Title

Go Chioco vs. Martinez

Case Decision Date

G.R. No. 19684 Oct 17, 1923

In the case of Go Chioco v. Martinez, the court ruled that the debtor had paid
a usurious rate of interest on the promissory note and was entitled to recover
the usurious interest paid, but could not recover the amount paid on account
of the principal, while the usurious creditor was not allowed to recover the
loaned capital.

45 Phil. 256

[ G.R. Nos. 19684 and 19685. October 17, 1923 ]

J. J. GO CHIOCO, PLAINTIFF AND APPELLANT, VS. E. MARTINEZ ET AL., DEFENDANTS

AND APPELLEES, AND ORTIGA HERMANOS, PLAINTIFFS AND APPELLANTS, VS. J. J. GO
CHIOCO, DEFENDANT AND APPELLANT AND APPELLEE.

DECISION

VILLAMOR, J.:

It appears from the record that on June 2, 1919, J. J. Go Chioco made a loan of P40,000 to
Ortiga Hermanos, and to that e!ect a promissory note, Exhibit 2, was executed, wherein
Ortiga Hermanos, Chan Lin Cun, and E. Martinez promised to pay, jointly and severally, said
sum within three months from the above mentioned date. On the same day, Ortiga
Hermanos, together with Chan Lin Cun and E. Martinez, signed another promissory note for
the amount of P1,800 payable within three months from said date, and on the same date
Ortiga Hermanos, through their manager, E. Martinez, delivered to J. J. Go Chioco check,
Exhibit 1, drawn against the Bank of the Philippine Islands for the amount of P1,800, which
was cashed by said J. J. Go Chioco.

When the note became due and the makers could not pay it, the same was cancelled and
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 another note, Exhibit 3, was executed in the sum of P40,000 for the period of three months,
which was signed, as the former, by the defendants, Ortiga Hermanos, Chan Lin Cun, and E.
Martinez. On the same date another note was delivered by the same debtors in favor of J. J.
Go Chioco for the sum of P1,800 as well as a check, payable to order, Exhibit 2-B, drawn
against the Bank of the Philippine Islands and signed by Ortiga Hermanos. Said check for the
sum of P1,800 was cashed by the plainti!, J. J. Go Chioco.

When the second note became due the makers failed to pay it, and, for that reason, the note
was cancelled and Exhibit 4 executed and signed by the same parties. On the same date, that
is, on December 2, 1919, Ortiga Hermanos delivered to J. J. Go Chioco the note, Exhibit 4-A,
for the sum of P1,800 as well as the check, Exhibit 3-B, drawn against the Bank of the
Philippine Islands for the same amount which was cashed by J. J. Go Chioco.

On March 2, 1920, when the last mentioned note became due, the defendants also failed to
pay the same and for that reason the note was again cancelled and another note executed
and signed by the same parties, making it appear that it should be paid within one month
and, for that reason, the other note, signed by the debtors, was for P600 only, as well as the
amount of the check given by Ortiga Hermanos, on March 1, 1920, drawn against the
Philippine National Bank, which was cashed by J. J. Go Chioco.

On April 2, 1920, the date upon which the last mentioned note should have been paid, the
defendants also failed to satisfy it and for this reason the note was again novated, stipulating
that the period would be for three months. On the same date the three debtors delivered
their note, Exhibit 6-A, for the amount of P1,800.

The debtors also failed to satisfy this debt within the period stipulated and, consequently,
the note was novated and on July the 2d, Exhibit 7 was signed by Ortiga Hermanos, Chan
Lin Cun and E. Martinez, which is another note for a period of three months. On the same
date the same parties delivered another note for the amount of P1,800 to J. J. Go Chioco,
payable within three months and on the following day, July 3, 1920, Ortiga Hermanos
delivered to J. J. Go Chioco Exhibit 6-A against the Bank of the Philippine Islands for the
same amount of P1,800.

Again, the note was not paid at maturity and for that reason the same was novated on
October 2, 1920, and signed by Ortiga Hermanos, Chan Lin Cun and E. Martinez, and on the
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 same date Ortiga Hermanos delivered to J. J. Go Chioco another promissory note for P1,800
and a check against the China Banking Corporation for the same amount. When the last
mentioned promissory note became due and the debtors being unable to meet it, a
promissory note Exhibit A was again executed and signed by Ortiga Hermanos, Chan Lin
Cun and E. Martinez in the sum of P40,000, in favor of J. J. Go Chioco payable within three
months from date.

The promissory note, Exhibit A, as inserted in the complaint, is as follows:

"By these presents, three months from date we promise to pay to the order of Mr. J. J. Go
Chioco the sum of forty thousand pesos (P40,000), Philippine currency, value received in
cash from said Go Chioco for commercial transactions.

"Manila, January 2, 1921.

(Sgd.) "ORTIGA HERMANOS

"CHAN LIN CUN

"E. MARTINEZ

"Due April 2, 1921."

This promissory note was not novated at its maturity as the former ones; but it appears that
on April 4, 1921, Ortiga Hermanos paid P5,000 and on May 20, 1921, P20,000, that is, a total
sum of P25,000. The refusal of Ortiga Hermanos to pay said promissory note in full gave rise
to the complaint of J. J. Go Chioco, "led on October 4, 1921, asking the court to render
judgment against the defendants for the amount of P15,000 with legal interest and costs.

The defendants E. Martinez and Chan Lin Cun "led a separate answer praying for the
dismissal of the complaint, with costs, the return of the sum of P5,857, which represents the
interest paid on said promissory note of P40,000 at the rate of 18 per cent per annum, and
the payment of P1,500 as attorney's fees.

The defendant Ortiga Hermanos answered the complaint praying that the promissory note
for the amount of P40,000 be declared null and void, for the reason that they had paid a
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 usurious rate of interest, namely, 18 per cent per annum; that they be absolved from the
complaint and that judgment in their favor be rendered for the amount of P1,500 as
attorney's fees, with costs, and that the plainti! be ordered to return the sum of P25,000
paid on account of the principal.

Thereafter, the defendant Ortiga Hermanos, on November 9, 1921, "led another and separate
complaint against J. J. Go Chioco praying that a judgment be rendered in their favor for
P11,850 which represents interest paid at the rate of 18 per cent per annum, plus P1,500 as
attorney's fees, with costs.

