FACTS:
On May 19, 1901, Pascual Balarag (defendant-appellee) executed a document acknowledging he borrowed 1,500 pesos from Irineo de Guzman (plaintiff-appellant). The document stated that Balarag mortgaged his iron-roofed house and lot as security and promised to execute a formal mortgage deed before a notary the following month. However, this formal deed was never executed.

De Guzman filed a complaint seeking to compel Balarag to execute the mortgage or return the 1,500 pesos with legal interest. Balarag, in his defense and cross-complaint, admitted the loan but argued that no interest was stipulated. He contended that de Guzman had been collecting rents from the property and occupying a portion of it, and these amounts should be credited against the principal debt. De Guzman, in turn, claimed he was collecting rents and occupying the property by mutual agreement as usufruct or interest on the loan.

The trial court dismissed de Guzman’s complaint, found that de Guzman had collected significant rents and occupied the property, and ordered him to return the resulting balance of P625 to Balarag, vacate the property, and pay ongoing rent. De Guzman appealed this decision.

ISSUE:
Whether interest on the loan was expressly stipulated, and how the rents collected by the creditor (de Guzman) from the debtor’s (Balarag’s) property, along with de Guzman’s occupation of the property, should be applied to the loan.

RULING:
The Supreme Court, in its decision on October 24, 1908, AFFIRMED the lower court’s judgment.

The Court ruled that, pursuant to Article 1755 of the Civil Code, interest is only owed when it has been expressly stipulated. As the original loan document did not expressly stipulate interest, de Guzman was not entitled to it. The Court found that de Guzman’s verbal claim that collected rents and his occupation of the property were for interest was unsubstantiated and contradicted by the lack of an express stipulation in the written agreement.

Consequently, all amounts received by de Guzman from rents collected from the property and the value of his occupation of Balarag’s house and lot must be applied against the principal loan of 1,500 pesos. The Court upheld the trial court’s accounting, which showed that de Guzman had collected 2,125 pesos in total from rents and the value of his occupation. After deducting the 1,500 peso loan, de Guzman was found to owe Balarag a balance of P625.

De Guzman was ordered to pay this balance to Balarag, vacate the property, and pay ongoing rentals until he did so.