Spouses Virgilio and Digna Anastacio-Calina vs. Development Bank of the Philippines

A debtor who receives a loan is bound to repay the amount received with the stipulated interest; payment of the principal is not deemed made until the interest is covered, and a fortuitous event cannot render the obligor liable beyond restitution, so attorney’s fees as liquidated damages may be disallowed.

Spouses Virgilio and Digna Anastacio-Calina obtained from the Development Bank of the Philippines an agricultural (deep-sea fishing) loan of ₱1,356,000.00 under a loan agreement dated July 16, 1975. The loan was secured by a promissory note bearing 12% interest per annum, a deed of undertaking, a chattel mortgage over the purse seine fishing vessel and nets, and a performance bond. The proceeds were intended to finance the acquisition of a purse seine fishing vessel and nets, with the spouses contributing counterpart funds for fixed and operating costs. DBP is a bank whose business includes charging interest on loans.

On July 16, 1975, the Spouses Calina and DBP entered into an agricultural (deep-sea fishing) loan agreement whereby DBP lent them ₱1,356,000.00. On July 24, 1975, as security for payment, the Spouses Calina executed a promissory note promising to pay the sum with 12% interest per annum. Under the note, at the end of the third month after full release or completion of the boat, only interest and advances due would be paid; thereafter the loan would be repayable within five years, with payments every three months of ₱91,144.50 covering amortizations on principal and interest. On the same date, they executed a Deed of Undertaking providing that the loan would be utilized to finance 80% of the total fixed cost: ₱1,345,258.00 for acquisition of one purse seine fishing vessel complete with engine and accessories, and ₱350,000.00 for purchase of purse seine nets and accessories, for a total fixed cost of ₱1,695,258.00, with borrower’s equity of ₱339,258.00 and DBP/IBRD fund of ₱1,356,000.00. The borrower was to put up ₱614,658.00 of its own funds, show proof of availability of ₱275,400.00 for operating cost before initial release, and avail of the loan within six months from perfection of the loan documents. The loan was to be secured by a chattel mortgage on the fishing boat and nets. The deed also provided for a commitment fee on unreleased proceeds, the bank’s right to reduce or stop releases if the project did not justify full amount, automatic maturity of advances upon abandonment, an “all risk” insurance policy on the vessel, and a performance bond equivalent to 80% of hull cost. Pursuant to these conditions, on July 31, 1975, Towers Assurance Corporation, acting as surety for petitioners, executed a Performance Bond for ₱319,085.60.

In August 1975, using the first release of the loan and their own funds to pay for materials and labor costs, the Spouses Calina commenced construction of a fishing boat on a beach in Panakan, Palawan. In September 1975, DBP gave the second release, and petitioners used 95% of it to purchase one unit of a Cummins Marine Diesel Engine; before installation, the engine was placed in storage. On September 25, 1975, DBP gave the third release to purchase other equipment. At that point, DBP had already released ₱451,589.80 to petitioners. In December 1975, petitioners requested DBP to inspect the partially completed keel of the fishing boat, but DBP’s inspectors were unavailable and failed to visit the construction site. In the last week of January 1976, typhoon Asyang hit Palawan and totally destroyed the fishing boat under construction; all materials were washed out to sea.

On January 26, 1978, petitioner Virgilio Calina informed DBP of his decision to abandon the project. He requested 60 days within which to sell the Cummins Marine Diesel Engine and, from the proceeds, pay all his obligations to DBP. On October 3, 1978, DBP demanded immediate payment of ₱666,195.55, representing petitioners’ obligation plus interest from August 18, 1978, excluding daily additional interest. On December 11, 1980, DBP filed a complaint for sum of money with a prayer for preliminary attachment against the Spouses Calina and Towers Assurance Corporation. Towers Assurance Corporation raised the defenses of laches and that the surety bond was never exposed to any risk because the amount of the debt was used to purchase the Cummins Marine Diesel Engine, not to construct the fishing vessel. The Spouses Calina filed their Answer with Counterclaim for damages on August 14, 1981. On October 20, 1981, the court issued the writ of attachment against the Cummins Marine Diesel Engine.

