Asia Trust Development Bank vs. Carmelo H. Tuble

Upon extrajudicial foreclosure and sale, the real estate mortgage contract is extinguished, and the mortgagee cannot invoke its dragnet clause to include interest from a separate loan in the redemption price; the dragnet clause does not cover a subsequent loan absent clear intent and reliance on the real estate mortgage as security. Compensatory legal interest under Article 2209 of the Civil Code is due only upon proof of default.

Respondent Carmelo H. Tuble was the vice-president of petitioner Asiatrust Development Bank. As an officer, he availed himself of the bank’s car incentive plan, loan privileges, and Senior Managers Deferred Incentive Plan. The statutory backdrop concerns the redemption price when the mortgagee is a bank, which the Court held is governed by the General Banking Act rather than by Act No. 3135 in relation to Rule 39 of the Rules of Court.

Respondent Carmelo H. Tuble served as vice-president of petitioner Asiatrust Development Bank. As an officer, he availed himself of the bank’s car incentive plan, loan privileges, and Senior Managers Deferred Incentive Plan. He acquired a Nissan Vanette through the car incentive plan; the arrangement was made to appear as a lease agreement requiring only monthly rentals, and the lease would terminate if the employee resigned or retired before full payment of the price.

Tuble obtained three separate loans. The first was a real estate loan evidenced by the January 18, 1993 Promissory Note No. 0142, with maturity date of January 1, 1999, secured by a mortgage over his property covered by Transfer Certificate of Title No. T 145794; no interest on this loan was indicated. The second was a consumption loan evidenced by the January 10, 1994 Promissory Note No. 0143, with maturity date of January 31, 1995 and interest at 18% per annum. Aside from these, Tuble allegedly obtained a salary loan as his third loan.

On March 30, 1995, he resigned. He was subsequently given the option to either return the vehicle without any further obligation or retain the unit and pay its remaining book value. After his retirement, Tuble had the following obligations to the bank: the purchase or return of the Nissan Vanette; ₱100,000 as consumption loan; ₱421,800 as real estate loan; and ₱16,250 as salary loan. In turn, the bank owed Tuble his pro-rata share in the DIP, which was to be issued after the bank had given the resigned employee’s clearance, and ₱25,797.35 representing his final salary and corresponding 13th month pay. Tuble claimed that since he and the bank were debtors and creditors of each other, offsetting could legally take place; he asked the bank to compute his DIP and apply his receivables to his outstanding loans. Instead, the bank sent him a June 1, 1995 demand letter obliging him to pay his debts and requiring him to return the Nissan Vanette. Despite the demand, the vehicle was not surrendered. On August 14, 1995, Tuble wrote the bank again to follow up his request to offset the loans. This letter was not immediately acted upon. Only on October 13, 1995 did the bank finally allow the offsetting of his various claims and liabilities; as a result, his liabilities were reduced to ₱970,691.46 plus the unreturned value of the vehicle.

To recover the Nissan Vanette, the bank filed a Complaint for replevin against Tuble and obtained a favorable judgment. To collect Tuble’s liabilities, the bank also filed a Petition for Extra-judicial Foreclosure of real estate mortgage over his property. The Petition was based only on his real estate loan, which at that time amounted to ₱421,800; his other liabilities to the bank were excluded. The foreclosure proceedings terminated, with the bank emerging as the purchaser of the secured property. Thereafter, Tuble timely redeemed the property on March 17, 1997 for ₱1,318,401.91. The redemption price increased to this figure because the bank had unilaterally imposed additional interest and other charges. With the payment of ₱1,318,401.91, Tuble was deemed to have fully paid his accountabilities. Three years after his payment, the bank issued him a Clearance necessary for the release of his DIP share. Subsequently, he received a Manager’s Check in the amount of ₱166,049.73 representing his share in the DIP funds.

Despite his payment of the redemption price, Tuble questioned how the foreclosure basis of ₱421,800 ballooned to ₱1,318,401.91 in a matter of one year. Belatedly, the bank explained that this redemption price included the Nissan Vanette’s book value, the salary loan, car insurance, 18% annual interest on the bank’s redemption price of ₱421,800, penalty and interest charges on Promissory Note No. 0142, and litigation expenses. From these items, the amounts that remained to be collected as stated in the Petition before the Supreme Court were the 18% annual interest on the redemption price and the interest charge on Promissory Note No. 0142. Because Tuble disputed the redemption price, he filed a Complaint for recovery of a sum of money and damages before the RTC, specifically seeking to collect ₱896,602.02 representing the excess charges on the redemption price, plus moral and exemplary damages.