By agreement of parties, both cases were heard together, it having been stipulated between
them that the evidence adduced in either case will be considered in the other.

Honorable Judge Carlos Imperial, who heard the case, in a decision dated June 24, 1922,
held:

(a) That the interest of 18 per cent per annum stipulated by the contending parties in these
two cases is null and usurious;

(b) That in accordance with the provisions of section 7 of Act No. 2655, the promissory note,
Exhibit A, executed by Ortiga Hermanos, Chan Lin Cun and E. Martinez, in the sum of
P40,000 payable within three months, and on which a usurious rate of interest of 18 per
cent per annum had been paid, is null and void, and that, as a result, the plainti! J. J. Go
Chioco has no right to recover the balance of said promissory note which amounts to
P15,000 from either Ortiga Hermanos or their sureties, Chan Lin Cun and E. Martinez; and

(c) That J. J. Go Chioco should refund to Ortiga Hermanos, their manager, or their duly
authorized representative, the total amount of P11,850 which represents the usurious
interest collected from December 2, 1919, to the date of the "ling of the complaint, together
with legal interest from November 9, 1921, when Ortiga Hermanos "led their complaint, and
said Go Chioco should likewise pay Ortiga Hermanos, Chan Lin Cun and E. Martinez the
sum of P3,000 as attorneys' fees of Messrs. A. D. Gibbs and Thos. D. Aitken, at the rate of
P1,500 each, together with costs of both instances.

From this decision both parties appealed, and the motion for new trial based on the ground
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 that the decision is contrary to the law and not justi"ed by the evidence having been denied,
both parties brought said case to the Supreme Court by bill of exceptions.

The appellant J. J. Go Chioco assigned as errors of the trial court the following: (1) In "nding
that the usurious interest upon the said promissory note of P40,000 has been paid from
December 2, 1920, at the rate of 18 per cent per annum, that is, the amount of P11,850 and in
sentencing him to pay Ortiga Hermanos said sum with legal interest thereon from the "ling
of the complaint of Ortiga Hermanos; (2) in sentencing J. J. Go Chioco to pay the sum of
P3,000 as attorney's fees of Messrs. A. D. Gibbs and Thos. D. Aitken at P1,500 each; (3) in not
sentencing Ortiga Hermanos to pay the amount of P15,000, with legal interest thereon from
the "ling of his complaint (Go Chioco's); and (4) in sentencing J. J. Go Chioco to the payment
of costs.

On the other hand, the appellant, Ortiga Hermanos, alleges that the trial court committed an
error in overruling their counterclaim for the amount of P25,000 paid on account of the
principal of a usurious promissory note, and in not sentencing J. J. Go Chioco to pay said
sum of P25,000.

The facts, as found by the trial court, necessary for a clear understanding of this case, brie#y
stated, are as follows: (1) That the plainti! made a loan to the defendant, Ortiga Hermanos, of
the sum of P40,000, and that interest at the rate of 18 per cent per annum has been paid; (2)
that the defendant paid the plainti!, as interest on said amount, including the payments in
April and July, 1921, to wit, P2,253.50 (P3.50 for stamps), from December 2, 1919, the total
sum of P11,850, which, together with the P1,500 as attorney's fees, constitutes the prayer of
the defendant's complaint; (3) that the defendant Ortiga Hermanos paid the plainti!, on two
di!erent occasions, on account of said loan of P40,000, the amount of P25,000 which was
set out in his counterclaim; and (4) that according to the complaint "led by J. J. Go Chioco of
the sum of P40,000 loaned there still remains a balance of P15,000 to be paid.

In view of the facts just stated and from the errors assigned by both parties, the questions to
be decided are: (1) Whether or not the defendant has paid the plainti! a usurious rate of
interest, namely, 18 per cent per annum upon the promissory note for the amount of
P40,000; (2) whether or not the debtor who has paid a usurious rate of interest can recover
the amount paid on account of the principal as well as the usurious interest paid, together
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 with attorney's fees and costs; and (3) whether or not the usurious creditor has a right to
recover his capital loaned to and not paid by the debtor.

I. That J. J. Go Chioco has collected interest at the rate of 18 per cent per annum upon the
amount of P40,000 which he loaned to Ortiga Hermanos, may be inferred from the evidence
and was so found by the trial court.

J. J. Go Chioco himself admits having collected the amount mentioned in the promissory
notes and checks signed by Ortiga Hermanos in the amount of P1,800 each, but alleges that
of that amount, P400 was paid as penalty for failure to pay the promissory notes at their
maturity. That is to say, of the amount of P1,800 w$ich represents the interest at 18 per cent
per annum on the capital of P40,000, he collected 4 per cent as penalty and 14 per cent as
interest.

The trial court, in analyzing the testimony of the witness J. J. Go Chioco, states:

"The explanation given by J. J. Go Chioco of said operations is undoubtedly ingenious, but in

the opinion of this court, is far from being satisfactory and acceptable. There is nothing in
the record to indicate, apart from his own testimony, that the parties have stipulated any
penalty for failure to pay at maturity any of the promissory notes executed, and the fact that
all interest was collected by the creditor in advance and before the promissory notes
became due, shows conclusively that no penalty was agreed upon by the parties. Indeed it
would seem that no such penal clause was necessary, since it was clearly stipulated that the
sum loaned would earn a stipulated interest; furthermore, if such an agreement had existed,
there is no reason why same should not have appeared in writing, either in the promissory
note itself or in any other document disclosing such contractual obligation. What appears
clear and can be inferred from all the documentary evidence adduced and of record is that,
J. J. Go Chioco required and collected as interest upon the amount of P40,000 he had
loaned, pro"ts amounting to 18 per cent which is in violation of section 3 of Act No. 2655 of
the Philippine Legislature, which enjoins and prohibits any person from charging a rate of
interest in excess of 14 per cent per annum upon any loan not guaranteed in the manner
provided for in section 2 of the said Act."

