Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
 
G.R. No. 109172 August 19, 1994
TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC., petitioner, 
vs.
The COURT OF APPEALS and ASSOCIATED BANK, respondents.
Gancayco Law Offices for petitioners.
Jose A. Soluta, Jr. & Associates for private respondent.
 
BIDIN, J.:
In this petition for review on certiorari, petitioner Trans-Pacific Industrial Supplies, Inc. seeks the reversal of the decision of respondent court, the
decretal portion of which reads:
WHEREFORE, the decision of June 11, 1991 is SET ASIDE and NULLIFIED; the complaint is dismissed, and on the
counterclaim, Transpacific is ordered to pay Associated attorney's fees of P15,000.00.
Costs against Transpacific.
SO ORDERED. (Rollo, p. 47)
Sometime in 1979, petitioner applied for and was granted several financial accommodations amounting to P1,300,000.00 by respondent Associated
Bank. The loans were evidenced and secured by four (4) promissory notes, a real estate mortgage covering three parcels of land and a chattel
mortgage over petitioner's stock and inventories.
Unable to settle its obligation in full, petitioner requested for, and was granted by respondent bank, a restructuring of the remaining indebtedness
which then amounted to P1,057,500.00, as all the previous payments made were applied to penalties and interests.
To secure the re-structured loan of P1,213,400.00, three new promissory notes were executed by Trans-Pacific as follows: (1) Promissory Note No.
TL-9077-82 for the amount of P1,050,000.00 denominated as working capital; (2) Promissory Note No. TL-9078-82 for the amount of P121,166.00
denominated as restructured interest; (3) Promissory Note No. TL-9079-82 for the amount of P42,234.00 denominated similarly as restructured
interest (Rollo. pp. 113-115).
The mortgaged parcels of land were substituted by another mortgage covering two other parcels of land and a chattel mortgage on petitioner's stock
inventory. The released parcels of land were then sold and the proceeds amounting to P1,386,614.20, according to petitioner, were turned over to the
bank and applied to Trans-Pacific's restructured loan. Subsequently, respondent bank returned the duplicate original copies of the three promissory
notes to Trans-Pacific with the word "PAID" stamped thereon.
Despite the return of the notes, or on December 12, 1985, Associated Bank demanded from Trans-Pacific payment of the amount of P492,100.00
representing accrued interest on PN No. TL-9077-82. According to the bank, the promissory notes were erroneously released.
Initially, Trans-Pacific expressed its willingness to pay the amount demanded by respondent bank. Later, it had a change of heart and instead initiated
an action before the Regional Trial Court of Makati, Br. 146, for specific performance and damages. There it prayed that the mortgage over the two
parcels of land be released and its stock inventory be lifted and that its obligation to the bank be declared as having been fully paid.
After trial, the court a quo rendered judgment in favor of Trans-Pacific, to wit:
WHEREFORE, premises considered and upon a clear preponderance of evidence in support of the stated causes of action, the
Court finds for the plaintiffs and against defendant, and
(a) declares plaintiff's obligations to defendant to have been already fully paid;
(b) orders defendant to execute and deliver to plaintiffs a release on the i September 11, 1981 mortgage over
TCT (50858) 
S-10086 and TCT (50859) S-109087, and ii December 20, 1983 chattel mortgage, within fifteen (15) days
from the finality hereof;
(c) orders defendant to pay plaintiffs Romeo Javier and Romana Bataclan-Javier the sum of P50,000.00 as
and for moral damages; and
(d) orders defendant to pay plaintiffs the sum of P30,000.00 as attorney's fees, plus expenses of the suit.
Defendant's counterclaims are dismissed for lack of merit.
With costs against defendant.
SO ORDERED. (Rollo, p. 101)
Respondent bank elevated the case to the appellate court which, as aforesaid, reversed the decision of the trial court. In this appeal, petitioner raises
four errors allegedly committed by the respondent court, namely:
I
RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT THE ACCRUED INTEREST IN THE AMOUNT OF
492,100.00 HAS NOT BEEN PAID WHEN ARTICLE 1176 OF THE CIVIL CODE PROVIDES THAT SUCH CLAIM FOR
INTEREST UPON RECEIPT OF PAYMENT OF THE PRINCIPAL MUST BE RESERVED OTHERWISE IT IS DEEMED
PAID.
II
RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT WITH THE DELIVERY OF THE DOCUMENTS
EVIDENCING THE PRINCIPAL OBLIGATION, THE ANCILLARY OBLIGATION OF PAYING INTEREST WAS NOT
RENOUNCED CONTRARY TO THE PROVISIONS OF ART. 1273 OF THE CIVIL CODE AND THE UNDISPUTED
EVIDENCE ON RECORD.
III
RESPONDENT APPELLATE COURT ERRED IN NOT HOLDING THAT PETITIONER HAS FULLY PAID ITS
OBLIGATION CONFORMABLY WITH ARTICLE 1234 OF THE CIVIL CODE.
IV
RESPONDENT APPELLATE COURT ERRED IN AWARDING ATTORNEY'S FEES IN FAVOR OF ASSOCIATED BANK
(Rollo, p. 15).
The first three assigned errors will be treated jointly since their resolution border on the common issue, i.e., whether or not petitioner has indeed paid
in full its obligation to respondent bank.
Applying the legal presumption provided by Art. 1271 of the Civil Code, the trial court ruled that petitioner has fully discharged its obligation by
virtue of its possession of the documents (stamped "PAID") evidencing its indebtedness. Respondent court disagreed and held, among others, that the
documents found in possession of Trans-Pacific are mere duplicates and cannot be the basis of petitioner's claim that its obligation has been fully
paid. Accordingly, since the promissory notes submitted by petitioner were duplicates and not the originals, the delivery thereof by respondent bank
to the petitioner does not merit the application of Article 1271 (1st par.) of the Civil Code which reads:
Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the
renunciation of the action which the former had against the latter.
