• Banco Filipino v. Court of Appeals, G.R. No.

129227, May 30, 2000 - VAL In this petition, BANCO FILIPINO SAVINGS contends, among others, that private respondents cannot
rely on the ruling in the case of Banco Filipino Savings & Mortgage Bank vs. Navarro considering that
G.R. No. 129227. May 30, 2000 they were not parties to said case. Petitioner also maintains that the order of the lower court, which
BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitioners, vs. THE HON. COURT OF was affirmed by the CA ordering the petitioner to refund the excess interest paid by private
APPEALS, and CALVIN & ELSA ARCILLA, respondents. respondents in the amount of P126,318.00 was without any legal basis since private respondents
  never raised the issue of interest nor prayed for any relief with respect thereto. Moreover, the private
GONZAGA_REYES, J.: respondents never paid said amount to the petitioner.
   
SUMMARY: Elsa Arcilla and her husband, Calvin Arcilla (appellees) secured, on 3 occasions, SC:
loans from the Banco Filipino Savings and Mortgage Bank (appellants) in the total amount of W/N the respondents are entitled to the refund of the alleged interest overpayments- YES
P107,946. The Appellees executed "Real Estate Mortgages" in favor of the Appellants and The loan contracts with real estate mortgage entered into by and between the petitioner and
under said deeds, the Appellant may increase the rate of interest, on said loans, within the respondent stated that the petitioner may increase the interest on said loans, within the limits
limits allowed by law, as Appellant’s BOD may prescribe for its borrowers. On January 2, 1976, allowed by law, as petitioner’s BOD may prescribe for its borrowers. At the time the contracts
the Central Bank of the Philippines issued Central Bank Circular No. 494, quoted infra, as were entered into, said escalation clause was valid.16 It was only pursuant to P.D. No. 1684
follows: which became effective March 17, 1980 wherein to be valid, escalation clauses should provide:
‘x x x 1.) that there can be an increase in interest if increased by law or by the Monetary Board; and
‘3. The maximum rate of interest, including commissions, premiums, fees and other charges 2.) in order for such stipulation to be valid, it must include a provision for the reduction of the
on loans with maturity of more than seven hundred thirty (730) days, by banking institutions, stipulated interest in the event that the maximum rate of interest is reduced by law or by the
including thrift banks, or by financial intermediaries authorized to engage in quasi- Monetary Board.17
banking functions shall be nineteen percent (19%) per annum.  
‘x x x Given the validity of the escalation clause, could the petitioner increase the stipulated interest
‘7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall pursuant to the Central Bank Circular 494 from 12% to 17%? SC: We rule that it may not.
continue to be governed by the Usury Law, as amended.’ (idem, supra)  
The escalation clause in the loan contracts reads as follows:
"xxx g) The rate of interest charged on the obligation secured by this mortgage, as well as the interest
After October 30, 1978, the Appellant issued a "Statement of Account" to the Appellees on their on the amount which may have been advanced by the Mortgagee in accordance with paragraph (b)
loan account to the effect that, as of October 30, 1978, the balance of their loan account, and (d) hereof, shall be subject, during the terms of this contract, to such an increase, within the
inclusive of interests, computed at 17% per annum, amounted to 284,490.75. It turned out that limits allowed by law, as the Board of Directors of the Mortgagee may prescribe for its debtors ; xxx"
the Appellant unilaterally increased the rate of interest on the loan account of the Appellees (emphasis supplied)18
from 12% per annum, as covenanted in the "Real Estate Mortgage" and "Deed of Consolidated  
and Amended Real Estate Mortgage" to 17% per annum on the authority of the aforequoted In Banco Filipino Savings & Mortgage Bank vs. Navarro,19 which involved a similar escalation
Central Bank Circular. clause20 , we ruled that Central Bank Circular 494, although it has the force and effect of law,
  is not a law and is not the law contemplated by the parties which authorizes the petitioner to
The Appellees failed to pay their monthly amortization. The Appellant filed a petition for the unilaterally raise the interest rate of the loan.21 Consequently, the reliance by the petitioner on
extrajudicial foreclosure of the REM for the amount of P342,798.00 inclusive of the 17% per Central Bank Circular 494 to unilaterally raise the interest rates on the loan in question was
annum which purportedly was the totality of Appellees’ account with the Appellant on their without any legal basis.
loans. The Appellant filed a "Petition for a Writ of Possession" with the RTC which was granted.  
The CA affirmed the Decision of the RTC.  
   
Appellees filed a complaint in the Court a quo for the "Annulment of the Loan Contracts, FACTS: Elsa Arcilla and her husband, Calvin Arcilla (appellees) secured, on 3 occasions,
Foreclose Sale with Prohibition and Injunction, Etc." The Appellees averred, in their complaint, loans from the Banco Filipino Savings and Mortgage Bank (appellants) in the total amount of
inter alia, that the loan contracts and mortgages between the Appellees and the Appellant were P107,946.00 as evidenced by "Promissory Note" executed by the Appellees in favor of the Appellant.
null and void because: (a) the interests, charges, etc., were deducted in advance from the face value  
of the "Promissory Notes" executed by the Appellees; and (b) the rate of interests charged by the To secure the payment of said loans, the Appellees executed "Real Estate Mortgages" in favor of the
Appellant were usurious. Appellants over their parcels of land located in BF-Parañaque. Under said deeds, the Appellant
  may increase the rate of interest, on said loans, within the limits allowed by law, as Appellant’s
In the interim, the SC promulgated its Decision in the precedent - where it declared that Central Bank BOD may prescribe for its borrowers. At that time, under the Usury Law, Act 2655, as amended,
Circular No. 494 was not the "law" envisaged in the mortgage deeds of borrowers of the Bank; the maximum rate of interest for loans secured by real estate mortgages was 12% per annum.
that the escalation clause incorporated in said deeds giving authority to the Appellant to  
increase the rate of interests without the corresponding deescalation clause should not be On January 10, 1975, the Appellees and the Appellant executed a "Deed of Consolidation and
given effect because of its one-sidedness in favor of the Appellant; that the aforesaid Central Amendment of Real Estate Mortgage" whereby the aforementioned loans of the Appellees and
Bank Circular did not apply to loans secured by real estate mortgages, and that, therefore, the the "Real Estate Mortgage" executed by them as security for the payment of said loans were
Appellant cannot rely said Circular as authority for it to unilaterally increase the rate of consolidated. Likewise, under said deed, the loan of the Appellees from the Appellant was
interests on loans secured by Real Estate Mortgages (Banco Filipino Savings & Mortgage increased to P188,000.00. The Appellees executed a "Promissory Note", dated January 15,
Bank vs. Navarro). 1975, whereby they bound and obliged themselves, jointly and severally, to pay the Appellant
 
the aforesaid amount of P188,000.00 with interest at the rate of 12% per annum, in 19 years deducted in advance from the face value of the "Promissory Notes" executed by the Appellees; and
from date thereof, in stated installments of P2,096.93 a month. (b) the rate of interests charged by the Appellant were usurious.
   
On January 2, 1976, the Central Bank of the Philippines issued Central Bank Circular No. 494, quoted In its Answer to the Complaint, the Appellant averred that the interests charged by it on
infra, as follows: Appellees’ loan accounts and that the said loan contracts and mortgages were lawful. The
‘x x x Appellant further averred that the Appellees’ action had already prescribed.
‘3. The maximum rate of interest, including commissions, premiums, fees and other charges In the interim, the SC promulgated its Decision in the precedent - where it declared that Central Bank
on loans with maturity of more than seven hundred thirty (730) days, by banking institutions, Circular No. 494 was not the "law" envisaged in the mortgage deeds of borrowers of the Bank;
including thrift banks, or by financial intermediaries authorized to engage in quasi- that the escalation clause incorporated in said deeds giving authority to the Appellant to
banking functions shall be nineteen percent (19%) per annum. increase the rate of interests without the corresponding deescalation clause should not be
‘x x x given effect because of its one-sidedness in favor of the Appellant; that the aforesaid Central
‘7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall Bank Circular did not apply to loans secured by real estate mortgages, and that, therefore, the
continue to be governed by the Usury Law, as amended.’ (idem, supra) Appellant cannot rely said Circular as authority for it to unilaterally increase the rate of
  interests on loans secured by Real Estate Mortgages (Banco Filipino Savings & Mortgage
In the meantime, the Skyline Builders, Inc., through its President, Appellee Calvin Arcilla, Bank vs. Navarro).
secured loans from the Bank of the Philippine Islands in the total amount of P450,000.00. To  
insure payment of the aforesaid loan, the FGU Insurance Corporation, issued PG Bond No. 1003 In the meantime, the FGU Insurance Corp., Inc., filed a "Motion for Substitution" with the RTC praying
for the amount of P225,000.00 in favor of the Bank of the Philippine Islands. that it be substituted as the Petitioner in said case. The Appellees were served with a copy of said
  motion and filed their Opposition thereto. However, on November 10, 1987, the RTC rendered a
Skyline Buildings, Inc., and the Appellees executed an "Agreement of Counter-Guaranty with Decision granting the motion of FGU Insurance Company.
Mortgage" in favor of the FGU Insurance Corporation covering the aforesaid parcels of land to  
assure payment of any amount that the insurance company may pay on account of said loans. On December 3, 1987, the Appellees filed a Motion, with the Court a quo, for leave to file an
The mortgage was annotated as Entry No. 58009 at the dorsal portion of Appellees’ titles. "Amended Complaint" to implead FGU Insurance Corporation as party defendant. The Court granted
  said motion and admitted Appellees’ Amended Complaint.
After October 30, 1978, the Appellant prepared and issued a "Statement of Account" to the  
Appellees on their loan account to the effect that, as of October 30, 1978, the balance of their After the requisite pre-trial, the Court a quo issued a Pre-Trial Order which defined, inter alia,
loan account, inclusive of interests, computed at 17% per annum, amounted to 284,490.75. It Appellees’ action against the Appellant, and the latter’s defenses, to wit:
turned out that the Appellant unilaterally increased the rate of interest on the loan account of "x x x
On the part of the defendants Banco Filipino Savings to simplify the case, it seeks to declare as null and void plaintiff’s loan
the Appellees from 12% per annum, as covenanted in the "Real Estate Mortgage" and "Deed of contract with Banco Filipino obtained in May 1974, on the ground that the interest agreed in the contract was usurious. Plaintiffs
Consolidated and Amended Real Estate Mortgage" to 17% per annum on the authority of the also seek to declare as null and void the foreclosure of their mortgage by Banco Filipino on the ground that the loan with the
aforequoted Central Bank Circular. said mortgagee foreclosure maybe validly done.
DEFENSES
  1. Prescription
The Appellees failed to pay their monthly amortizations to Appellant. The latter forthwith filed, 2. Laches
on April 3, 1979, a petition, with the Provincial Sheriff, for the extrajudicial foreclosure of 3. Estoppel" (page 496, Records)
Appellees’ "Real Esate Mortgage" in favor of the Appellant for the amount of P342,798.00  
inclusive of the 17% per annum which purportedly was the totality of Appellees’ account with In the meantime, the Appellees and FGU Insurance Corporation entered into and forged a
the Appellant on their loans. The Appellant was the purchaser of the property at public auction for "Compromise Agreement." The Court a quo promulgated a Decision, dated April 3, 1991, based
the aforesaid amount of P324,798.00. On May 25, 1979, the Sheriff executed a "Certificate of Sale" on said "Compromise Agreement." Under the "Compromise Agreement", the Appellees bound
over the aforesaid properties in favor of the Appellant for the aforesaid amount. and obliged themselves, jointly and severally, to pay to FGU Insurance Corporation the
  amount of P1,964,117.00 in 3 equal installments and that:
The Appellant filed a "Petition for a Writ of Possession" with the RTC. On February 28, 1980, the "x x x
6. Upon faithful compliance by plaintiffs Calvin S. Arcilla and Elsa B. Arcilla with their Agreement, defendant
Court rendered a Decision granting the Petition of the Appellant. The Appellees appealed to the FGU Insurance Corporation shall renounce in their favor all its rights, interests and claims to the four (4)
CA but the latter Court, on June 29, 1985, promulgated a Decision affirming the Decision of the parcels of land mentioned in paragraph No. 4 of this Compromise Agreement, together with all the
RTC. improvements thereon, and plaintiffs Calvin S. Arcilla and Elsa B. Arcilla shall be subrogated to all such
  rights, interests and claims. In addition, defendant FGU Insurance Corporation shall execute in favor of
In the meantime, the FGU Insurance Corporation, Inc., redeemed the aforesaid properties from the plaintiffs Calvin S. Arcilla and Elsa B. Arcilla a deed of cancellation of the real estate mortgage constituted in
Appellant by paying to the latter the amount of P389,289.41 inclusive of interest computed at 17% per its favor on the above-mentioned four (4) parcels of land, together with all the improvements thereon. All
annum. The Appellant and FGU Insurance Corp., Inc., executed, on May 27, 1980, a "Deed of documentary stamps and expenses for registration of the said deed of cancellation of mortgage shall be for
the account of plaintiffs Calvin S. Arcilla and Elsa B. Arcilla.
Redemption". 7. Subject to the provisions of paragraph No. 4 of this Compromise Agreement, the execution of this
  Compromise Agreement shall be without prejudice to the prosecution of the claims of plaintiffs Calvin S.
On September 2, 1985, the Appellees filed a complaint in the Court a quo for the "Annulment of Arcilla and Elsa B. Arcilla. (pages 543-544, Records)
the Loan Contracts, Foreclose Sale with Prohibition and Injunction, Etc." The Appellees Thereafter, the Appellees and the Appellant agreed, upon the prodding of the Court a quo, that the only issue
averred, in their complaint, inter alia, that the loan contracts and mortgages between the to be resolved by the Court a quo was, whether or not the Appellees were entitled to the refund, under the
Appellees and the Appellant were null and void because: (a) the interests, charges, etc., were Decision of the Supreme Court in "Banco Filipino Savings and Mortgage Bank vs. Hon. Miguel Navarro, et
al.," supra. On November 8, 1991, the Appellees filed a "Motion for Summary Judgment" appending thereto,
inter alia, the Affidavit of Appellee Calvin S. Arcilla and the appendages thereof (pages 550-555, Records).
 Appellant filed its Opposition but did not append any affidavit to said Opposition. On March 26, 1993, the Under Article 1150 of the Civil Code, the time for prescription of all kinds of actions, when there is
Court a quo promulgated a Decision, the decretal portion of which reads as follows: no special provision which ordains otherwise, shall be counted from the day they may be brought.
‘WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against  
defendant Banco Filipino ordering defendant Banco Filipino to pay spouses Calvin S. Arcilla and Elsa B.
Arcilla the sum of P126,139.00 with interest thereon at 12% per annum reckoned from the filing of the
Thus, the period of prescription of any cause of action is reckoned only from the date the cause of
complaint. action accrued.7 And a cause of action arises when that which should have been done is not
SO ORDERED.’ (pages 584-585, Records)" done, or that which should not have been done is done.8 The period should not be made to
  retroact to the date of the execution of the contract on January 15, 1975 as claimed by the
Petitioner appealed to the CA, which affirmed the decision of the RTC. Their Motion for petitioner for at that time, there would be no way for the respondents to know of the violation
Reconsideration was denied hence this petition. of their rights.9 The CA therefore correctly found that respondents’ cause of action accrued
  on October 30, 1978, the date they received the statement of account showing the increased
BANCO FILIPINO SAVINGS: rate of interest, for it was only from that moment that they discovered the petitioner’s
•  the complaint filed by herein private respondents was an action for Annulment of Loan Contracts, unilateral increase thereof. We quote with approval the pertinent portions of the Court of Appeals
foreclosure sale with prohibition and injunction. It is contended that these causes of action accrued decision as follows:
on the date of the execution of the promissory note and deed of mortgage on January 15, 1975 and "It is the legal possibility of bringing the action that determines the starting point for the
not October 30, 1978 as found by the CA. Thus, private respondents cause of action has already computation of the period of prescription (Constancia C. Telentino vs. Court of Appeals, et al.,
prescribed inasmuch as the case was filed on September 2, 1985 or more than ten years thereafter. 162 SCRA 66). In fine, the ten-year prescriptive period is to be reckoned from the accrual of
•  Petitioner further contends that private respondents cannot rely on the ruling in the case of Appellees’ right of action, not necessarily on the very date of the execution of the contracts
Banco Filipino Savings & Mortgage Bank vs. Navarro considering that they were not parties subject of the action (Naga Telepone Co. Inc. vs. Court of Appeals, et al., 230 SCRA 351). A
to said case. party’s right of action accrues only when the confluence of the following elements is
•  Petitioner also maintains that the order of the lower court, which was affirmed by the CA established:
ordering the petitioner to refund the excess interest paid by private respondents in the "xxx: a) a right in favor of the plaintiff by whatever means and under whatever law it
amount of P126,318.00 was without any legal basis since private respondents never raised arises or is created; b) an obligation on the part of defendant to respect such right; and
the issue of interest nor prayed for any relief with respect thereto. Moreover, the private c) an act or omission on the part of such defendant violative of the right of the plaintiff
respondents never paid said amount to the petitioner. While the amount was included in the (Cole vs. Vda. de Gregorio, 116 SCRA 670 [1982]; Mathay vs. Consolidated Bank &
bid price of the bank when it bought the mortgaged properties during the public auction, Trust Co., 58 SCRA 559 [1974]; Vda. de Enriquez vs. Dela Cruz, 54 SCRA 1 [1973]. It
said bid price did not prejudice the private respondents because when the private is only when the last element occurs or takes place that it can be said in law that a
respondents repurchased the properties, the amount they paid was different and cause of action has arisen (Cole vs. Vda. De Gregorio, supra)" (Maria U. Español vs.
independent of the redemption price of the bank. Chairman, etc., et al.,, 137 SCRA 314, page 318)
•  Besides, the agreement between the private respondents and FGU Insurance Corporation was one  
of sale and not redemption. Thus, any amount paid by the private respondents to FGU was More, the aggrieved must have either actual or presumptive knowledge of the violation, by the guilty
voluntarily entered into by them and was not a consequence of the foreclosure of the mortgage party of his rights either by an act or omission. The question that now comes to the fore is when the
properties. Appellees became precisely aware of the unilateral increase, by the Appellant, of the rate of interest
  on their loan account to 17% per annum. As can be ascertained from the records, the Appellees
CALVIN & ELSA ARCILLA: discovered or should have discovered, for the first time, the unilateral increase by the
•  their action has not prescribed considering that prescription begins to run from the day the action Appellant of the rate of interest to 17% per annum when they received the "Statement of
may be brought; the date their right of action accrued. It is their contention that the period of Account" of the Appellant as of October 30, 1978. Hence, it was only then that the prescriptive
prescription of their action should commence to run from October 30, 1978 when the petitioner period for the Appellees to institute their action in the Court a quo commenced. Since the
unilaterally increased the rate of interest on private respondents’ loan to 17% per annum. Thus, Appellees filed their complaint in the Court a quo on September 2, 1985, the same was
when private respondents filed their action against the petitioner on September 2, 1985 or almost seasonably filed within the ten-year prescriptive period."10
eight years thereafter, their action had not yet prescribed.  
•  Moreover, private respondents aver that they are entitled to the refund inasmuch as the escalation W/N the respondents are entitled to the refund of the alleged interest overpayments- YES
clause incorporated in the loan contracts do not have a corresponding de-escalation clause and is We find that they are despite the absence of any prayer therefor. This Court has ruled that it is the
therefore illegal. material allegations of fact in the complaint, not the legal conclusion made therein or the prayer that
  determines the relief to which the plaintiff is entitled.11 It is the allegations of the pleading which
ISSUES: W/N the action of the private respondents prescribed; W/N the respondents are determine the nature of the action and the Court shall grant relief warranted by the allegations and
entitled to the refund of the alleged interest overpayments. the proof even if no such relief is prayed for.12 Thus, even if the complaint seeks the declaration of
  nullity of the contract, the CA correctly ruled that the factual allegations contained therein ultimately
RULING: WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 45891 is AFFIRMED and the seek the return of the excess interests paid.
instant petition is hereby DENIED.  
  The amended complaint13 of herein private respondents specifically allege that the contracts of loan
RATIO: entered into by them and the petitioner were contrary to and signed in violation of the Usury Law14
W/N the action of the private respondents prescribed- NO and consequentially pray that said contracts be declared null and void. The amended complaint
Petitioner’s claim that the action of the private respondents has prescribed is bereft of merit. reads:
  "6. The aforementioned loans granted by defendant Banco Filipino to the plaintiffs as stated on the face of
the promissory note and real estate mortgage (Annexes "B" to "D", inclusive) were not actually received by
 the plaintiffs because interests, charges, etc. were deducted in advance from the face value of the loans not
in accordance with the contracts;
7. Even the loan contracts (Annexes "B" to "D", inclusive) required by defendant Banco Filipino to be signed
by the plaintiffs were contrary to and in violation of the then Usury Law, as amended;
8. Assuming arguendo that the loan contracts between plaintiffs and defendant Banco Filipino are valid, the
extra-judicial foreclosure of the properties of the plaintiffs on May 24, 1979 was null and void for having been
conducted in clear violation of the law (Act 3135), namely: a) lack of roper notice to the plaintiffs; b) lack of
proper publication and posting as required by law; c) the alleged sale was conducted at the place other than
that prescribed by law, among others;
9. On May 27, 1990, defendant Banco Filipino purportedly executed in favor of defendant FGU Insurance
Corporation a Deed of Redemption over the foreclosed properties of the plaintiffs, again, without notice to the
latter, as evidenced by the said Deed of Redemption, copy of which is hereto attached and marked as Annex
"F".
10. The Deed of Redemption (Annex "F") is clearly null and void for having been executed in violation of
Rule 39, Rules of Court, and other related provisions of the Rules of Court."15
 
The loan contracts with real estate mortgage entered into by and between the petitioner and
respondent stated that the petitioner may increase the interest on said loans, within the limits
allowed by law, as petitioner’s BOD may prescribe for its borrowers. At the time the contracts
were entered into, said escalation clause was valid.16 It was only pursuant to P.D. No. 1684
which became effective March 17, 1980 wherein to be valid, escalation clauses should provide:
1.) that there can be an increase in interest if increased by law or by the Monetary Board; and
2.) in order for such stipulation to be valid, it must include a provision for the reduction of the
stipulated interest in the event that the maximum rate of interest is reduced by law or by the
Monetary Board.17
 
Given the validity of the escalation clause, could the petitioner increase the stipulated interest
pursuant to the Central Bank Circular 494 from 12% to 17%? SC: We rule that it may not.
 