After examining the evidence before us, we are unable to "nd anything which will warrant
the reversal or modi"cation of the above conclusion arrived at by the trial court.
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 From the record it appears that the "rst promissory note should have become due within
three months, that is, on September 2, 1919. On the same date, June 2, 1919, Ortiga Hermanos
signed a promissory note for P1,800 which should likewise have become due on September
2, 1919, and at the same time issued a check for the amount of P1,800 which was collected by
J. J. Go Chioco. This operation was repeated several times every three months, with the
exception of the promissory note of March 2, 1920, for which a period of one month only
was "xed. So it is clear that whenever the note for P40,000 was novated, Ortiga Hermanos
signed a promissory note for P1,800, together with the corresponding check, which was
collected by the creditor J. J. Go Chioco. It is therefore evident that Ortiga Hermanos paid J.
J. Go Chioco in advance the interest at 18 per cent per annum upon the loan of P40,000.

We hold that the contention of J. J. Go Chioco that he has only charged 14 per cent upon the
loan of P40,000 as interest and 4 per cent as penalty for failure to pay the notes, is
untenable. The checks issued by Ortiga Hermanos and cashed by J. J. Go Chioco are
negotiable instruments and they represent an unconditional obligation to pay the amount
therein stated of P1,800 which, if we take into consideration the value of the loan, represents
the interest at the rate of 18 per cent per annum.

In accordance with section 285 of the Code of Civil Procedure, the agreement to pay interest,
reduced to writing in the promissory notes for P1,800, is considered as containing all those
terms stipulated by the parties, and therefore there can be, between the parties and their
representatives or successors in interest, no evidence of the terms of the agreement other
than the contents of the writing, except in the following cases:

(1) Where a mistake or imperfection of the writing, or its failure to express the true intent
and agreement of the parties, is put in issue by the pleadings;

(2) Where the validity of the agreement is the fact in dispute.

As far as the record goes, said promissory notes of P1,800 were not put in issue during the
trial nor is there any discussion as to their validity. Said notes recite a speci"c obligation and
its language is not subject to ambiguity. J. J. Go Chioco cannot, therefore, change, by his
mere testimony, the terms of said notes in the sense that part of the amount therein stated
was collected as penalty.
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 Moreover, the fact that the interest in question was collected quarterly and in advance, with
the exception of one case wherein the interest was collected for one month, shows, in our
opinion, that the transaction was for the collection of interest, since you cannot charge or
collect anything in advance as penalty for failure to ful"ll an obligation which was not yet
enforceable.

That the parties to a contract of loan may validly agree upon a penalty in case the obligation
is not ful"lled, beside the interest not prohibited by the Usury Law, is a proposition generally
admitted, but in the case at bar, the alleged penalty, collected in advance before the maturity
of the obligation, far from ful"lling its objects to compel the debtor to duly pay his obligation,
is a scheme to avert his compliance with the Usury Law.

Supposing that the agreement, if there was any, to pay a penalty in case the promissory note,
at its maturity, is not paid, is in substance similar to the agreement to pay attorney's fees, as
the attorney for J. J. Go Chioco alleges, such an agreement is, however, subject to the
limitation indicated in the case of Bachrach Garage and Taxicab Company vs. Golingco (39
Phil., 912), quoted by counsel for J. J. Go Chioco. In that case the court said:

"The stipulation that in case of noncompliance the debtor shall pay a "xed amount for the
fees of the attorney who may be employed by the creditor for the purpose of enforcing
compliance with the obligation is not deemed to be an interest within the purview of Act No.
2655, and neither is the computation "xed by said Act applicable thereto. It is not an
indemnity for gain which cannot be realized, but an amount which the creditor spends and
which constitutes a loss really su!ered by reason of the noncompliance with the obligation.

"When the amount stipulated for the attorney's fees is so exorbitant that it exceeds that
which should justly be paid for that purpose, the excess shall be considered as indirect or
simulated interest, according to the spirit of the law, and should therefore be subject to the
computation. In the case at bar, the 1212 per cent to which the trial court reduced the 25 per
cent stipulated represents, in our opinion, the amount which the plainti! was justly obliged
to pay for his attorney's fees, and should not be considered as interest in the computation of
the latter."

But, in the case at bar, there is an unsurmountable di%culty which prevents us from
considering as penalty 4 per cent of the total 18 per cent paid by Ortiga Hermanos as interest,
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 and that di%culty lies in the lack of evidence upon such alleged agreement as to the penalty.
In the case of Bachrach Garage and Taxicab Company vs. Golingco, supra, it appears from
the promissory note itself, signed by the defendant and his sureties, that in case the services
of an attorney will be necessary for the collection of said note, the defendant promised to
pay to the holder of the same 25 per cent of the principal and interest upon said note as
attorney's fees; while in the case at bar there is no such clause in the promissory note signed
by Ortiga Hermanos. In that case, the plainti! was compelled to sue in order to collect his
note, engaging the services of an attorney; while in the case at bar, the plainti! J. J. Go
Chioco was compelled only to "le a complaint on November, 1921, to recover from Ortiga
Hermanos the sum of P15,000, the balance of the original capital of P40,000, having
collected, as it was already said, interest in advance at the rate of 18 per cent from December
2, 1919, to November 2, 1921. From the foregoing, we are of the opinion and so hold that
Ortiga Hermanos paid J. J. Go Chioco upon the loan of P40,000, interest at the rate of 18 per
cent per annum which is in violation of section 3 of Act No. 2655, that is, the Usury Law.

With this conclusion at which we arrive, it is evident that Ortiga Hermanos, having paid to J.
J. Go Chioco the amount of P11,850 as usurious interest from December 2, 1919, up to the
"ling of his complaint, have, under section 6 of Act No. 2655, the right to recover said sum of
P11,850 together with P1,500 which the trial court granted them as attorney's fees of Mr. A.
D. Gibbs and costs.

As to the attorney's fees, counsel for J. J. Go Chioco assigned as error of the trial court in
granting P1,500 to attorney Thos. D. Aitken, who represented the other defendants Chan Lin
Cun and E. Martinez. Counsel alleges that all of the amount representing interest was paid
by Ortiga Hermanos, and the sureties Chan Lin Cun and E. Martinez could not therefore
successfully maintain an action to recover any interest nor attorney's fees. We agree with
this contention and it is our opinion that J. J. Go Chioco is not bound to pay the attorney's
fees of the sureties Chan Lin Cun and E. Martinez. Therefore, the judgment appealed from
should be modi"ed in this respect, by deducting P1,500 from the sum of P3,000 allowed by
the trial court.