Respondent court is of the view that the above provision must be construed to mean the original copy of the document evidencing the credit and not
its duplicate, thus:
. . . [W]hen the law speaks of the delivery of the private document evidencing a credit, it must be construed as referring to the
original. In this case, appellees (Trans-Pacific) presented, not the originals but the duplicates of the three promissory notes."
(Rollo, p. 42)
The above pronouncement of respondent court is manifestly groundless. It is undisputed that the documents presented were duplicate originals and
are therefore admissible as evidence. Further, it must be noted that respondent bank itself did not bother to challenge the authenticity of the duplicate
copies submitted by petitioner. In People vs. Tan, (105 Phil. 1242 [1959]), we said:
When carbon sheets are inserted between two or more sheets of writing paper so that the writing of a contract upon the outside
sheet, including the signature of the party to be charged thereby, produces a facsimile upon the sheets beneath, such signature
being thus reproduced by the same stroke of pen which made the surface or exposed impression, all of the sheets so written on
are regarded as duplicate originals and either of them may be introduced in evidence as such without accounting for the
nonproduction of the others.
A duplicate copy of the original may be admitted in evidence when the original is in the possession of the party against whom the evidence is offered,
and the latter fails to produce it after reasonable notice (Sec. 2[b], Rule 130), as in the case of respondent bank.
This notwithstanding, we find no reversible error committed by the respondent court in disposing of the appealed decision. As gleaned from the
decision of the court a quo, judgment was rendered in favor of petitioner on the basis of presumptions, to wit:
The surrender and return to plaintiffs of the promissory notes evidencing the consolidated obligation as restructured, produces a
legal presumption that Associated had thereby renounced its actionable claim against plaintiffs (Art. 1271, NCC). The
presumption is fortified by a showing that said promissory notes all bear the stamp "PAID", and has not been otherwise
overcome. Upon a clear perception that Associated's record keeping has been less than exemplary . . ., a proffer of bank copies of
the promissory notes without the "PAID" stamps thereon does not impress the Court as sufficient to overcome presumed
remission of the obligation vis-a-vis the return of said promissory notes. Indeed, applicable law is supportive of a finding that in
interest bearing obligations-as is the case here, payment of principal (sic) shall not be deemed to have been made until the
interests have been covered (Art. 1253, NCC). Conversely, competent showing that the principal has been paid, militates against
postured entitlement to unpaid interests.
In fine. the Court is satisfied that plaintiffs must be found to have settled their obligations in full.
As corollary, a finding is accordingly compelled that plaintiffs (sic) accessory obligations under the real estate mortgage over two
(2) substituted lots as well as the chattel mortgage, have been extinguished by the renunciation of the principal debt (Art. 1273,
NCC), following the time-honored axiom that the accessory follows the principal. There is, therefore, compelling warrant (sic) to
find in favor of plaintiffs insofar as specific performance for the release of the mortgages on the substituted lots and chattel is
concerned. (Rollo, p. 100)
premised by:
Records show that Associated's Salvador M. Mesina is on record as having testified that all three (3) December 8, 1990
promissory notes for the consolidated principal obligation, interest and penalties had been fully paid (TSN, July 18, 1990, p. 18).
It is, moreover, admitted that said promissory notes were accordingly returned to Romeo Javier. (Ibid.)
The above disquisition finds no factual support, however, per review of the records. The presumption created by the Art. 1271 of the Civil Code is
not conclusive but merely prima facie. If there be no evidence to the contrary, the presumption stands. Conversely, the presumption loses its legal
efficacy in the face of proof or evidence to the contrary. In the case before us, we find sufficient justification to overthrow the presumption of
payment generated by the delivery of the documents evidencing petitioners indebtedness.
It may not be amiss to add that Article 1271 of the Civil Code raises a presumption, not of payment, but of the renunciation of the credit where more
convincing evidence would be required than what normally would be called for to prove payment. The rationale for allowing the presumption of
renunciation in the delivery of a private instrument is that, unlike that of a public instrument, there could be just one copy of the evidence of credit.
Where several originals are made out of a private document, the intendment of the law would thus be to refer to the delivery only of the
original original rather than to the original duplicate of which the debtor would normally retain a copy. It would thus be absurd if Article 1271 were
to be applied differently.
While it has been consistently held that findings of facts are not reviewable by this Court, this rule does not find application where both the trial and
the appellate courts differ thereon (Asia Brewery, Inc. v. CA, 224 SCRA 437 [1993]).
Petitioner maintains that the findings of the trial court should be sustained because of its advantage in observing the demeanor of the witnesses while
testifying (citing Crisostomo v. Court of Appeals, 197 SCRA 833) more so where it is supported by the records (Roman Catholic Bishop of Malolos
v. Court of Appeals, 192 SCRA 169).
This case, however, does not concern itself with the demeanor of witnesses. As for the records, there is actually none submitted by petitioner to prove
that the contested amount, i.e., the interest, has been paid in full. In civil cases, the party that alleges a fact has the burden of proving it (Imperial
Victory Shipping Agency v. NLRC 200 SCRA 178 [1991]). Petitioner could have easily adduced the receipts corresponding to the amounts paid
inclusive of the interest to prove that it has fully discharged its obligation but it did not.
There is likewise nothing on the records relied upon by the trial court to support its claim, by empirical evidence, that the amount corresponding to
the interest has indeed been paid. The trial court totally relied on a disputable presumption that the obligation of petitioner as regards interest has been
fully liquidated by the respondent's act of delivering the instrument evidencing the principal obligation. Rebuttable as they are, the court a quo chose
to ignore an earlier testimony of Mr. Mesina anent the outstanding balance pertaining to interest, as follows:
Court:
 Q Notwithstanding, let us go now specifically to promissory note No. 9077-82 in the amount of consolidated
principal of P1,050,000.00. Does the Court get it correctly that this consolidated balance has been fully paid?