In an effort to settle their financial obligations, petitioners sought buyers for the engine by advertising in several newspapers. On September 17, 1984, Pacific Power and Process Corporation offered to buy the engine for ₱600,000.00. On October 29, 1984, petitioners requested DBP to signify its conformity to the sale. DBP refused and decided to sell the engine at public auction. The auction was held on March 8, 1985, but no bids were made. On August 26, 1985, DBP wrote petitioners finally agreeing to the sale of the engine for ₱600,000.00 and the payment of the proceeds as settlement for the loan, and also agreeing to condone penalty charges and interest on past due interest computed up to the date of payment. By then, however, petitioners’ buyer had lost interest. They tried to find other buyers but to no avail, and the engine remained unsold.

During trial, the parties agreed on the disposition of the engine. On August 28, 1989, they filed a Joint Motion to Lift the Writ of Attachment so that they could sell the engine pending litigation and apply the proceeds to the payment of the Spouses Calina’s outstanding account with DBP, “without prejudice to whatever negotiation and agreements that the parties may enter into to settle the case amicably in the event the sales proceeds of the Cummins Marine Diesel Engine is not sufficient to pay off the total obligation.” The trial court granted the motion. On February 3, 1992, the engine was sold for ₱550,000.00, and the amount was applied to the loan. The parties, however, could not agree whether the total amount of the loan had been fully settled, so the trial continued.

The trial court found that the Spouses Calina received from DBP only ₱451,589.80 of the agreed ₱1,356,000.00 loan, and that this amount was used to purchase the Cummins engine. It also found that the non-completion of the vessel was caused by a fortuitous event affecting both parties; that DBP novated the contract when it agreed to condone interest and penalties, but the novation was revoked by Calina’s failure to pay ₱600,000.00; and that the subsequent agreement of both parties to sell the engine for ₱550,000.00 was substantial compliance with the novated contract to condone interests and penalties and was more than sufficient to offset the loan of ₱451,589.80 after condonation. The Supreme Court noted that petitioners did not assail the computation of their debt; as of August 18, 1978, they owed ₱666,195.55, and as of February 3, 1992, they had paid ₱550,000.00.

• Interest on Advances: Petitioners argued that the Court of Appeals gravely erred in requiring them to pay interest on the ₱451,589.80 advance made by DBP, in violation of the agreement between the parties and without any valid document in support thereof.
• Condonation and Revocation: Petitioners argued that the Court of Appeals erred in ruling that there was partial condonation of the interest due, but that the condonation was revoked when petitioners still did not pay the loan despite the reduction in interest.
• Compromise Settlement: Petitioners maintained that what transpired between the parties after the filing of the complaint in the trial court was a compromise settlement and not a condonation of interest.
• Sufficiency of Proceeds: Petitioners argued that the Court of Appeals erred in not holding that the ₱550,000.00 proceeds from the sale of the Cummins Diesel engine were more than sufficient to offset the principal loan of ₱451,589.80.
• Attorney’s Fees: Petitioners argued that the Court of Appeals gravely erred in awarding 10% attorney’s fees despite the absence of bad faith on their part and the absence of any circumstance provided for in Article 2208 of the Civil Code.
• Computation of Interest: In the alternative, petitioners submitted that the interest to be awarded should be reckoned from the date of the compromise settlement between the parties and only on the remaining balance of ₱50,000.00.

• Questions of Fact: DBP contended that the petition raised only questions of fact and should not be given due course.
• Interest on Amount Received: DBP argued that the Court of Appeals did not err in ordering petitioners to pay interest on the amount actually received as proceeds of their loan, as the promissory note provided for it; moreover, as petitioners were in default, they were liable to pay additional interest equal to 12% of the entire unpaid obligation as indemnity for damages.
• Novation and Waiver: DBP argued that petitioners did not challenge the finding that DBP novated the contract by agreeing to condone interest and penalties but that the condonation was revoked by petitioners’ failure to pay the agreed amount; therefore, petitioners could not state as erroneous the Court of Appeals’ affirmance of that finding and could not abandon the novation theory for a compromise theory.
• No Compromise Agreement: DBP maintained that it never entered into a compromise agreement with petitioners; it only sought the trial court’s approval to sell the Cummins engine and to partially apply the proceeds to petitioners’ outstanding obligations, and the July 14, 1989 Motion was not connected to DBP’s letter dated August 26, 1985.
• Insufficiency of Proceeds: DBP argued that the Court of Appeals did not err in finding that the proceeds from the sale of the Cummins engine were not sufficient to fully offset petitioners’ outstanding obligation; as of August 18, 1978, petitioners already owed ₱666,195.55, and they were liable to pay 12% regular interest per annum on the principal obligation of ₱451,589.80, plus 10% attorney’s fees.
• Attorney’s Fees: DBP argued that in the promissory note and the deed of undertaking, petitioners agreed to pay attorney’s fees in case DBP was forced to engage a lawyer to enforce its rights against them.
• Debt Not Limited to ₱600,000.00: DBP argued that because the compromise agreement based on its letter did not come to fruition, the amount of petitioners’ debt could not be pegged at ₱600,000.00 only.