The escalation clause in the loan contracts reads as follows:
"xxx g) The rate of interest charged on the obligation secured by this mortgage, as well as the interest
on the amount which may have been advanced by the Mortgagee in accordance with paragraph (b)
and (d) hereof, shall be subject, during the terms of this contract, to such an increase, within the
limits allowed by law, as the Board of Directors of the Mortgagee may prescribe for its debtors ; xxx"
(emphasis supplied)18
 
In Banco Filipino Savings & Mortgage Bank vs. Navarro,19 which involved a similar escalation
clause20 , we ruled that Central Bank Circular 494, although it has the force and effect of law,
is not a law and is not the law contemplated by the parties which authorizes the petitioner to
unilaterally raise the interest rate of the loan.21 Consequently, the reliance by the petitioner on
Central Bank Circular 494 to unilaterally raise the interest rates on the loan in question was
without any legal basis.
 
Petitioner’s argument that the Banco Filipino case cannot be applied to the present case since the
respondents were not intervenors therein is flawed. Only the judgment in said case cannot
bind the respondents as they were not parties thereto, however, the doctrine enunciated
therein is a judicial decision and forms part of the legal system of the land.22 It forms a
precedent, which must be adhered to under the doctrine of stare decisis.23 Thus, even if the
respondents were not parties to the above-mentioned case, the doctrine enunciated therein may be
applied to the present case.

 
• Consolidated Bank & Trust Co. v. Court of Appeals, G.R. No. 114286, April 19, 2001 - PIA date, respondent Corporation paid a marginal deposit of P320,445.00 to Solidbank. The letter of credit was
G.R. No. 114286       April 19, 2001 used to purchase around 500k liters of bunker fuel oil from Petrophil Corporation, which the latter delivered
THE COSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK), petitioner vs. THE COURT OF directly to the Corporation in its Bulacan plant. In relation to the same transaction, a trust receipt for the
APPEALS, CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and SPOUSE, respondents. amount of P 1,001,520 was executed by the Corporation, with Lim as signatory.

SUMMARY: Continental Cement Corp and Lim as VP, obtained a letter of credit from Solidbank in the amount of Claiming that respondents failed to turn over the goods covered by the trust receipt or the proceeds
P1M used to purchase 500,000 liters of bunker fuel oil from Petrophil Corp which were delivered in the Corporation’s thereof, petitioner filed a complaint for sum of money with application for preliminary attachment before the
Bulacan plant. On the same day, the Corporation paid a marginal deposit of P320k to Solidbank. Solidbank then Regional Trial Court of Manila. In answer to the complaint, respondents averred that the transaction between
filed a complaint for the collection of sum of money against them claiming they failed to turn over the goods covered them was a simple loan and not a trust receipt transaction , and that the amount claimed by petitioner did not
by the trust receipts or its proceeds. The Corporation contended that the transaction between them was a simple take into account payments already made by them. Lim also denied any personal liability in the subject
loan and not a trust receipt transaction, and that the amount claimed did not take into account payments they transactions. In a Supplemental Answer, respondents prayed for reimbursement of alleged overpayment to
already made. They also prayed for reimbursement of alleged overpayment in the amount of P490k. They contend petitioner of the amount of P490,228.90.
that the marginal deposit they made should not be deducted outright from the amount of the letter of credit. The
marginal deposit should be considered only after computing the principal plus accrued interest and other charges.  At the pre-trial conference, the parties agreed on the following issues:
1) Whether or not the transaction involved is a loan transaction or a trust receipt transaction;
ISSUE: WON the marginal deposit must not be deducted or set off before the computing the accrued interests (NO) 2) Whether or not the interest rates charged against the defendants by the plaintiff are proper under the
letter of credit, trust receipt and under existing rules or regulations of the Central Bank;
The SC held that to sustain such contention would be a clear case of unjust enrichment, for while a marginal deposit 3) Whether or not the plaintiff properly applied the previous payment of P300,456.27 by the defendant
earns no interest in favour of the debtor-depositor, the bank is not only able to use the same for its own purposes, corporation on July 13, 1982 as payment for the latter’s account; and
interest-free, but is also able to earn interest on the money loaned to respondent Corporation. Indeed, it would be 4) Whether or not the defendants are personally liable under the transaction sued for in this case.
onerous to compute interest and other charges on the face value of the letter of credit which the petitioner issued,
without first crediting or setting off the marginal deposit which the respondent Corporation paid to it. Compensation RTC: dismissed the Complaint and ordered petitioner to pay respondents the following amounts under their
is proper and should take effect by operation of law because the requisites in Article 1279 of the Civil Code are counterclaim: P490,228.90 representing overpayment of respondent Corporation, with interest thereon at the legal
present and should extinguish both debts to the concurrent amount. Hence, the interests and other charges on the rate from July 26, 1988 until fully paid; P10,000.00 as attorney's fees; and costs.
subject letter of credit should be computed only on the balance of P681,075, which was the portion actually loaned
by the bank to the Corporation. CA: partially modified the Decision by deleting the award of attorney's fees in favor of respondents and, instead,
ordering respondent Corporation to pay petitioner P37,469.22 as and for attorney's fees and litigation expenses.
Bakaitanong: 
Neither do we find error when the lower court and the CA set aside as invalid the floating rate of interest exhorted by Hence, the instant petition raising the following issues:
petitioner to be applicable. The pertinent provision in the trust receipt agreement fixing the interest rate states: 1. WHETHER OR NOT THE RESPONDENT APPELLATE COURT ACTED INCORRECTLY OR
I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after COMMITTED REVERSIBLE ERROR IN HOLDING THAT THERE WAS OVERPAYMENT BY PRIVATE
July 1, 1981, when the Central Bank floated the interest rate, and to pay additionally the penalty of 1% RESPONDENTS TO THE PETITIONER IN THE AMOUNT OF P490,228.90 DESPITE THE ABSENCE
per month until the amount/s or instalments/s due and unpaid under the trust receipt on the reverse side OF ANY COMPUTATION MADE IN THE DECISION AND THE ERRONEOUS APPLICATION OF
hereof is/are fully paid. PAYMENTS WHICH IS IN VIOLATION OF THE NEW CIVIL CODE.
2. WHETHER OR NOT THE MANNER OF COMPUTATION OF THE MARGINAL DEPOSIT BY THE
Such stipulation is invalid, there being no reference rate set either by it or by the Central Bank, leaving the RESPONDENT APPELLATE COURT IS IN ACCORDANCE WITH BANKING PRACTICE.
determination thereof at the sole will and control of petitioner. While it may be acceptable, for practical reasons given 3. WHETHER OR NOT THE AGREEMENT AMONG THE PARTIES AS TO THE FLOATING OF
the fluctuating economic conditions, for banks to stipulate that interest rates on a loan not be fixed and instead be INTEREST RATE IS VALID UNDER APPLICABLE JURISPRUDENCE AND THE RULES AND
made dependent upon prevailing market conditions, there should always be a reference rate upon which to peg REGULATIONS OF THE CENTRAL BANK.
such variable interest rates.  Polotan, Sr. v. Court of Appeals : the contractual provision stating that "if there occurs 4. WHETHER OR NO THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN NOT
any change in the prevailing market rates, the new interest rate shall be the guiding rate in computing the interest CONSIDERING THE TRANSACTION AT BAR AS A TRUST RECEIPT TRANSACTION ON THE BASIS
due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting OF THE JUDICIAL ADMISSIONS OF THE PRIVATE RESPONDENTS AND FOR WHICH
on the monthly statement served to the Cardholder" was considered valid. The aforequoted provision was upheld RESPONDENTS ARE LIABLE THEREFOR.
notwithstanding that it may partake of the nature of an escalation clause, because at the same time it provides for 5. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN NOT
the decrease in the interest rate in case the prevailing market rates dictate its reduction.  HOLDING PRIVATE RESPONDENT SPOUSES LIABLE UNDER THE TRUST RECEIPT
TRANSACTION.
In other words, unlike the stipulation subject of the instant case, the interest rate involved in the Polotan case is
designed to be based on the prevailing market rate. On the other hand, a stipulation ostensibly signifying an ISSUE: WON the marginal deposit must not be deducted or set off before the computing the accrued interests
agreement to "any increase or decrease in the interest rate," without more, cannot be accepted by this Court as
valid for it leaves solely to the creditor the determination of what interest rate to charge against an outstanding loan. RULING: NO. WHEREFORE, in view of all the foregoing, the instant Petition for Review is DENIED. The Decision of
the Court of Appeals dated July 26, 1993 in CA-G.R. CY No.29950 is AFFIRMED.
THE TRANSACTION IS MERELY A SIMPLE LOAN AND NOT A TRUST RECEIPT TRANSACTION
Colinares v. Court of Appeals: Inasmuch as the debtor received the goods subject of the trust receipt before the RATIO: ON THE OVERPAYMENT
trust receipt itself was entered into, the transaction in question was a simple loan and not a trust receipt agreement. Petitioner decries the lack of computation by the lower court as basis for its ruling that there was an overpayment
Prior to the date of execution of the trust receipt, ownership over the goods was already transferred to the debtor. made. While such a computation may not have appeared in the Decision itself, we note that the trial court's finding
This situation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong of overpayment is supported by evidence presented before it. At any rate, we painstakingly reviewed and computed
in ownership to the bank and are only released to the importer in trust after the loan is granted. In the case at bar, the payments together with the interest and penalty charges due thereon and found that the amount of overpayment
the delivery to the Corporation of the goods subject of the trust receipt occurred long before the trust receipt itself made by respondent Bank to petitioner, i.e., P263,070.13, was more than what was ordered reimbursed by the
was executed.  lower court. However, since respondents did not file an appeal in this case, the amount ordered reimbursed by the
lower court should stand.
FACTS: On July 13, 1982, Continental Cement Corporation and Gregory T. Lim obtained from Consolidated
Bank and Trust Corporation Letter of Credit No. DOM-23277 in the amount of P 1,068,150.00 On the same ON THE MARGINAL DEPOSIT AND THE COMPUTATION OF THE INTERESTS ACCRUED (topic)
PETITIONER: the marginal deposit made by the Corporation should not be deducted outright from the amount of The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty
the letter of credit. The marginal deposit should be considered only after computing the principal plus and abuse of confidence in the handling of money or goods to the prejudice of another regardless of
accrued interest and other charges.  whether the latter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither
dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC. Petitioners
To sustain this on this score would be to countenance a clear case of unjust enrichment, for while a marginal continually endeavored to meet their obligations, as shown by several receipts issued by PBC
deposit earns no interest in favour of the debtor-depositor, the bank is not only able to use the same for its acknowledging payment of the loan.
own purposes, interest-free, but is also able to earn interest on the money loaned to respondent
Corporation. Indeed, it would be onerous to compute interest and other charges on the face value of the The Information charges Petitioners with intent to defraud and misappropriating the money for their
letter of credit which the petitioner issued, without first crediting or setting off the marginal deposit which personal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a state of mind
the respondent Corporation paid to it. Compensation is proper and should take effect by operation of law was not proved to be present in Petitioners' situation. Petitioners employed no artifice in dealing with
because the requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the PBC and never did they evade payment of their obligation nor attempt to abscond. Instead, Petitioners
concurrent amount. sought favorable terms precisely to meet their obligation.

Hence, the interests and other charges on the subject letter of credit should be computed only on the Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale, contrary to
balance of P681,075, which was the portion actually loaned by the bank to respondent Corporation. the express provision embodied in the trust receipt. They are contractors who obtained the fungible
goods for their construction project. At no time did title over the construction materials pass to the bank,
Neither do we find error when the lower court and the CA set aside as invalid the floating rate of interest but directly to the Petitioners from CM Builders Centre. This impresses upon the trust receipt in question
exhorted by petitioner to be applicable. The pertinent provision in the trust receipt agreement fixing the interest vagueness and ambiguity, which should not be the basis for criminal prosecution in the event of violation
rate states: of its provisions.
I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after
July 1, 1981, when the Central Bank floated the interest rate, and to pay additionally the penalty of 1% The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under
per month until the amount/s or instalments/s due and unpaid under the trust receipt on the reverse side the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable if not reprehensible.
hereof is/are fully paid. Such agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be
disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to
We agree with CA that the foregoing stipulation is invalid, there being no reference rate set either by it or by misinterpretation, as had happened in this case. Eventually, PBC showed its true colors and admitted that it was
the Central Bank, leaving the determination thereof at the sole will and control of petitioner. While it may be only after collection of the money, as manifested by its Affidavit of Desistance.
acceptable, for practical reasons given the fluctuating economic conditions, for banks to stipulate that
interest rates on a loan not be fixed and instead be made dependent upon prevailing market conditions, Similarly, the Corporation cannot be said to have been dishonest in its dealings with petitioner. Neither has it been
there should always be a reference rate upon which to peg such variable interest rates.  shown that it has evaded payment of its obligations. Indeed, it continually endeavored to meet the same, as shown
Polotan, Sr. v. Court of Appeals: the contractual provision stating that "if there occurs any change in the by the various receipts issued by petitioner acknowledging payment on the loan. Certainly, the payment of the sum
prevailing market rates, the new interest rate shall be the guiding rate in computing the interest due on the of P1,832,158.38 on a loan with a principal amount of only P681,075.93 negates any badge of dishonesty , abuse of
outstanding obligation without need of serving notice to the Cardholder other than the required posting on confidence or mishandling of funds on the part of respondent Corporation, which are the gravamen of a trust receipt
the monthly statement served to the Cardholder" was considered valid. The aforequoted provision was upheld violation. Furthermore, Respondent Corporation is not an importer, which acquired the bunker fuel oil for re-sale; it
notwithstanding that it may partake of the nature of an escalation clause, because at the same time it provides for needed the oil for its own operations. More importantly, at no time did title over the oil pass to petitioner, but directly
the decrease in the interest rate in case the prevailing market rates dictate its reduction.  to respondent Corporation to which the oil was directly delivered long before the trust receipt was executed. The fact
that ownership of the oil belonged to respondent Corporation, through its President, Gregory Lim, was
In other words, unlike the stipulation subject of the instant case, the interest rate involved in the Polotan acknowledged by petitioner's own account officer on the witness stand, to wit:
case is designed to be based on the prevailing market rate. On the other hand, a stipulation ostensibly
signifying an agreement to "any increase or decrease in the interest rate," without more, cannot be Q -After the bank opened a letter of credit in favor of Petrophil Corp. for the account of the defendants thereby
accepted by this Court as valid for it leaves solely to the creditor the determination of what interest rate to paying the value of the bunker fuel oil what transpired next after that?
charge against an outstanding loan. A -Upon purchase of the bunker fuel oil and upon the requests of the defendant possession of the bunker fuel oil
were transferred to them.
THE TRANSACTION IS MERELY A SIMPLE LOAN AND NOT A TRUST RECEIPT TRANSACTION Q -You mentioned them to whom are you referring to?
Petitioner has also failed to convince us that its transaction with respondent Corporation is really a trust receipt A -To the Continental Cement Corp. upon the execution of the trust receipt acknowledging the ownership of the
transaction instead of merely a simple loan, as found by the lower court and the Court of Appeals. bunker fuel oil this should be acceptable for whatever disposition he may make.
Q - You mentioned about acknowledging ownership of the bunker fuel oil to whom by whom?
Colinares v. Court of Appeals: Inasmuch as the debtor received the goods subject of the trust receipt before the A - By the Continental Cement Corp.
trust receipt itself was entered into, the transaction in question was a simple loan and not a trust receipt agreement. Q – So by your statement who really owns the bunker fuel oil
Prior to the date of execution of the trust receipt, ownership over the goods was already transferred to the A TTY. RACHON: Objection already answered,
debtor. This situation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein COURT: Give time to the other counsel to object.
the goods belong in ownership to the bank and are only released to the importer in trust after the loan is A TTY. RACHON : He has testified that ownership was acknowledged in favor of Continental Cement Corp. so that
granted. question has already been answered.
A TTY. BANAGA: That is why I made a follow up question asking ownership of the bunker fuel oil.
COURT: Proceed.
In the case at bar, as in Colinares, the delivery to the Corporation of the goods subject of the trust receipt
occurred long before the trust receipt itself was executed. More specifically, delivery of the bunker fuel oil to A TTY .BANAGA:
Q - Who owns the bunker fuel oil after purchase from Petrophil Corp.
respondent Corporation's Bulacan plant commenced on July 7, 1982 and was completed by July 19, 1982. Further,
the oil was used up by the Corporation in its normal operations by August, 1982. On the other hand, the subject trust A - Gregory Lim.
receipt was only executed nearly two months after full delivery of the oil was made to respondent Corporation, or on
September 2, 1982. By all indications, then, it is apparent that there was really no trust receipt transaction that took place.
Evidently, respondent Corporation was required to sign the trust receipt simply to facilitate collection by
petitioner of the loan it had extended to the former.
The danger in characterizing a simple loan as a trust receipt transaction was explained in Colinares, to wit:
LIM IS NOT PERSONALLY LIABLE
Finally, we are not convinced that respondent Gregory T. Lim and his spouse should be personally liable under the
subject trust receipt. The  argument that the Corporation and Lim and his spouse are one and the same cannot be
sustained. The transactions sued upon were clearly entered into by Lim in his capacity as Executive Vice President
of the Corporation. We stress the hornbook law that corporate personality is a shield against personal liability of its
officers. Thus, we agree that respondents Gregory T. Lim and his spouse cannot be made personally liable since
respondent Lim entered into and signed the contract clearly in his official capacity as Executive Vice President. The
personality of the corporation is separate and distinct from the persons composing it.
• New Sampaguita Builders v. PNB, G.R. No. 148753, 2004 - EV In this case, the Promissory Notes specified the interest rate to be charged: 19.5 percent in
G.R. No. 148753. July 30, 2004. the first, and 21.5 percent in the second and again in the third.  However, a uniform clause therein
NEW SAMPAGUITA BUILDERS CONSTRUCTION, INC. (NSBCI) and Spouses EDUARDO R. permitted respondent to increase the rate “within the limits allowed by law at any time depending on
DEE and ARCELITA M. DEE, petitioners, vs. PHILIPPINE NATIONAL BANK, respondent. whatever policy it may adopt in the future x x x,” without even giving prior notice to petitioners.  The
PANGANIBAN, J.: Court holds that petitioners’ accessory duty to pay interest did not give respondent unrestrained
  freedom to charge any rate other than that which was agreed upon.  No interest shall be due, unless
Courts have the authority to strike down or to modify provisions in promissory notes that expressly stipulated in writing.  It would be the zenith of farcicality to specify and agree upon rates
grant the lenders unrestrained power to increase interest rates, penalties and other charges  at  the that could be subsequently upgraded at whim by only one party to the agreement.
latter’s  sole discretion and without giving prior notice to  and  securing the  consent of the           The “unilateral determination and imposition” of increased rates is “violative of the principle of
borrowers. This unilateral authority is anathema to the mutuality of contracts and enable lenders to mutuality of contracts ordained in Article 1308 of the Civil Code.” One-sided impositions do not have
take undue advantage of borrowers.  Although the Usury Law has been effectively repealed, courts the force of law between the parties, because such impositions are not based on the parties’ essential
may still reduce iniquitous or unconscionable rates charged for the use of money.  Furthermore, equality. 
excessive interests, penalties and other charges not revealed in disclosure statements issued by “While the Usury Law ceiling on interest rates was lifted by [Central Bank] Circular No. 905,
banks, even if stipulated in the promissory notes, cannot be given effect under the Truth in Lending nothing in the said Circular grants lenders carte blanche authority to raise interest rates to levels
Act. which will either enslave their borrowers or lead to a hemorrhaging of their assets.”  In fact, we have
declared nearly ten years ago that neither this Circular nor PD 1684, which further amended the
Summary Usury Law, “authorized either party to unilaterally raise the interest rate without the other’s consent.”
Moreover, a similar case eight years ago pointed out to the same respondent (PNB) that
Petitioner New Sampaguita Builders Construction INC (NSCBI), through its President Eduardo Dee, borrowing signified a capital transfusion from lending institutions to businesses and industries and
had obtained a commercial loan accommodation from respondent Philippine National Bank (PNB) was done for the purpose of stimulating their growth; yet respondent’s continued “unilateral and
amounting to Php8M. The loan was secured by a mortgage on several parcels of land. Said loan was lopsided policy” of increasing interest rates “without the prior assent” of the borrower not only defeats
further secured by the joint and several signatures of (Petitioners)Spouses Eduardo and Arcelita Dee. this purpose, but also deviates from this pronouncement.  Although such increases are not usurious,
Moreover, NSCBI executed three promissory notes. In addition, petitioner corporation also signed the since the “Usury Law is now legally inexistent” -- the interest ranging from 26 percent to 35 percent in
Credit Agreement. On August 31, 1989, Spouses Dee executed a 'Joint and Solidary Agreement' the statements of account -- “must be equitably reduced for being iniquitous, unconscionable and
(JSA) in favor of PNB 'unconditionally and irrevocably binding themselves to be jointly and severally exorbitant.” Rates found to be iniquitous or unconscionable are void, as if it there were no express
liable with the borrower for the payment of all sums due and payable to the Bank under the Credit contract thereon.  Above all, it is undoubtedly against public policy to charge excessively for the use
Document. of money.
Furthermore, respondent did not follow the stipulation in the Promissory Notes providing for
Petitioner failed to pay their loan obligations. The properties securing the loan account of petitioner the automatic conversion of the portion that remained unpaid after 730 days -- or two years from date
had therefore been foreclosed and sold at public auction. of original release -- into a medium-term loan, subject to the applicable interest rate to be applied from
the dates of original release.
On August 4, 1992, PNB informed NSBCI that the proceeds of the sale conducted on February 26, In the first, second and third Promissory Notes, the amount that remained unpaid as of
1992 were not sufficient to cover its total claim amounting to P12,506,476.43, and thus demanded October 27, 1989, December 1989 and January 4, 1990 -- their respective due dates -- should have
from the latter the deficiency of P2,172,476.43 plus interest and other charges until the amount was been automatically converted by respondent into medium-term loans on June 30, 1991, September 2,
fully paid. 1991, and September 7, 1991, respectively.  And on this unpaid amount should have been imposed
the same interest rate charged by respondent on other medium-term loans; and the rate applied from
Petitioners refused to pay the above deficiency claim which compelled PNB to institute a complaint for June 29, 1989, September 1, 1989 and September 6, 1989 -- their respective original release -- until
the collection of its deficiency claim of P2,172,476.43 plus interest and other charges. paid.  But these steps were not taken.  Aside from sending demand letters, respondent did not at all
exercise its option to enforce collection as of these Notes’ due dates.  Neither did it renew or extend
Trial Court: dismissed the PNB’s complaint; the account.
CA: reversed TC decision and held, among others, that the increases in the interest rates on NSBCI's In these three Promissory Notes, evidently, no complaint for collection was filed with the
loan were also held to be authorized by law and the Monetary Board and — like the increases in courts.  It was not until January 30, 1992 that a Petition for Sale of the mortgaged properties was filed
penalty rates — voluntarily and freely agreed upon by the parties in the Credit Agreements they -- with the provincial sheriff, instead.  Moreover, respondent did not supply the interest rate to be
executed. Thus, these increases were binding upon petitioners. Moreover, PNB was allowed to charged on medium-term loans granted by automatic conversion.  Because of this deficiency, we
recover any deficiency in the mortgage account not realized in the foreclosure sale, since petitioner- shall use the legal rate of 12 percent per annum on loans and forbearance of money, as provided for
spouses had agreed to be solidarily liable for all sums due and payable to respondent. by CB Circular 416.