A Yes, the principal, yes, sir.
Q Fully settled?
A Fully settled, but the interest of that promissory note has not been paid, Your Honor.
Q In other words, you are saying, fully settled but not truly fully settled?
A The interest was not paid.
Q Not fully settled?
A The interest was not paid, but the principal obligation was removed from our books, Your Honor.
Q And you returned the promissory note?
A We returned the promissory note. (TSN, July 18, 1990, p. 22)
That petitioner has not fully liquidated its financial obligation to the Associated Bank finds more than ample confirmation and self-defeating posture
in its letter dated December 16, 1985, addressed to respondent bank, viz.:
. . . that because of the prevailing unhealthy economic conditions, the business is unable to generate sufficient resources for debt
servicing.
Fundamentally on account of this, we propose that you permit us to fully liquidate the remaining obligations to you of P492,100
through a payment in kind (dacion en pago) arrangement by way of the equipments (sic) and spare parts under chattel mortgage
to you to the extent of their latest appraised values." (Rollo, pp. 153-154; Emphasis supplied)
Followed by its August 20, 1986 letter which reads:
We have had a series of communications with your bank regarding our proposal for the eventual settlement of our remaining
obligations . . .
As you may be able to glean from these letters and from your credit files, we have always been conscious of our obligation to
you which had not been faithfully serviced on account of unfortunate business reverses. Notwithstanding these however, total
payments thus far remitted to you already exceede (sic) the original principal amount of our obligation. But because of interest
and other charges, we find ourselves still obligated to you by P492,100.00. . . .
. . . We continue to find ourselves in a very fluid (sic) situation in as much as the overall outlook of the industry has not
substantially improved. Principally for this reason, we had proposed to settle our remaining obligations to you by way of dacion
en pago of the equipments (sic) and spare parts mortgaged to you to (the) extent of their applicable loan values. (Rollo, p. 155;
Emphasis supplied)
Petitioner claims that the above offer of settlement or compromise is not an admission that anything is due and is inadmissible against the party
making the offer (Sec. 24, Rule 130, Rules of Court). Unfortunately, this is not an iron-clad rule.
To determine the admissibility or non-admissibility of an offer to compromise, the circumstances of the case and the intent of the party making the
offer should be considered. Thus, if a party denies the existence of a debt but offers to pay the same for the purpose of buying peace and avoiding
litigation, the offer of settlement is inadmissible. If in the course thereof, the party making the offer admits the existence of an indebtedness
combined with a proposal to settle the claim amicably, then, the admission is admissible to prove such indebtedness (Moran, Comments on the Rules
of Court, Vol. 5, p. 233 [1980 ed.); Francisco, Rules of Court, Vol. VII, p. 325 [1973 ed.] citing McNiel v. Holbrook, 12 Pac. (US) 84, 9 L.ed. 1009).
Indeed, an offer of settlement is an effective admission of a borrower's loan balance (L.M. Handicraft Manufacturing Corp. v. Court of Appeals, 186
SCRA 640 [1990]). Exactly, this is what petitioner did in the case before us for review.
Finally, respondent court is faulted in awarding attorney's fees in favor of Associated Bank. True, attorney's fees may be awarded in a case of clearly
unfounded civil action (Art. 2208 [4], CC). However, petitioner claims that it was compelled to file the suit for damages in the honest belief that it
has fully discharged its obligations in favor of respondent bank and therefore not unfounded.
We believe otherwise. As petitioner would rather vehemently deny, undisputed is the fact of its admission regarding the unpaid balance of
P492,100.00 representing interests. It cannot also be denied that petitioner opted to sue for specific performance and damages after consultation with
a lawyer (Rollo, p. 99) who advised that not even the claim for interests could be recovered; hence, petitioner's attempt to seek refuge under Art.
1271 (CC). As previously discussed, the presumption generated by Art. 1271 is not conclusive and was successfully rebutted by private respondent.
Under the circumstances, i.e., outright and honest letters of admission vis-a-vis counsel-induced recalcitrance, there could hardly be honest belief. In
this regard, we quote with approval respondent court's observation:
The countervailing evidence against the claim of full payment emanated from Transpacific itself. It cannot profess ignorance of
the existence of the two letters, Exhs. 3 & 4, or of the import of what they contain. Notwithstanding the letters, Transpacific
opted to file suit and insist(ed) that its liabilities had already been paid. There was thus an 
ill-advised attempt on the part of Transpacific to capitalize on the delivery of the duplicates of the promissory notes, in complete
disregard of what its own records show. In the circumstances, Art. 2208 (4) and (11) justify the award of attorney's fees. The sum
of P15,000.00 is fair and equitable. (Rollo, pp. 46-47)
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-43608             July 20, 1937
THE YEK TONG FIRE and MARINE INSURANCE CO., LTD., plaintiff-appellant, 
vs.
PELAGIO YUSINGCO, ET AL., defendants. 
VICENTE MADRIGAL, appellant.
Duran and Lim for plaintiff-appellant.
Salvador E. Imperial for defendant-appellant.
DIAZ, J.:
The plaintiff, Yek Tong Lim Fire & Marine Insurance Co., Ltd. and the defendant Vicente Madrigal appealed from the judgment of the Court of First
Instance of Manila, ordering (a) the defendant Pelagio Yusingco to pay to the plaintiff the sum of P17,590.85 with interest thereon at 12 per cent per
annum for August 10, 1932, until fully paid, plus the sum of P4,500 as attorney's fees and the costs of the suit; (b) the defendant Vicente Madrigal to
turn over to the plaintiff the amount of money received by him in October, 1932, from his codefendant provincial sheriff of Surigao, and (c)
absolving said sheriff from the complaint.
