such interest as may accrue thereon and expenses as may be incurred by plaintiff bank. (p. 4, Complaint)

Petitioner RCBC contends that the Court of Appeals erred in awarding to it the minimal sum of P3,060,406.25 instead of P18,961,372.43 granted by the trial court.

The rule is well settled that the jurisdiction of this Court in cases brought before it from the Court of Appeals via Rule 45 of the 1997 Rules of Civil Procedure, as amended, is limited to reviewing errors of law. Findings of fact of the latter court are conclusive, except in a number of instances. In Siguan vs. Lim[3] this Court enumerated those instances when the factual findings of the Court of Appeals are not deemed conclusive, to wit: (1) when the conclusion is a finding grounded entirely on speculations, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both the appellant and appellee; (7) when the findings are contrary to those of the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by the respondent; and (10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record.

In the case at bar, exception No. 6 is present. Here, the Court of Appeals made findings contrary to the admissions of the parties. We refer to the terms and conditions agreed upon by petitioner RCBC and respondent borrowers in the Trust Receipts[4] and the Comprehensive Surety Agreements.[5]

Significantly, the validity of those contracts is not being questioned. It follows that the very terms and conditions of the same contracts become the law between the parties.

Herein lies the reversible error on the part of the Court of Appeals. When it ruled that only P3,060,406.25 should be awarded to petitioner RCBC, the Appellate Court disregarded the parties stipulations in their contracts of loan, more specifically, those pertaining to the agreed (1) interest rates, (2) service charges and (3) penalties in case of any breach thereof.[6] Indeed, the Court of Appeals failed to apply this time-honored doctrine:

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That which is agreed to in a contract is the law between the parties. Thus, obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.[7]

The Court cannot vary the terms and conditions therein stipulated unless such stipulation is contrary to law, morals, good customs, public order or public policy.[8]

In relation to the determination and computation of interest payments, this Court, in Eastern Shipping Lines, Inc. vs. Court of Appeals,[9] through Mr. Justice Jose C. Vitug, held:

The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications, guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for future guidance.

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

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

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. 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 of the Civil Code.

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

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

The case now before us involves an obligation arising from a letter of credit-trust receipt transaction. Under this arrangement, a bank extends to a borrower a loan covered by the letter of credit, with the trust receipt as security of the loan.[10] A trust receipt is a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except thru utilization, as collateral, of the merchandise imported or purchased.[11]

In contracts contained in trust receipts, the contracting parties may establish agreements, terms and conditions they may deem advisable, provided they are not contrary to law, morals or public order.[12] In the case at bar, there are specific amounts of interest, service charges and penalties agreed upon by

the parties. Pertinent provisions in the four (4) trust receipts (TR. No. 1909, TR. No. 1932, TR. No. 1732, and TR No. 2065)[13] read:

All obligations of the undersigned under this Trust Receipt shall bear interest at the rate of sixteen per centum (16%) per annum plus service charge of two per centum (2%) per annum from the date of the execution of this Trust Receipt until paid. It is expressly agreed and understood that regardless of the maturity date hereof, I/we hereby authorize the said Bank to correspondingly increase the interest of this Trust Receipt to the extent allowed by law without notice to me/us whenever the Central Bank of the Philippines raises the interest on borrowings of Banks or the interest provided for in the Usury Law, or whenever , in the sole judgment of the holder of this Trust Receipt is warranted by the increase in money market rates or by similar events.

Without prejudice to the criminal action that may be brought by the Bank against the entrustee by reason of default or breach of this Trust Receipt, I/we agree to pay a penalty and/or liquidated damages equivalent to six per centum (6%) per annum of the amount due and unpaid.

In the event of the bringing of any action or suit by you or any default of the undersigned hereunder: I/we shall on demand pay you reasonable attorneys and other fees and cost of collection, which shall in no case be less than ten per centum (10%) of the value of the property and the amount involved by the action or suit.

If there are two or more signatories on this Trust Receipt, our obligations hereunder shall in all cases be joint and several.

Applying the above-quoted rules of thumb in the computation of interest, as enunciated by this Court in Eastern Shipping Lines, Inc.,[14] the principal amount of loans corresponding to each trust receipt must earn an interest at the rate of sixteen percent (16%) per annum[15] with the stipulated service charge of two percent (2%) per annum on the loan principal or the outstanding balance thereof,[16] from the date of execution until finality of this Decision.[17] A penalty of six percent (6%) per annum of the amount due and unpaid must also be imposed computed from the date of demand (in this case on March 9, 1982),[18] until finality of Judgment.[19] The interest of 16% percent per annum, as long as unpaid, also earns interest, computed from the date of the filing of the complaint (March 12, 1982) until finality of this Courts Decision.[20] From such date of finality, the total unpaid amount (principal + interest + service charge + penalty + interest on the interest) computed shall earn interest of 12% per annum until satisfied.

The Court of Appeals awarded only the sum of P3,060,406.25 as it was the amount prayed for in the complaint. The Appellate Court, however, failed to consider that the complaint was filed on March 12, 1982, or just a year after the execution of the trust receipts. The computed interests then, the service charge, the penalty and the attorneys fees corresponded only to one year. The interest on the interest could not have been computed then since the finality of judgment could not yet be ascertained. Significantly, from the filing of the complaint on March 12, 1982 up to the time the Appellate Courts decision was promulgated, on May 14, 1998, there had been a lapse of sixteen years. The computed interest in 1982 would no longer be true in 1998. What the Appellate Court should have done then was to compute the total amount due in accordance with the rules of thumb laid down by this Court in Eastern Shipping Lines, Inc.,[21] the resulting formula of which is as follows:

TOTAL AMOUNT DUE = principal + interest + service charge + penalty + interest on interest

Interest = principal x 16 % per annum x no. of years from date of execution until finality of judgment

Service charge = principal x 2% per annum x no. of years from date of execution until finality of judgment

Penalty = principal x 6% per annum x no. of years from demand (March 9, 1982) until finality of judgment

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Interest on interest = Interest computed as of the filing of the complaint (March 12, 1982) x 12% x no. of years until finality of judgment

Attorneys fees is 10% of the total amount computed as of finality of judgment

Total amount due as of the date of finality of judgment will earn an interest of 12% per annum until fully paid.

The total amount due corresponding to each of the four (4) contracts of loan may be easily determined by the trial court through a simple mathematical computation based on the formula specified above. Mathematics is an exact science, the application of which needs no further proof from the parties.

WHEREFORE, the petition is hereby GRANTED. The assailed decision of the Court of Appeals is MODIFIED in the sense that the award to petitioner RCBC of P3,060,406.25 is SET ASIDE and substituted with an amount to be computed by the trial court, upon finality of this Decision, in accordance with the formula indicated above.

SO ORDERED.

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