• Interest on Advances: Whether the Court of Appeals erred in requiring petitioners to pay 12% interest on the ₱451,589.80 actually released under the loan agreement and promissory note.
• Condonation and Revocation: Whether the Court of Appeals erred in ruling that there was partial condonation of interest but that it was revoked by petitioners’ failure to pay the agreed amount.
• Compromise Settlement: Whether the events after the filing of the complaint constituted a compromise settlement rather than a condonation of interest.
• Sufficiency of Proceeds: Whether the ₱550,000.00 proceeds from the sale of the Cummins engine were sufficient to offset the principal loan of ₱451,589.80.
• Attorney’s Fees: Whether the Court of Appeals erred in awarding 10% attorney’s fees absent bad faith and outside the circumstances in Article 2208 of the Civil Code.
• Computation of Interest: Whether interest should be reckoned from the date of the compromise settlement and only on the remaining balance of ₱50,000.00.
• Factual Review: Whether the Court may resolve the factual question of whether the parties entered into a compromise agreement, or is bound by the trial court’s findings.

• Interest on Advances: No. The Court of Appeals did not err in requiring interest on the amount actually released. The promissory note stipulated 12% interest per annum, and Article 1253 of the New Civil Code provides that payment of the principal is not deemed made until the interests have been covered.
• Condonation and Revocation: No. The finding that any condonation was revoked by petitioners’ failure to pay the agreed amount was not challenged by petitioners in the lower courts; it is binding and cannot be raised for the first time on appeal.
• Compromise Settlement: No. The Court is not a trier of facts and will not disturb the trial court’s findings absent the recognized exceptions; none are present, so the compromise issue cannot be resolved anew.
• Sufficiency of Proceeds: No. As of August 18, 1978, petitioners owed ₱666,195.55; the ₱550,000.00 payment did not fully settle the obligation because it did not cover the accrued interest and the remaining balance.
• Attorney’s Fees: Yes. The Court of Appeals erred in awarding 10% attorney’s fees. The destruction of the fishing boat by typhoon Asyang was a fortuitous event, and such supervening event cannot render petitioners liable beyond restitution of what they received.
• Computation of Interest: No. Interest must be computed at 12% on ₱666,195.55 from August 18, 1978 to February 2, 1992; after deducting ₱550,000.00, 12% interest runs on the remaining balance from February 3, 1992 until full payment.
• Factual Review: No. The Court is not a trier of facts; the trial court’s factual findings are binding and conclusive absent the recognized exceptions, and none are present.