The appeal of the defendant Vicente Madrigal according to him, is based on the ground that the lower court committed the following alleged errors:
I. In holding that the claim of the plaintiff, as mortgagee, is superior to his, as assignee of the preferred credit of Earnshaw Docks &
Honolulu Iron Works, which had made some repairs on the steamship Yusingco;
II. In ordering him to turn over to the plaintiff the amount of money received by him from the defendant provincial sheriff of Surigao,
named Protolico P. Egay, which formed a part of the proceeds of the auction sale of the steamship Yusingco, and
III. In denying his motion for a new trial based upon his allegation that the decision is contrary to law and the evidence taken.
The plaintiff's appeal, in turn, is due to the fact that, according to it, the lower court erred in absolving the defendant provincial sheriff of Surigao, and
in denying its motion for a new trial based on the ground that the decision, in so far as it absolves said sheriff from the complaint, is not supported by
the evidence and is contrary to law.
The facts pertinent to the case, as inferred from the stipulation submitted to the lower court by the parties and from the same evidence taken during
the trial, may be summarized as follows:
The defendant Pelagio Yusingco was the owner of the steamship Yusingco and, as such, he executed, on November 19, 1927, a power of attorney in
favor of Yu Seguioc to administer, lease, mortgage and sell his properties, including his vessels or steamships (Exhibit N). Yu Seguios, acting as such
attorneys in fact of Pelagio Yusingco, mortgaged to the plaintiff Yek Tong Lin Fire & Marine Insurance Co., Ltd., with the approval of the Bureau of
Customs, the steamship Yusingco belonging to the defendant, to answer for any amount that said plaintiff might pay in the name of the defendant on
account of a promissory note for P45,000 executed by it, upon receipt of said sum as loan from the China Banking Corporation, on September 25,
1928, and on account of a guaranty in the sum of P20,000 subscribed by it in favor of said bank on the 17th of said month and year, the deed, Exhibit
A, having been executed to the effect, in absolute conformity with the Chattel Mortgage Law.
One year and some months later, or in February, 1930, and in April, 1931, the steamship Yusingco needed some repairs which were made by the
Earnshaw Docks & Honolulu Iron Works upon petition of A. Yusingco Hermanos which, according to documentary evidence of record, was co-
owner of Pelagio Yusingco. The repairs were made upon the guaranty of the defendant and appellant Vicente Madrigal at a cost of P8,244.66.
When neither A. Yusingco Hermanos nor Pelagio Yusingco could pay said sum to the Earnshaw Docks & Honolulu Iron Works, the defendant and
appellant Vicente Madrigal had to make payment thereof with the stipulated interest thereon, which was at the rate of 9 per cent per annum, on March
9, 1932, because he was bound thereto by reason of the bond filed by him, the payment then made by him having amounted to P8,777.60. On said
date, but after the credit of the Earnshaw Docks & Honolulu Iron Works, for the repairs made by it on the steamship Yusingco had already been paid,
said company assigned its credit against A. Yusingco Hermanos to the defendant and appellant Vicente Madrigal, by executing to that end the
instrument Exhibit 5, which was duly registered in the Bureau of Customs. Some days later, when said defendant discovered that he was not to be
reimbursed for the repairs made on the steamship Yusingco, he brought an action against his codefendant Pelagio Yusingco and A. Yusingco
Hermanos to compel them to reimburse him, thereby giving rise to civil case No. 41654 of the Court of First Instance of Manila, entitled "Vicente
Madrigal, plaintiff, vs. Pelagio Yusingco and A. Yusingco Hermanos, defendants" (Exhibit 6), which resulted in a judgment favorable to him and
adverse to the Yusingcos, as the latter were ordered to pay him the sum of P3,269.66 plus interest thereon at said rate of 9 per cent per annum from
May 6, 1931, with the costs of the suit. It was provided in the judgment that upon failure of the Yusingcos to pay the above-stated amounts to Vicente
Madrigal, a writ of execution would be issued in order to have the steamship Yusingco sold at public auction for the purpose of satisfying said
amounts with the proceeds thereof.
Inasmuch as neither the defendant Pelagio Yusingco nor A. Yusingco Hermanos paid the amount of the judgment rendered in civil case No. 41654,
in favor of the defendant and appellant Vicente Madrigal, the latter sought and obtained from the Court of First Instance, which tried the case, the
issuance of the corresponding writ of execution (Exhibit 8). However, before the sale of the steamship Yusingco, by virtue of the writ of execution so
issued, was carried out, the plaintiff and appellant filed with the defendant sheriff a third party claim demanding said ship for himself, alleging that it
had been mortgaged to him long before the issuance of said writ and, therefore, he was entitled to the possession thereof. The defendant sheriff then
informed the defendant and appellant Vicente Madrigal that if he wished to have the execution sought by him carried out, he should file the
indemnity bond required by section 451 of Act No. 190. This was done by Vicente Madrigal, but in order to prevent him and the sheriff from
proceeding with the execution, the plaintiff and appellant instituted this case in the court of origin and asked for the issuance of a writ of preliminary
injunction addressed to said two defendants to restrain them from selling the steamship Yusingco at public auction. The writ of preliminary
injunction, which was issued on August 19, 1932, was later dissolved, the defendant and appellant Vicente Madrigal having filed a bond of P5,000.
This left the preliminary injunction unimpaired and valid for the sale of the steamship Yusingco at public auction. For this reason, said ship was sold
at public auction on September 19, 1932, and was purchased, under the circumstances, by the plaintiff and appellant itself, which was the highest
bidder, having made the highest bid of P12,000 (Exhibit 8). Of said amount, the defendant sheriff turned over P10,195 to Vicente Madrigal in
payment of his judgment credit, distributing the balance in the manner stated in Exhibit 9. It is said sum of P10,195 which the lower court ordered
Vicente Madrigal to turn over to the plaintiff.