The RTC found that the value of the car should not have been included, considering that the bank had already recovered the Nissan Vanette. The obligations arising from the salary loan and car insurance should have been excluded, for there was no proof that these debts existed. The interest and penalty charges should have been deleted because Promissory Note No. 0142 did not indicate any interest or penalty charges. Neither should litigation expenses have been added, since there was no proof that the bank incurred those expenses. The RTC also found that the bank treated Tuble unfairly and unreasonably and caused him severe humiliation when the Nissan Vanette was seized from his new office at Kuok Properties Philippines; it noted that Tuble, as previous vice-president, was no ordinary employee, was a man of good professional standing, and actively participated in civic organizations. The CA affirmed these findings.

• Applicable Law: Petitioner argued that the General Banking Law, not the Rules of Court, should govern the computation of the redemption price because it is a banking institution; the law allows redemption by paying the amount fixed by the court in the order of execution with interest at the rate specified in the mortgage.
• 18% Annual Interest and Dragnet Clause: Petitioner maintained that the Real Estate Mortgage Contract contained a dragnet clause covering all obligations of Tuble, including the consumption loan under Promissory Note No. 0143, and that the 18% annual interest rate in that note was the proper basis for interest on the bid price of ₱421,800.
• Interest on Promissory Note No. 0142: Petitioner claimed that Tuble was liable for legal interest at 12% per annum on Promissory Note No. 0142 under Central Bank Circular No. 416 and Article 2209 of the Civil Code, despite the note containing no stipulation on interest.
• Car Rental Fee: Petitioner raised for the first time on certiorari the inclusion of the car’s rental fee in the redemption price.
• Default and Legal Compensation: Petitioner argued that Tuble was in default because legal compensation could not take effect; Article 1279 requires debts to be liquidated and demandable, and Tuble’s DIP share had not yet been determined.

• Excess Redemption Price: Tuble disputed the redemption price and sought recovery of ₱896,602.02 representing excess charges; he questioned how the foreclosure basis of ₱421,800 ballooned to ₱1,318,401.91 in one year.
• Offsetting: Tuble claimed that since he and the bank were debtors and creditors of each other, offsetting of loans could legally take place; he asked the bank to compute his DIP and apply his receivables to his outstanding loans.
• No Default / Legal Compensation: Tuble denied being in default, arguing that by way of legal compensation he effectively paid his liabilities on time.
• Damages: Tuble prayed for moral and exemplary damages.

• Applicable Law on Redemption Price: Whether the General Banking Law, rather than Act No. 3135 in relation to Section 28 of Rule 39, governs the redemption price when the mortgagee is a bank.
• 18% Annual Interest on Bid Price: Whether the bank is entitled to include 18% annual interest on the bid price of ₱421,800 in the redemption price, whether under the Real Estate Mortgage Contract, its dragnet clause, or the statutory right of redemption.
• Interest Charges on Promissory Note No. 0142: Whether the bank is entitled to include interest charges on Promissory Note No. 0142 in the redemption price, and whether Tuble was in default for purposes of compensatory interest.
• Moral and Exemplary Damages: Whether the awards of ₱200,000 moral damages and ₱50,000 exemplary damages are proper.

• Applicable Law on Redemption Price: Yes. The General Banking Act, as special and subsequent legislation, governs the redemption price when the mortgagee is a bank and amended Section 6 of Act No. 3135 insofar as the redemption price is concerned.
• 18% Annual Interest on Bid Price: No. The Real Estate Mortgage Contract was extinguished by foreclosure; its dragnet clause could not be invoked, and even if it subsisted, the ambiguity and absence of reliance on the security made the 18% interest inapplicable.
• Interest Charges on Promissory Note No. 0142: No. Promissory Note No. 0142 contained no stipulation on interest; the claimed 12% was compensatory interest due only upon default, and Tuble was not in default.
• Moral and Exemplary Damages: Yes. The awards were affirmed because the bank treated Tuble unfairly and unreasonably and caused him humiliation, and his social standing justified the amount.