II and III. The other questions raised in this appeal refer to whether a debtor, who has paid
usurious interest, can recover the amount paid by him on account of the principal and
whether the usurious creditor has a right to recover the principal loaned, and not paid by the
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 debtor. The resolution on these two questions depends upon the interpretation of section 7
of Act No. 2655 which provides:

"All conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of debt,
and all deposits of goods or other things, whereupon or whereby there shall be reserved,
secured, taken, or received, directly or indirectly, a higher rate or greater sum or value for
the loan or forbearance of money, goods, or credits than is hereinbefore allowed, shall be
void: Provided, however, That no merely clerical error in the computation of interest, made
without intent to evade any of the provisions of this Act, shall render a contract void: And
provided further, That nothing herein contained shall be construed to prevent the purchase
by an innocent purchaser of negotiable mercantile paper, usurious or otherwise, for
valuable consideration before maturity, when there has been no intent on the part of said
purchaser to evade the provisions of this Act and said purchase was not a part of the original
usurious transaction. In any case, however, the maker of said note shall have the right to
recover from said original holder the whole interest paid by him thereon and, in case of
litigation, also the costs and such attorney's fees as may be allowed by the court."

As may be seen, notwithstanding the provision as to the nullity of the usurious note, in case
the same is endorsed to an innocent third person, the innocent purchaser is entitled to
collect the amount, with interest, from the maker and the maker is entitled to recover from
the original holder thereof only the interest paid by him, and, in case of litigation, the costs
and attorney's fees as may be allowed by the court. Therefore, the only e!ect of the nullity of
the note is the recovery of the interest paid by the debtor, not the value of the note.

If, on account of the nullity of a usurious note, the original holder thereof, or the payee, has
no right to recover any amount upon said note, there is no reason why, in case the same is
transferred to a third person who acquires it in good faith and for a consideration, the payee
should be bene"ted by the amount collected by him from the transferee as payment of the
note endorsed and not repay the maker the value of the same. Likewise, if by virtue of such a
nullity, nothing can be collected by the holder of the note, there is no reason why the
reimbursement of the interest should be limited to the amount collected during the two
years immediately preceding the date on which the action for the recovery thereof was
instituted, and should not include all the interest collected prior to said period. And it is
because the law limits the e!ect of the nullity to the reimbursement of the interest paid
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 during the period of two years preceding the "ling of the complaint, which provision being
of a penal nature must be strictly construed so that it should not include the reimbursement
of the principal paid and the unpaid principal which is not provided in the law.

That the legislator did not have in mind that the usurious creditor should lose the capital
loaned by him is further made apparent by the provisions of section 8 of Act No. 2655 as
amended by Act No. 2992. Said section reads thus:

"All loans under which payment is to be made in agricultural products or seed or in any
other kind of commodities shall also be null and void unless they provide that such products
or seed or other commodities shall be appraised at the time when the obligation falls due at
the current local market price: Provided, That unless otherwise stated in a document
written in a language or dialect intelligible to the debtor and subscribed in the presence of
not less than two witnesses, any contract advancing money to be repaid later in agricultural
products or seed or any other kind of commodities shall be understood to be a loan, and any
person or corporation having paid otherwise shall be entitled in case action is brought
within two years after such payment or delivery to recover all the products or seed delivered
as interest, or the value thereof, together with the costs and attorney's fees in such sum as
may be allowed by the court. Nothing contained in this section shall be construed to prevent
the lender from taking interest for the money lent, provided such interest be not in excess of
the rates herein "xed."

Under this legal provision, in case of a usurious contract, by virtue of which payments are to
be made on agricultural products, seeds or other fruits, the debtor may recover from the
usurious creditor only what he might deliver as interest, which shows, in our opinion, that
what he might have paid as principal is not recoverable. Now, if it is held that in another
kind of a usurious contract, the debtor may recover not only the interest paid but also the
principal, how can it be explained that by the mere fact of the debt being payable in fruits,
the debtor is not entitled to recover the principal which he might have paid? The conclusion
is inevitable that the nullity of a usurious loan provided in the law means only that the
lender cannot demand payment of the stipulated usurious interest.

Moreover, section 10 of Act No. 2655 as amended by Act No. 2992 provides:

"Without prejudice to the proper civil action, violations of this Act shall be subject to
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 criminal prosecution and the guilty person shall, upon conviction, be sentenced to a "ne of
not less than "fty pesos nor more than two hundred pesos, or to imprisonment for not less
than ten days nor more than six months, or both, in the discretion of the court, and to return
the entire sum received as interest from the party aggrieved, and in case of nonpayment, to
su!er subsidiary imprisonment at the rate of one day for every two pesos: Provided, That in
case of corporations, associations, societies or companies the manager, administrator or
gerente or the person who has charge of the management or administration of the business
shall be criminally responsible for any violation of this Act."

As may be seen, this legal provision requires the restitution only of what might have been
received by the convicted usurer as interest. If the intention of the legislator was to
con"scate the principal loaned, he would not have limited himself to the statement that the
interest collected must be refunded.

In interpreting Act No. 2655, the fact must not be lost sight of that in August, 1911, the
Philippine Commission enacted Act No. 2073, which "xes and de"nes the legal rate of
interest, declares the e!ect of usury on contracts, and provides for other purposes in the
Moro Province, Mountain Province, and in the provinces of Agusan and Nueva Vizcaya.
Section 3 of this Act provides:

"Sec. 3. All bonds, bills, notes, assurances, conveyances, chattel mortgages, and all other
contracts and securities whatsoever, and all deposits of goods, or anything whatever,
whereupon or whereby there shall be reserved, secured, or taken any greater sum or value
for the loan or forbearance of any money, goods, or things in action, than is above
prescribed, shall be void, except as to bona "de purchasers of negotiable paper, as
hereinafter provided, in good faith, for a valuable consideration, before maturity: Provided,
That no merely clerical error in the computation of interest, made with no intent to avoid the
provisions of this Act, shall render the contract usurious: And provided further, That the
payment of interest in advance for one year at a rate not to exceed "fteen per centum per
annum shall not be construed to constitute usury: And provided further, That nothing
herein shall be construed to prevent the purchase of negotiable mercantile paper, usurious
or otherwise, for a valuable consideration, by an innocent purchaser, free from all equities,
at any price, before the maturity of the same, when there has been no intent to evade the
provisions of this Act, or where said purchase has not been a part of the original usurious
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 transaction. In any case, however, where the original holder of a usurious note sells the
same to an innocent purchaser, the maker of said note or his representative shall have the
right to recover back from the said original holder the amount of principal and interest paid
by him on said note."

