Miranda vs. Imperial, G.R. No. L-49090, February 28, 2947

This is a pre-war case. The complaint was filed before the Court of First Instance of Albay on November 25, 1941, that is, almost on the eve of the outbreak of the Pacific War. The court rendered its decision on March 17, 1943. The case was elevated to this Supreme Court by virtue of the appeal filed by the plaintiff on June 9, 1943.

Before it could be decided, the case records were burned along with other records of this Court in the conflagration of Manila during the Battle of Liberation.

Therefore, what we have before us is a reconstituted record using documents provided by the lawyers of the appellant, namely: (a) copies of the record on appeal; (b) copies of the brief submitted by the lawyers of the appellant.

The appellee has not submitted any brief, either personally or through counsel. Both parties' lawyers were duly notified of the reconstitution proceedings by the commissioner of this Court, but only the lawyers of the appellant appeared and submitted the aforementioned copies."

It is alleged in the complaint that before November 17, 1938, the defendant spouses, Feliciano Imperial and Juana de Imperial, owed Elias Imperial the amount of ₱1,000; that in consideration of this debt and to secure its payment, they had ceded, by way of anticresis, to the said Elias Imperial the possession and enjoyment of three parcels of riceland they owned; that on the aforementioned date, November 17, 1938, the defendants proposed to the plaintiff, Teodora L. Vda. de Miranda, that she lend them the amount of ₱1,000 in order to redeem the land from Elias Imperial, with her subrogating into the position of creditor in place of Elias under the same terms and conditions of the anticresis contract entered into with the latter; that, since the plaintiff had the amount requested and, furthermore, the defendant is her sister-in-law, being the widow of the plaintiff’s brother, she accepted the proposal and actually handed over the amount of ₱1,000 to the defendants, who in turn gave it to Elias Imperial to redeem the properties; that, as they were relatives, the contract was not reduced to writing, but after the redemption and after Elias Imperial made an annotation to that effect at the bottom of the ownership documents covering the three parcels of land, said documents were handed over at the same time to the plaintiff, who was present together with the defendant, as proof of the loan and of the transfer of the new anticresis contract; that from then on, the plaintiff enjoyed the produce, receiving her share from the harvests corresponding to 1939 and 1940, at the rate of two harvests per year, and in the first harvest of 1941—that is, a total of five harvests from November 17, 1938, to April 1941; that the plaintiff was no longer able to enjoy the second harvest of 1941, which was in October, because the defendants then decided to appropriate such harvest and the subsequent ones until the present; that the harvest collected by the defendants in October 1941, which should have belonged to the plaintiff, was 50 cavanes of palay, whose market price was ₱2.50 per cavan, or a total value of ₱120.

Therefore, the plaintiff prays that, under the first cause of action, the defendants be ordered to execute a mortgage document in favor of the plaintiff securing the three parcels of land mentioned above to guarantee the payment to the plaintiff of the ₱1,000 she paid to Mr. Elias Imperial on behalf of said defendants, fixing in said document a period of three months for payment, or a period deemed reasonable by the sound judgment of the court, and subject to an interest rate of twelve percent (12%) per annum; and under the second cause of action, that the defendants be ordered to pay the plaintiff the sum of ₱120 as the value of the palay harvest collected from the parcels of land described in this complaint and illegally appropriated by said defendants, in addition to the costs of the suit; and finally, she prays for any other just and equitable remedy.

Regarding the first cause of action, the defendants argue in their defense that they only received the amount of P500 from the plaintiff, to which they added another P500 to redeem the lands from Elias Imperial; and that the said debt of P500 was more than paid off with the products of the land which the plaintiff received from five consecutive harvests, thereby "automatically extinguishing the contractual rights and obligations of the parties."

As to the second cause of action, they deny it, and assert that the harvest gathered in October 1941, and all subsequent ones, legally belonged to them, the defendants; and that said October harvest, just like in the previous years, yielded them 70 cavanes of palay as their share.

The defendants also raise a counterclaim in their answer, alleging:

That there was a verbal agreement between the plaintiff and the defendant Juana de Imperial, by virtue of which the latter received from the former the sum of P500 to redeem the aforementioned lands, with the understanding that the plaintiff would take all the products of the land under the same terms and conditions as the previous contract with Elias Imperial, until the debt would be fully paid by means of such products;
That, in fact, the redemption took place, with Elias returning the documents to Juana with a note of cancellation of the debt written at the bottom of the documents; but that afterwards, the plaintiff borrowed said documents under the pretext of familiarizing herself with the adjoining owners of the lands, which explains how the documents came into her possession, and that she has retained them until the day of the hearing;
That in addition to the three parcels of land in question, the plaintiff also received the produce of a fourth parcel belonging to the defendants, yielding 10 cavanes of palay per harvest;
That from all four parcels of land, the plaintiff received as her share from the five harvests a total of 400 cavanes of palay, and that at the time, each cavan was valued at P2.50 in the market;
That therefore, the plaintiff earned no less than P1,000 from the produce she received, and after deducting the P500 debt owed by the defendants, plus P100 in legal interest, there remains a balance of P400 in favor of the defendants. Thus, they request that judgment be rendered against the plaintiff for this last amount.