FIRST ISSUE Moreover, the court also considered three disclosure statements, as well as the two credit
The SC held that NSBCI’s loan accounts with PNB appear to be bloated with some iniquitous agreements, which did not provide for any increase in the specified interest rates.  Thus, none would
imposition of interests, penalties, other charges and attorney’s fees. now be permitted. 
 
(of relevance to our topic: interests and penalty charges…) Penalty, or Increases Thereof, Unjustified
No penalty charges or increases thereof appear either in the Disclosure Statements or in
The Increases in Interest are Baseless any of the clauses in the second and the third Credit Agreements. While a standard penalty charge of
6 percent per annum has been imposed on the amounts stated in all three Promissory Notes still
remaining unpaid or unrenewed when they fell due, there is no stipulation therein that would justify “On February 11, 1989, Board Resolution No. 05, Series of 1989 was approved by
any increase in that charges.  The effect, therefore, when the borrower is not clearly informed of the [Petitioner] NSBCI [1)] authorizing the company to x x x apply for or secure a commercial loan
Disclosure Statements -- prior to the consummation of the availment or drawdown -- is that the lender with the PNB in an aggregate amount of P8.0M, under such terms agreed by the Bank and the
will have no right to collect upon such charge or increases thereof, even if stipulated in the Notes.  NSBCI, using or mortgaging the real estate properties registered in the name of its President and
The time is now ripe to give teeth to the often ignored forty-one-year old “Truth in Lending Act” and Chairman of the Board [Petitioner] Eduardo R. Dee as collateral; [and] 2) authorizing [petitioner-
thus transform it from a snivelling paper tiger to a growling financial watchdog of hapless borrowers. spouses] to secure the loan and to sign any [and all] documents which may be required by
Besides, we have earlier said that the Notes are contracts of adhesion; although not invalid [Respondent] PNB[,] and that [petitioner-spouses] shall act as sureties or co-obligors who shall
per se, any apparent ambiguity in the loan contracts -- taken as a whole -- shall be strictly construed be jointly and severally liable with [Petitioner] NSBCI for the payment of any [and all]
against respondent who caused it. Worse, in the statements of account, the penalty rate has again obligations.
been unilaterally increased by respondent to 36 percent without petitioners’ consent.  As a result of its
move, such liquidated damages intended as a penalty shall be equitably reduced by the Court for “On August 15, 1989, Resolution No. 77 was approved by granting the request of
being iniquitous or unconscionable. [Respondent] PNB thru its Board NSBCI for an P8 Million loan broken down into a revolving
credit line of P7.7M and an unadvised line of P0.3M for additional operating and working
capital to mobilize its various construction projects, namely:     
Second ISSUE: The SC held that the Extrajudicial Foreclosure is Valid, But Deficiency Claims 1. MWSS Watermain;
is Excessive 2. NEA-Liberty farm;
Since the excessive interest rates in the Statements of Account sent to petitioners are 3. Olongapo City Pag-Asa Public Market;
reduced to 19.5 percent and 21.5 percent, as stipulated in the Promissory Notes; upon loan 4. Renovation of COA-NCR Buildings 1, 2 and 9;
conversion, these rates are further reduced to the legal rate of 12 percent. Payments made by 5. Dupels, Inc., Extensive prawn farm development project;
petitioners are pro-rated, the charges on penalty and insurance eliminated, and the resulting total 6. Banawe Hotel Phase II;
unpaid principal and interest of P6,582,077.70 as of the date of public auction is then subjected to 1 7. Clark Air Base -- Barracks and Buildings; and
percent attorney’s fees. The total outstanding obligation is compared to the bid price. On the basis of 8. Others: EDSA Lighting, Roxas Blvd. Painting NEA Sapang Palay and Angeles City.’ 
these rates and the comparison made, the deficiency claim receivable amounting to P2,172,476.43 in
fact vanishes. Instead, there is an overpayment by more than P3 million. “The loan of [Petitioner] NSBCI was secured by a first mortgage on the following: a)
In fine, under solutio indebiti or payment by mistake, there is no deficiency receivable in three (3) parcels of residential land located at Mangaldan, Pangasinan with total land area of
favor of PNB, but rather an excess claim or surplus payable by respondent; this excess should 1,214 square meters[,] including improvements thereon and registered under TCT Nos. 128449,
immediately be returned to petitioner-spouses or their assigns -- not to mention the buildings and 126071, and 126072 of the Registry of Deeds of Pangasinan; b) six (6) parcels of residential land
improvements on and the fruits of the property -- to the end that no one may be unjustly enriched or situated at San Fabian, Pangasinan with total area of 1,767 square meters[,] including
benefited at the expense of another. Such surplus is in the amount of P3,686,101.52 improvements thereon and covered by TCT Nos. 144006, 144005, 120458, 120890, 144161[,] and
121127 of the Registry of Deeds of Pangasinan; and c) a residential lot and improvements
To summarize, to give full force to the Truth in Lending Act, only the interest rates of 19.5 percent and thereon located at Mangaldan, Pangasinan with an area of 4,437 square meters and covered by
21.5 percent stipulated in the Promissory Notes may be imposed by respondent on the respective TCT No. 140378 of the Registry of Deeds of Pangasinan.
availments.  After 730 days, the portions remaining unpaid are automatically converted into medium-
term loans at the legal rate of 12 percent.   In all instances, the simple method of interest computation “The loan was further secured by the joint and several signatures of [Petitioners]
is followed.  Payments made by petitioners are applied and pro-rated according to basic legal Eduardo Dee and Arcelita Marquez Dee, who signed as accommodation-mortgagors since all
principles.  Charges on penalty and insurance are eliminated, and 1 percent attorney’s fees imposed the collaterals were owned by them and registered in their names.
upon the total unpaid balance of the principal and interest as of the date of public auction.   The P2
million deficiency claim therefore vanishes, and a refund of P3,686,101.52 arises. “Moreover [Petitioner] NSBCI executed the following documents, viz: a) promissory
note dated June 29, 1989 in the amount of P5,000,000.00 with due date on October 27, 1989;
[b)] promissory note dated September 1, 1989 in the amount of P2,700,000.00 with due date on
The Case December 30, 1989; and c) promissory note dated September 6, 1989 in the amount of
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to nullify the P300,000.00 with maturity date on January 4, 1990.
June 20, 2001 Decision of the Court of Appeals (CA) in CA-GR CV No. 55231.  The decretal portion
of the assailed Decision reads as follows: “In addition, [petitioner] corporation also signed the Credit Agreement dated August
“WHEREFORE, the decision of the Regional Trial Court of Dagupan City, Branch 40 dated December 31, 1989 relating to the ‘revolving credit line’ of P7.7 Million x x x and the Credit Agreement
28, 1995 is REVERSED and SET ASIDE.  The foreclosure proceedings of the mortgaged properties dated September 5, 1989 to support the ‘unadvised line’ of P300,000.00.
of defendants-appellees and the February 26, 1992 auction sale are declared legal and valid and said
defendants-appellees are ordered to pay plaintiff-appellant PNB, jointly and severally[,] the amount of “On August 31, 1989, [petitioner-spouses] executed a ‘Joint and Solidary Agreement’
deficiency that will be computed by the trial court based on the original penalty of 6% per annum as (JSA) in favor of [Respondent] PNB ‘unconditionally and irrevocably binding themselves to be
explicitly stated in the loan documents and to pay attorney’s fees in an amount equivalent to x x x 1% jointly and severally liable with the borrower for the payment of all sums due and payable to
of the total amount due and the costs of suit and expenses of litigation.” the Bank under the Credit Document.
 
  “Later on, [Petitioner] NSBCI failed to comply with its obligations under the
The Facts promissory notes.
The facts are narrated by the CA as follows:
 “On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of [Petitioner] NSBCI sent a allegedly a newspaper of general  circulation in the Province of Pangasinan, including the cities of
letter to the Branch Manager of the PNB Dagupan Branch requesting for a 90-day extension Dagupan and San Carlos.  In addition[,] copies of the notice were posted in three (3) public places[,]
for the payment of interests and restructuring of its loan for another term. and copies thereof furnished [Petitioner] NSBCI at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue,
Quezon City, [and at] 555 Shaw Blvd., Mandaluyong[, Metro Manila;] and [Petitioner] Sps. Eduardo
“Subsequently, NSBCI tendered payment to [Respondent] PNB [of] three (3) checks and Arcelita Dee at 213 Wilson St., San Juan, Metro Manila.
aggregating P1,000,000.00, namely 1) check no. 316004 dated August 8, 1991 in the amount of
P200,000.00; 2) check no. 03499997 dated August 8, 1991 in the amount of P650,000.00; and 3) “On February 26, 1992, the Provincial Deputy Sheriff Cresencio F. Ferrer of Lingayen,
check no. 03499998 dated August 15, 1991 in the amount of P150,000.00.[8] Pangasinan foreclosed the real estate mortgage and sold at public auction the mortgaged
properties of [petitioner-spouses,] with [Respondent] PNB being declared the highest bidder
“In a meeting held on August 12, 1991, [Respondent] PNB’s representative[,] Mr. Rolly for the amount of P10,334,000.00.
Cruzabra, was informed by [Petitioner] Eduardo Dee of his intention to remit to [Respondent] PNB
post-dated checks covering interests, penalties and part of the loan principals of his due account. “On March 2, 1992, copies of the Sheriff’s Certificate of Sale were sent by registered mail to
[petitioner] corporation’s address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City
On August 22, 1991, [Respondent] bank’s Crispin Carcamo wrote [Petitioner] Eduardo and [petitioner-spouses’] address at 213 Wilson St., San Juan, Metro Manila.
Dee[,] informing him that [Petitioner] NSBCI’s proposal [was] acceptable[,] provided the total
payment should be P4,128,968.29 that [would] cover the amount of P1,019,231.33 as principal, “On April 6, 1992, the PNB Dagupan Branch Manager sent a letter to [petitioners] at their
P3,056,058.03 as interests and penalties[,] and P53,678.93 for insurance[,] with the issuance of address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City[,] informing them that the
post-dated checks to be dated not later than November 29, 1991. properties securing their loan account [had] been sold at public auction, that the Sheriff’s Certificate of
Sale had been registered with the Registry of Deeds of Pangasinan on March 13, 1992[,] and that a
“On September 6, 1991, [Petitioner] Eduardo Dee wrote the PNB Branch Manager period of one (1) year therefrom [was] granted to them within which to redeem their properties.
reiterating his proposals for the settlement of [Petitioner] NSBCI’s past due loan account amounting to
P7,019,231.33. “[Petitioners] failed to redeem their properties within the one-year redemption period[,] and
so [Respondent] PNB executed a [D]eed of [A]bsolute [S]ale consolidating title to the properties in its
`“[Petitioner] Eduardo Dee later tendered four (4) post-dated Interbank checks aggregating name.  TCT Nos. 189935 to 189944 were later issued to [Petitioner] PNB by the Registry of Deeds of
P1,111,306.67 in favor of [Respondent] PNB, viz: Pangasinan.
Check No Date Amount
“On August 4, 1992, [Respondent] PNB informed [Petitioner] NSBCI that the
O3500087 Sept. 29, 1991 P277,826.70 proceeds of the sale conducted on February 26, 1992 were not sufficient to cover its total
claim amounting to P12,506,476.43[,] and thus demanded from the latter the deficiency of
O3500088 Oct. 29, 1991  P277,826.70 P2,172,476.43 plus interest and other charges[,] until the amount [was] fully paid.