The phraseology of section 7 of Act No. 2655 is so similar to the language of section 3 of Act
No. 2073 that it may well be said that Act No. 2655 was drafted after Act No. 2073 for the
whole Philippines, which Act (No. 2655) "xes the rate of interest on loans, declares the e!ect
of receiving or collecting usurious interest and provides for other purposes. A comparison
of the terms of the laws above quoted shows only one essential di!erence, and that is, that
while section 3 of the former Act No. 2073 gives the debtor the right to recover not only the
usurious interest but also the principal, section 7 of the later Act, that is, Act No. 2655,
authorizes the debtor to recover only what he might have paid. In view of this fact, there is
no room for doubt that the Philippine Legislature, in enacting Act No. 2655, deemed the
provision of section 3 of Act No. 2073 to be unjust as to the con"scation of the principal and
so it provided in Act No. 2655 that the debtor may recover only the interest paid, attorney's
fees and costs.

In the case of Delgado vs. Alonso Duque Valgona (44 Phil., 739), decided March 31, 1923, the
decision in the case of Moncrief vs. Palmer (114 Atl., 181; 17 A. L. R., 119, 120), is quoted with
approval wherein it was held that "he who seeks equity must do equity" by repaying the
creditor the capital which he might have received by virtue of the usurious contract. In
discussing the law applicable to the case, the court, among other things, said:

" 'The provisions of the Rhode Island statute with reference to usury are drastic. Chapter
434, Public Laws 1909, amended by chapter 838, Public Laws 1912. The violation of the act is
punishable as a misdemeanor, every contract made in violation of it is void, and the
borrower may recover in an action at law, not only the interest, but any portion of the
principal paid by him upon such usurious contract. The complainant's solicitor has
presented to us a very comprehensive and able argument in support of his contention that
equity should recognize the view of public policy emphatically expressed in the legislative
act, and should cancel the usurious and void contract. This argument would have more
persuasive force if the question were a new one. The settled and nearly universal practice of
courts of equity is opposed to the complainant's contention. The statutes of di!erent states
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 have various provisions directed towards the prevention of the extortion and oppression of
usury. Whatever may be the method adopted by the legislature, however, although the
legislative provision may go to the limit of our statute and declare the contract void and
unenforceable, nevertheless courts of equity, in the absence of statute speci"cally
constraining them to act di!erently, have insisted upon the equitable principle that he "who
seeks equity must do equity," and have required the borrower, before he can be given the
relief of cancellation of the contract, to perform the moral obligation resting upon him, and
pay or o!er to pay the principal of the loan with legal interest.' "

Commenting upon the former decision rendered in the case of Delgado vs. Alonso Duque
Valgona, supra, Mr. Justice Street who wrote the opinion of the court said:

"The doctrine of that case we consider applicable here; and without expressing any opinion
upon the broader question whether capital lent upon a usurious contract can be recovered
in an aggressive action by the creditor, we are content to hold that when the debtor in a
usurious contract sees "t, or "nds it necessary to apply to the court for equitable relief, he
will, as a condition to the granting of such relief, be required to restore what he received
from the other party. In the present case both parties are before the court in the attitude of
suppliants, each asking for relief from the contract in question; and in order to avoid the
possibility of further litigation, as well as to secure complete justice, an order will be entered
requiring the plainti!, as a condition of the satisfaction of the judgment in his favor, to
reconvey to the defendant the same twelve parcels acquired by the plainti! from the
defendant."

The essential facts in that case are: On the "rst of February, 1918, Alonso Duque Valgona, the
defendant, sold certain lands to Luciano Delgado, the plainti!, and to secure the payment of
the purchase price, Delgado executed, at the same time, a deed of mortgage in favor of the
defendant on the same lands and also on two other large parcels, of which the plainti! was
already the owner, situated in the municipality of Tinambac, Province of Camarines Sur. The
conditions of this mortgage, so far as essentially pertaining to this case, are contained in
clauses A to E, inclusive, of paragraph 2, and which in substance are as follows: (a) The
mortgagor (Delgado) promised to pay to the mortgagee (Alonso Duque Valgona) the sum of
P15,000 in one installment; (b) to secure the payment of this amount the debtor executed a
mortgage in favor of the creditor on fourteen parcels of land described in paragraph one of
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 said deed; (c) as long as the debt subsists, the debtor binds himself to pay interest in the sum
of P2,250 in two semi-annual installments of P1,175 each, which, as may be observed,
exceeds the other amount by P100; (d) the creditor gives the debtor the period of twelve
years from the date of the deed within which to pay the P15,000 above mentioned. Lastly, in
clause E, it is stipulated that if the debtor fails to pay within the twelve years, the creditor
may, at the expiration of this period, take possession of the lands mortgaged.

The mortgage in question having been held usurious, because it was found that the
stipulated interest exceeded 15 per cent per annum, the court rendered judgment in favor of
the plainti!, the mortgagor, for the recovery of the usurious interest paid by him, that is,
P2,625, with interest thereon, plus P1,000 attorney's fees; and reversed the judgment
appealed from in so far as the defendant was adjudged entitled to recover the sum of
P15,000, which was the amount of the mortgage deed, and ordered the plainti!, the usurious
debtor, to return to the defendant creditor the twelve parcels of land which were the subject-
matter of the sale, the price of which was secured by the mortgage, thus the result being that
if the creditor did not succeed in recovering the P15,000 which he had paid to the debtor, in
lieu thereof he recovered the twelve parcels of land which were the consideration of the
mortgage.

In the case before us, we have J. J. Go Chioco claiming from Ortiga Hermanos the payment
of P15,000, the unpaid balance of the capital loaned and Ortiga Hermanos in turn
demanding from J. J. Go Chioco the repayment of the usurious interest paid by him, plus
attorney's fees and costs, besides the P25,000 paid on. account of the loan of P40,000.