After reviewing the matter, the court rendered a decision in which the following facts were found conclusively proven:

That for about 10 years prior to November 17, 1938, the defendants, Feliciano Imperial and Juana de Imperial, owed Elias Imperial the amount of P1,000;
That between the creditor and the debtors there was an accessory contract of antichresis, by virtue of which the former enjoyed—as he did in fact enjoy during that 10-year period—all the produce from the three parcels of rice land in question, with said produce considered as interest on the loaned amount;
That during the entire time Elias Imperial possessed and enjoyed the lands, not a single grain of palay was applied toward the payment or amortization of the loan principal;
That on November 17, 1938, the defendants received from the plaintiff not P500 as they claimed, but P1,000, to redeem the properties from Elias Imperial, under the agreement that the plaintiff would be subrogated in the place of Elias Imperial as creditor, under the same terms and conditions of the previous antichresis contract;

The court concluded—and expressly stated—that the plaintiff actually loaned the defendants P1,000, and that the agreement was for her to receive the products of the three parcels previously under antichresis to Elias Imperial, as interest on the loan, until the loan was fully paid. Indeed, the plaintiff peacefully received the produce from five consecutive harvests, but after the April 1941 harvest, the defendants completely ousted the plaintiff and appropriated all the subsequent harvests.

From the facts established in the judgment, as summarized, it is clear that the antichresis contract involved in this case is that defined under Article 1885 of the Civil Code, which provides:

“The parties may stipulate that the interest on the debt be compensated by the fruits of the property given in antichresis.”

However, the trial court, instead of applying this article, which it should have done based on the proven facts, issued the following ruling:

“Despite this agreement, the defendants’ claim that the value of the products received by the plaintiff must be applied to the payment of the loan principal after deducting legal interest must be upheld.”

In other words, the court applied not Article 1885 but Article 1881 of the Civil Code, which reads:

“By the contract of antichresis, the creditor acquires the right to receive the fruits of the immovable property of his debtor, with the obligation to apply them first to the interest if any is due, and then to the principal of his credit.”

The trial court based this conclusion on the prior decision of the former Court of Appeals in Santa Rosa v. Noble (R.G. No. 43769, 35 O.G. 2734; Lawyer’s Journal Vol. V, No. 23, p. 1109), penned by Justice Jose Lopez Vito.

Thus, the lower court, after performing the necessary arithmetic to apply the products—first to the interest and then to the capital—awarded the plaintiff a remaining balance of P435.17, and ordered that the products of the land continue to be applied to this balance until fully paid, or alternatively, that the defendants pay it in full at once with 6% interest per annum from May 1, 1941.

The plaintiff then filed the present appeal, raising only questions of law, arguing:

That the trial court erred in not strictly applying Article 1885 of the Civil Code;
That the court could not arbitrarily create a contract not agreed upon by the parties;
That Article 1885 refers specifically to a certain type of antichresis, and Article 1881 to another;
That when, as in the present case, the agreement is for the fruits of the property to be applied solely as interest, no part of the produce should be applied to reduce the principal;
And that therefore, she, the appellant, is entitled to be repaid the full principal of her credit, i.e., P1,000, in addition to the produce or interest already received.

The court a quo based its ruling on the aforementioned decision of the Court of Appeals, believing that the two cases were entirely analogous—especially since both originated from the same region, Bicol, and referred to a contract very common in that region, a contract popularly called "sangla" or "prenda"; in the Visayas, where Cebuano is spoken, and in Mindanao, it is also called "saop" and sometimes "prenda".

It seems unnecessary to state that only decisions of the Supreme Court establish binding jurisprudence or doctrine in this jurisdiction. However, this does not prevent a conclusion or pronouncement of the Court of Appeals, on a point of law not yet resolved in our jurisprudence, from serving as a legal guideline for lower courts—and that such a pronouncement may rise to the level of doctrine if, after being tested through careful analysis and judicial review, we find it of sufficient merit and weight to be consecrated as a rule of jurisprudence. To this end, we have carefully and thoroughly examined the Court of Appeals' decision in the said case of Santa Rosa vs. Noble, which, as stated, also comes from the Bicol region, just like the case now before us.