• Applicable Law on Redemption Price: The bank correctly argued that the General Banking Law applies. Under the General Banking Act, in judicial or extrajudicial foreclosure of a real estate mortgage securing an obligation to a bank, the mortgagor may redeem by paying the amount fixed by the court in the order of execution, with interest at the rate specified in the mortgage. Union Bank of the Philippines vs. Court of Appeals, citing Ponce de Leon vs. Rehabilitation Finance Corporation and Sy vs. Court of Appeals, established that the General Banking Act, being special and subsequent legislation, amended Section 6 of Act No. 3135 insofar as the redemption price is concerned when the mortgagee is a bank. Thus, the amount to be paid in redeeming the property is determined by the General Banking Act, not by the Rules of Court in relation to Act No. 3135. This did not, however, entitle the bank to the disputed charges.

• 18% Annual Interest on Bid Price: At the time Tuble resigned, he had several liabilities to the bank. When the bank instituted foreclosure, it foreclosed only the mortgage secured by the real estate loan of ₱421,800; it did not include the consumption loan under Promissory Note No. 0143 or the other alleged obligations. On February 28, 1996, the bank availed itself of foreclosure and effectively gained the property. Consequently, the Real Estate Mortgage Contract was extinguished. In foreclosures, the mortgaged property is subjected to proceedings for satisfaction of the obligation; payment is effected by abnormal means, and once the proceeds from the sale are applied to the obligation, the obligation is extinguished. The Court cited Spouses Romero vs. Court of Appeals for the rule that the mortgage indebtedness was extinguished with the foreclosure and sale, leaving only the right of redemption. Because the Real Estate Mortgage Contract was extinguished, the bank could no longer rely on it or invoke its provisions, including the dragnet clause. It could not refer to the 18% annual interest in Promissory Note No. 0143, nor use the same security to collect other loans not included in the foreclosure; doing so would be akin to foreclosing an already foreclosed property. The bank should have filed separate actions for the excluded loans. Despite extinguishment, Tuble had a statutory right of redemption. Redemption is by force of law, and the purchaser at public auction is bound to accept it. The law provides the terms; the mortgagee cannot dictate them. Under the General Banking Act, the redemptioner has one year after the sale to redeem; must pay the amount due under the mortgage deed, with interest at the rate specified in the mortgage, and all costs and expenses incurred by the bank from the sale and custody of the property less income derived; juridical persons have a special rule. The bank could not alter that right by imposing additional charges and including other loans. The Court cited Rural Bank of San Mateo, Inc. vs. Intermediate Appellate Court: the power to decide whether to foreclose is the mortgagee’s prerogative, but once it files a petition with the sheriff, the sheriff’s acts are governed by mortgage laws, not the mortgagee’s instructions. The bank included numerous charges and loans, ballooning the redemption price to ₱1,318,401.91; on this error alone, the additional charges should be denied, and the bank could not impose the 18% annual interest on the redemption price.

• Dragnet Clause: Assuming the Real Estate Mortgage Contract subsisted, the dragnet clause did not justify the 18% annual interest. A dragnet clause may exceptionally secure future loans or advancements, but an obligation is not secured by a mortgage unless it fairly comes within the terms of the mortgage contract. The mortgage agreement, being a contract of adhesion, is carefully scrutinized and strictly construed against the bank that prepared it. The deed contained no specific mention of interest to be added in case of default or redemption; the contract was silent on computation of the redemption price. Although it referred to the Promissory Notes as constitutive of Tuble’s secured obligations, it did not state that the interest to be charged in case of redemption should be what is specified in the Promissory Notes. In Philippine Banking Communications vs. Court of Appeals, the Court construed such silence or omission of additional charges strictly against the bank and held penalties and charges not due for want of stipulation. Moreover, the Promissory Notes offered different interest charges: Promissory Note No. 0142, corresponding to the real estate loan, contained no stipulation on interest, while Promissory Note No. 0143, corresponding to the consumption loan, provided 18% per annum. This created an ambiguity as to which interest should apply; applying 18% would negate the 0% interest in Promissory Note No. 0142, the note that referred to the principal agreement to which the security attached. Under the principle of contra proferentem, ambiguity is construed against the party who caused it, here the bank. Thus, the courts a quo did not err in not appreciating 18% interest. Furthermore, the dragnet clause would not automatically include the consumption loan. Under Prudential Bank vs. Alviar, absent clear and supportive evidence of a contrary intention, a mortgage containing a dragnet clause will not be extended to cover future advances unless the document evidencing the subsequent advance refers to the mortgage as providing security. The Court adopted the “reliance on the security test” from Prudential Bank and Philippine Bank of Communications. The test considers whether the mortgage with a dragnet clause is an offer by the mortgagor to provide security for advances, and whether the bank accepted that offer when making the subsequent advance; among the factors are whether the second note was secured by a separate chattel mortgage, whether there was a reference connecting the real estate mortgage to the advance, whether the mortgagor signed in a different capacity, and whether the bank alleged or proved reliance on the real estate mortgage security. Here, Promissory Note No. 0143 made no reference to the earlier real estate loan, and the bank did not allege that it relied on the real estate mortgage security in issuing the consumption loan. Tuble was the bank’s previous vice-president; the consumption loan was given as an accommodation or privilege, not as an ordinary loan, and the salary loan was apparently motivated by his status as a top executive, not by the creation of security. The bank therefore could not claim reliance on the previous security. The dragnet clause did not cover the consumption loan, and its 18% interest was inapplicable. No grave abuse of discretion attended the refusal to apply 18% interest.