• Interest on Advances: The loan agreement and promissory note stipulated 12% interest per annum on the loan. Petitioners received ₱451,589.80. When they informed DBP of their intention to desist from continuing the project, that immediately rendered due and demandable any amount advanced to them. DBP formalized its demand on October 3, 1978, seeking ₱666,195.55, representing the obligation plus interest from August 18, 1978. Article 1953 of the New Civil Code provides that persons who receive loans of money are bound by law to pay to the creditor an equal amount of the same quality. Article 1253 provides that if the debt produces interest, payment of the principal shall not be deemed made until the interests have been covered. DBP is a bank, and charging interest for loans is an essential and fundamental element of the banking business. Thus, the Court of Appeals did not err in requiring interest on the amount actually received.
• Condonation and Revocation: From the onset of trial, the Spouses Calina advocated the theory that there had been a novation of the contract. Based on this stance and the evidence, the trial court declared that DBP considered condoning interest and penalties, but this was subsequently revoked when Calina failed to comply with the condition to pay ₱600,000.00. Petitioners did not challenge this ruling in the appellate court. They cannot now raise this issue in their petition before the Supreme Court. To countenance such action would be unfair to DBP and offensive to the basic rules of fair play, justice, and due process. The rule that a party cannot raise a new issue on appeal, cited in Drilon vs. Court of Appeals, et al., bars petitioners from abandoning the novation theory for a compromise theory.
• Compromise Settlement: It is improper for the Supreme Court to determine whether there was a compromise agreement entered into by the parties. The Court is not a trier of facts, nor will it disturb the trial court’s findings of fact, such findings being, as a rule, binding and conclusive. This doctrine admits of only a few exceptions, such as when the findings are grounded entirely on speculation, surmises, or conjectures; when the inference made by the appellate court from its factual findings is manifestly mistaken, absurd, or impossible; when there is grave abuse of discretion in the appreciation of facts; when the findings of the appellate court go beyond the issues of the case, run contrary to the admissions of the parties, or fail to notice certain relevant facts which, if properly considered, will justify a different conclusion; when there is a misappreciation of facts; when the findings of fact are conclusions without mention of the specific evidence on which they are based, are premised on the absence of evidence, or are contradicted by evidence on record. None of these exceptions are present.
• Sufficiency of Proceeds: Petitioners failed to comply with the original terms of the agreement. It was erroneous for them to blame DBP for their failure to comply with their contract. DBP was well within its right when it sought to sell the engine at public auction; if the auction had succeeded, it would have benefited all parties because the engine could have been sold at a much higher price. Throughout the proceedings, petitioners did not assail the computation of their debt. Thus, it is settled that as of August 18, 1978, petitioners owed ₱666,195.55 to DBP. As of February 3, 1992, petitioners had paid ₱550,000.00. Plainly, they have not fully paid their obligation. Persons who receive loans of money are bound by law to pay the creditor an equal amount of the same quality. In addition, DBP had the right to demand interest based on the promissory note, and Article 1253 provides that payment of the principal is not deemed made until the interests have been covered. The ₱550,000.00 payment was therefore not sufficient to offset the loan.
• Attorney’s Fees: Attorney’s fees partake of the nature of liquidated damages. It is true that the promissory note and the deed of undertaking executed by petitioners provided for the payment of attorney’s fees should DBP be forced to litigate. However, a fortuitous event, typhoon Asyang, caused the destruction of the fishing boat subject of the project. This supervening event, independent of the will of the obligor, cannot render the latter liable beyond the restitution of what they may have received in advance from the creditor. Consequently, petitioners cannot be made to pay attorney’s fees on damages. The award of attorney’s fees was therefore deleted.
• Computation of Interest: Petitioners have to pay ₱666,195.55, plus 12% interest based on the principal amount of the debt, computed from August 18, 1978 to February 2, 1992. From this sum, the ₱550,000.00 paid by petitioners must be deducted. The remaining balance, plus 12% interest thereon until the date of full payment, constitutes the liability of petitioners to DBP. This computation rejects petitioners’ alternative claim that interest should run only from the date of the alleged compromise settlement and only on a remaining balance of ₱50,000.00.
• Factual Review: The Supreme Court is not a trier of facts. The trial court’s findings are binding and conclusive on the Court, subject to the recognized exceptions, none of which are present. Hence, the Court will not disturb the finding that any condonation was revoked by petitioners’ failure to pay the agreed amount, and it will not determine anew whether a compromise agreement existed.