Without subscribing to—nor are we now called to do so—the interesting observations made by the Court of Appeals in that decision, we believe, nevertheless, that the trial court erred in applying it to the present case, as there are fundamental differences between the two cases, namely:

First Difference:

In the Court of Appeals case, usury was an issue, a key point in controversy. That court stated:

"But the defendants argue that the contract stated in Exhibit E is usurious, thus raising the issue of whether Act No. 2655, known as the Usury Law, which sets the permissible rate of interest for loans, applies to contracts of antichresis."

Although not expressly stated, the Court of Appeals, by ruling that the Usury Law applied and thereby limiting the interest collectible to the legal rate of 6%, practically adjudicated the contract of antichresis as usurious.

In the case before us, however, the issue of usury was never raised—neither in the pleadings nor during trial. The trial court’s decision makes no factual finding on usury. And since the present appeal raises only questions of law, with the facts in the judgment taken as conclusively established and undisputed, it follows that our reviewing power must remain strictly confined to those facts, and we are not permitted to go beyond their scope.

After all, it is not surprising that the defendants never raised the issue of usury, as for 10 years, they had been debtors of Elias Imperial without any apparent dispute damaging their relationship (in fact, Elias even testified in favor of the defendants at trial). And we have already seen that the plaintiff merely subrogated herself in the place of Elias under the original antichresis contract.

Second Difference:

It is clear that the antichresis involved in Santa Rosa vs. Noble is that defined under Article 1881 of the Civil Code, the type of antichresis where:

"The creditor acquires the right to receive the fruits of an immovable property of his debtor with the obligation to apply them to the payment of the interest, if due, and then to the principal of his credit."

The Court of Appeals itself stated in its decision:

"As to whether the same interest rate established by the Usury Law should apply when there is an express stipulation that the fruits shall be compensated as interest under Article 1885—this is not the case now before us, since we have declared that Exhibit ‘E’ falls under the provisions of Article 1881 of the Civil Code." (Italics ours.)

In contrast, the antichresis at issue in the present case is that defined in Article 1885, which provides:

“The contracting parties may stipulate that the interest on the debt be compensated by the fruits of the property given in antichresis.”

Here is the clear pronouncement of the trial court on this point:

"After a careful consideration of the evidence and all the attending circumstances, the court concludes, and therefore holds, that the plaintiff actually loaned the defendants P1,000, and that the agreement between the parties was that the plaintiff would receive the products of the three parcels of land formerly conveyed in antichresis to Elias Imperial as interests on said loan until the same is paid." (Italics ours.)

Since, according to the very conclusion of the trial court, there existed an agreement that the products of the properties would be used to compensate the interest on the debt, in accordance with Article 1885 of the Civil Code, it would be arbitrary to judicially alter that agreement—essentially creating a contract for the parties that they did not make. More specifically, it would mean transforming the actual agreement into something that falls under a different article of the Code that was neither intended nor contemplated by the contracting parties.

Article 1255 of the Civil Code provides that:

“The contracting parties may establish such covenants, clauses, and conditions as they deem appropriate, provided they are not contrary to law, morals, or public order.”

This excludes judicial fiat from contracts. Courts may interpret contracts; what they cannot do is reshape or forge them on behalf of the parties.

We agree with the Court of Appeals that the contract called “sangla” or “prenda” (over real estate) in Bicol, and “saop” or “prenda” in Visayas and Mindanao, indeed has the characteristics of antichresis, and therefore may be considered as such. Aside from the sale with right of repurchase (venta con pacto de retro), this contract is the most well-known and commonly used in our towns and rural areas. It is utilized by the farmer or laborer—whether to improve and expand cultivation, to buy new land to enlarge holdings, to marry off and endow children, or even to provide a proper burial for the deceased.

And why not say it plainly? The unfortunate passion for gambling sometimes ends in such a contract as well—adding bitterness to life, if not bringing ruin to the small landowner.

The question we must now resolve is this:

Is the Usury Law automatically or ministerially applicable to antichresis, as the appealed decision seems to suggest?

Undoubtedly not.
Antichresis, as a contract—whether under Article 1881 or Article 1885 of the Civil Code—is not necessarily usurious. It can be, of course, but only if properly proven. To so declare it, not only must usury be made an issue—a key, contentious point in the pleadings and at trial—so that each party has their “day in court” and can properly defend themselves, but it must also be conclusively demonstrated that the usury is so extreme and unconscionable as to lead one to believe the contract was used as a disguise or device to violate or circumvent the Usury Law.

The rationale is simple: antichresis inherently involves contingency and risk. The creditor’s right to receive the fruits of the land—a defining characteristic of antichresis—is subject to various unpredictable circumstances. There may be a poor or even nonexistent harvest—perhaps due to a typhoon, flooding from overflowing rivers, devastation by locusts, or social upheaval that disrupts farming altogether, etc.