O3500089 Nov. 29, 1991    P277,826.70 “[Petitioners] refused to pay the above deficiency claim which compelled
[Respondent] PNB to institute the instant [C]omplaint for the collection of its deficiency claim.
O3500090 Dec. 20, 1991    P277,826.57
“Finding that the PNB debt relief package automatically [granted] to [Petitioner]
NSBCI the benefits under the program, the court a quo ruled in favor of [petitioners] in its
Decision dated December 28, 1995, the fallo of which reads:
“Upon presentment[,] however, x x x check nos. 03500087 and 03500088 dated September
29 and October 29, 1991 were dishonored by the drawee bank and returned due [to] a ‘stop payment’ ‘In view of the foregoing, the Court believes and so holds that the [respondent] has no cause of action
order from [petitioners]. against the [petitioners]. ‘WHEREFORE, the case is hereby DISMISSED, without costs.’”
“On November 12, 1991, PNB’s Mr. Carcamo wrote [Petitioner] Eduardo Dee informing him On appeal, respondent assailed the trial court’s Decision dismissing its deficiency claim on
that unless the dishonored checks [were] made good, said PNB branch ‘shall recall its the mortgage debt.  It also challenged the ruling of the lower court that Petitioner NSBCI’s loan
recommendation to the Head Office for the restructuring of the loan account and refer the matter to its account was bloated, and that the inadequacy of the bid price was sufficient to set aside the auction
legal counsel for legal action.[’]  [Petitioners] did not heed [respondent’s] warning and as a result[,] the sale.
PNB Dagupan Branch sent demand letters to [Petitioner] NSBCI at its office address at 1611 ERDC  
Building, E. Rodriguez Sr. Avenue, Quezon City[,] asking it to settle its past due loan account. Ruling of the Court of Appeals
Reversing the trial court, the CA held that Petitioner NSBCI did not avail itself of
“[Petitioners] nevertheless failed to pay their loan obligations within the [timeframe] respondent’s debt relief package (DRP) or take steps to comply with the conditions for
given them and as a result, [Respondent] PNB  filed  with  the  Provincial  Sheriff  of qualifying under the program.  The appellate court also ruled that entitlement to the program was
Pangasinan at Lingayen a Petition for Sale under Act 3135, as amended[,] and Presidential not a matter of right, because such entitlement was still subject to the approval of higher bank
Decree No. 385 dated January 30, 1992. authorities, based on their assessment of the borrower’s repayment capability and satisfaction of
other requirements.
“The notice of extra-judicial sale of the mortgaged properties relating to said PNB’s
[P]etition for [S]ale was published in the February 8, 15 and 22, 1992 issues of the Weekly Guardian,
 As to the misapplication of loan payments, the CA held that the subsidiary ledgers of 10. WON the Honorable Court of Appeals seriously erred in not holding that the Respondent PNB
NSBCI’s loan accounts with respondent reflected all the loan proceeds as well as the partial bloated the loan account of petitioner corporation by imposing interests, penalties and attorney’s
payments that had been applied either to the principal or to the interests, penalties and other fees without legal, valid and equitable justification.
charges.  Having been made in the ordinary and usual course of the banking business of 11. WON the auction price at which the mortgaged properties was sold was disproportionate to their
respondent, its entries were presumed accurate, regular and fair under Section 5(q) of Rule 131 actual fair mortgage value. 
of the Rules of Court.  Petitioners failed to rebut this presumption. 12. WON Respondent PNB is not entitled to recover the deficiency in the mortgage account not
realized in the foreclosure sale, considering that:
The increases in the interest rates on NSBCI’s loan were also held to be authorized A. Petitioners are merely guarantors of the mortgage debt of petitioner corporation which has a
by law and the Monetary Board and -- like the increases in penalty rates -- voluntarily and separate personality from the [petitioner-spouses].
freely agreed upon by the parties in the Credit Agreements they executed.  Thus, these B. The joint and solidary agreement executed by [petitioner- spouses] are contracts of adhesion not
increases were binding upon petitioners. binding on them;
C. The NSBCI Board Resolution is not valid and binding on [petitioner-spouses] because they were
However, after considering that two to three of Petitioner NSBCI’s projects covered compelled to execute the said Resolution[;] otherwise[,] Respondent PNB would not grant
by the loan were affected by the economic slowdown in the areas near the military bases in the petitioner corporation the loan;
cities of Angeles and Olongapo, the appellate court annulled and deleted the adjustment in D. The Respondent PNB had already in its possession the properties of the [petitioner-spouses]
penalty from 6 percent to 36 percent per annum.  Not only did respondent fail to demonstrate the which served as a collateral to the loan obligation of petitioner corporation[,] and to still allow
existence of market forces and economic conditions that would justify such increases; it could also Respondent PNB to recover the deficiency claim amounting to a very substantial amount of P2.1
have treated petitioners’ request for restructuring as a request for availment of the DRP.  million would constitute unjust enrichment on the part of Respondent PNB.
Consequently, the original penalty rate of 6 percent per annum was used to compute the deficiency 13. WON Whether or not the extrajudicial foreclosure proceedings and auction sale, including all
claim. subsequent proceedings[,] are null and void for non-compliance with jurisdictional and other
mandatory requirements; whether or not the petition for extrajudicial foreclosure of mortgage was
The auction sale could not be set aside on the basis of the inadequacy of the auction price, filed prematurely; and whether or not the finding of fraud by the trial court is amply supported by
because in sales made at public auction, the owner is given the right to redeem the mortgaged the evidence on record.”
properties; the lower the bid price, the easier it is to effect redemption or to sell such right.  The bid
price of P10,334,000.00 vis-à-vis respondent’s claim of P12,506,476.43 was found to be neither ISSUES:
shocking nor unconscionable. 1. WON the loan accounts are bloated? —YES
14. WON the extrajudicial foreclosure and subsequent claim for deficiency are valid and proper?—-
Extrajudicial Foreclosure Valid, But Deficiency Claims Excessive
The attorney’s fees were also reduced by the appellate court from 10 percent to 1 percent  
of the total indebtedness.  First, there was no extreme difficulty in an extrajudicial foreclosure of a real HELD:
estate mortgage, as this proceeding was merely administrative in nature and did not involve a court The Petition is partly meritorious;CA decision affirmed with modification that PNB is oredered to
litigation contesting the proceedings prior to the auction sale.  Second, the attorney’s fees were refund the sum of P3,686,101.52 representing the overcollection computed above, plus interest
exclusive of all stipulated costs and fees. Third, such fees were in the nature of liquidated damages thereon at the legal rate of 6% per annum from the filing of the Complaint until the finality of this
that did not inure to respondent’s salaried counsel. Decision.  After this Decision becomes final and executory, the applicable rate shall be 12% per
annum until its satisfaction. 
Respondent was also declared to have the unquestioned right to foreclose the Real
Estate Mortgage.  It was allowed to recover any deficiency in the mortgage account not RATIO:
realized in the foreclosure sale, since petitioner-spouses had agreed to be solidarily liable for
all sums due and payable to respondent. First Main Issue:
Bloated Loan Accounts
Finally, the appellate court concluded that the extrajudicial foreclosure proceedings At the outset, it must be stressed that only questions of law may be raised in a petition for
and auction sale were valid for the following reasons: (1) personal notice to the mortgagors, review on certiorari under Rule 45 of the Rules of Court.  As a rule, questions of fact cannot be the
although unnecessary, was actually made; (2) the notice of extrajudicial sale was duly published and subject of this mode of appeal. As exceptions to this rule, however, factual findings of the CA may be
posted; (3) the extrajudicial sale was conducted through the deputy sheriff, under the direction of the reviewed on appeal when, inter alia, the factual inferences are manifestly mistaken; the judgment is
clerk of court who was concurrently the ex-oficio provincial sheriff and acting as agent of respondent; based on a misapprehension of facts; or the CA manifestly overlooked certain relevant and
(4) the sale was conducted within the province where the mortgaged properties were located; and (5) undisputed facts that, if properly considered, would justify a different legal conclusion.  In the present
such sale was not shown to have been attended by fraud. case, these exceptions exist in various instances.

Hence this Petition. Indeed, Petitioner NSBCI’s loan accounts with respondent appear to be bloated with
Petitioners submit the following issues for our consideration: some iniquitous imposition of interests, penalties, other charges and attorney’s fees. To
1. WON the Honorable Court of Appeals correctly ruled that petitioners did not avail of PNB’s debt demonstrate this point, the Court shall take up one by one the promissory notes, the credit
relief package and were not entitled thereto as a matter of right. agreements and the disclosure statements.
9. WON petitioners have adduced sufficient and convincing evidence to overthrow the presumption
of regularity and correctness of the PNB entries in the subsidiary ledgers of the loan accounts of Increases in Interest Baseless
petitioners.
 Promissory Notes. In each drawdown, the Promissory Notes specified the interest
rate to be charged: 19.5 percent in the first, and 21.5 percent in the second and again in the In the first, second and third Promissory Notes, the amount that remained unpaid as of
third.  However, a uniform clause therein permitted respondent to increase the rate “within the October 27, 1989, December 1989 and January 4, 1990 -- their respective due dates -- should have
limits allowed by law at any time depending on whatever policy it may adopt in the future x x been automatically converted by respondent into medium-term loans on June 30, 1991, September 2,
x,” without even giving prior notice to petitioners.  The Court holds that petitioners’ accessory 1991, and September 7, 1991, respectively.  And on this unpaid amount should have been imposed
duty to pay interest did not give respondent unrestrained freedom to charge any rate other the same interest rate charged by respondent on other medium-term loans; and the rate applied from
than that which was agreed upon.  No interest shall be due, unless expressly stipulated in June 29, 1989, September 1, 1989 and September 6, 1989 -- their respective original release -- until
writing.  It would be the zenith of farcicality to specify and agree upon rates that could be paid.  But these steps were not taken.  Aside from sending demand letters, respondent did not at all
subsequently upgraded at whim by only one party to the agreement. exercise its option to enforce collection as of these Notes’ due dates.  Neither did it renew or extend
  the account.
          The “unilateral determination and imposition” of increased rates is “violative of the
principle of mutuality of contracts ordained in Article 1308 of the Civil Code.” One-sided In these three Promissory Notes, evidently, no complaint for collection was filed with
impositions do not have the force of law between the parties, because such impositions are the courts.  It was not until January 30, 1992 that a Petition for Sale of the mortgaged
not based on the parties’ essential equality.  properties was filed -- with the provincial sheriff, instead.  Moreover, respondent did not
supply the interest rate to be charged on medium-term loans granted by automatic
Although escalation clauses are valid in maintaining fiscal stability and retaining the value conversion.  Because of this deficiency, we shall use the legal rate of 12 percent per annum on
of money on long-term contracts, giving respondent an unbridled right to adjust the interest loans and forbearance of money, as provided for by CB Circular 416.
independently and upwardly would completely take away from petitioners the “right to assent to an
important modification in their agreement” and would also negate the element of mutuality in their Credit Agreements. Aside from the promissory notes, another main document involved in
contracts.  The clause cited earlier made the fulfillment of the contracts “dependent exclusively upon the principal obligation is the set of credit agreements executed and their annexes.
the uncontrolled will” of respondent and was therefore void.  Besides, the pro forma promissory notes
have the character of a contract d’adhésion, “where the parties do not bargain on equal footing, the The first Credit Agreement dated June 19, 1989 -- although offered and admitted in
weaker party’s [the debtor’s] participation being reduced to the alternative ‘to take it or leave it.’” evidence, and even referred to in the first Promissory Note -- cannot be given weight.
“While the Usury Law ceiling on interest rates was lifted by [Central Bank] Circular
No. 905, nothing in the said Circular grants lenders carte blanche authority to raise interest First, it was not signed by respondent through its branch manager. Apparently it was surreptitiously
rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their acknowledged before respondent’s counsel, who unflinchingly declared that it had been signed by the
assets.”  In fact, we have declared nearly ten years ago that neither this Circular nor PD 1684, parties on every page, although respondent’s signature does not appear thereon.
which further amended the Usury Law, “authorized either party to unilaterally raise the interest
rate without the other’s consent.” Second, it was objected to by petitioners, contrary to the trial court’s findings. However, it was not the
Agreement, but the revolving credit line of P5,000,000, that expired one year from the Agreement’s
Moreover, a similar case eight years ago pointed out to the same respondent (PNB) date of implementation.
that borrowing signified a capital transfusion from lending institutions to businesses and
industries and was done for the purpose of stimulating their growth; yet respondent’s Third, there was no attached annex that contained the General Conditions. Even the
continued “unilateral and lopsided policy” of increasing interest rates “without the prior Acknowledgment did not allude to its existence. Thus, no terms or conditions could be added to the
assent” of the borrower not only defeats this purpose, but also deviates from this Agreement other than those already stated therein.
pronouncement.  Although such increases are not usurious, since the “Usury Law is now
legally inexistent” -- the interest ranging from 26 percent to 35 percent in the statements of Since the first Credit Agreement cannot be given weight, the interest rate on the first
account -- “must be equitably reduced for being iniquitous, unconscionable and availment pegged at 3 percent over and above respondent’s prime rate on the date of such
exorbitant.” Rates found to be iniquitous or unconscionable are void, as if it there were no availment has no bearing at all on the loan.  After the first Note’s due date, the rate of 19
express contract thereon.  Above all, it is undoubtedly against public policy to charge percent agreed upon should continue to be applied on the availment, until its automatic
excessively for the use of money. conversion to a medium-term loan.

It cannot be argued that assent to the increases can be implied either from the June The second Credit Agreement dated August 31, 1989, provided for interest --
18, 1991 request of petitioners for loan restructuring or from their lack of response to the respondent’s prime rate, plus the applicable spread in effect as of the date of each availment, on a
statements of account sent by respondent.  Such request does not indicate any agreement to revolving credit line of P7,700,000 -- but did not state any provision on its increase or decrease.
an interest increase; there can be no implied waiver of a right when there is no clear, Consequently, petitioners could not be made to bear interest more than such prime rate plus spread. 
unequivocal and decisive act showing such purpose. Besides, the statements were not letters of The Court gives weight to this second Credit Agreement for the following reasons.
information sent to secure their conformity; and even if we were to presume these as an offer, there  
was no acceptance.  No one receiving a proposal to modify a loan contract, especially interest -- a First, this document submitted by respondent was admitted by petitioners. Again, contrary to their
vital component -- is “obliged to answer the proposal.” assertion, it was not the Agreement -- but the credit line -- that expired one year from the Agreement’s
date of implementation. Thus, the terms and conditions continued to apply, even if drawdowns could
Furthermore, respondent did not follow the stipulation in the Promissory Notes no longer be made.
providing for the automatic conversion of the portion that remained unpaid after 730 days -- or
two years from date of original release -- into a medium-term loan, subject to the applicable
interest rate to be applied from the dates of original release.
Second, there was no 7-page annex offered in evidence that contained the General Conditions, As to the third Disclosure Statement on Loan/Credit Transaction dated September 6,
notwithstanding the Acknowledgment of its existence by respondent’s counsel.  Thus, no terms or 1989, we hold that the same 21.5 percent effective interest rate per annum would apply to the
conditions could be appended to the Agreement other than those specified therein. third availment or drawdown evidenced by the third Promissory Note.  This Statement was
made available to petitioner-spouses, only after the related Credit Agreement had been executed, but
Third, the 12-page General Conditions offered and admitted in evidence had no probative value.  simultaneously with the consummation of the Statement’s related availment or drawdown. 
There was no reference to it in the Acknowledgment of the Agreement; neither was respondent’s Nonetheless, the rate herein should still be regarded as equivalent to the prime rate plus spread,
signature on any of the pages thereof.  Thus, the General Conditions’ stipulations on interest under the similar presumption that this private transaction was fair and regular and that the ordinary
adjustment, whether on a fixed or a floating scheme, had no effect whatsoever on the Agreement.  course of business was followed.
Contrary to the trial court’s findings, the General Condition were correctly objected to by petitioners. 
The rate of 21.5 percent agreed upon in the second Note thus continued to apply to the In sum, the three disclosure statements, as well as the two credit agreements
second availment, until its automatic conversion into a medium-term loan. considered by this Court, did not provide for any increase in the specified interest rates.  
Thus, none would now be permitted.  When cross-examined, Julia Ang-Lopez, Finance Account
The third Credit Agreement dated September 5, 1989, provided for the same rate of Analyst II of PNB, Dagupan Branch, even testified that the bases for computing such rates were those
interest as that in the second Agreement.  This rate was to be applied to availments of an sent by the head office from time to time, and not those indicated in the notes or disclosure
unadvised line of P300,000.  Since there was no mention in the third Agreement, either, of any statements.
stipulation on increases or decreases in interest, there would be no basis for imposing amounts
higher than the prime rate plus spread.  Again, the 21.5 percent rate agreed upon would continue In addition to the preceding discussion, it is then useless to labor the point that the increase
to apply to the third availment indicated in the third Note, until such amount was automatically in rates violates the impairment clause of the Constitution, because the sole purpose of this provision
converted into a medium-term loan. is to safeguard the integrity of valid contractual agreements against unwarranted interference by the
State in the form of laws.  Private individuals’ intrusions on interest rates is governed by statutory
The Court also finds that, first, although this document was admitted by petitioners, it was enactments like the Civil Code.
the credit line that expired one year from the implementation of the Agreement.  The terms and  
conditions therein continued to apply, even if availments could no longer be drawn after expiry. Penalty, or Increases
Thereof, Unjustified
Second, there was again no 7-page annex offered that contained the General Conditions,
regardless of the Acknowledgment by the same respondent’s counsel affirming its existence.  Thus, No penalty charges or increases thereof appear either in the Disclosure Statements
the terms and conditions in this Agreement relating to interest cannot be expanded beyond that which or in any of the clauses in the second and the third Credit Agreements earlier discussed.  
was already laid down by the parties. While a standard penalty charge of 6 percent per annum has been imposed on the amounts
stated in all three Promissory Notes still remaining unpaid or unrenewed when they fell due,
Disclosure Statements.  In the present case, the Disclosure Statements furnished by there is no stipulation therein that would justify any increase in that charges.   The effect,
respondent set forth the same interest rates as those respectively indicated in the Promissory therefore, when the borrower is not clearly informed of the Disclosure Statements -- prior to
Notes.  Although no method of computation was provided showing how such rates were arrived at, the consummation of the availment or drawdown -- is that the lender will have no right to
we will nevertheless take up the Statements seriatim in order to determine the applicable rates collect upon such charge or increases thereof, even if stipulated in the Notes.   The time is now
clearly. ripe to give teeth to the often ignored forty-one-year old “Truth in Lending Act” and thus transform it
from a snivelling paper tiger to a growling financial watchdog of hapless borrowers.
As to the first Disclosure Statement on Loan/Credit Transaction dated June 13, 1989,
we hold that the 19.5 percent effective interest rate per annum would indeed apply to the first Besides, we have earlier said that the Notes are contracts of adhesion; although not
availment or drawdown evidenced by the first Promissory Note.  Not only was this Statement invalid per se, any apparent ambiguity in the loan contracts -- taken as a whole -- shall be
issued prior to the consummation of such availment or drawdown, but the rate shown therein can also strictly construed against respondent who caused it. Worse, in the statements of account, the
be considered equivalent to 3 percent over and above respondent’s prime rate in effect.  Besides, penalty rate has again been unilaterally increased by respondent to 36 percent without
respondent mentioned no other rate that it considered to be the prime rate chargeable to petitioners.  petitioners’ consent.  As a result of its move, such liquidated damages intended as a penalty
Even if we disregarded the related Credit Agreement, we assume that this private transaction shall be equitably reduced by the Court for being iniquitous or unconscionable.
between the parties was fair and regular, and that the ordinary course of business was followed.
Although the first Disclosure Statement was furnished Petitioner NSBCI prior to the
As to the second Disclosure Statement on Loan/Credit Transaction dated September execution of the transaction, it is not a contract that can be modified by the related Promissory Note,
2, 1989, we hold that the 21.5 percent effective interest rate per annum would definitely apply but a mere statement in writing that reflects the true and effective cost of loans from respondent. 
to the second availment or drawdown evidenced by the second Promissory Note.  Incidentally, Novation can never be presumed, and the animus novandi “must appear by express agreement of
this Statement was issued only after the consummation of its related availment or drawdown, yet such the parties, or by their acts that are too clear and unequivocal to be mistaken.” To allow novation will
rate can be deemed equivalent to the prime rate plus spread, as stipulated in the corresponding surely flout the “policy of the State to protect its citizens from a lack of awareness of the true cost of
Credit Agreement.  Again, we presume that this private transaction was fair and regular, and that the credit.”
ordinary course of business was followed.  That the related Promissory Note was pre-signed would With greater reason should such penalty charges be indicated in the second and third
also bolster petitioners’ claim although, under cross-examination Efren Pozon -- Assistant Department Disclosure Statements, yet none can be found therein.  While the charges are issued after the
Manager I of PNB, Dagupan Branch -- testified that the Disclosure Statements were the basis for respective availment or drawdown, the disclosure statements are given simultaneously therewith. 
preparing the Notes. Obviously, novation still does not apply.
 