• Loan Obligation and Payment of Interest — A person who receives a loan of money is bound by law to pay the creditor an equal amount of the same quality. If the debt produces interest, payment of the principal is not deemed made until the interests have been covered. The Court applied this to hold that the ₱550,000.00 payment did not extinguish the loan because the accrued interest had not been covered, leaving a balance on which 12% interest continued to run.
• Banking Interest — Charging interest for loans is an essential and fundamental element of the banking business, indeed the very core of a bank’s existence. DBP, as a bank, was entitled to charge the stipulated 12% interest on the loan.
• Binding Nature of Trial Court’s Factual Findings — The Supreme Court is not a trier of facts and will not disturb the trial court’s findings, which are binding and conclusive, except in specified instances such as findings grounded on speculation, surmises, or conjectures; manifestly mistaken inferences; grave abuse of discretion; findings beyond the issues; findings contrary to admissions or failing to notice relevant facts; misappreciation of facts; or conclusions without evidentiary basis. None of the exceptions applied, so the Court declined to determine whether a compromise agreement existed.
• Fortuitous Event and Attorney’s Fees — A fortuitous event independent of the obligor’s will cannot render the obligor liable beyond the restitution of what the obligor may have received in advance from the creditor. Attorney’s fees partake of the nature of liquidated damages. Because typhoon Asyang destroyed the fishing boat, the Court deleted the award of attorney’s fees despite the stipulation in the promissory note and deed of undertaking.
• New Issue on Appeal — A party cannot raise a new issue or abandon a theory adopted below and adopt another on appeal. Petitioners advocated novation before the trial court and Court of Appeals; they could not later claim that there was no novation but a compromise agreement. This would be unfair to respondent and offensive to fair play, justice, and due process.

• "Persons who receive loans of money are bound by law to pay to the creditor an equal amount of the same quality." — This states the statutory basis under Article 1953 for the petitioners’ liability and anchors the Court’s conclusion that the loan was not fully paid.
• "Article 1253 of the New Civil Code provides that, if the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered." — This is the ratio for rejecting the claim that the ₱550,000.00 proceeds fully offset the loan.
• "The respondent is a bank. To hold that bank debtors should not pay interest on their loans would be anathema to the nature of any bank’s business. The charging of interest for loans forms a very essential and fundamental element of the banking business. In fact, it may be considered to be the very core of the banking’s existence or being." — This justifies the continued imposition of stipulated interest on a bank loan.
• "However, a fortuitous event, typhoon Asyang, caused the destruction of the fishing boat subject of the project. This supervening event, independent of the will of the obligor, cannot render the latter liable beyond the restitution of what they may have received in advance from the creditor. Consequently, petitioners cannot be made to pay attorney’s fees on damages." — This is the basis for deleting the attorney’s fees award.

• Singson vs. Court of Appeals and Cathay Pacific Airways, Inc., 346 Phil. 831 (1997); Alitalia Airways vs. Court of Appeals, G.R. No. 77011, July 24, 1990, 187 SCRA 763, 769-770 — Cited for the rule that trial court findings of fact are binding and conclusive on the Supreme Court, subject only to recognized exceptions.
• Halili vs. Court of Appeals, et al., 350 Phil. 906 (1998) — Cited for the exceptions to the binding nature of factual findings; the Court found none present.
• Drilon vs. Court of Appeals, et al., 336 Phil. 949 (1994) — Cited for the principle that a party cannot raise a new issue or change theory on appeal; petitioners could not abandon novation for compromise.
• Rizal Commercial Banking Corporation, et al. vs. Court of Appeals and Goyu & Sons, Inc., G.R. Nos. 128833-34, April 20, 1998, 289 SCRA 292 — Cited for the proposition that charging interest is essential and fundamental to the banking business.
• House vs. De la Costa, 68 Phil. 742 (1939) — Cited with Article 1266 in support of the ruling that a fortuitous event limits the obligor’s liability to restitution of what was received in advance, thus disallowing attorney’s fees.

• Article 1253, New Civil Code — Provides that if the debt produces interest, payment of the principal shall not be deemed made until the interests have been covered. Applied to hold that the ₱550,000.00 payment did not extinguish the loan because accrued interest remained unpaid.
• Article 1953, New Civil Code — Provides that persons who receive loans of money are bound to pay the creditor an equal amount of the same quality. Applied to hold petitioners liable for the amount actually received under the loan.
• Article 1266, New Civil Code — Cited in connection with the fortuitous event. The Court ruled that the supervening event, independent of the obligor’s will, cannot render the obligor liable beyond restitution of what was received in advance, and thus deleted attorney’s fees.
• Rule 45, Revised Rules of Court — The petition for review on certiorari was filed under this rule. The Court resolved the petition by affirming the Court of Appeals with modifications.

The following concurred: ANGELINA SANDOVAL-GUTIERREZ, RENATO C. CORONA, ADOLFO S. AZCUNA, and CANCIO C. GARCIA.