In view of the fact that we are called upon to pass upon the claim of the creditor J. J. Go
Chioco, we are now compelled to render our opinion on the question whether or not a
creditor has direct action against the debtor for the recovery of the capital loaned upon a
stipulation of usurious interest. As is well known, usury is an act prohibited by law and to
determine the rights and action of the parties in interest, it is necessary to take into account
the legal previsions applicable in each jurisdiction.

And, if we turn our attention on the Acts above cited, Nos. 2073 and 2655, it will be seen that
section 6 of the former Act provides:

"Whenever it satisfactorily appears to a court that any bond, bill, note, assurance, pledge,
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 conveyance, contract, security, or evidence of debt has been taken or received in violation of
the provisions of this Act, the court shall declare the same to be void, and enjoin any
proceeding thereon, and shall order the same to be cancelled and given up."

This provision shows that under that law, it was expressly prohibited to maintain any action
on usurious contracts. Then there is no doubt that the creditor cannot institute any action
for the recovery of the capital or part of the capital loaned. Undoubtedly, the legislator, in
enacting Act No. 2073, deemed it reasonable that the creditor should lose the capital,
because, aside from the fact that in that Act no penalty was provided for against usury other
than the loss of all the interest paid by the debtor in case the usurious instrument was
negotiated (section 3), and of the interest paid in the two years preceding the "ling of the
complaint in all other cases (section 2); in said Act only one rate of interest quite liberal was
"xed; namely, 15 per cent per annum according to section 1 and building and loan
associations as well as pawn shops were exempted from every limitation according to
section 7.

But the Act now in force, No. 2655, as amended by Act No. 2992, contains no such
prohibitive provision as that of the former Act No. 2073 and the silence of Act No. 2655 in
this respect, in contra-distinction with the express prohibition of Act No. 2073, shows that
said prohibition was intentionally omitted from the law now in force, and that the
Legislature, in omitting such rule from the new law, did not intend to bar the creditor from
coming into court for the recovery of his capital. And the reason for such an omission is
clear if it is taken into account that Act No. 2655 made the situation of the creditor quite
di%cult in these respects: (a) No creditor is exempt from the law (section 2); (b) the
maximum rates were "xed, which were to be applicable to building and loan associations
and pawn shops (section 4); (c) the general rate of interest was reduced to 12 per cent on
loans with securities of real properties and 14 per cent if there are no such securities
(sections 2 and 3); (d) in case of litigation, the judge shall sentence the creditor to pay
attorney's fees to the debtor (sections 6 and 8); (e) usury was made a crime and is
punishable by a "ne equal to the interest stipulated, or subsidiary imprisonment in case of
insolvency (section 10). We believe that these new penalties and restrictions were inserted
by the Legislature in lieu of the loss of the capital provided by Act No. 2073.

And the foregoing conclusion is fully sustained not only by the history of the Usury Law, but
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 also by the preamble of the law itself. By the history, because the bill of the Commission No.
217 prepared by Commissioner Martin in 1914 in its section 1 contained a provision to the
e!ect that "any contract which directly or indirectly provides for the payment of any interest
in excess of 12 per cent per annum shall be null and void not only as to the interest but as to
the principal invested," which provision was eliminated from the Usury Law as it was "nally
passed by the Legislature. By the preamble, because speaking of the necessity of the
intervention of the prosecuting attorney in actions resulting from the violation of the Usury
Law, as well as of the penal sanction, said preamble gives the following reasoning: "We
believe it to be a sound proposition that the "scal should intervene in the actions arising
from the violation of the proposed provisions set out in the original bill, because, among
other reasons, those poor persons unable to employ an attorney will be represented and
thus the law would not be a dead letter. But without the penal clause, it seems that such
intervention is not proper. But, why not insert such clause? We would not be the "rst and
only nation which would do such a thing. We are of the opinion that a "ne equivalent to four
times the amount in excess of the interest charged or subsidiary imprisonment in case of
insolvency, would be su%cient and better than the forfeiture of the principal." Therefore,
there can be no room for doubt that it was not the intention of the Philippine Legislature to
forfeit the principal in condemning usury by means of a law.

Page on Contracts, vol. 1, pages 757 et seq., in dealing with the e!ect of usurious executory
contracts, says:

"A contract usurious in its nature will not be enforced by the courts. Whether such contract
is illegal or merely void is a di%cult question to answer, as the exact e!ect of such contract
depends on the wording and construction of the statute by which such excessive rate of
interest is forbidden. Such statutes in terms, varying in di!erent jurisdictions, provide with
considerable exactness the e!ect of such transactions; and the courts rarely feel authorized
to apply thereto the common law principles of illegal or void contracts, in addition to the
express requirements of the statute. This rests upon the familiar principal that where a
statute creates a new right or o!ense and provides a speci"c remedy or punishment, that
remedy alone can apply. In some jurisdictions, apart from the question of the right to
recover the principal, which is hereafter discussed, it is held that other provisions of an
inseverable usurious contract, such as a valid provision for attorney's fees, are themselves
enforceable if no other objection than that of usury exists thereto. Where this view obtains
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 such contracts are not illegal. Further, in some jurisdictions, collateral securities are
enforced up to the amount lawfully due. Where this view obtain such contracts cannot be
classed as illegal, in the sense in which the term is used at common law. Under usury
statutes the principal loaned may be recovered. The e!ect of the usury statutes is for the
most part con"ned to the interest paid or agreed to be paid. Under many statutes an
agreement for usury causes a forfeiture of the entire interest, leaving only the principal to be
recovered."

Discussing, in another passage, the discharge of collateral securities, the same author adds:

"* * * The provisions of certain statutes, however, make securities in contracts given on a
usurious consideration absolutely void, and require their cancellation without conditions.
Under such statutes an o!er to repay the amount borrowed is not necessary in order to
enable the debtor to have such contracts or conveyances cancelled. In a suit by the debtor
for cancellation, he may have the amount paid in by him as usurious interest applied in
payment of the principal, even if he could not maintain a separate action in equity to recover
it. If the creditor is seeking to enforce a usurious contract, equity may in a proper case
restrain him from enforcing it, without requiring the previous payment of the amount due.
Thus in an action by the creditor to enforce the usurious contract, the debtor may interpose
usury as a defense without paying or tendering the amount of the debt. If the statute
prevents recovery of interest on a usurious contract, the creditor can recover only the
amount actually loaned by him." (Carpenter vs. Lewis, 60 S. C., 23; 38 S. E., 244.)

