G.R. No. L-4483
IGNACIO SAN JOSE AND LORENZA JIMENEZ, plaintiffs-appellees, vs. PEDRO ORTEGA AND MARIA P. EUSEBIO, defendants-appellants.
October 14, 1908

FACTS:

On August 6, 1903, Pedro Ortega and Maria P. Eusebio (defendants-appellants) mortgaged two houses to Ignacio San Jose and Lorenza Jimenez (plaintiffs-appellees) for 1,150 Mexican pesos, due in one year. On the same date, another instrument was executed, increasing the security and stipulating monthly payments of 15 pesos, with the balance due on August 6, 1904. Pedro Ortega testified that he only received 1,000 pesos, with the 150 pesos representing interest on the principal. The principal debt was not paid when due.

On March 1, 1905, the defendants executed a document (Exhibit B) acknowledging a debt of P180, payable in monthly installments of P15. On March 25, 1905, they executed another promissory note (Exhibit A) binding themselves to pay P1,000 to the plaintiffs or their order by March 1, 1906.

The plaintiffs filed a complaint on September 15, 1906, demanding payment of the P1,000 based on Exhibit A. During the trial, the defendants presented 35 receipts showing monthly payments of P15 from August 31, 1903, to June 30, 1906, totaling P545. The defendants claimed these payments should reduce their outstanding principal debt of P1,000 to P605. The Court of First Instance, however, found that the P15 monthly payments were for interest, and that the P1,000 debt in Exhibit A remained outstanding. The defendants appealed, asserting that the lower court erred in validating Exhibit A and in considering the monthly payments as interest instead of principal.

ISSUE:

Whether the monthly payments of P15 made by the defendants should be applied to the principal amount of the loan or as payment for interest due on the debt.

RULING:

The Supreme Court affirmed the decision of the lower court.

The Court rejected the appellants’ arguments:
1. The promissory note (Exhibit A) was voluntarily acknowledged and admitted by the defendants. Their claim that they signed it believing it to be an extension of time, without proving fraud or falsity, was insufficient to invalidate the document. The note served to confirm the existing debt of P1,000.
2. It is proper and in accordance with law to accord value to a document that has been recognized and whose contents are not disproved.
3. The P15 monthly payments were correctly considered as interest. Pedro Ortega himself testified, “As I was on terms of intimacy with him and had asked him to grant me an extension, I paid him the interest.” This statement, coupled with the fact that the original obligation contemplated interest (150 pesos out of 1,150), strongly suggests that all P15 monthly payments were intended for interest.

Furthermore, the Court cited Article 1173 of the Civil Code, which provides that “if the debt bears interest, payments can not be considered as made on account of the principal until the interest is covered.” Since it was established that the debt bore interest and that the payments were made in relation to that interest, the legal presumption dictates that the payments covered the accrued interest first. Therefore, the P180 in Exhibit B and the P150 in the original notarial instruments, payable in P15 monthly installments, were legally considered interest on the P1,000 principal actually received as a loan.

The Court concluded that the defendants’ contention that their indebtedness was reduced to P605 could not be sustained. The P1,000 debt stated in the promissory note (Exhibit A) was still owing.

The judgment of the Court of First Instance was affirmed, with costs against the appellants.