Other Charges Unwarranted Accounting Principles (GAAP) for the Banking Industry, all interests accrued or earned on such loans,
In like manner, the other charges imposed by respondent are not warranted.  No particular except those that were restructured and non-accruing, have been periodically taken into income.
values or rates of service charge are indicated in the Promissory Notes or Credit Agreements, and no Without a doubt, the subsidiary ledgers in a manual accounting system are mere private documents
total value or even the breakdown figures of such non-finance charge are specified in the Disclosure that support and are controlled by the general ledger. Such ledgers are neither foolproof nor standard
Statements.  Moreover, the provision in the Mortgage that requires the payment of insurance and in format, but are periodically subject to audit.  Besides, we go by the presumption that the recording
other charges is neither made part of nor reflected in such Notes, Agreements, or Statements. of private transactions has been fair and regular, and that the ordinary course of business has been
  followed.
Attorney’s Fees Equitably Reduced  
We affirm the equitable reduction in attorney’s fees. These are not an integral part of the Second Main Issue:
cost of borrowing, but arise only when collecting upon the Notes becomes necessary.  The purpose of Extrajudicial Foreclosure Valid, But
these fees is not to give respondent a larger compensation for the loan than the law already allows, Deficiency Claims Excessive
but to protect it against any future loss or damage by being compelled to retain counsel – in-house or Respondent aptly exercised its option to “foreclose the mortgage,” after petitioners had
not -- to institute judicial proceedings for the collection of its credit. Courts have has the power to failed to pay all the Notes in full when they fell due.  The extrajudicial sale and subsequent
determine their reasonableness based on quantum meruit and to reduce the amount thereof if proceedings are therefore valid, but the alleged deficiency claim cannot be recovered.
excessive.
Auction Price Adequate
In addition, the disqualification argument in the Affidavit of Publication raised by petitioners In the accessory contract of real mortgage, in which immovable property or real rights
no longer holds water, inasmuch as Act 496 has repealed the Spanish Notarial Law.  In the same thereto are used as security for the fulfillment of the principal loan obligation, the bid price may be
vein, their engagement of their counsel in another capacity concurrent with the practice of law is not lower than the property’s fair market value.  In fact, the loan value itself is only 70 percent of the
prohibited, so long as the roles being assumed by such counsel is made clear to the client.  The only appraised value.  As correctly emphasized by the appellate court, a low bid price will make it
reason for this clarification requirement is that certain ethical considerations operative in one easier for the owner to effect redemption by subsequently reacquiring the property or by selling the
profession may not be so in the other. right to redeem and thus recover alleged losses.  Besides, the public auction sale has been regularly
  and fairly conducted, there has been ample authority to effect the sale, and the Certificates of Title
Debt Relief Package can be relied upon.  No personal notice is even required, because an extrajudicial foreclosure is an
Not Availed Of action in rem, requiring only notice by publication and posting, in order to bind parties interested in the
We also affirm the CA’s disquisition on the debt relief package (DRP). foreclosed property.
Respondent’s Circular is not an outright grant of assistance or extension of payment, but a
mere offer subject to specific terms and conditions. As no redemption was exercised within one year after the date of registration of the
Certificate of Sale with the Registry of Deeds, respondent -- being the highest bidder -- has the right
Petitioner NSBCI failed to establish satisfactorily that it had been seriously and directly to a writ of possession, the final process that will consummate the extrajudicial foreclosure.   On the
affected by the economic slowdown in the peripheral areas of the then US military bases. Its other hand, petitioner-spouses, who are mortgagors herein, shall lose all their rights to the property.
allegations, devoid of any verification, cannot lead to a supportable conclusion.  In fact, for short-term  
loans, there is still a need to conduct a thorough review of the borrower’s repayment possibilities. No Deficiency Claim Receivable
  After the foreclosure and sale of the mortgaged property, the Real Estate Mortgage is
Neither has Petitioner NSBCI shown enough margin of equity, based on the latest loan extinguished. Although the mortgagors, being third persons, are not liable for any deficiency in the
value of hard collaterals, to be eligible for the package. Additional accommodations on an unsecured absence of a contrary stipulation, the action for recovery of such amount -- being clearly sureties to
basis may be granted only when regular payment amortizations have been established, or when the the principal obligation -- may still be directed against them.  However, respondent may impose
merits of the credit application would so justify only the stipulated interest rates of 19.5 percent and 21.5 percent on the respective availments
-- subject to the 12 percent legal rate revision upon automatic conversion into medium-term
The branch manager’s recommendation to restructure or extend a total outstanding loan loans -- plus 1 percent attorney’s fees, without additional charges on penalty, insurance or any
not exceeding P8,000,000 is not final, but subject to the approval of respondent’s Branches increases thereof. 
Department Credit Committee, chaired by its executive vice-president. Aside from being further
conditioned on other pertinent policies of respondent, such approval nevertheless needs to be Accordingly, the excessive interest rates in the Statements of Account sent to
reported to its Board of Directors for confirmation. In fact, under the General Banking Law of 2000, petitioners are reduced to 19.5 percent and 21.5 percent, as stipulated in the Promissory
banks shall grant loans and other credit accommodations only in amounts and for periods of time Notes; upon loan conversion, these rates are further reduced to the legal rate of 12 percent.
essential to the effective completion of operations to be financed, “consistent with safe and sound Payments made by petitioners are pro-rated, the charges on penalty and insurance eliminated,
banking practices.” The Monetary Board -- then and now -- still prescribes, by regulation, the and the resulting total unpaid principal and interest of P6,582,077.70 as of the date of public
conditions and limitations under which banks may grant extensions or renewals of their loans and auction is then subjected to 1 percent attorney’s fees. The total outstanding obligation is
other credit accommodations. compared to the bid price. On the basis of these rates and the comparison made, the
  deficiency claim receivable amounting to P2,172,476.43 in fact vanishes. Instead, there is an
overpayment by more than P3 million, as shown in the following Schedules:
Entries in Subsidiary Ledgers
Regular and Correct
Contrary to petitioners’ assertions, the subsidiary ledgers of respondent properly reflected
all entries pertaining to Petitioner NSBCI’s loan accounts.  In accordance with the Generally Accepted SCHEDULE 1: PN (1) drawdown amount on 6/29/89
Less: Interest deducted in advance (per 6/13/89 Disclosure Interest at 19.5%
Statement) p.a.

Net proceeds 6/1/90-6/29/90 ([5,000,000-(356,821.30+821.33)]

x 19.5% x [29/365]) 71,924.74
Principal Amount due as of
6/29/90
Add: Less: Payment on 6/29/90 (pro-rated upon
Interest at 19.5% interest) 839,012.66
p.a.
Balan
ce (767,087.92)
10/28/89-12/31/89 (5,000,000 x 19.5% x [65/365]) 173,630.14
1/1/90-1/5/90 (5,000,000 x 19.5%
x [5/365]) 13,356.16 186,986.30
 
Amount due as of 1/5/90
Add:
Less: Payment on 1/5/90 (pro-rated upon
interest) 543,807.61
Interest at 19.5% p.a.
Balan
6/30/90-12/31/90 ([5,000,000-
ce (356,821.30)
(356,821.30+821.33+767,087.92)] x 19.5% x [185/365]) 383,014.64
1/1/91-6/29/91 ([5,000,000-
Add: (356,821.30+821.33+767,087.92)] x 19.5% x
Interest at 19.5% [180/365]) 372,662.90
p.a. Interest at 12% p.a. upon automatic
conversion
1/6/90-3/30/90 ([5,000,000-356,821.30] x 19.5% x
[84/365]) 208,370.59 6/30/91-8/8/91 ([5,000,000-
Amount due as of (356,821.30+821.33+767,087.92)] x 12% x [40/365]) 50,962.45 806,639.
3/30/90
Less: Payment on 3/30/90 (pro-rated upon Amount due as of 8/8/91
interest) 163,182.85 Less: Payment on 8/8/91 (pro-rated upon
interest) 493,906.
Balan
ce 45,187.75 Balan
ce 312,733.
Add:
Interest at 19.5% Add:
p.a.
Interest at 12% p.a.
3/31/90-5/31/90 ([5,000,000-356,821.30] x 19.5%
x [62/365]) 153,797.34 8/9/91-8/15/91 ([5,000,000-
Amount due as of (356,821.30+821.33+767,087.92)] x 12% x [7/365]) 8,918.
5/31/90 198,985.09
Less: Payment on 5/31/90 (pro-rated upon Amount due as of 8/15/91 321,652.
interest) 199,806.42 Less: Payment on 8/15/91 (pro-rated upon
interest) 86,593.
Balan
ce (821.33) Balan
ce 235,058.
Add:
Add:
 Interest at 12% p.a. 12/31/89 (2,700,000 x 21.5% x [1/365]) 1,590.41
1/1/90-1/5/90 (2,700,000 x 21.5% x
8/16/91-11/29/91 ([5,000,000- [5/365]) 7,952.05 9,542.47
(356,821.30+821.33+767,087.92)] x 12% x [106/365]) 135,050.49
Amount due as of 1/5/90
Amount due as of 11/29/91 370,109.22
Less: Payment on 11/29/91 (pro-rated upon Less: Payment on 1/5/90 (pro-rated upon interest) 27,752.12
interest) 161,096.81
Balance (18,209.65)
Balan
ce 209,012.41
Add:
Add:
Interest at 21.5% p.a.
Interest at 12% p.a. 1/6/90-3/30/90 ([2,700,000-18,209.65] x 21.5% x
[84/365]) 132,693.52
11/30/91-12/20/91 ([5,000,000-
(356,821.30+821.33+767,087.92)] x 12% x [21/365]) 26,755.28 Amount due as of 3/30/90

Amount due as of 12/20/91 235,767.70 Less: Payment on 3/30/90 (pro-rated upon interest) 103,917.28
Less: Payment on 12/20/91 (pro-rated upon
interest) 162,115.78 Balance 28,776.23

Balan Add:
ce 73,651.92
Interest at 21.5% p.a.
Add:
3/31/90-5/31/90 ([2,700,000-18,209.65] x 21.5% x
Interest at 12% p.a. [62/365]) 97,940.45

12/21/91-12/31/91 ([5,000,000- Amount due as of 5/31/90 126,716.69

(356,821.30+821.33+767,087.92)] x 12% x [11/365]) 14,281.03
Less: Payment on 5/31/90 (pro-rated upon interest) 127,239.72
1/1/92-2/26/92 ([5,000,000-
(356,821.30+821.33+767,087.92)] x 12% x [57/365]) 74,001.70 88,282.74
Balance (523.04)
Amount due on PN (1) as of 2/26/92 161,934.66
Add:

Interest at 21.5% p.a.

 
6/1/90-6/29/90 ([2,700,000-(18,209.65+523.04)] x
SCHEDULE 2: PN (2) drawdown amount on 9/1/89 21.5% x [29/365]) 45,801.92
Less: Interest deducted in advance (per 9/1/89 Disclosure
Statement) Amount due as of 6/29/90

Net proceeds Less: Payment on 6/29/90 (pro-rated upon interest) 534,286.14

Principal Balance (488,484.22)

Add:
 
Interest at 21.5% p.a.
Ad Bal 2,328,
d: anc 136,0 848.3
Interest at e 65.30 9
21.5% p.a. Ad
6/30/90-12/31/90 ([2,700,000- d:
(18,209.65+523.04+488,484.22)] x 21.5% x 238,953.2 Interest at
[185/365]) 8 12% p.a.
1/1/91-8/8/91 ([2,700,000- 11/30/91-12/20/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] x 284,160.6 523,1 523,1 (18,209.65+523.04+488,484.22)] x 12% 15,13 15,13
21.5% x [220/365]) 6 13.94 13.94 x [21/365]) 9.21 9.21
2,715, Amount due 2,343,
Amount due 897.0 as of 151,2 987.6
as of 8/8/91 4 12/20/91 04.51 1
Less: Payment on 8/8/91 320,3 320,3 Less: Payment on
(pro-rated upon interest) 03.08 03.08 12/20/91 (pro-rated upon 103,9 103,9
Bal 2,395, interest) 69.45 69.45
anc 202,8 593.9 Bal 2,240,
e 10.86 5 anc 47,23 018.1
Ad e 5.07 6
d: Ad
Interest at d:
21.5% p.a. Interest at
8/9/91-8/15/91 ([2,700,000- 12% p.a.
(18,209.65+523.04+488,484.22)] x 9,041. 9,041. 12/21/91-12/31/91 ([2,700,000-
21.5% x [7/365]) 48 48 (18,209.65+523.04+488,484.22)] x 12%
Amount due 2,404, x [11/365]) 7,930.06
as of 211,8 635.4 1/1/92-2/26/92 ([2,700,000-
8/15/91 52.33 3 (18,209.65+523.04+488,484.22)] x 12% 49,02 49,02
Less: Payment on 8/15/91 57,03 57,03 x [57/365]) 41,092.15 2.22 2.22
(pro-rated upon interest) 3.69 3.69 2,289,
Bal 2,347, Amount due on PN (2) as 96,25 040.3
anc 154,8 601.7 of 2/26/92 7.28 P 8
e 18.64 4
Ad
d:
 
Interest at
21.5% p.a.
 
8/16/91-9/1/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] x
21.5% x [17/365]) 21,957.87 SCHEDULE 3: PN (3) drawdown amount on 9/6/89 P
Interest at 12% p.a. upon
automatic conversion Less: Interest deducted in advance (per 9/6/89 Disclosure Statement)
9/2/91-11/29/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] x 12% 86,11 86,11 Net proceeds
x [89/365]) 64,161.43 9.30 9.30
Amount due 2,433, Principal
as of 240,9 721.0
11/29/91 37.94 4 Add:
Less: Payment on
11/29/91 (pro-rated upon 104,8 104,8 Interest at 21.5% p.a.
interest) 72.65 72.65
1/5/90 (300,000 x 21.5% x [1/365]) 176.71
 Amount due as of 1/5/90 6/30/90-12/31/90 ([300,000-(337.22+58.44+54,583.14)] x
21.5% x [185/365]) 26,700.60
Less: Payment on 1/5/90 (pro-rated upon interest) 513.93
1/1/91-8/8/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% 58,452.6
x [220/365]) 31,752.06 6
Balance (337.22)
Amount due as of
8/8/91
Add:
Less: Payment on 8/8/91 (pro-rated upon 35,790.6
interest) 1
Interest at 21.5% p.a.
22,662.0
Balance 5
1/6/90-3/30/90 ([300,000-337.22] x 21.5% x [84/365]) 14,827.15
Add:
Amount due as of 3/30/90
Interest at 21.5%
p.a.
Less: Payment on 3/30/90 (pro-rated upon interest) 11,611.70
8/9/91-8/15/91 ([300,000-(337.22+58.44+54,583.14)]] x
Balance 3,215.45 21.5% x [7/365]) 1,010.29
Amount due as of 23,672.3
Add: 8/15/91 4
Less: Payment on 8/15/91 (pro-rated
Interest at 21.5% p.a. upon interest) 6,372.93
17,299.4
3/31/90-5/31/90 ([300,000-337.22] x 21.5% x [62/365]) 10,943.85 Balance 1

Amount due as of 5/31/90 14,159.30 Add:

Interest at 21.5%
Less: Payment on 5/31/90 (pro-rated upon interest) 14,217.74 p.a.

Balance (58.44) 8/16/91-9/6/91 ([300,000-(337.22+58.44+54,583.14)]] x

21.5% x [22/365]) 3,175.21
Add: Interest at 12% p.a. upon automatic
conversion
Interest at 21.5% p.a.
9/7/91-11/29/91 ([300,000-(337.22+58.44+54,583.14)]] x
12% x [84/365]) 6,766.61 9,941.82
6/1/90-6/29/90 ([300,000-(337.22+58.44)] x 21.5% x [29/365]) 5,117.90
Amount due as of 27,241.2
11/29/91 3
Amount due as of 6/29/90
Less: Payment on 11/29/91 (pro-rated 11,857.2
upon interest) 4
Less: Payment on 6/29/90 (pro-rated upon interest) 59,701.04
15,383.9
Balance 8
Balance (54,583.14)
Add:
 
Interest at 12% p.a.
Add: 11/30/91-12/20/91 ([300,000-(337.22+58.44+54,583.14)]] x
Interest at 21.5% 12% x [21/365]) 1,691.65
p.a. Amount due as of 17,075.6
12/20/91 4
Less: Payment on 12/20/91 (pro-rated 11,741.3
upon interest) 5 339,861.08

Balance 5,334.29

Add: 6/29/90 PN (1) 71,924.74

Interest at 12% p.a. PN (2) 45,801.92

12/21/91-12/31/91 ([300,000-(337.22+58.44+54,583.14)]] x PN (3) 5,117.90

12% x [11/365]) 886.10
122,844.56
1/1/92-2/26/92 ([300,000-(337.22+58.44+54,583.14)]] x 12%
x [57/365]) 4,591.63 5,477.73
10,812.0
Amount due on PN (3) as of 2/26/92 3
8/8/91 PN (1) 806,639.99

PN (2) 523,113.94

PN (3) 58,452.66
SCHEDULE 4: Application of Payments Upon Interest
1,388,206.59
Date Interest

Payable
8/15/91 PN (1) 321,652.11
1/5/90 PN (1)             P 186,986.30 P
PN (2) 211,852.33
PN (2) 9,542.47
PN (3) 23,672.34
PN (3) 176.71
557,176.79
196,705.48

11/29/91 PN (1) 370,109.22

3/30/90 PN (1) 208,370.59
PN (2) 240,937.94
PN (2) 132,693.52
PN (3) 27,241.23
PN (3) 14,827.15
638,288.39
355,891.26

12/20/91 PN (1) 235,767.70

5/31/90 PN (1) 198,985.09
PN (2) 151,204.51
PN (2) 126,716.69
PN (3) 17,075.64
PN (3) 14,159.30
 P 404,047.85 P First, the JSA was executed on August 31, 1989.  As correctly adverted to by petitioners, it
covered only the Promissory Notes of P2,700,000 and P300,000 made after that date. The terms of a
contract of suretyship undeniably determine the surety’s liability and cannot extend beyond what is
stipulated therein.  Yet, the total amount petitioner-spouses agreed to be held liable for was
P7,700,000; by the time the JSA was executed, the first Promissory Note was still unpaid and was
In the preparation of the above-mentioned schedules, these basic legal principles were thus brought within the JSA’s ambit.
followed:
Second, while the JSA included all costs, charges and expenses that respondent might
First, the payments were applied to debts that were already due.  Thus, when the first payment was incur or sustain in connection with the credit documents, only the interest was imposed under the
made and applied on January 5, 1990, all Promissory Notes were already due. pertinent Credit Agreements.  Moreover, the relevant Promissory Notes had to be resorted to for
proper valuation of the interests charged.
Second, payments of the principal were not made until the interests had been covered. For instance,
the first payment on January 15, 1990 had initially been applied to all interests due on the notes, Third, although the JSA, as a contract of adhesion, should be taken contra proferentum
before deductions were made from their respective principal amounts.  The resulting decrease in against the party who may have caused any ambiguity therein, no such ambiguity was found. 
interest balances served as the bases for subsequent pro-ratings. Petitioner-spouses, who agreed to be accommodation mortgagors, can no longer be held individually
liable for the entire onerous obligation [175] because, as
Third, payments were proportionately applied to all interests that were due and of the same nature it turned out, it was respondent that still owed them.
and burden.  This legal principle was the rationale for the pro-rated computations shown on Schedule
4. To summarize, to give full force to the Truth in Lending Act, only the interest rates of
19.5 percent and 21.5 percent stipulated in the Promissory Notes may be imposed by
Fourth, since there was no stipulation on capitalization, no interests due and unpaid were added to respondent on the respective availments.   After 730 days, the portions remaining unpaid are
the principal; hence, such interests did not earn any additional interest.  The simple -- not automatically converted into medium-term loans at the legal rate of 12 percent.   In all
compounded -- method of interest calculation was used on all Notes until the date of public auction. instances, the simple method of interest computation is followed.   Payments made by
petitioners are applied and pro-rated according to basic legal principles.   Charges on penalty
In fine, under solutio indebiti or payment by mistake, there is no deficiency and insurance are eliminated, and 1 percent attorney’s fees imposed upon the total unpaid
receivable in favor of PNB, but rather an excess claim or surplus payable by respondent; this balance of the principal and interest as of the date of public auction.   The P2 million deficiency
excess should immediately be returned to petitioner-spouses or their assigns -- not to claim therefore vanishes, and a refund of P3,686,101.52 arises.
mention the buildings and improvements on and the fruits of the property -- to the end that no
one may be unjustly enriched or benefited at the expense of another. Such surplus is in the WHEREFORE, this Petition is hereby PARTLY GRANTED.  The Decision of the Court of
amount of P3,686,101.52, computed as follows: Appeals is AFFIRMED, with the MODIFICATION that PNB is ORDERED to refund the sum of
P3,686,101.52 representing the overcollection computed above, plus interest thereon at the legal rate
       Total unpaid principal and interest on the of six percent (6%) per annum from the filing of the Complaint until the finality of this Decision.   After
       promissory notes as of February 26, 1992: this Decision becomes final and executory, the applicable rate shall be twelve percent (12%) per
          Drawdown on June 29, 1989 annum until its satisfaction.  No costs. SO ORDERED.
              (Schedule 1)                                               P        4,037,204.10
          Drawdown on September 1, 1989                                              
              (Schedule 2)                                                          2,289,040.38
          Drawdown on September 6, 1989                                              
              (Schedule 3)                                                            255,833.22
                                                                                           6,582,077.70
     Add: 1% attorney’s fees                                                        65,820.78
     Total outstanding obligation                                               6,647,898.48
     Less: Bid price                                                               10,334,000.00
     Excess                                                                 P        3,686,101.52