When the law provides that the penalty for usury is the con"scation of all the interest which
was stipulated, the lender may, in an action based upon the contract, recover the amount
actually lent or paid without interest. (39 Cyc., 1007.)

In support of this proposition, the following doctrines are cited:

"If the rate of interest, stipulated in writing, was higher than ten per cent, only the principal
could be recovered." (Alston vs. Brashears, 4 Ark., 422.)

"Where it appears from the decree itself that a portion of the amount reported to be due by
the master is 'tainted with usury,' the same being admitted by complainants, it was error to
allow any sum whatever for interest, Chapter 4022 laws of Florida, acts of 1891, providing
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 that 'only the actual principal sum of such usurious contracts can be enforced either at law
or in equity.' " (Lyle and Lyle vs. Winn and Winn, 45 Fla., 419.)

"Under the statute providing that in case of usury the defendant shall be entitled to costs, the
plainti!, upon being allowed recovery for principal, less penalties, is not entitled to
attorney's fees or costs. (Libert vs. Unfried, 47 Wash. [Rem.], 186.)

"By the laws of Mississippi (Stat. 25 June, 1822), where an usurious rate of interest has been
stipulated, the lender can recover only the principal." (Coxe vs. Rowley, 12 Robinson's Rep.,
273.)

"Under the Usury Act of 1875, the penalty for taking more than legal interest was a forfeiture
of the interest and the excess of interest. If it had already been paid it could be recovered by
suit, or by way of set-o! against a suit for the principal, within the time allowed by that act,
but in either eventwhether payment had been made or notonly interest (both legal and
usurious) was forfeited, and the lender had a right to recover the principal actually loaned."
(Lanier vs. Cox, 65 Ga., 265.)

We believe that the doctrines laid down in the cases above cited are applicable in this
jurisdiction as, in fact, the Usury Law provides for the loss in favor of the debtor of the
stipulated usurious interest which might have been paid during the two years preceding the
claim of the debtor.

But counsel for Ortiga Hermanos argues in support of his contention that they are entitled to
recover the P25,000 paid on account of the principal, that the consideration of the note is
the payment of interest at 18 per cent, and the contract being void on account of the illegality
of the consideration, application should be made in this case of articles 1305 and 1306 of the
Civil Code.

The contention of counsel for Ortiga Hermanos in this respect is untenable. "Every statute is
understood to contain, by implication, if not by its express terms, all such provisions as may
be necessary to e!ectuate its object and purpose, or to make e!ective the rights, powers,
privileges, or jurisdiction which it grants, and also all such collateral and subsidiary
consequences as may be fairly and logically inferred from its terms." (Black on
Interpretation of Laws, page 62.) In our opinion, the Usury Act, No. 2655, as amended by Act
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 No. 2992, contains all that is necessary for the application of its provisions. Section 1 of the
Act "xes the interest of loans in default of agreement between the parties; sections 2, 3, and
4 "x the interest on certain loans and prohibit the collection of interest in excess of the
limitation "xed; section 5 regulates the collection of interest upon interest; sections 6, 7 and
8 determine the e!ects of the collection of a usurious interest and of loans wherein said
interest was stipulated or paid; section 9 requires the making of an oath in answers to a
complaint for the recovery of usurious interests; section 10 contains the repealing clause
and section 12 "xes the date on which the Act was to take e!ect. The law, in declaring
usurious loans to be void, determines its e!ects and makes them to consist in the
reimbursement of the interest paid during the two years preceding the making of the claim,
the payment of attorney's fees and provides further for the institution of criminal action for
the imposition of the penalty "xed by the law. And with regards to the capital lent, we have
said in another part of this decision that the law did not intend to close the courts to the
creditor for relief in the recovery of his principal. In view thereof, we are of the opinion and
so hold, that articles 1305 and 1306 of the Civil Code are not applicable to the case at bar.

Furthermore, "it has been said that the law of usury is penal in its nature and therefore
should be strictly construed. Thus, while courts, under a statute, avoiding the entire contract
for usury, will uphold the defense according to the letter of the statute, they will grant
a%rmative relief, not expressly given by such statute, only on payment of the money
actually loaned and legal interest. And this is because, while it is the duty of courts to give
e!ect to the letter of a statute against oppression of the borrower, they will not extend the
letter of the statute to relief oppressive of the lender." (R. C. L., vol. 27, page 207.) And in fact
to uphold the contention of Ortiga Hermanos would be to permit a debtor to enrich himself
with the money lent, to the prejudice of the creditor; it would be to extend the e!ects of
usurious loans to other matters not mentioned in the Law; it would be to increase the
restrictions provided by the Legislature which is beyond the jurisdiction of the courts.

Having thus resolved the question which we have considered in this appeal, the errors
assigned by both appellants are consequently disposed of.

Therefore, the judgment appealed from is a%rmed in so far as J. J. Go Chioco is sentenced

to return to Ortiga Hermanos the usurious interest paid during the two years preceding the
claim; namely, P11,850, the legal interest thereon, from November 9, 1921, the date of the
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 "ling of the complaint, plus P1,500 as attorney's fees and the costs. And the same is reversed
in so far as the defendants Ortiga Hermanos and their sureties, Chan Lin Cun and E.
Martinez, are absolved from the payment of the balance of the capital lent, which is P15,000,
and in so far as J. J. Go Chioco is sentenced to pay P1,500 as fees of the attorney for the
defendants' sureties. And it is adjudged that Ortiga Hermanos and their sureties should pay
jointly to J. J. Go Chioco the sum of P15,000, the unpaid balance of the capital lent, with legal
interest thereon from October 4, 1921, when the complaint was "led. (Aguilar vs. Rubiato and
Gonzalez Vila, 40 Phil., 570.)

Without special pronouncement as to the costs in this instance. So ordered.

Araullo, C.J., Avancena, Johns, and Romualdez, JJ., concur.