In addition to the foregoing facts, it should be stated that when the defendant and appellant Vicente Madrigal instituted said civil case No. 41654
against Pelagio Yusingco and A. Yusingco Hermanos in March, 1932, the steamship Yusingco was already in the possession of Pelagio Yusingco in
the port of Surigao (Stipulation of Facts, paragraph VI).
It should be added further that the payments made by the plaintiff on account of the credit of the China Banking Corporation against Pelagio
Yusingco, by virtue of the deed of mortgage executed by the latter in favor of said plaintiff, through an attorney in fact, encumbering the
steamship Yusingco, amounted to only P16,190.83 plus P700 as insurance premium, which are still less than that adjudicated to the plaintiff by the
lower court.
The parties seem to believe that the important if not the only question to be decided is whether or not the credit of the plaintiff, as mortgage creditor
of Pelagio Yusingco, is superior to that of Vicente Madrigal, as judgment creditor of said Pelagio Yusingco Hermanos. If the plaintiff is to be
believed, it seems clear that as they (the plaintiff, Pelagio Yusingco, Vicente Madrigal, and A. Yusingco Hermanos) as merchants, the provisions of
the Code of Commerce should govern their acts (article 2, Code of Commerce). The plaintiff contends that if Vicente Madrigal enjoyed any preferred
right at all, it could have been no other than that based upon article 580 of said Code. The pertinent part of said article reads:
In all judicial sales of vessels for the payment of creditors, the said creditors shall have preference in the order stated:
xxx     xxx     xxx
8. The part of the price which has not been paid the last vendor, the credits pending for the payment of material and work in the
construction of the vessel, when it has not navigated, and those arising from the repair and equipment of the vessel and it provisioning
which victuals and fuel during its last voyage.
 In order that the credits provided for this subdivision may enjoy the preference they must appear by contracts recorded in the registry of
vessels, or if they were contracted for the vessel while on a voyage and said vessel has not returned to the port of her registry, they must be
made under the authority required for such cases and entered in the certificate of registry of the said vessel.
Basing its opinion upon the foregoing provision of law, the plaintiff contends that as the repair made on the steamship Yusingco were not for
averages suffered during its last voyage, the defendant Vicente Madrigal cannot invoke preferential right for having paid for them as guarantor.
Granting this to be true, it does not follow that the plaintiff is entitled to recover from said Vicente Madrigal what the latter received from the
defendant provincial sheriff of Surigao, by virtue of the execution of the judgment rendered in his favor. Neither does it follow that said defendant
(Vicente Madrigal) has no other right of action against Pelagio Yusingco and A. Yusingco Hermanos for the recovery of what he had paid for them,
particularly when the Earnshaw Dock & Honolulu Iron Works, which had performed the repairs in question, assigned to him the credit it had against
them. There is no doubt that under the provisions of article 1922, paragraph 1, of the Civil Code, the Earnshaw Docks & Honolulu Iron Works was
entitled to recover the cost of said repairs (International Banking Corporation vs. Corrales, 10 Phil., 435; Bank of the Philippine Islands vs. Walter A.
Smith & Co., 55 Phil., 533), inasmuch as the steamship Yusingco, before as well as at the time of its sale at public auction by virtue of a judicial writ,
was in the possession of the owners thereof, Pelagio Yusingco and A. Yusingco Hermanos, debtors of the plaintiff. If the Earnshaw Docks &
Honolulu Iron Works had such right, naturally the defendant and appellant Vicente Madrigal later had such right, to the same extent as the former, by
virtue of the assignment made to him after he, as guarantor, paid the obligation contracted by the Yusingcos with the Earnshaw Docks & Honolulu
Iron Works for the repair of said vessel. This is necessarily so because the assignee is entitled to exercise the right and prosecute all actions belonging
to the assignor (articles 1212 and 1528, Civil Code; section 114, Act No. 190).
When the plaintiff attempted to foreclose the mortgage constituted in its favor, first by filing its third party claim in civil case No. 41654 wherein the
writ of execution, by virtue of which the steamship Yusingco was sold at public auction, was issued, its only right with respect to said vessel was to
sell it judicially or extrajudicially in accordance with law, upon default in the performance of the conditions of the mortgage contract entered into
between it and the owners thereof, in order to apply the proceeds of the sale to its mortgage credit against said owners, or at least against Pelagio
Yusingco, if such proceeds are sufficient (Bachrach Motor Co. vs. Summers, 42 Phil., 3), and if insufficient, to collect the balance thereof on other
property belonging to said defendants (Exhibit C, page 3). The steamship Yusingco was then in custodia legis and, under the circumstances, it could
neither take possession thereof nor sell it pursuant to the conditions of its mortgage contract.
After the steamship Yusingco had been sold by virtue of the judicial writ issued in civil case No. 41654 for the execution of the judgment rendered in
favor of Vicente Madrigal, the only right left to the plaintiff was to collect its mortgage credit from the purchaser thereof at public auction, inasmuch
as the rule is that a mortgage directly and immediately subjects the property on which it is imposed, whoever its possessor may be, to the fulfillment
of the obligation for the security of which it was created (article 1876, Civil Code); but it so happens that it can not take such steps now because it
was the purchaser of the steamship Yusingco at public auction, and it was so with full knowledge that it had a mortgage credit on said vessel.
Obligations are extinguished by the merger of the rights of the creditor and debtor (articles 1156 and 1192, Civil Code).