• Interest Charges on Promissory Note No. 0142: The bank claimed 12% interest per annum on Promissory Note No. 0142 despite the note containing no stipulation on interest, invoking Central Bank Circular No. 416 and Article 2209 of the Civil Code. Article 2209 allows recovery of legal interest in the absence of stipulation, but this is compensatory interest, not monetary interest. Monetary interest is compensation set by the parties for the use or forbearance of money; compensatory interest is a penalty or indemnity for damages imposed by law or the courts. Compensatory interest is due only if the obligor is proven to have defaulted in paying the loan. A default must exist before the bank can collect the 12% per annum compensatory legal interest. Tuble denied being in default because, by legal compensation, he effectively paid his liabilities on time. This argument was flawed: legal compensation under Article 1279 requires that the debts be liquidated and demandable. Liquidated debts are those whose exact amount has already been determined. Tuble’s receivable, including his DIP share, was not yet determined; it was the bank’s policy to compute and issue the computation only after the retired employee had been cleared. Thus, Tuble incorrectly invoked legal compensation on the issue of default. Nevertheless, based on the findings of the RTC and the CA, Tuble’s obligation under Promissory Note No. 0142 was set to mature on January 1, 1999, but he had already settled his liabilities on March 17, 1997 by paying ₱1,318,401.91 as redemption price. In 1999, the bank issued his Clearance and DIP share in view of the full settlement of his obligations. There being no substantial delay on his part, the CA did not grievously err in not declaring him in default. Consequently, the compensatory interest was not due.

• Moral and Exemplary Damages: The courts a quo awarded Tuble ₱200,000 moral damages and ₱50,000 exemplary damages. The RTC, which had the opportunity to examine the parties, found that the bank treated Tuble unfairly and unreasonably by refusing to lend even a little charity and human consideration when it immediately foreclosed the loans of its previous vice-president instead of heeding his request to make a straightforward calculation of his receivables and offset them against his liabilities. The RTC found this was a simple request within the bank’s control, and had it been granted, the lawsuit would have been avoided. The RTC also found that the bank caused Tuble severe humiliation when the Nissan Vanette was seized from his new office at Kuok Properties Philippines. It highlighted that Tuble, as previous vice-president, was no ordinary employee; he was a man of good professional standing and actively participated in civic organizations. The Court affirmed the RTC and CA. Moral damages include cases of besmirched reputation, moral shock, social humiliation, and similar injury; the social and financial standings of the parties are additional elements in determining the amount. Based on the findings that Tuble suffered undue embarrassment given his social standing, the courts a quo had factual basis to justify the award of moral damages and, consequently, exemplary damages.

