G.R. No. 48389 ; July 27, 1942
CLEOFE VELEZ, plaintiff-appellant, vs. MAXIMO BALZARSA and FLAVIA MABILIN, defendants-appellees.

FACTS

On November 16, 1937, plaintiff Cleofe Velez filed an amended complaint seeking the return of certain parcels of land. She alleged these lands were sold by defendants Maximo Balzarsa and Flavia Mabilin to her deceased husband, Ramon Neri San Jose, with a right of repurchase, and that defendants remained in possession under a lease but had failed to pay rentals for over two years. She stated that these lands were adjudicated to her in the distribution of her husband’s estate, approved by the court. Defendants, in their amended answer, claimed the real agreement was a loan secured by a mortgage of the lands. They alleged the borrowed amount was only P2,400, but they had already paid P4,420.88, and thus prayed for the return of the excess P2,029.88.
At trial, the parties stipulated that: (1) plaintiff had the right to bring the suit; (2) the real question involved was the collection of a debt; (3) defendants admitted executing the loan documents (Exhibits A to E); (4) plaintiff admitted defendants made payments as shown by receipts (Exhibits 1 to 22); and (5) the lands described in the documents were given as security for the defendants’ obligation.
The trial court found the total amount loaned by Neri to defendants was P3,067, and defendants paid P4,429.88 (P3,997.25 to Neri and P432.63 to plaintiff). The court determined these payments were applied to the principal, not as interest or rents, resulting in an overpayment of P1,362.88. It dismissed the complaint and ordered plaintiff to return the P432.63 she received, applying Article 1895 of the Civil Code. The court held defendants were not entitled to recover the overpayment made to the deceased Neri, as this claim was not presented before the committee on appraisal and claims during the administration of his estate. Plaintiff appealed.

ISSUE

Whether the payments made by defendants to the deceased Ramon Neri San Jose and the plaintiff should be considered as payment of rents, interest, or principal on the loan.

RULING

The Supreme Court affirmed the trial court’s judgment. The Court held that the payments were correctly applied to the principal of the loan, not as rents or interest.
1. Not Rents: The contracts (Exhibits A and D) stipulated that the creditor (Neri) took possession of the lands and would reap their fruits. There was no promise by defendants to pay rents, and the use of the term “rents” in the receipts prepared by Neri and plaintiff did not change the nature of the payments, as defendants, in their ignorance, merely accepted them as proofs of payment.
2. Not Interest: Under Article 1755 of the Civil Code, interest is not due unless expressly stipulated, which was not the case here. Furthermore, since the lender enjoyed the fruits of the mortgaged lands, it was unfair to also charge interest. The amount paid by defendants (P1,143.50 within about 1 year and 8 months on a P2,100 debt) would constitute usury if considered as interest, which cannot be presumed. The alleged occupation of Neri as a money lender did not satisfy the requirement for express stipulation of interest.
3. Applied to Principal: Following the precedent in Guzman vs. Balarag, where a creditor collected rents from mortgaged property, the Court found it must be assumed such collections were intended for the refund of the debt. The trial court’s factual finding that the payments were intended as payments on the principal was upheld.
4. Return of Excess Payment: Article 1895 of the Civil Code, governing the quasi-contract of solutio indebiti (payment by mistake), applied. The plaintiff received money she had no right to collect, and defendants paid it by mistake (believing they were paying the principal but overpaying). The plaintiff was therefore obligated to return the excess amount she personally received (P432.63). The Court declined to rule on the recoverability of the overpayment made to the deceased Neri, as the defendants did not appeal that part of the judgment.
The judgment of the trial court was affirmed, with costs against the appellant.