Joint and Solidary Agreement.  Contrary to the contention of the petitioner-spouses, their
Joint and Solidary Agreement (JSA) was indubitably a surety, not a guaranty.  They consented
to be jointly and severally liable with Petitioner NSBCI -- the borrower -- not only for the
payment of all sums due and payable in favor of respondent, but also for the faithful and
prompt performance of all the terms and conditions thereof.  Additionally, the corporate
secretary of Petitioner NSBCI certified as early as February 23, 1989, that the spouses should
act as such surety.  But, their solidary liability should be carefully studied, not sweepingly assumed
to cover all availments instantly.
• Mendoza v. Court of Appeals, G.R. 116710, June 25, 2001 - MARKO It is basic that there can be no contract in the true sense in the absence of the element of agreement,
or of mutual assent of the parties. If this assent is wanting on the part of one who contracts, his act
G.R. No. 116710      June 25, 2001 has no more efficacy than if it had been done under duress or by a person of unsound mind.
DANILO D. MENDOZA, also doing business under the name and style of ATLANTIC  
EXCHANGE PHILIPPINES, petitioner, vs. Similarly, contract changes must be made with the consent of the contracting parties. The minds of all
COURT OF APPEALS, PHILIPPINE NATIONAL BANK, FERNANDO MARAMAG, JR., RICARDO the parties must meet as to the proposed modification, especially when it affects an important aspect
G. DECEPIDA and BAYANI A. BAUTISTA, respondents. of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always
  a vital component, for it can make or break a capital venture.
Summary: Petitioner Danilo obtained a credit line and Letter of Credit/Trust Receipt(LC/TR) line It has been held that no one receiving a proposal to change a contract to which he is a party is
worth P500K and P1M, respectively, from respondent PNB. As security, petitioner mortgaged some of obliged to answer the proposal, and his silence per se cannot be construed as an acceptance.
his properties to PNB. Petitioner failed to pay his LC/TR accounts and later on, petitioner offered a Estoppel will not lie against the petitioner regarding the increase in the stipulated interest on the
restructuring of his past due accounts into a five-year term loan. Petitioner alleged that respondent subject Promissory Notes Nos. 127/82 and 128/82 inasmuch as he was not even informed
PNB accepted his approval after a couple of revisions. He further claimed that he and his wife were beforehand by respondent bank of the change in the stipulated interest rates. However, we also note
asked to sign two (2) blank promissory note forms. According to petitioner, they were made to believe that the said two (2) subject Promissory Notes Nos. 127/82 and 128/82 expressly provide for a
that the blank promissory notes were to be filled out by respondent PNB to conform with the 5-year penalty charge of 3% per annum to be imposed on any unpaid amount when due.
restructuring plan allegedly agreed upon. The first Promissory Note, No. 127/82, covered the principal  
while the second Promissory Note, No. 128/82, represented the accrued interest. The subject Facts:
Promissory Notes Nos. 127/82 and 128/82 both dated December 29, 1982 in the principal amounts of DE LEON, JR., J.
P 2,651,118.86 and P1,536,798.73, were payable on equal semi-annual amortization and contained Petitioner Danilo D. Mendoza is engaged in the domestic and international trading of raw
the following escalation clause: x x x which interest rate the BANK may increase within the limits materials and chemicals. He operates under the business name Atlantic Exchange Philippines
allowed by law at any time depending on whatever policy it may adopt in the future; Provided, that, (Atlantic), a single proprietorship registered with the DTI. Sometime in 1978, he was granted by
the interest rate on this note shall be correspondingly decreased in the event that the applicable respondent PNB a P500,000.00 credit line and a P1,000,000.00 Letter of Credit/Trust Receipt
maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in (LC/TR) line.
the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in the  
maximum interest rate. x x x As security for the credit accommodations and for those which may thereinafter be granted,
  petitioner mortgaged to respondent PNB the following: 1) three (3) parcels of land with
Pursuant to the escalation clauses of the subject two (2) promissory notes, the interest rate on the improvements in F. Pasco Avenue, Santolan, Pasig; 2) his house and lot in Quezon City; and 3)
principal amount in Promissory Note No. 127/82 was increased from 21% to 29% on May 28, 1984, several pieces of machinery and equipment in his Pasig coco-chemical plant.
and to 32% on July 3, 1984 while the interest rate on the accrued interest per Promissory Note No.  
128/82 was increased from 18% to 29% on May 28, 1984, and to 32% on July 3, 1984. The real estate mortgage provided the following escalation clause:
Petitioner failed to pay the subject two (2) Promissory Notes Nos. 127/82 and 128/82 as they fell due. (f) The rate of interest charged on the obligation secured by this mortgage as well as the interest
Respondent PNB extra-judicially foreclosed the real and chattel mortgages, and the mortgaged on the amount which may have been advanced by the Mortgagee in accordance with paragraph
properties were sold at public auction to respondent PNB, as highest bidder, for a total of (d) of the conditions herein stipulated shall be subject during the life of this contract to such
P3,798,719.50. increase within the rates allowed by law, as the Board of Directors of the Mortgagee may
  prescribe for its debtors.
Petitioner filed in the RTC a complaint for specific performance, nullification of the extra-judicial  
foreclosure and damages against respondents. He alleged, among others, that that the escalation Petitioner executed in favor of respondent PNB three (3) promissory notes covering the
clauses in the subject two (2) Promissory Notes Nos. 127/82 and 128/82 were null and void. The RTC P500,000.00 credit line, one dated March 8, 1979 for P310,000.00; another dated March 30, 1979
ruled in favor of petitioner, but the CA reversed it. Hence, the present case. for P40,000.00; and the last dated September 27, 1979 for P150,000.00. The said 1979 promissory
  notes uniformly stipulated: "with interest thereon at the rate of 12% per annum, until paid, which
The issue is WON the unilateral determination and imposition of increased interest rates by interest rate the Bank may, at any time, without notice, raise within the limits allowed by law
respondent bank is valid – NO. (Note: The SC ruled in favor of PNB, except for the interest issue. xxx.”
See full ratio).  
  Petitioner made use of his LC/TR line to purchase raw materials from foreign importers. He signed a
SC: It appears that respondent bank increased the interest rates on the two (2) subject Promissory total of 11 documents denominated as "Application and Agreement for Commercial Letter of
Notes Nos. 127/82 and 128/82 without the prior consent of the petitioner. The petitioner did not agree Credit,” on various dates from February 8 to September 11, 1979, which uniformly contained the
to the increase in the stipulated interest rate of 21% per annum on Promissory Note No. 127/82 and following clause: "Interest shall be at the rate of 9% per annum from the date(s) of the draft(s) to
18% per annum on Promissory Note No. 128/82. As held in several cases, the unilateral the date(s) of arrival of payment therefor in New York. The Bank, however, reserves the right
determination and imposition of increased interest rates by respondent bank is violative of the to raise the interest charges at any time depending on whatever policy it may follow in the
principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As held in one case: future."
  In a letter dated January 3, 1980 and signed by Branch Manager Fil S. Carreon Jr., respondent PNB
advised petitioner Mendoza that effective December 1, 1979, the bank raised its interest rates
to 14% per annum, in line with Central Bank's Monetary Board Resolution No. 2126 dated November
29, 1979.
   
On March 9, 1981, he wrote a letter to respondent PNB requesting for the restructuring of his The subject Promissory Notes Nos. 127/82 and 128/82 both dated December 29, 1982 in the
past due accounts into a five-year term loan and for an additional LC/TR line of P2,000,000.00. principal amounts of P 2,651,118.86 and P1,536,798.73, were payable on equal semi-annual
According to the letter, because of the shut-down of his end-user companies and the huge amortization and contained the following escalation clause:
amount spent for the expansion of his business, petitioner failed to pay to respondent bank  
his LC/TR accounts as they became due and demandable. x x x which interest rate the BANK may increase within the limits allowed by law at any time
Ceferino D. Cura, Branch Manager of PNB Mandaluyong replied on behalf of the respondent depending on whatever policy it may adopt in the future; Provided, that, the interest rate on this
bank and required petitioner to submit the following documents before the bank would act on his note shall be correspondingly decreased in the event that the applicable maximum interest rate is
request: 1) Audited Financial Statements for 1979 and 1980; 2) Projected cash flow (cash in - cash reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed
out) for five (5) years detailed yearly; and 3) List of additional machinery and equipment and proof of upon shall take effect on the effectivity date of the increase or decrease in the maximum interest rate.
ownership thereof. Cura also suggested that petitioner reduce his total loan obligations to Three xxx
Million Pesos (P3,000,000.00) "to give us more justification in recommending a plan of It appears from the record that the subject Promissory Notes Nos. 127/82 and 128/82 superseded
payment or restructuring of your accounts to higher authorities of the Bank. and novated the three (3) 1979 promissory notes and the eleven (11) 1979 "Application and
  Agreement for Commercial Letter of Credit" which the petitioner executed in favor of respondent PNB.
On September 25, 1981, petitioner sent another letter addressed to PNB Vice-President Jose  
Salvador, regarding his request for restructuring of his loans. He offered respondent PNB the According to the petitioner, sometime in June 1983 the new PNB Mandaluyong Branch Manager
following proposals: 1) the disposal of some of the mortgaged properties, more particularly, his Bayani A. Bautista suggested that he sell the coco-chemical plant so that he could keep up with the
house and lot and a vacant lot in order to pay the overdue trust receipts ; 2) capitalization and semi-annual amortizations. On three (3) occasions, Bautista even showed up at the plant with some
conversion of the balance into a 5-year term loan payable semi-annually or on annual instalments; 3) unidentified persons who claimed that they were interested in buying the plant.
a new P2,000,000.00 LC/TR line in order to enable Atlantic Exchange Philippines to operate at Petitioner testified that when he confronted the PNB management about the two (2) Promissory Notes
full capacity; 4) assignment of all his receivables to PNB from all domestic and export sales Nos. 127/82 and 128/82 which he claimed were improperly filled out, Bautista and Maramag
generated by the LC/TR line; and 5) maintenance of the existing P500,000.00 credit line. assured him that the five-year restructuring agreement would be implemented on the
  condition that he assigns 10% of his export earnings to the Bank. In a letter dated August 22,
The petitioner testified that respondent PNB Mandaluyong Branch found his proposal favorable and 1983, petitioner Mendoza consented to assign 10% of the net export proceeds of a Letter of Credit
recommended the implementation of the agreement. However, Fernando Maramag, PNB Executive covering goods amounting to $114,000.00. However, petitioner claimed that respondent PNB
Vice-President, disapproved the proposed release of the mortgaged properties and reduced subsequently debited 14% instead of 10% from his export proceeds.
the proposed new LC/TR line to P1,000,000.00. Petitioner claimed he was forced to agree to  
these changes and that he was required to submit a new formal proposal and to sign two (2) Pursuant to the escalation clauses of the subject two (2) promissory notes, the interest rate on
blank promissory notes. the principal amount in Promissory Note No. 127/82 was increased from 21% to 29% on May
  28, 1984, and to 32% on July 3, 1984 while the interest rate on the accrued interest per Promissory
In a letter dated July 2, 1982, petitioner offered the following revised proposals to respondent Note No. 128/82 was increased from 18% to 29% on May 28, 1984, and to 32% on July 3, 1984.
bank: 1) the restructuring of past due accounts including interests and penalties into a 5-year term  
loan, payable semi-annually with one year grace period on the principal; 2) payment of Four Hundred Petitioner failed to pay the subject two (2) Promissory Notes Nos. 127/82 and 128/82 as they
Thousand Pesos (P400,000.00) upon the approval of the proposal; 3) reduction of penalty from 3% fell due. Respondent PNB extra-judicially foreclosed the real and chattel mortgages, and the
to 1%; 4) capitalization of the interest component with interest rate at 16% per annum; 5) mortgaged properties were sold at public auction to respondent PNB, as highest bidder , for a
establishment of a P1,000,000.00 LC/TR line against the mortgaged properties; 6) assignment of total of P3,798,719.50.
all his export proceeds to respondent bank to guarantee payment of his loans.
 
  The petitioner filed in the RTC in Pasig, Rizal a complaint for specific performance,
According to petitioner, respondent PNB approved his proposal. He further claimed that he nullification of the extra-judicial foreclosure and damages against respondents. He alleged that
and his wife were asked to sign two (2) blank promissory note forms. According to petitioner, the Extrajudicial Foreclosure Sale of the mortgaged properties was null and void since his loans were
they were made to believe that the blank promissory notes were to be filled out by respondent restructured to a five-year term loan; hence, it was not yet due and demandable; that the escalation
PNB to conform with the 5-year restructuring plan allegedly agreed upon. The first Promissory clauses in the subject two (2) Promissory Notes Nos. 127/82 and 128/82 were null and void ,
Note, No. 127/82, covered the principal while the second Promissory Note, No. 128/82, that the total amount presented by PNB as basis of the foreclosure sale did not reflect the actual loan
represented the accrued interest. obligations of the plaintiff to PNB; that Bautista purposely delayed payments on his exports and
  caused delays in the shipment of materials; that PNB withheld certain personal properties not covered
Petitioner testified that respondent PNB allegedly contravened their verbal agreement by 1) by the chattel mortgage; and that the foreclosure of his mortgages was premature so that he was
affixing dates on the two (2) subject promissory notes to make them mature in two (2) years instead unable to service his foreign clients, resulting in actual damages amounting to P 2,004,461.00.
of five (5) years as supposedly agreed upon; 2) inserting in the first Promissory Note No. 127/82  
an interest rate of 21% instead of 18%; 3) inserting in the second Promissory Note No. 128/82, the TC: Rendered judgment in favor of the petitioner and ordered the nullification of the extrajudicial
amount stated therein representing the accrued interest as One Million Five Hundred Thirty Six foreclosure of the real estate mortgage; also ordered respondent PNB to restructure to five-years
Thousand Four Hundred Ninety Eight Pesos and Seventy Three Centavos (P1,536,498.73) when it petitioner's principal loan of P2,651,118.86 and the accumulated capitalized interest on the same in
should only be Seven Hundred Sixty Thousand Three Hundred Ninety Eight Pesos and Twenty Three the amount of P760,389.23 as of December 1982, and that respondent PNB should compute the
Centavos (P760,398.23) and pegging the interest rate thereon at 18% instead of 12%. additional interest from January 1983 up to October 15, 1984 only when respondent PNB took
possession of the said properties, at the rate of 12% and 9% respectively. Lordered respondent PNB
xxx
to grant petitioner Mendoza an P2,000,000.00 loan in order for him to have the necessary capital to Considering that your accounts/accommodations were granted and carried in the books of our Mandaluyong
resume operation. It also ordered respondents PNB, Bayani A. Bautista and Ricardo C. Decepida to Branch, we would suggest that your requests and proposals be directed to Ceferino Cura, Manager of our said
pay to petitioner actual damages in the amount of P2,113,961.00 and the peso equivalent of Branch.
$6,215.00 at the prevailing foreign exchange rate on October 11, 1983; and exemplary damages in We feel certain that Mr. Cura will be pleased to discuss matters of mutual interest with you.
the P200,000.00. xxx
 
 
CA: Reversed the decision of the TC. Held that there is no evidence of a promise from respondent
PNB, admittedly a banking corporation, that it had accepted the proposals of the petitioner to have a Petitioner also presented a letter which he addressed to Mr. Jose Salvador, Vice-President of the
five-year restructuring of his overdue loan obligations. It found and held, on the basis of the evidence Metropolitan Branches of PNB, dated September 24, 1981, which reads:
adduced, that "appellee's (Mendoza) communications were mere proposals while the bank's
responses were not categorical that the appellee's request had been favorably accepted by the bank." Re: Restructuring of our Account into a 5-year Term Loan and Request for the Establishment of a P2.0 Million
Hence, the present case. LC/TR Line
Dear Sir:
  In compliance with our discussion last September 17, we would like to formalize our proposal to support our above
Petitioner: The PNB management restructured his existing loan obligations to a five-year term loan requested assistance from the Philippine National Bank.
and granted him another P2,000,000.00 LC/TR line; that the Promissory Notes Nos. 127/82 and xxx
128/82 evidencing a 2-year restructuring period or with the due maturity date "December 29, 1984" Again we wish to express our sincere appreciation for your open-minded approach towards the solution of this
were filled out fraudulently by respondent PNB, and contrary to his verbal agreement with respondent problem which we know and will be beneficial and to the best interest of the bank and mutually advantageous to
your client.
PNB; hence, his indebtedness to respondent PNB was not yet due and the extrajudicial foreclosure of xxx
his real estate and chattel mortgages was premature. On the other hand, respondent PNB denies that  
petitioner's loan obligations were restructured to five (5) years and maintains that the subject two (2)
Promissory Notes Nos. 127/82 and 128/82 were filled out regularly and became due as of December
29, 1984 as shown on the face thereof.  
  ISSUE/S: 1.) WON the proposed five-year restructuring plan was deemed automatically approved by
Contending that respondent PNB had allegedly approved his proposed five-year restructuring plan, PNB – NO;
petitioner presented three (3) documents executed by respondent PNB officials. The first 2.) WON the 2 subject promissory notes were completed irregularly – NO.
document is a letter dated March 16, 1981 addressed to the petitioner and signed by Ceferino D. 3.) WON respondent PNB’s action of withholding 10% from petitioner’s export proceeds is proof that
Cura, Branch Manager of PNB Mandaluyong, which states: proposal had been accepted – NO.
x x x In order to study intelligently the feasibility of your above request, please submit the following *4.) WON the unilateral determination and imposition of increased interest rates by respondent
documents/papers within thirty (30) days from the date thereof, viz: bank is valid – NO.
1. Audited Financial Statements for 1979 and 1980; 5.) WON PNB’s bid prices were “unconscionable and shocking to the conscience of men" – NO.
2. Projected cash flow (cash in - cash out) for five years detailed yearly; and 6.) WON the extra-judicial foreclosure of petitioner’s real estate and chattel mortgages was not
3. List of additional machinery and equipment and proof of ownership thereof. premature and that it was in fact legal and valid – YES.
We would strongly suggest, however, that you reduce your total obligations to at least P3 million (principal and
interest and other charges) to give us more justification in recommending a plan of payment or restructuring of your  
accounts to higher authorities of this bank. RULING: WHEREFORE, the petition is hereby DENIED. The challenged Decision of the Court of
  Appeals in CA-G.R. CV No. 38036 is AFFIRMED with modification that the increase in the stipulated
interest rates of 21% per annum and 18% per annum appearing on Promissory Notes Nos. 127/82
and 128/82 respectively is hereby declared null and void.
The second document is a letter dated May 11, 1981 addressed to Mr. S. Pe Benito, Jr., Managing
Director of the Technological Resources Center and signed by said PNB Branch Manager, Ceferino RATIO:
D. Cura. According to petitioner, this letter showed that respondent PNB seriously considered the 1st Issue:
restructuring of his loan obligations to a five-year term loan, to wit: Petitioner argues that he submitted the requirements according to the instructions given to him and
xxx that upon submission thereof, his proposed five-year restructuring plan was deemed automatically
At the request of our client, we would like to furnish you with the following information pertinent to his accounts with approved by respondent PNB.
us: We disagree.
xxx
We are currently evaluating the proposal of the client to restructure his accounts with us into a five-year plan.  
We hope that the above information will guide you in evaluating the proposals of Mr. Danilo Mendoza. Nowhere in those letters is there a categorical statement that respondent PNB had approved
xxx the petitioner’s proposed five-year restructuring plan. It is stretching the imagination to construe
them as evidence that his proposed five-year restructuring plan has been approved by the
respondent PNB which is admittedly a banking corporation. Only an absolute and unqualified
  acceptance of a definite offer manifests the consent necessary to perfect a contract. If anything, those
correspondences only prove that the parties had not gone beyond the preparation stage, which is the
The third document is a letter dated July 8, 1981 addressed to petitioner and signed by PNB Assistant Vice-
President Apolonio B. Francisco. period from the start of the negotiations until the moment just before the agreement of the parties.
   