• Extinguishment of Real Estate Mortgage by Foreclosure — When the mortgaged property is foreclosed and sold, and the proceeds are applied to the secured obligation, the obligation and the real estate mortgage contract are extinguished; only the statutory right of redemption remains. In this case, because the bank foreclosed only the ₱421,800 real estate loan and purchased the property, the Real Estate Mortgage Contract was extinguished, and the bank could no longer invoke its provisions, including the dragnet clause, to impose the 18% interest from the separate consumption loan on the redemption price.
• Statutory Right of Redemption — Redemption of foreclosed property is a statutory privilege; its terms are fixed by law, and the mortgagee cannot dictate or alter them by imposing additional charges or including other loans. Under the General Banking Act, the redemptioner must pay the amount due under the mortgage deed, with interest at the rate specified in the mortgage, and costs and expenses less income. The bank violated this by including numerous charges and loans, ballooning the redemption price.
• Dragnet Clause and Reliance on the Security Test — A dragnet clause may secure future loans or advancements, but it does not automatically cover them. An obligation is not secured unless it fairly falls within the mortgage terms. The mortgage, being a contract of adhesion, is strictly construed against the bank. Under the reliance on the security test, a dragnet clause will not extend to a subsequent advance absent clear intent and proof that the bank relied on the real estate mortgage as security; the subsequent note must refer to the mortgage as providing security. Here, Promissory Note No. 0143 did not refer to the real estate mortgage, and the bank did not allege reliance, especially because the consumption loan was an accommodation to a top executive.
• Contra Proferentem — Ambiguity in a contract is construed against the party who drafted it. The Real Estate Mortgage Contract was silent on the redemption-price interest and referred to two promissory notes with conflicting interest terms (0% and 18%); because the bank drafted the contract, the ambiguity was resolved against it, and the 18% interest was not applied.
• Monetary Interest vs. Compensatory Interest — Monetary interest is compensation for the use or forbearance of money; compensatory interest is a penalty or indemnity for damages imposed by law or the courts. Compensatory interest under Article 2209 of the Civil Code is due only upon proof of default. The bank’s claimed 12% legal interest on Promissory Note No. 0142 was compensatory, and Tuble was not in default, so it was not due.
• Requisites of Legal Compensation — Legal compensation requires, among other things, that both debts be due and liquidated and demandable. A debt is liquidated when its exact amount is determined. Tuble’s DIP share was not yet determined, so he could not invoke legal compensation to claim he had paid on time; however, the bank still failed to prove default because he settled before maturity.
• Moral and Exemplary Damages — Moral damages may be awarded for besmirched reputation, moral shock, social humiliation, and similar injury, with the social and financial standing of the parties considered in determining the amount. Exemplary damages may be awarded when moral damages are justified. The bank’s unfair and unreasonable treatment and the humiliating seizure of the vehicle from Tuble’s new office justified both awards.

• "Once the proceeds from the sale of the property are applied to the payment of the obligation, the obligation is already extinguished." — This states the ratio for extinguishment of the mortgage obligation and supports the denial of the bank’s reliance on the Real Estate Mortgage Contract and its dragnet clause.
• "Consequently, since the Real Estate Mortgage Contract is already extinguished, petitioner can no longer rely on it or invoke its provisions, including the dragnet clause stipulated therein." — This is the core ruling that barred the bank from using the extinguished mortgage contract to impose the 18% interest from the separate consumption loan on the redemption price.
• "In the absence of clear and supportive evidence of a contrary intention, a mortgage containing a dragnet clause will not be extended to cover future advances, unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor." — This is the canonical formulation of the dragnet-clause rule applied to reject the bank’s attempt to include the consumption loan and its 18% interest.
• "Compensatory interest, as a form of damages, is due only if the obligor is proven to have defaulted in paying the loan." — This defines the condition for the bank’s claimed 12% legal interest and explains why it was not due absent default.