The conclusion arrived at by this court is that the defendant and appellant Vicente Madrigal enjoys preference in the payment of his judgment credit
with the proceeds of the sale of the steamship Yusingco, by virtue of the assignment to him of the credit of the Earnshaw Docks & Honolulu Iron
Works, because it is so provided not only in article 1922 of the Civil Code but also in article 1926, rule 4, thereof, notwithstanding the preference
referred to in rule 1 of the latter article, which provides that credits secured by a pledge exclude all others to extent of the value is not secured by
pledge but by mortgage, so much so that the mortgage deed executed in its favor contains a clause to the effect that if the proceeds of the sale of the
steamship Yusingco, in case it is sold by reason of default in the performance of the conditions thereon, should be insufficient, the plaintiff could its
credit on other property of the debtors (Exhibit C, page 3).
Rule 4 of the above-cited article 1926 reads: "In all other cases the value of the personal property shall be applied pro rata to the payment of the
credits which enjoy special preference with respect to such property," and a vessel is personal property, as stated in the case of Philippine Refining
Co. vs. Jarque (61 Phil., 229). Said rule refers to the credits stated in said article 1922 (12 Manresa, Civil Code, 706).
Having arrived at this conclusion, it becomes unnecessary to pass upon the other errors assigned by the parties, particularly if it is taken into
consideration that the plaintiff-appellant has to date taken no action against the defendant sheriff for the recovery of the damages it claims to have
suffered, upon the indemnity bond filed by the defendant and appellant Vicente Madrigal, in accordance with section 451 of Act No. 190, as amended
by Act No. 4108 on December 6, 1933. Under said Act No. 4108 (section 2), all rights of action against indemnity bonds must be filed within the
inextensible period of 120 days effective said date, December 6, 1933.
Wherefore, the appealed judgment is modified, reversing it in so far as it orders the defendant and appellant Vicente Madrigal to turn over to the
plaintiff the amount of money paid him by the provincial sheriff of Surigao from the proceeds of the sale of the steamship Yusingco, and affirming it
in so far as it absolves said sheriff from the complaint, with the costs to the plaintiff-appellant. So ordered.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-43191             November 13, 1935
PAULINO GULLAS, plaintiff-appellant, 
vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Gullas, Lopez, Tuaño and Leuterio for plaintiff-appellant.
Jose Delgado for defendant-appellant.
 
MALCOLM, J.:
Both parties to this case appealed from a judgment of the Court of First Instance of Cebu, which sentenced the defendant to return to the account of
the plaintiff the sum of P5098, with legal interest and costs, the plaintiff to secure damages in the amount of P10,000 more or less, and the defendant
to be absolved totally from the amended complaint. As it is conceded that the plaintiff has already received the sum represented by the United States
treasury, warrant, which is in question, the appeal will thus determine the amount, if any, which should be paid to the plaintiff by the defendant.
The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a member of the Philippine Bar, resident in the City of
Cebu. The second named is a banking corporation with a branch in the same city. Attorney Gullas has had a current account with the bank.
It appears from the record that on August 2, 1933, the Treasurer of the United States for the United States Veterans Bureau issued a Warrant in the
amount of $361, payable to the order of Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as endorsers of this check. Thereupon it
was cashed by the Philippine National Bank. Subsequently the treasury warrant was dishonored by the Insular Treasurer.
At that time the outstanding balance of Attorney Gullas on the books of the bank was P509. Against this balance he had issued certain cheeks which
could not be paid when the money was sequestered by the On August 20, 1933, Attorney Gullas left his residence for Manila.
The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas which could not be delivered to him at that time
because he was in Manila. In the bank's letter of August 21, 1933, addressed to Messrs. Paulino Gulla and Pedro Lopez, they were informed that the
United States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos for $361 or P722, the payment for which had been received has
been returned by our Manila office with the notation that the payment of his check has been stopped by the Insular Treasurer. "In view of this
therefore we have applied the outstanding balances of your current accounts with us to the part payment of the foregoing check", namely, Mr. Paulino
Gullas P509. On the return of Attorney Gullas to Cebu on August 31, 1933, notice of dishonor was received and the unpaid balance of the United
States Treasury warrant was immediately paid by him.
As a consequence of these happenings, two occurrences transpired which inconvenienced Attorney Gullas. In the first place, as above indicated,
checks including one for his insurance were not paid because of the lack of funds standing to his credit in the bank. In the second place, periodicals in
the vicinity gave prominence to the news to the great mortification of Gullas.lawphil.net
A variety of incidental questions have been suggested on the record which it can be taken for granted as having been adversely disposed of in this
opinion. The main issues are two, namely, (1) as to the right of Philippine National Bank, and to apply a deposit to the debt of depositor to the bank
and (2) as to the amount damages, if any, which should be awarded Gullas.
The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles 1195 et seq., 1758 et seq. The portions of Philippine law
provide that compensation shall take place when two persons are reciprocally creditor and debtor of each other (Civil Code, article 1195). In his
connection, it has been held that the relation existing between a depositor and a bank is that of creditor and debtor. (Fulton Iron Works Co. vs. China
Banking Corporation [1933], 59 Phil., 59.)
The Negotiable Instruments Law contains provisions establishing the liability of a general indorser and giving the procedure for a notice of dishonor.
The general indorser of negotiable instrument engages that if he be dishonored and the, necessary proceedings of dishonor be duly taken, he will pay
the amount thereof to the holder. (Negotiable Instruments Law, sec. 66.) In this connection, it has been held a long line of authorities that notice of
dishonor is in order to charge all indorser and that the right of action against him does not accrue until the notice is given. (Asia Banking
Corporation vs. Javier [1923] 44 Phil., 777; 5 Uniform Laws Annotated.)
As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor. In
Louisiana, however, a civil law jurisdiction, the rule is denied, and it is held that a bank has no right, without an order from or special assent of the
depositor to retain out of his deposit an amount sufficient to meet his indebtedness. The basis of the Louisiana doctrine is the theory of confidential
contracts arising from irregular deposits, e. g., the deposit of money with a banker. With freedom of selection and after full preference to the minority
rule as more in harmony with modern banking practice. (1 Morse on Banks and Banking, 5th ed., sec. 324; Garrison vs. Union Trust Company
[1905], 111 A.S.R., 407; Louisiana Civil Code Annotated, arts. 2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8
Manresa, Comentarios al Codigo Civil Español, 4th ed., 359 et seq., 11 Manresa pp. 694 et seq.)