There is nothing in the record that even suggests that respondent PNB assented to the alleged five- However, apart from petitioner's self-serving verbal declarations, we find no sufficient proof
year restructure of petitioner’s overdue loan obligations to PNB. However, the trial court ruled in favor that the subject two (2) Promissory Notes Nos. 127/82 and 128/82 were completed irregularly.
of petitioner Mendoza, holding that since petitioner has complied with the conditions of the alleged Therefore, we rule that the presumption has not been rebutted.
oral contract, the latter may not renege on its obligation to honor the five-year restructuring period,  
under the rule of promissory estoppel. Citing Ramos v. Central Bank, the trial court said: Besides, it could be gleaned from the record that the petitioner is an astute businessman who
  took care to reduce in writing his business proposals to the respondent bank. It is unthinkable
The broad general rule to the effect that a promise to do or not to do something in the future does not that the same person would commit the careless mistake of leaving his subject two (2)
work an estoppel must be qualified, since there are numerous cases in which an estoppel has been promissory notes in blank in the hands of other persons. As the respondent Court of Appeals
predicated on promises or assurances as to future conduct. The doctrine of ‘promissory estoppel’ is correctly pointed out:
by no means new, although the name has been adopted only in comparatively recent years.  
According to that doctrine, an estoppel may arise from the making of a promise, even though without Surely, plaintiff-appellee who is a C.P.A and a Tax Consultant will insist that the details of the two
consideration, if it was intended that the promise should be relied upon and in fact it was relied upon, promissory notes he and his wife executed in 1982 should be specific to enable them to make the
and if a refusal to enforce it would be virtually to sanction the perpetration of fraud or would result in precise computation in the event of default as in the case at bench. In fact, his alleged omission as a
other injustice. In this respect, the reliance by the promisee is generally evidenced by action or C.P.A. and a Tax Consultant to insist that the two promissory notes be filled up on important details
forbearance on his part, and the idea has been expressed that such action or forbearance would like the rates of interest is inconsistent with the legal presumption of a person who takes ordinary care
reasonably have been expected by the promissor. xxx of his concerns (Section 3 (c), Rule 131, Revised Rules on Evidence).
   
The doctrine of promissory estoppel is an exception to the general rule that a promise of As pointed out by the CA, Orlando Montecillo, Chief, Loans and Discounts, PNB Mandaluyong
future conduct does not constitute an estoppel. In some jurisdictions, in order to make out a Branch, testified that the said Promissory Notes Nos. 127/82 and 128/82 were completely filled
claim of promissory estoppel, a party bears the burden of establishing the following elements: (1) a out when Danilo Mendoza signed them.
promise reasonably expected to induce action or forebearance; (2) such promise did in fact
induce such action or forebearance, and (3) the party suffered detriment as a result.
 
3rd Issue:
  In a last-ditch effort to save his five-year loan restructuring theory, petitioner contends that respondent
It is clear from the forgoing that the doctrine of promissory estoppel presupposes the existence of a PNB's action of withholding 10% from his export proceeds is proof that his proposal had been
promise on the part of one against whom estoppel is claimed. The promise must be plain and accepted and the contract had been partially executed. He claims that he would not have consented
unambiguous and sufficiently specific so that the Judiciary can understand the obligation assumed to the additional burden if there were no corresponding benefit. This contention is not well taken. 
and enforce the promise according to its terms. For petitioner to claim that respondent PNB is
estopped to deny the five-year restructuring plan, he must first prove that respondent PNB had
 
There is no credible proof that the 10% assignment of his export proceeds was not part of the
promised to approve the plan in exchange for the submission of the proposal. As discussed earlier,
conditions of the two-year restructuring deal. Considering that the resulting amount obtained
no such promise was proven, therefore, the doctrine does not apply to the case at bar. A
from this assignment of export proceeds was not even enough to cover the interest for the
cause of action for promissory estoppel does not lie where an alleged oral promise was
corresponding month, we are hard-pressed to construe it as the required proof that
conditional, so that reliance upon it was not reasonable. It does not operate to create liability
respondent PNB allegedly approved the proposed five-year restructuring of petitioner’s
where it does not otherwise exist.
overdue loan obligations.
  It is interesting to note that in his Complaint, petitioner made no mention that the assignment of his
Since there is no basis to rule that petitioner's overdue loan obligations were restructured to export proceeds was a condition for the alleged approval of his proposed five-year loan restructuring
mature in a period of five (5) years, we see no other option but to respect the two-year period plan. The Complaint merely alleged that "plaintiff in a sincere effort to make payments on his
as contained in the two (2) subject Promissory Notes Nos. 127/82 and 128/82, marked as obligations agreed to assign 10% of his export proceeds to defendant PNB." This curious omission
Exhibits "BB" and "CC" respectively which superseded and novated all prior loan documents signed leads the court to believe that the alleged link between the petitioner’s assignment of export
by petitioner in favor of respondent PNB. Petitioner argues, in his memorandum, that "respondent proceeds and the alleged five-year restructuring of his overdue loans was more contrived than
Court of Appeals had no basis in saying that the acceptance of the five-year restructuring is totally real.
absent from the record." On the contrary, the subject Promissory Notes Nos. 127/82 and 128/82 are
clear on their face that they were due on December 29, 1984 or two (2) years from the date of the
 
(RELATED TO TOPIC - INTEREST) – 4 Issue th

signing of the said notes on December 29, 1982.

It appears that respondent bank increased the interest rates on the two (2) subject Promissory Notes
  Nos. 127/82 and 128/82 without the prior consent of the petitioner. The petitioner did not agree to
2 Issue:
nd
the increase in the stipulated interest rate of 21% per annum on Promissory Note No. 127/82
Petitioner claims that the two (2) subject Promissory Notes Nos. 127/82 and 128/82 were signed by and 18% per annum on Promissory Note No. 128/82. As held in several cases, the unilateral
him in blank with the understanding that they were to be subsequently filled out to conform with his determination and imposition of increased interest rates by respondent bank is violative of the
alleged oral agreements with PNB officials, among which is that they were to become due only after principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As held in one
five (5) years. If petitioner were to be believed, the PNB officials concerned committed a fraudulent case:
act in filling out the subject two (2) promissory notes in question. Private transactions are presumed to It is basic that there can be no contract in the true sense in the absence of the element of
be fair and regular. The burden of presenting evidence to overcome this presumption falls upon agreement, or of mutual assent of the parties. If this assent is wanting on the part of one who
petitioner. Considering that petitioner imputes a serious act of fraud on respondent PNB, which is a
banking corporation, this court will not be satisfied with anything but the most convincing evidence.
contracts, his act has no more efficacy than if it had been done under duress or by a person of Petitioner also contends that respondent PNB’s bid prices for this foreclosed properties in the total
unsound mind. amount of P3,798,719.50, were allegedly "unconscionable and shocking to the conscience of men".
  He claims that the fair market appraisal of his foreclosed plant site together with the improvements
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all thereon located in Pasig, Metro Manila amounted to P5,441,650.00 while that of his house and lot in
the parties must meet as to the proposed modification, especially when it affects an important aspect Quezon City amounted to P722,000.00 per the appraisal report dated September 20, 1990 of Cuervo
of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always Appraisers, Inc. That contention is not well taken considering that:
a vital component, for it can make or break a capital venture.  
It has been held that no one receiving a proposal to change a contract to which he is a party is 1. The total of the principal amounts alone of petitioner’s subject Promissory Notes Nos.
obliged to answer the proposal, and his silence per se cannot be construed as an acceptance . 127/82 and 128/82 which are both overdue amounted to Four Million One Hundred Eighty Seven
Estoppel will not lie against the petitioner regarding the increase in the stipulated interest on Thousand Nine Hundred Seventeen Pesos and Fifty Nine Centavos (P 4,187,917.59).
the subject Promissory Notes Nos. 127/82 and 128/82 inasmuch as he was not even informed 2. While the appraisal of Cuervo Appraisers, Inc. was undertaken in September 1990, the extrajudicial
beforehand by respondent bank of the change in the stipulated interest rates. However, we foreclosure of petitioner’s real estate and chattel mortgages have been effected way back on October
also note that the said two (2) subject Promissory Notes Nos. 127/82 and 128/82 expressly 15, 1984, October 23, 1984 and December 21, 1984. Common experience shows that real estate
provide for a penalty charge of 3% per annum to be imposed on any unpaid amount when due. values especially in Metro Manila tend to go upward due to developments in the
  locality.1âwphi1.nêt
5 Issue:
th 3. In the public auction/foreclosure sales, respondent PNB, as mortgagee, was not obliged to
Petitioner prays for the release of some of his movables being withheld by respondent PNB, alleging bid more than its claims or more than the amount of petitioner’s loan obligations which are all
that they were not included among the chattels he mortgaged to respondent bank. However, overdue. The foreclosed real estate and chattel mortgages which petitioner earlier executed are
petitioner did not present any proof as to when he acquired the subject movables and hence, we are accessory contracts covering the collaterals or security of his loans with respondent PNB. The
not disposed to believe that the same were "after-acquired" chattels not covered by the chattel and principal contracts are the Promissory Notes Nos. 127/82 and 128/82 which superseded and novated
real estate mortgages. the 1979 promissory notes and the 1979 eleven (11) Applications and Agreements for Commercial
Letter of Credit.
 
In asserting its rights over the subject movables, respondent PNB relies on a common provision in the  
two (2) subject Promissory Notes Nos. 127/82 and 128/82 which states: Finally, the record shows that petitioner did not even attempt to tender any redemption price to
In the event that this note is not paid at maturity or when the same becomes due under any of the respondent PNB, as highest bidder of the said foreclosed real estate properties, during the one-year
provisions hereof, we hereby authorized the BANK at its option and without notice, to apply to the redemption period.
payment of this note, any and all moneys, securities and things of value which may be in its hands on In view of all the foregoing, it is our view and we hold that the extrajudicial foreclosure of petitioner’s
deposit or otherwise belonging to me/us and for this purpose. We hereby, jointly and severally, real estate and chattel mortgages was not premature and that it was in fact legal and valid.
irrevocably constitute and appoint the BANK to be our true Attorney-in-Fact with full power and
authority for us in our name and behalf and without prior notice to negotiate, sell and transfer any
moneys securities and things of value which it may hold, by public or private sale and apply the
proceeds thereof to the payment of this note.
 
It is clear, however, from the above-quoted provision of the said promissory notes that respondent
bank is authorized, in case of default, to sell "things of value" belonging to the mortgagor
"which may be on its hands for deposit or otherwise belonging to me/us and for this purpose."
Besides the petitioner executed not only a chattel mortgage but also a real estate mortgage to
secure his loan obligations to respondent bank.
 
A stipulation in the mortgage, extending its scope and effect to after-acquired property is valid
and binding where the after-acquired property is in renewal of, or in substitution for, goods on
hand when the mortgage was executed, or is purchased with the proceeds of the sale of such
goods. As earlier pointed out, the petitioner did not present any proof as to when the subject
movables were acquired.
 
More importantly, respondent bank makes a valid argument for the retention of the subject movables.
Respondent PNB asserts that those movables were in fact "immovables by destination" under Art.
415 (5) of the Civil Code. It is an established rule that a mortgage constituted on an immovable
includes not only the land but also the buildings, machinery and accessories installed at the time the
mortgage was constituted as well as the buildings, machinery and accessories belonging to the
mortgagor, installed after the constitution thereof.
 
6 Issue:
th
• First Metro Investment Corp. v. Este del Sol Mountain, G.R. No. 141811, November 15, 2011 5. FMIC was in fact unable to organize an underwriting/selling syndicate to sell any share of stock of
-YODH respondent Este del Sol and much less to supervise such a syndicate. There was really no need for an
G.R. No. 141811            November 15, 2001 Underwriting Agreement since respondent Este del Sol had its own licensed marketing arm.
 
FIRST METRO INVESTMENT CORPORATION, petitioner, vs. ESTE DEL SOL MOUNTAIN 6. FMIC failed to comply with its obligation under the Consultancy Agreement
RESERVE, INC., VALENTIN S. DAEZ, JR., MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA,  
ALEXANDER G. ASUNCION, ALBERTO M. LADORES, VICENTE M. DE VERA, JR., and FELIPE
*
SC held that an apparently lawful loan is usurious when it is intended that additional compensation for
B. SESE, respondents. the loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for
DE LEON, JR., J.: the lender's services which are of little value or which are not in fact to be rendered, such as in the
 
Before us is a petition for review on certiorari of the Decision of the Court of Appeals dated November 8, 1999 in CA-G.R. CV No. 53328 reversing the Decision of
1 2 3 instant case.
the Regional Trial Court of Pasig City, Branch 159 dated June 2, 1994 in Civil Case No. 39224. Essentially, the Court of Appeals found and declared that the fees
provided for in the Underwriting and Consultancy Agreements executed by and between petitioner First Metro Investment Corp. (FMIC) and respondent Este del
 
Sol Mountain Reserve, Inc. (Este del Sol) simultaneously with the Loan Agreement dated January 31, 1978 were mere subterfuges to camouflage the usurious FACTS: On January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan of Seven
interest charged by petitioner FMIC.
Million Three Hundred Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to finance the
 
construction and development of the Este del Sol Mountain Reserve, a sports/resort complex project
SUMMARY: Respondent Este del Sol obtained a loan from Petitioner FMIC in the amount of over ₱7
located at Barrio Puray, Montalban, Rizal. 4

million in order to finance the construction of a sports/resort complex.

 
 
Under the terms of the Loan Agreement, the proceeds of the loan were to be released on
FMIC agreed but on the condition that two other separate contracts should be executed, namely a
staggered basis. Interest on the loan was pegged at sixteen (16%) percent per annum based on
Consultancy agreement and an Underwriting Agreement. The Underwriting agreement was for FMIC
the diminishing balance. The loan was payable in thirty-six (36) equal and consecutive monthly
to offer to the public 120 thousand shares of stock of respondent EDS and the Consultancy
amortizations to commence at the beginning of the thirteenth month from the date of the first release
agreement was also executed where respondent Este del Sol engaged the services of petitioner
in accordance with the Schedule of Amortization.   5

FMIC for a fee as consultant to render general consultancy services.

 
 
In case of default, an acceleration clause was, among others, provided and the amount due was
The Underwriting agreement had these monetary provisions: Underwriting fee of 200k Annual
made subject to a twenty (20%) percent one-time penalty on the amount due and such amount
supervision fee of 200k Consultancy fee of 332k.
shall bear interest at the highest rate permitted by law from the date of default until full payment
 
thereof plus liquidated damages at the rate of two (2%) percent per month compounded
In order to secure the loan, EDS executed a real estate mortgage contract over 2 parcels of land
quarterly on the unpaid balance and accrued interests together with all the penalties, fees, expenses
which were used for its development project. EDS also executed individual Continuing Suretyship
or charges thereon until the unpaid balance is fully paid, plus attorney's fees equivalent to twenty-five
agreements with its co-respondents who promised to pay for the debt in case of EDS’s default.
(25%) percent of the sum sought to be recovered, which in no case shall be less than Twenty
 
Thousand Pesos (P20,000.00) if the services of a lawyer were hired. 6

EDS defaulted in payment and FMIC sold at auction the foreclosed property. The proceeds of the
 
sale left an unpaid balance of over ₱6 million. The sureties refused to pay so FMIC brought the
In accordance with the terms of the Loan Agreement, respondent Este del Sol executed several
present suit.
documents as security for payment, among them, (a) a Real Estate Mortgage dated January 31, 1978 over
7

  two (2) parcels of land being utilized as the site of its development project with an area of approximately One Million Twenty-Eight
The Respondents presented the defense that the Underwriting agreement and the Consultancy Thousand and Twenty-Nine (1,028,029) square meters and particularly described in TCT Nos. N-24332 and N-24356 of the Register of
Agreement were in fact subterfuges to disguise the usury being committed by FMIC. Deeds of Rizal, inclusive of all improvements, as well as all the machineries, equipment, furnishings and furnitures existing thereon; and
  (b) individual Continuing Suretyship agreements by co-respondents Valentin S. Daez, Jr., Manuel Q. Salientes, Ma. Rocio
A. De Vega, Alexander G. Asuncion, Alberto M. Ladores, Vicente M. De Vera, Jr. and Felipe B. Sese, all dated February 2, 1978, to
Issue: WON the contracts were made to hide usury. Yes. guarantee the payment of all the obligations of respondent Este del Sol up to the aggregate sum of Seven Million Five Hundred
  Thousand Pesos (P7,500,000.00) each. 8

SC held that the following facts and circumstances indicated that the said contracts were merely  
cloaks to cover an illegal scheme to violate the Usury Law: Respondent Este del Sol also executed, as provided for by the Loan Agreement, an Underwriting
  Agreement on January 31, 1978 whereby petitioner FMIC shall underwrite on a best-efforts basis the
1. The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is the same public offering of One Hundred Twenty Thousand (120,000) common shares of respondent Este del
date of the Loan Agreement. Sol's capital stock for a one-time underwriting fee of Two Hundred Thousand Pesos
  (P200,000.00). In addition to the underwriting fee, the Underwriting Agreement provided that for
2. Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of an underwriting supervising the public offering of the shares, respondent Este del Sol shall pay petitioner FMIC an
agreement and specifically mentioned that such underwriting agreement is a condition precedent for
petitioner FMIC to extend the loan.
annual supervision fee of Two Hundred Thousand Pesos (P200,000.00) per annum for a period
  of four (4) consecutive years. The Underwriting Agreement also stipulated for the payment by
3. Este del Sol was billed by petitioner on February 28, 1978 P1,330,000.00 as consultancy fee despite respondent Este del Sol to petitioner FMIC a consultancy fee of Three Hundred Thirty-Two
the Consultancy agreement providing that the fee is for 332,500 Thousand Five Hundred Pesos (P332,500.00) per annum for a period of four (4) consecutive
  years. Simultaneous with the execution of and in accordance with the terms of the Underwriting
4. The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred Thousand Agreement, a Consultancy Agreement was also executed on January 31, 1978 whereby
Pesos (P200,000.00), and one Million Three Hundred Thirty Thousand Pesos (P1,330,000.00), respondent Este del Sol engaged the services of petitioner FMIC for a fee as consultant to render
respectively, were billed by petitioner to respondent Este del Sol on February 22, 1978,35 that is, on the
same occasion of the first partial release of the loan.
general consultancy services. 9

   
In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol for the amounts of [a] Two Hundred Thousand
Pesos (P200,000.00) as the underwriting fee of petitioner FMIC in connection with the public offering of the common shares of stock of
respondent Este del Sol; [b] One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) as consultancy fee for a period of four In their Answer, the respondents sought the dismissal of the case and set up several special and
(4) years; and [c] Two Hundred Thousand Pesos (P200,000.00) as supervision fee for the year beginning February, 1978, in
accordance to the Underwriting Agreement. The said amounts of fees were deemed paid by respondent Este del Sol to petitioner
10
affirmative defenses, foremost of which is that the Underwriting and Consultancy Agreements
FMIC which deducted the same from the first release of the loan. executed simultaneously with and as integral parts of the Loan Agreement and which provided for the
  payment of Underwriting, Consultancy and Supervision fees were in reality subterfuges resorted to
Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a by petitioner FMIC and imposed upon respondent Este del Sol to camouflage the usurious
revised Schedule of Amortization, it appeared to have incurred a total obligation of Twelve Million interest being charged by petitioner FMIC. 16

Six Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos and Ninety-Eight Centavos  
(P12,679,630.98) per the petitioner's Statement of Account dated June 23, 1980, to wit: 11 The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its former Senior Vice-President, Felipe Neri, its
Vice-President for Marketing, and Dennis Aragon, an Account Manager of its Account Management Group, as well as documentary
  evidence. On the other hand, co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and Perfecto Doroja, former Senior
STATEMENT OF ACCOUNT OF ESTE DEL SOL MOUNTAIN RESERVE, INC. Manager and Assistant Vice-President of FMIC, testified for the respondents.
AS OF JUNE 23, 1980  
After the trial, the trial court rendered its decision in favor of petitioner FMIC, the dispositive
PARTICULARS AMOUNT
portion of which reads:
P7,999,631.4  
Total amount due as of 11-22-78 per revised amortization schedule dated 1-3-78 2 WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants, ordering defendants jointly and
severally to pay to plaintiff the amount of P6,863,297.73 plus 21% interest per annum, from June 24, 1980, until the entire
amount is fully paid, plus the amount equivalent to 25% of the total amount due, as attorney's fees, plus costs of suit.
      Defendants' counterclaims are dismissed, for lack of merit.
Interest on P7,999,631.42 @ 16% p.a. from 11-22-78 to 2-22-79 (92 days) 327,096.04
 
Balance 8,326,727.46 On November 8, 1999, the appellate court reversed the challenged decision of the trial court.
 