Thus, Articles 2, 3, and 8 of Act No. 2655 (Usury Law), which require payment of fixed sums or their equivalents regardless of yield, do not automatically apply to antichresis. The occasional outcome where the creditor receives fruits whose value exceeds the legal interest rate does not by itself make the contract usurious. The law presumes that such an excess is the return the creditor earns for bearing the risks and uncertainties of the arrangement.

Supporting U.S. Jurisprudence:

Similar contractual types exist in American law, analogous to our “sangla” or “saop”. The following authorities illustrate this:

Corpus Juris (66 C.J. 212):

“In view of the rule that a creditor’s return need not be limited to the statutory rate when it is affected by a contingency putting the whole of it at hazard, a contract is ordinarily not usurious where the creditor is to receive, in consideration of his loan or forbearance, property or services of uncertain value, even if the probable value exceeds lawful interest—unless the excess is so blatant as to show corrupt intent to violate or evade the usury laws.”

Cyclopedia of Law and Procedure (39 Cyc. 959):

“Where the lender is to receive something other than money—such as property or services—and the value of such profit is necessarily uncertain, the contract is not usurious, even if the probable value exceeds legal interest, unless the consideration is so grossly excessive as to reveal a corrupt intent to violate the usury laws.”

Webb on Usury, p. 85:

“An agreement whereby the lender, instead of receiving interest, will receive the rents and profits of certain land for a term of years is not usurious if no intent to evade the statute is shown. The fact that such rents and profits exceed lawful interest does not make the contract usurious.”

Observations by Manresa on Antichresis:

In his commentary on the Spanish Civil Code, Manresa makes the following insightful remarks about antichresis, despite its occasional misuse as a vehicle for usury:

“By drafting the law in this manner, the authors of the Code wisely responded to the demands of modern principles governing loan agreements, which hold that there is no economic or legal reason to condemn antichresis. Moreover, they sought to protect the debtor from harm that would otherwise be inevitable, as experience had shown that despite prohibitions, anticretic agreements were widespread in practice—often disguised as sales with right of repurchase. Far from benefiting the borrower (as the law intended), this disguise seriously harmed them, because—unable to grant the creditor enjoyment of the fruits for interest amortization or partial capital repayment—they were forced to alienate their property, surrendering ownership that they could hardly ever regain.”

The rule, therefore, is—or ought to be—the following:

(a) The contract of antichresis, known in this country by the vernacular names “sangla” or “saop”, cannot be adjudged or declared usurious unless usury itself is raised as an issue, a contentious point between the parties, in accordance with the procedural rules governing such matters;

(b) For such a contract to be considered and declared usurious, it is not sufficient that the fruits (i.e., income or produce) of the property given in antichresis, as received by the creditor, exceed somewhat the legal interest rate. Instead, it must be shown that the excess is so obvious, so offensive, and so shocking to the conscience that it necessarily leads one to believe that the contract was crafted as a device to conceal a malicious intent to violate or evade the Usury Law;

(c) In the absence of these circumstances, the “sangla” or “saop” must be respected, and its enforcement should proceed under Article 1881 or Article 1885 of the Civil Code, as the case may be. The courts must not alter the terms of the antichresis, which must stand as the law between the parties.

Regarding the present case:

This case presents certain difficulties in determining the appropriate judgment. The plaintiff asks the court to order the defendants to execute in her favor a mortgage document over the three parcels of land to secure the payment of the ₱1,000 debt, “stipulating therein a term of three months for payment—or any reasonable period as determined by the court—and subject to an interest rate of 12% per annum; or, alternatively, to grant any other remedy that may be appropriate.”

In our judgment, such a course would only delay the final resolution and liquidation of the matter, to the prejudice of the parties and to the efficient administration of justice.

Since the defendants have taken possession of the parcels of land, which they transferred by way of antichresis to the plaintiffs, and have enjoyed the fruits thereof from October 1941 to the present, and since the plaintiffs have shown their willingness to terminate the antichresis agreement by filing the complaint on November 25, 1941—not to recover possession of said land, but to demand payment of the debt with interest from the said date—we hereby reverse the appealed decision and render the following judgment:

Judgment:

(1) The defendants are ordered to pay the plaintiffs the amount of ₱1,000, representing the principal of their loan, with interest at the rate of 6% per annum, beginning November 25, 1941 (the date the complaint was filed), plus court costs. This amount must be paid to the plaintiffs, or deposited in the Court of First Instance of Albay, within three months from the official lifting of the present moratorium;

(2) In default of payment, as required in the preceding paragraph, the three parcels of land in question shall be sold at public auction by the sheriff, in accordance with the law on mortgage foreclosure;

(3) Until payment is made, as ordered in this decision, the total amount owed (including legal interest and court costs) shall remain a preferential lien on the three parcels of land in question.

So ordered.

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