Starting, therefore, from the premise that the Philippine National Bank had with respect to the deposit of Gullas a right of set off, we next consider if
that remedy was enforced properly. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting for any
action by Gullas, the bank made use of the money standing in his account to make good for the treasury warrant. At this point recall that Gullas was
merely an indorser and had issued in good faith.
As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third party, it has been held that he has a right of
action against the bank for its refusal to pay such a check in the absence of notice to him that the bank has applied the funds so deposited in
extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.) The decision cited represents the
minority doctrine, for on principle it would seem that notice is not necessary to a maker because the right is based on the doctrine that the relationship
is that of creditor and debtor. However this may be, as to an indorser the situation is different, and notice should actually have been given him in
order that he might protect his interests.
We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to follow up that statement with others proving exact
damages is not so easy. For instance, for alleged libelous articles the bank would not be primarily liable. The same remark could be made relative to
the loss of business which Gullas claims but which could not be traced definitely to this occurrence. Also Gullas having eventually been reimbursed
lost little through the actual levy by the bank on his funds. On the other hand, it was not agreeable for one to draw checks in all good faith, then, leave
for Manila, and on return find that those checks had not been cashed because of the action taken by the bank. That caused a disturbance in Gullas'
finances, especially with reference to his insurance, which was injurious to him. All facts and circumstances considered, we are of the opinion that
Gullas should be awarded nominal damages because of the premature action of the bank against which Gullas had no means of protection, and have
finally determined that the amount should be P250.
Agreeable to the foregoing, the errors assigned by the parties will in the main be overruled, with the result that the judgment of the trial court will be
modified by sentencing the defendant to pay the plaintiff the sum of P250, and the costs of both instances.
Villa-Real, Imperial, Butte, and Goddard, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-39427             February 24, 1934
TIRSO GARCIA, in his capacity as receiver of the Mercantile Bank of China, plaintiff-appellee, 
vs.
LIM CHU SING, defendant-appellant.
Marcelino Lontok for appellant.
Nicolas Santiago for appellee.
VILLA-REAL, J.:
This is an appeal taken by the defendant Lim Chu Sing from the judgment rendered by the Court of First Instance of Manila, the dispositive part of
which reads as follows:
Wherefore, judgment is rendered sentencing the defendant to pay the sum of P9,105.17 with interest thereon at the rate of six per cent per
annum from September 1, 1932, until fully paid, plus the sum of P910.51, as attorney's fees, with the costs of this suit.
In conformity with the stipulation, this judgment shall be subject to execution after ninety (90) days. So ordered.
In support of his appeal, the appellant assigns the following alleged errors as committed by the court a quo in its decision, to wit:
 1. In denying the motion dated December 27, 1932, praying for the inclusion of Lim Cuan Sy, being the principal debtor, as party to this
suit.
2. In holding as improper the compensation of the defendant's debt of P9,106.17, claimed in the complaint, with his credit amounting to
P10,000 with the Mercantile Bank of China.
3. In not ordering that after the compensation the plaintiff-appellee, as receiver of the Mercantile Bank of China, should liquidate the
dividends of the defendant-appellant's shares.
4. In sentencing the defendant-appellant to pay to the plaintiff-appellee the sum of P910.51 as attorney's fees, plus interest at 6 per cent per
annum on the sum of P9,105.17, with costs.
5. In denying the motion for a new trial.
When the case was called for hearing, the parties submitted the following stipulation of facts for the consideration of the trial court, to wit:
Come now both parties and to this Honorable Court respectfully submit the following stipulation:
1. The defendant admits the facts alleged in the complaint.
2. The plaintiff admits the allegations in the answer, particularly with reference to the fact that the defendant is the owner of two hundred
shares at a par value of fifty pesos (P50) each, that is (Pl0,000).
3. The court may render judgment in accordance with this stipulation, but the same shall be subject to execution after ninety (90) days.
Wherefore, they respectfully submit this stipulation and pray that judgment be rendered in accordance therewith.
The facts alleged in the complaint and admitted by both parties under the above quoted stipulation of facts are as follows:
On June 20, 1930, the defendant-appellant Lim Chu Sing executed and delivered to the Mercantile Bank of China promissory note for the sum of
P19,605.17 with interest thereon at 6 per cent per annum, payable monthly as follows: P1,000 on July 1, 1930; P500 on August 1, 1930; and P500 on
the first of every month thereafter until the amount of the promissory note together with the interest thereon is fully paid (Exhibit A). One of the
conditions stipulated in said promissory note is that in case of defendant's default in the payment of any of the monthly installments, as they become
due, the entire amount or the unpaid balance thereof together with interest thereon at 6 per cent per annum, shall become due and payable on demand.
The defendant had been, making several partial payments thereon, leaving an unpaid balance of P9,105.17. However, he defaulted in the payment of
several installments by reason of which the unpaid balance of P9,105.17 on the promissory note has ipso facto become due and demandable.
The facts alleged in the answer and admitted by both parties under the same stipulation of facts are as follows:
The debt which is the subject matter of the complaint was not really an indebtedness of the defendant but of Lim Cuan Sy, who had an account with
the plaintiff bank in the form of "trust receipts" guaranteed by the defendant as surety and with chattel mortgage securities. The plaintiff bank,
without the knowledge and consent of the defendant, foreclosed the chattel mortgage and privately sold the property covered thereby. Inasmuch as
Lim Cuan Sy failed to comply with his obligations, the plaintiff required the defendant, as surety, to sign a promissory note for the sum of
P19,105.17 payable in the manner hereinbefore stated (Exhibit A). The defendant had been paying the corresponding installments until the debt was
reduced to the sum of P9,105.17 claimed in the complaint. The defendant is the owner of shares of stock of the plaintiff Mercantile Bank of China
amounting to P10,000. The plaintiff bank is now under liquidation.