CONCURRING AND DISSENTING

STREET, J.:

While I am in full accord with most that is said in the opinion of the court in this case, I am
nevertheless constrained to dissent from the proposition that the plainti! is entitled to
recover the unpaid residue of the capital advanced by him to the "rm of Ortiga Hermanos
upon the usurious notes which are the subject of the principal action. Section 7 of Act No.
2655 declares that all contracts whereby there shall be reserved a higher rate of interest
than is allowed by law shall be void. This provision is taken from section 2214 of the Statutes
of the State of Minnesota (edition 1894), and it is similar to section 373 of the General
Business Law of the State of New York. Both of these provisions in turn have their source in
Chapter 16 of the Statutes of 12 Anne, relating to usury, which was in force in England for
more than a hundred years before it was there "nally abrogated and which served as a
prototype for the early legislation on usury in many American States. In the course of the
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 last "fty years we note a general tendency towards a relaxation of the laws relating to usury
in the United States, but the statute of 12 Anne in some form or other still remains
substantially in force in "ve or six states, including New York and Minnesota. It is suggestive
that our Legislature in enacting a law relative to usury should have found its model precisely
in the laws of those states where the provisions on the subject are most rigorous.

Now, in the period of nearly two hundred years during which the statute of 12 Anne has
been in force in various countries, the courts have uniformly held to the doctrine that no
action can be maintained by the creditor, suing on such contract, to recover either principal
or lawful interest. An apparent exception is admitted in the situation where the debtor
applies to a court of equity to have the instrument surrendered up or cancelled. In this case
the court requires the debtor to do equity by restoring the capital as a condition precedent to
obtaining equitable relief. This rule was applied by us in Delgado vs. Alonso Duque Valgona
(44 Phil., 739). But the doctrine underlying that line of cases has never been extended so as
to permit the plainti! to recover his capital in an aggressive action instituted by himself; and
a careful examination of the American and English decisions will reveal the fact that in
those jurisdictions where usurious contracts are void, the courts have uniformly refused to
entertain the action (Bank of the United States vs. Owens, 2 [Pet.] U. S., 527; 7 L. ed., 508;
Missouri, Kansas & Texas Trust Co. vs. Krumseig and Krumseig, 172 U. S., 351; 43 L. ed., 474).

It is hardly necessary to suggest that on account of the multitudinous variety of laws relating
to usury in the various States of the American Union, decisions from American courts are of
little practical value on this subject unless it is made to appear that the law of the State from
which a particular decision comes is similar to the law now in force in these Islands.

DISSENTING

MALCOLM, J.:
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 While entertaining the highest respect for the members of the Court who have here taken a
mild stand with reference to our Usury Law, I have to say frankly that, in my opinion, a
mistake has thereby been made and the purpose of the law nulli"ed.

The Usury Law (Act No. 2655) was put on the statute books by the Philippine Legislature to
eradicate a virulent social cancer. Three separate and distinct consequences were to #ow
from the provisions of the law. The "rst two consequences were civil in nature. One
provided for a%rmative relief by which the borrower was permitted to recover the whole
interest paid or delivered, together with costs and attorney's fees if he should have paid or
delivered a higher rate or sum than that provided by the law (sec. 6). The other civil relief
was negative in nature and provided in e!ect that all conveyances, contracts, etc.,
whereupon or whereby there shall be received, directly or indirectly, a higher rate or greater
sum or value for a loan than is legally allowed "shall be void." (Sec. 7.) The law was "nally
given a criminal aspect and violations of it made persons subject to criminal prosecution
and to the payment of "nes equivalent to the total interest stipulated. (Sec. 10.)

A comparative study of the usury statutes in the United States discloses that they are of three
general classes. Two classes make usurious contracts unlawful either as to the interest or as
to so much of the interest as exceeds the legal rate. The third class, for instance Minnesota
and New York, makes the contract void and enjoins any proceeding thereon, and orders the
same to be cancelled.

The placing of the Minnesota and New York statutes on the subject of usury and the
Philippine statute on the same subject side by side, discloses that section 7 of the Philippine
Usury Law is practically identical with the Minnesota and New York laws. (Webb on Usury,
Appendix; 3 Birdseye Cumming & Gilbert's Consolidated Laws of New York, Ann., sec. 373.)
Both the Minnesota and New York statutes on the one hand and the Philippine statute on the
other, make usurious contracts void. The same construction should, therefore, be given to
the Philippine statute as to the Minnesota and New York statutes which apparently inspired
the local law.

In Minnesota, the statute has been construed by the Supreme Court of that State to mean
that a contract for a usurious loan of money is void, and there is no valid indebtedness for
the money loaned. (Ormund vs. Hobart [1886], 36 Minn., 306.) In New York, a usurious
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 contract is not void per se but merely voidable at the option either of the borrower or those
in privity with him. The statute, however, renders all securities infected with usury
absolutely void. (Williams vs. Tilt [1867], 36 N. Y., 319; Union Credit & Investment Co. vs.
Union Stockyard & Market Co. [1905], 92 N. Y. Supp., 269; Cla#in vs. Boorum [1890], 122 N. Y.,
385; Schlesinger vs. Gilhooly [1907], 189 N. Y., 1; Missouri, Kansas & Texas Trust Co. vs.
Krumseig and Krumseig [1899], 172 U. S., 351.)

The Philippine law on the subject of usury says without equivocation that all contracts or
evidences of debts which recognize usurious interest, "shall be void." I repeat, "void," that is,
of no e!ect whatever; absolutely and entirely null; of no legal force and which for that
reason cannot be enforced. (8 Words and Phrases, pp. 7332 et seq.)

But let it be assumed that it is rarely that things are wholly void and without force and e!ect,
and that in this instance, void has the meaning of voidable. Yet it remains true that voidable
signi"es that which may be rati"ed or disa%rmed and which is binding until disa%rmed. In
this instance, the defendant has seen "t to disa%rm the contract.

There is consequently in my judgment not much room for discussion. The contract is void
or voidable. The court should not enforce the illegal contract at the suit of the guilty party.
(Civil Code, arts. 1305, 1306.)

I am accordingly of the opinion that, taking into consideration the plain language of section
7 of Act No. 2655 and giving to it its true meaning, the rule should be, that the usurious
contract is avoided and that the lender cannot be permitted to maintain an action in the
courts to enforce his usurious contract. Such natural construction of the law will be for the
best interests of the entire Philippines.

The decision of Judge of First Instance Imperial is right and should be a%rmed.
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