G.R. No. L-4721

RICARDO NOLAN, plaintiff-appellee, vs. BASILIO MAJINAY, defendant-appellant.

January 23, 1909

FACTS:
On May 3, 1901, Basilio Majinay entered into a loan and mortgage agreement with Compañia General de Tabacos de Filipina. Majinay needed money for his “Basag” hacienda and obtained a credit of $5,000 Mexican currency at 9% annual interest, with a liquidation date set for June 30, 1902. As security, Majinay assigned and pledged the fruits and crops of his “Basag” and “Cadujaan” haciendas, and specifically mortgaged four parcels of land forming the “Basag” hacienda. The contract stipulated that Majinay would deliver his entire sugar crop to the company, and the company initially delivered $3,000, with Majinay subsequently making various sugar deliveries up to June 9, 1902.

After the initial agreement, the creditor company computed interest every six months, adding it to the capital (compounding interest). It also extended additional loans to Majinay beyond the original $5,000 after June 30, 1902 (the agreed liquidation date), until October 1905, and charged 9% interest on these later amounts, despite no specific agreement for such. No proper liquidation of accounts was made on June 30, 1902, as stipulated in the contract.

ISSUE:
1. Was a proper liquidation of Majinay’s account necessary to determine if the mortgage debt was settled by June 30, 1902?
2. Was the creditor company authorized to compound interest every six months and add it to the principal?
3. Should other amounts loaned to Majinay outside the original $5,000 credit after June 30, 1902, bear the stipulated 9% interest?

RULING:
The Supreme Court SET ASIDE or REVERSED the judgment appealed from and ordered a new trial for a proper liquidation.

1. YES, a proper liquidation was necessary. The Court held that since Majinay had delivered various amounts of sugar, an itemized account (liquidation) was essential to determine if the $5,000 debt was settled by June 30, 1902. This liquidation was crucial to clarify whether a foreclosure action or an ordinary action was appropriate.
2. NO, the creditor company was not authorized to compound interest. The contract did not stipulate that interest would be capitalized every six months. Citing Article 1755 of the Civil Code, interest is only owed when expressly stipulated. Permitting compound interest without a written agreement before the obligation is due would be impermissible. Under Article 1109 of the Civil Code, interest due only earns legal interest from the time it is judicially demanded unless otherwise stipulated.
3. NO, other amounts loaned to Majinay outside the original $5,000 after June 30, 1902, should not bear the 9% interest. The public instrument limited the 9% interest to the $5,000 loan. For subsequent loans, it was not proven that any interest was agreed upon, either orally or in writing. Under Articles 1281 and 1283 of the Civil Code, the literal sense of the contract’s terms must be observed when clear. The creditor company is entitled only to legal interest (Article 1108, Civil Code) on these un-stipulated subsequent loans.

Therefore, the case was remanded for a new trial to conduct a proper liquidation based on the written contract, the mortgage-secured amount, and the correct application of interest.