On December 27, 1932, the defendant-appellant Lim Chu Sing filed a motion praying for the inclusion of the principal debtor Lim Cuan Sy as party
defendant so that he could avail himself of the benefit of the exhaustion of the property of said Lim Cuan Sy. Said motion was denied in open court
by the presiding judge without the defendant-appellant having excepted to such order of denial.
The proceeds of the sale of the mortgaged chattels together with other payments made were applied to the amount of the promissory note in question,
leaving the balance which the plaintiff now seeks to collect.
The first question to be decided in this appeal is whether or not the court a quo erred in denying the motion for inclusion of a party a defendant, filed
by the defendant-appellant.
According to the provisions of section 141 of the Code of Civil Procedure, ". . . Rulings of the court upon minor matters, such as adjournments,
postponements of trials, the extension of time for filing pleadings or motions, and other matters addressed to the discretion of the court in the
performance of its duty, shall not be subject to exception. But exception may be taken to any other ruling, order, or judgment of the court made
during the pendency of the action in the Court of First Instance." "An `exception' has been defined as an objection taken to the decision of the trial
court upon a matter of law, and is a notice that the party taking it preserves for the consideration of the appellate court a ruling deemed erroneous. (8
Am. Enc. P. and P., 157.)" " `Errors in a judgment or decree will not be noticed on appeal in the absence of objections and exceptions taken below,
and they should be sufficiently specific to direct the attention of the court to the alleged defects.' (8 Enc. Pl and Pr., 289.)" (Garcia de Lara vs.
Gonzales de Lara, 2 Phil., 297.) Inasmuch as an exception is an objection taken to the decision of the trial court upon a matter of law and is a notice
that the party taking it will submit for the consideration of the appellate court the ruling deemed erroneous, failure to interpose it deprived the
appellant of the right to raise the question whether or not the court a quo committed the alleged error attributed to it in its ruling which had not been
excepted to by the said appellant. The inclusion in, or exclusion from an action of a certain party is a question of law. The herein defendant-appellant,
not having excepted to the order of the Court of First Instance of Manila denying his motion for the inclusion of Lim Cuan Sy as party defendant, is
estopped from raising such question upon appeal (Roman Catholic Bishop of Lipa vs. Municipality of San Jose, 27 Phil., 571; Vergara vs. Laciapag,
28 Phil., 439; Andrews vs. Morente Rosario, 9 Phil., 634).
The second question to be decided is whether or not it is proper to compensate the defendant-appellant's indebtedness of P9,105.17, which is claimed
in the complaint, with the sum of P10,000 representing the value of his shares of stock with the plaintiff entity, the Mercantile Bank of China.
According to the weight of authority, a share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and,
therefore, it is not a credit (14 Corpus Juris, p. 388, see. 511). Stockholders, as such, are not creditors of the corporation (14 Corpus Juris, p. 848, Sec.
1289). It is the prevailing doctrine of the American courts, repeatedly asserted in the broadest terms, that the capital stock of a corporation is a trust
fund to be used more particularly for the security of creditors of the corporation, who presumably deal with it on the credit of its capital stock (14
Corpus Juris, p. 383, sec. 505). Therefore, the defendant-appellant Lim Chu Sing not being a creditor of the Mercantile Bank of China, although the
latter is a creditor of the former, there is no sufficient ground to justify a compensation (art. 1195, Civil Code; Acuña Co Chongco vs. Dievas, 12
Phil., 250).
The third question to be decided in this appeal is whether or not the court a quo erred in sentencing the said defendant-appellant to pay the sum of
P910.51 as attorney's fees in addition to interest at 6 per cent per annum on the amount sought in the complaint.
The pertinent clause of the promissory note Exhibit A reads as follows: "In case of default of any of the above installments, the total amount of the
balance still unpaid of this note will become due and payable on demand plus interest thereon at the rate of 6 per cent per annum from date of this
note until payment is made. And I further agree to pay an additional sum equivalent to 10 per cent of the said note to cover cost and attorney's fees
for collection."
The stipulation relative to the payment of interest at the rate of 6 per cent per annum on the unpaid balance of the promissory note Exhibit A refers to
the capital and the 10 per cent stipulated for costs and attorney's fees cannot be considered as interest but an indemnity for damages occasioned by
the collection of the indebtedness through judicial process. Therefore the two rates in question cannot be combined and considered usurious interest.
With reference to the costs, the 10 per cent stipulated in the promissory note is for costs and attorney's fees which may be incurred in the collection of
the indebtedness through judicial process. Therefore, the defendant-appellant should not again be made to pay for them (Bank of the Philippine
Islands vs. Yulo, 31 Phil., 476).
In view of the foregoing, this court is of the opinion and so holds: (1) That failure to file an exception to a ruling rendered in open court denying a
motion for the inclusion of a party as defendant deprives the petitioner, upon appeal of the right to raise the question whether such denial proper or
improper; (2) that the shares of a banking corporation do not constitute an indebtedness of the corporation to the stockholder and, therefore, the latter
is not a creditor of the former for such shares; (3) that the indebtedness of a shareholder to a banking corporation cannot be compensated with the
amount of his shares therein, there being no relation of creditor and debtor with respect to such shares; and (4) that the percentage stipulated in a
contract, for costs and attorney's fees for the collection of an indebtedness, includes judicial costs.
Wherefore, with the sole modification that the costs be eliminated from the appealed judgment, the same is hereby affirmed, without special
pronouncement as to costs of this instance. So ordered.
Malcolm, Hull, Imperial, and Goddard, JJ., concur.