• Union Bank of the Philippines vs. Court of Appeals, G.R. No. 134068, 412 Phil. 64 (2001) — Controlling precedent establishing that the General Banking Act, as special and subsequent legislation, amended Section 6 of Act No. 3135 on the redemption price when the mortgagee is a bank.
• Ponce de Leon vs. Rehabilitation Finance Corporation, G.R. No. L-24571, 146 Phil. 862 (1970) — Cited in Union Bank for the same principle on the General Banking Act’s application to bank mortgagees.
• Sy vs. Court of Appeals, G.R. No. 83139, 254 Phil. 120 (1989) — Cited in Union Bank for the same principle on the General Banking Act’s application to bank mortgagees.
• Spouses Romero vs. Court of Appeals (footnote reference: Spouses De Robles vs. CA, G.R. No. 128503, 10 June 2004, 431 SCRA 566) — Cited for the rule that the mortgage indebtedness was extinguished with the foreclosure and sale of the mortgaged property, leaving only the right of redemption.
• Rural Bank of San Mateo, Inc. vs. Intermediate Appellate Court, 230 Phil. 293 (1986) — Held that once the mortgagee files a foreclosure petition with the sheriff, the sheriff’s acts are governed by mortgage laws, not by the mortgagee’s instructions; applied to reject the bank’s inclusion of unauthorized charges.
• Philippine Banking Communications vs. Court of Appeals, 323 Phil. 297 (1996) — Held that silence or omission of additional charges in the mortgage contract is strictly construed against the bank; penalties and charges are not due for want of stipulation.
• Prudential Bank vs. Alviar, 502 Phil. 595 (2005) — Established the reliance-on-the-security test for dragnet clauses and the rule that a dragnet clause will not extend to future advances absent clear intention and reference or reliance; also cited for construing ambiguity contra proferentem.
• Traders Royal Bank vs. Castañares, G.R. No. 172020, 6 December 2010, 636 SCRA 519 — Recognized that a dragnet clause may exceptionally secure future loans or advancements.
• Siga-An vs. Villanueva, G.R. No. 173227, 20 January 2009, 576 SCRA 696 — Distinguished monetary interest from compensatory interest and held that compensatory interest is due only upon default.
• Canada vs. All Commodities Marketing Corporation, G.R. No. 146141, 17 October 2008, 569 SCRA 321 — Cited for the prohibition on raising new issues, especially factual ones, for the first time on appeal; applied to reject the car rental fee argument.
• Mateo vs. Court of Appeals, 99 Phil. 1042 (1956) — Cited for the rule that the right of redemption of foreclosed properties is a statutory privilege.
• Natino vs. Intermediate Appellate Court, 274 Phil. 602 (1991) — Cited for the rule that redemption is by force of law and the purchaser at public auction is bound to accept it.
• Spouses Caviles vs. Court of Appeals, 438 Phil. 13 (2002) — Cited for the rule that in foreclosures, the mortgaged property is subjected to proceedings for the satisfaction of the obligation.
• State Investment House, Inc. vs. Seventeenth Div., CA, G.R. No. 99308, 13 November 1992, 215 SCRA 734 — Cited for the rule that once the proceeds from the sale of the property are applied to the obligation, the obligation is extinguished.
• Jinalinan Technical School, Inc. vs. NLRC, 530 Phil. 77 (2006) — Cited for the definition of grave abuse of discretion as a judgment exercised arbitrarily and without basis in fact and law.
• Compania General de Tabacos vs. French and Unson, 39 Phil. 34 (1918) — Cited for the rule that liquidated debts are those whose exact amount has already been determined.
• Makahali vs. Court of Appeals, 241 Phil. 260 (1988) — Cited as providing factual basis for the award of moral damages.

• Section 6, Act No. 3135 — The Court held that the General Banking Act, as special and subsequent legislation, amended this provision insofar as the redemption price is concerned when the mortgagee is a bank.
• Section 28, Rule 39, Rules of Court — Provides that the redemptioner may redeem the property within one year from the date of registration of the certificate of sale by paying the purchaser the amount of purchase, with 1% per month interest, plus assessments or taxes paid by the purchaser. The Court noted this provision but held that the General Banking Act governs when the mortgagee is a bank.
• General Banking Act (Republic Act No. 337, as amended), Section 78 (referred to in the text as Section 47 of the General Banking Law) — Requires that in judicial or extrajudicial foreclosure of a real estate mortgage securing an obligation to a bank, the mortgagor may redeem by paying the amount fixed by the court in the order of execution, with interest at the rate specified in the mortgage. It also sets the terms of redemption: within one year after the sale; payment of the amount due under the mortgage deed, with interest at the rate specified in the mortgage, and all costs and expenses incurred by the bank from the sale and custody of the property less income derived; and a special rule for juridical persons.
• Article 2209, Civil Code — Provides that if the obligation consists in the payment of a sum of money and the debtor incurs delay, the indemnity for damages, absent stipulation, shall be the interest agreed upon, and in the absence of stipulation, the legal interest. The Court held this allows compensatory interest, not monetary interest, and only upon proof of default.
• Article 1279, Civil Code — Enumerates the requisites of legal compensation, including that both debts be due and liquidated and demandable. The Court applied this to hold that Tuble’s DIP share was not yet liquidated, so legal compensation could not be invoked on the issue of default.
• Article 1306, Civil Code — Provides that contracting parties may establish stipulations not contrary to law, morals, good customs, public order, or public policy. The Court held that the freedom to stipulate is limited by law and that the bank could not alter the statutory right of redemption.
• Central Bank Circular No. 416 — Invoked by the bank for the 12% legal interest; the Court held that because Tuble was not in default, the compensatory interest was not due.
• Rule 45, Revised Rules of Court — The procedural vehicle for the Petition for Review on Certiorari filed by petitioner.

Antonio T. Carpio, Mariano C. Del Castillo, Jose Portugal Perez, and Bienvenido L. Reyes concurred. Justice Del Castillo was designated as an additional member in lieu of Associate Justice Arturo D. Brion per S.O. No. 1257 dated 19 July 2012.