One time penalty of 20% of the entire unpaid obligations under Section 6.02 (ii) of Loan The appellate court found and declared that the fees provided for in the Underwriting and Consultancy Agreements were
Agreement 1,665,345.49 mere subterfuges to camouflage the excessively usurious interest charged by the petitioner FMIC on the loan of
respondent Este del Sol; and that the stipulated penalties, liquidated damages and attorney's fees were "excessive,
iniquitous, unconscionable and revolting to the conscience," and declared that in lieu thereof, the stipulated one time
Past due interest under Section 6.02 (iii) of loan Agreement: twenty (20%) percent penalty on the amount due and ten (10%) percent of the amount due as attorney's fees would be
@ 19% p.a. from 2-22-79 to 11-30-79 (281 days) 1,481,879.93 reasonable and suffice to compensate petitioner FMIC for those items. Thus, the appellate court dismissed the complaint
@ 21% p.a. from 11-30-79 to 6-23-80 (206 days) 1,200,714.10 as against the individual respondents sureties and ordered petitioner FMIC to pay or reimburse respondent Este del Sol
the amount of Nine Hundred Seventy-One Thousand Pesos (P971,000.00) representing the difference between what is
          due to the petitioner and what is due to respondent Este del Sol, based on the following computation: 17

Other charges — publication of extra judicial foreclosure of REM made on 5-23-80 & 6-6-80 4,964.00  
P12,679,630.    
Total Amount Due and Collectible as of June 23, 1980 98 A: DUE TO THE [PETITIONER]

P7,382,500.0
Principal of Loan 0
 
Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage on 1,476,500.00
June 23, 1980. At the public auction, petitioner FMIC was the highest bidder of the mortgaged
12
Add: 20% one-time Penalty Attorney's       900,000.0 P9,759,000.0
properties for Nine Million Pesos (P9,000,000.00). The total amount of Three Million One Hundred fees 0 0
Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos (P3,188,630.75) was
   
deducted therefrom, that is, for the publication fee for the publication of the Sheriff's Notice of Sale, Less: Proceeds of foreclosure Sale 9,000,000.00
Four Thousand Nine Hundred Sixty-Four Pesos (P4,964.00); for Sheriff's fees for conducting the
foreclosure proceedings, Fifteen Thousand Pesos (P15,000.00); and for Attorney's fees, Three Million
One Hundred Sixty-Eight Thousand Six Hundred Sixty-Six Pesos and Seventy-Five Centavos Deficiency P759,000.00
(P3,168,666.75). The remaining balance of Five Million Eight Hundred Eleven Thousand Three
Hundred Sixty-Nine Pesos and Twenty-Five Centavos (P5,811,369.25) was applied to interests and B. DUE TO [RESPONDENT ESTE DEL SOL]
penalty charges and partly against the principal, due as of June 23, 1980, thereby leaving a balance
of Six Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Return of usurious interest in the form of: P 200,000.00
Seventy-Three Centavos (P6,863,297.73) on the principal amount of the loan as of June 23,           Underwriting fee 200,000.00
          Supervision fee     1,330,000.
1980. 13
          Consultancy fee 00
 
Failing to secure from the individual respondents, as sureties of the loan of respondent Este del Sol P1,730,000.0
by virtue of their continuing surety agreements, the payment of the alleged deficiency balance, Total amount due Este 0
despite individual demands sent to each of them, petitioner instituted on November 11, 1980 the
14

instant collection suit against the respondents to collect the alleged deficiency balance of Six
15

 The appellee is, therefore, obliged to return to the appellant Este del Sol the difference of P971,000.00 or (P1,730,000.00
Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three less P759,000.00).
Centavos (P6,863,297.73) plus interest thereon at twenty-one (21%) percent per annum from June  
24, 1980 until fully paid, and twenty-five (25%) percent thereof as and for attorney's fees and costs.
 
ISSUE: WON the Underwriting and Consultancy Agreements were actually cloaks to disguise usury legal in form was in fact a device to cover usury. If from a construction of the whole transaction it
(WON the Loan is Usurious) (YES) becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts
  should and will permit no scheme, however ingenious, to becloud the crime of usury. 25

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND WITH  
APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT:
  In the instant case, several facts and circumstances taken altogether show that the Underwriting
a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY AGREEMENTS SHOULD NOT BE and Consultancy Agreements were simply cloaks or devices to cover an illegal scheme employed
CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN AGREEMENT, AND INSTEAD, THEY SHOULD BE by petitioner FMIC to conceal and collect excessively usurious interest, and these are:
CONSIDERED AS A SINGLE CONTRACT.
b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS ARE "MERE SUBTERFUGES TO  
CAMOUFLAGE THE USURIOUS INTEREST CHARGED" BY THE PETITIONER. a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is the
c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONER'S WITNESSES ON THE SERVICES PERFORMED BY same date of the Loan Agreement. Furthermore, under the Underwriting Agreement payment of the
26

PETITIONER. supervision and consultancy fees was set for a period of four (4) years to coincide ultimately with the
27

d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD WAIVED THEIR RIGHT TO SEEK RECOVERY term of the Loan Agreement. This fact means that all the said agreements which were executed
28

OF THE AMOUNTS THEY PAID TO PETITIONER, AND [ii] THAT RESPONDENTS HAD ADMITTED THE VALIDITY OF
simultaneously were set to mature or shall remain effective during the same period of time.
THE UNDERWRITING AND CONSULTANCY AGREEMENTS.
e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY "WHAT IS DUE TO EACH PARTY AFTER THE  
FORECLOSURE SALE", AS SHOWN IN PP. 34-35 OF THE ASSAILED DECISION, EVEN GRANTING JUST FOR THE b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of an
SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS CORRECT IN STIGMATIZING [i] THE PROVISIONS OF underwriting agreement and specifically mentioned that such underwriting agreement is a
29

THE LOAN AGREEMENT THAT REFER TO STIPULATED PENALTIES, LIQUIDATED DAMAGES AND ATTORNEY'S condition precedent for petitioner FMIC to extend the loan to respondent Este del Sol, indicating and
30

FEES AS SUPPOSEDLY "EXCESSIVE, INIQUITOUS AND UNCONSCIONABLE AND REVOLTING TO THE as admitted by petitioner FMIC's employees, that such Underwriting Agreement is "part and parcel
31

CONSCIENCE" AND [ii] THE UNDERWRITING, SUPERVISION AND CONSULTANCY SERVICES AGREEMENT AS
of the Loan Agreement." 32

SUPPOSEDLY "MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" UPON THE
RESPONDENT ESTE BY PETITIONER.  
f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND THUS THE INDIVIDUAL RESPONDENTS, c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three
ARE STILL OBLIGATED TO THE PETITIONER. Hundred Thirty Thousand Pesos (P1,330,000.00) as consultancy fee despite the clear provision in
33

  the Consultancy Agreement that the said agreement is for Three Hundred Thirty-Two Thousand
RULING: WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the Five Hundred Pesos (P332,500.00) per annum for four (4) years and that only the first year consultancy
Court of Appeals is AFFIRMED. Costs against petitioner. fee shall be due upon signing of the said consultancy agreement. 34

 
SO ORDERED. d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred Thousand
  Pesos (P200,000.00), and one Million Three Hundred Thirty Thousand Pesos (P1,330,000.00),
RATIO: respectively, were billed by petitioner to respondent Este del Sol on February 22, 1978, that is, on 35

SC NOT A TRIER OF FACTS (SKIP) the same occasion of the first partial release of the loan in the amount of Two Million Three Hundred
Petitioner essentially assails the factual findings and conclusion of the appellate court that the Underwriting and Consultancy Agreements were executed to Eighty-Two Thousand Five Hundred Pesos (P2,382,500.00). It is from this first partial release of the
36

conceal a usurious loan. Inquiry upon the veracity of the appellate court's factual findings and conclusion is not the function of this Court for the Supreme Court is
not a trier of facts. Only when the factual findings of the trial court and the appellate court are opposed to each other does this Court exercise its discretion to re- loan that the said corresponding bills for Underwriting, Supervision and Constantly fees were conducted
examine the factual findings of both courts and weigh which, after considering the record of the case, is more in accord with law and justice. and apparently paid, thus, reverting back to petitioner FMIC the total amount of One Million Seven
 
Hundred Thirty Thousand Pesos (P1,730,000.00) as part of the amount loaned to respondent Este del
After a careful and thorough review of the record including the evidence adduced, we find no reason to depart Sol.37

from the findings of the appellate court.  

  e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any
ON THE SUSPENSION OF THE USURY LAW share of stock of respondent Este del Sol and much less to supervise such a syndicate , thus
  failing to comply with its obligation under the Underwriting Agreement. Besides, there was really no
38

FMIC contends that Central Bank Circular No. 905 which took effect on January 1, 1983 and need for an Underwriting Agreement since respondent Este del Sol had its own licensed marketing
removed the ceiling on interest rates for secured and unsecured loans, regardless of maturity, should arm to sell its shares and all its shares have been sold through its marketing arm. 39

be applied retroactively to a contract executed on January 31, 1978, as in the case at bar, that is,  
f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement, aside 40

while the Usury Law was in full force and effect. from the fact that there was no need for a Consultancy Agreement, since respondent Este del Sol's
  officers appeared to be more competent to be consultants in the development of the projected
SC Disagreed. It is an elementary rule of contracts that the laws in force at the time the contract sports/resort complex. 41

was made and entered into, govern it.   20

 
  All the foregoing established facts and circumstances clearly belie the contention of petitioner
More significantly, Central Bank Circular No. 905 did not repeal nor in any way amend the Usury FMIC that the Loan, Underwriting and Consultancy Agreements are separate and independent
Law but simply suspended the latter's effectivity. The illegality of usury is wholly the creature of
21
transactions. The Underwriting and Consultancy Agreements which were executed and delivered
legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another law. Thus, 22
contemporaneously with the Loan Agreement on January 31, 1978 were exacted by petitioner
retroactive application of a Central Bank Circular cannot, and should not, be presumed. 23
FMIC as essential conditions for the grant of the loan.
   
THE CONTRACT BETWEEN FMIC AND EDSMRI WAS USURIOUS An apparently lawful loan is usurious when it is intended that additional compensation for the
  loan be disguised by an ostensibly unrelated contract providing for payment by the borrower
When a contract between two (2) parties is evidenced by a written instrument, such document is for the lender's services which are of little value or which are not in fact to be rendered, such
ordinarily the best evidence of the terms of the contract. Courts only need to rely on the face of as in the instant case. In this connection, Article 1957 of the New Civil Code clearly provides that:
42

written contracts to determine the intention of the parties. However, this rule is not without exception. 24
 
The form of the contract is not conclusive for the law will not permit a usurious loan to hide Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury
shall be void. The borrower may recover in accordance with the laws on usury.
itself behind a legal form. Parol evidence is admissible to show that a written document though
 
THE PRINCIPAL DEBT IS STILL DEMANDABLE
 
In usurious loans, the entire obligation does not become void because of an agreement for
usurious interest; the unpaid principal debt still stands and remains valid but the stipulation as to
the usurious interest is void, consequently, the debt is to be considered without stipulation as to the
interest. The reason for this rule was adequately explained in the case of Angel Jose Warehousing
43

Co., Inc. v. Chelda Enterprises where this Court held:

44

 
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The
illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the
latter only should be deemed void, since it is the only one that is illegal.
 
Thus, the nullity of the stipulation on the usurious interest does not affect the lender's right to
receive back the principal amount of the loan. With respect to the debtor, the amount paid as interest
under a usurious agreement is recoverable by him, since the payment is deemed to have been made
under restraint, rather than voluntarily. 45

 
This Court agrees with the factual findings and conclusion of the appellate court, to wit:
 
We find the stipulated penalties, liquidated damages and attorney's fees, excessive, iniquitous and unconscionable and
revolting to the conscience as they hardly allow the borrower any chance of survival in case of default. And true enough,
ESTE folded up when the appellee extrajudicially foreclosed on its (ESTE's) development project and literally closed its
offices as both the appellee and ESTE were at the time holding office in the same building. Accordingly, we hold that 20%
penalty on the amount due and 10% of the proceeds of the foreclosure sale as attorney's fees would suffice to
compensate the appellee, especially so because there is no clear showing that the appellee hired the services of counsel
to effect the foreclosure, it engaged counsel only when it was seeking the recovery of the alleged deficiency.
 
Attorney's fees as provided in penal clauses are in the nature of liquidated damages. So long as such
stipulation does not contravene any law, morals, or public order, it is binding upon the parties.
Nonetheless, courts are empowered to reduce the amount of attorney's fees if the same is "iniquitous
or unconscionable." Articles 1229 and 2227 of the New Civil Code provide that:
46

 
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.
 
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.
 
In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred
Thirty Pesos and Seventy-Five Centavos (93,188,630.75) for the stipulated attorney's fees equivalent
to twenty-five (25%) percent of the alleged amount due, as of the date of the auction sale on June 23,
1980, is manifestly exorbitant and unconscionable. Accordingly, we agree with the appellate court that
a reduction of the attorney's fees to ten (10%) percent is appropriate and reasonable under the facts
and circumstances of this case.
 
Lastly, there is no merit to petitioner FMIC's contention that the appellate court erred in awarding an
amount allegedly not asked nor prayed for by respondents. Whether the exact amount of the relief
was not expressly prayed for is of no moment for the reason that the relief was plainly warranted by
the allegations of the respondents as well as by the facts as found by the appellate court. A party is
entitled to as much relief as the facts may warrant 47

 
In view of all the foregoing, the Court is convinced that the appellate court committed no reversible
error in its challenged Decision.
• Herrera v. Petrophil Corporation, 146 SCRA 385, 1986 - MONA  area of 365 sqrm. more or less, will be occupied by LESSEE without rental during the
G.R. No. L-48349 December 29, 1986 lifetime of this lease. PROVIDED FINALLY, that the Lessor is paid 8 years advance rental
FRANCISCO HERRERA, plaintiff-appellant,  vs. PETROPHIL CORPORATION, defendant-appellee. based on P2,930.70 per month discounted at 12% interest per annum or a total net amount
CRUZ, J. of P130,288.47 before registration of lease. Leased premises shall be delivered within 30
  days after 1st partial payment of financial aid. 
Summary: On December 5, 1969, a "Lease Agreement" was entered into by the Herrera and ESSO  
Standard Eastern. Inc., (substituted by Petrophil Corp) for 20 years with a condition that monthly On December 31, 1969, pursuant to the said contract, the ESSO (PETROPHIL) paid to the
rentals should be paid and there should be advance payment of rentals for the first eight years of the HERRERA advance rentals for the first eight years, subtracting therefrom the amount of
said contract. Pursuant to the said contract, defendant-appellee paid the advance rentals for the first P101,010.73, the amount it computed as constituting the interest or discount for the first eight
eight years, subtracting the amount of P101,010.73, the amount it computed as constituting the years, in the total sum P180,288.47. On August 20, 1970, ESSO (PETROPHIL), explaining that
interest or discount for the first eight years, in the total sum P180,288.47. On August 20, 1970, ESSO there had been a mistake in computation, paid to HERRERA the additional sum of P2,182.70,
(Petrophil), explained that there had been a mistake in computation, paid to the appellant the thereby reducing the deducted amount to only P98,828.03. 
additional sum of P2,182.70, thereby reducing the deducted amount to only P98,828.03.  
Herrera sued ESSO (Petrophil), for the sum of P98,828.03, with interest, claiming this had been On October 14, 1974, HERRERA sued ESSO (PETROPHIL)  for the sum of P98,828.03, with
illegally deducted from him in violation of the Usury Law. The defendant-appellee argued that the interest, claiming this had been illegally deducted from him in violation of the Usury Law. He
amount deducted was not usurious interest but a given to it for paying the rentals in advance for eight also prayed for moral damages and attorney's fees. In its answer, ESSO (PETROPHIL) admitted the
years. factual allegations of the complaint but argued that the amount deducted was not usurious
ISSUE: WON the  defendant-appelle violated the usury law. - NO interest but a given to it for paying the rentals in advance for eight years. 
RULING:  
There is no usury in this case because there was neither loan nor forbearance but a mere discount LC: Judgment on the pleadings was rendered for the defendant. 
which the plaintiff-appellant allowed the defendant-appellee to deduct from the total payments                Concerning the computation of the deductible discount, the trial court declared:
because they were being made in advance for eight years. The discount was in effect a reduction of As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant)
the rentals which the lessor had the right to determine, and any reduction thereof, by any amount, shall pay the lessor (plaintiff) eight (8) years in advance rentals based on P2,930.20 per
would not contravene the Usury Law. month discounted at 12% interest per annum. Thus, the total rental for one-year period is
The difference between a discount and a loan or forbearance is that the former does not have to be P35,162.40 (P2,930.20 multiplied by 12 months) and that the interest therefrom is
repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on P4,219.4880 (P35,162.40 multiplied by 12%). So, therefore, the total interest for the first
usury. eight (8) years should be only P33,755.90 (P4,129.4880 multiplied by eight (8) years and
To constitute usury, "there must be loan or forbearance; the loan must be of money or something not P98,828.03 as the defendant claimed it to be.
circulating as money; it must be repayable absolutely and in all events; and something must be  
exacted for the use of the money in excess of and in addition to interest allowed by law." The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most
The elements of usury are (1) a loan, express or implied; (2) an understanding between the parties seriously misleading. He just computed the annual discount to be at P4,129.4880 and then
that the money lent shall or may be returned; (3) that for such loan a greater rate or interest that is simply multiplied it by eight (8) years. He did not take into consideration the naked fact that
allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt intent to the rentals due on the eight year were paid in advance by seven (7) years, the rentals due
take more than the legal rate for the use of money loaned. Unless these four things concur in every on the seventh year were paid in advance by six (6) years, those due on the sixth year by
transaction, it is safe to affirm that no case of usury can be declared. five (5) years, those due on the fifth year by four (4) years, those due on the fourth year by
As to the deductible discount, the agreement was for a uniform deduction for the advance rentals for three (3) years, those due on the third year by two (2) years, and those due on the second
each of the eight years, and neither of the parties can deviate from it now. year by one (1) year, so much so that the total number of years by which the annual rental
On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight years, of P4,129.4880 was paid in advance is twenty-eight (28), resulting in a total amount of
the total rental was P281,347.20 from which was deducted the total discount of P33,761.68, leaving a P118,145.44 (P4,129.48 multiplied by 28 years) as the discount. However, defendant was
difference of P247,585.52. Subtracting from this amount, the sum of P182,471.17 already paid will most fair to plaintiff. It did not simply multiply the annual rental discount by 28 years. It
leave a balance of P65,114.35 still due the plaintiff-appellant. computed the total discount with the principal diminishing month to month as shown by
  Annex 'A' of its memorandum. This is why the total discount amount to only P 8,828.03.
FACTS:  
On December 5, 1969, the plaintiff-appellant (Herrera) and ESSO Standard Eastern. Inc., (later The allegation of plaintiff that defendant made the computation in a compounded manner is
substituted by Petrophil Corporation) entered into a "Lease Agreement" whereby the former erroneous. Also after making its own computations and after examining closely defendant's
(Herrera) leased to the latter (ESSO) a portion of his property for a period of twenty (20) years Annex 'A' of its memorandum, the court finds that defendant did not charge 12% discount
from said date, subject inter alia to the following conditions: on the rentals due for the first year so much so that the computation conforms with the
3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40 sqm. per month on 400 provision of the Lease Agreement to the effect that the rentals shall be 'payable yearly in
sqm. and are to be expropriated later on or P560 per month and Fl.40 per sqm. per month advance within the 1st 20 days of each year. ‘
on 1,693 sqm. or P2,370.21 per month or a total of P2,930.20 per month 2,093 sqm. more  
or less, payable yearly in advance within the 1st twenty days of each year; provided, a HERRERA’S DEFENSE:
financial aid in the sum of P15,000 to clear the leased premises of existing improvements Plaintiff-appellant now prays for a reversal of that judgment, insisting that the lower court erred in the
thereon is paid in this manner; P10,000 upon execution of this lease and P5,000 upon computation of the interest collected out of the rentals paid for the first eight years; that such interest
delivery of leased premises free and clear of improvements thereon within 30 days from the was excessive and violative of the Usury Law; and that he had neither agreed to nor accepted the
date of execution of this agreement. The portion on the side of the leased premises with an
defendant-appellant's computation of the total amount to be deducted for the eight years advance To constitute usury, "there must be loan or forbearance; the loan must be of money or
rentals.  something circulating as money; it must be repayable absolutely and in all events; and
  something must be exacted for the use of the money in excess of and in addition to interest
The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his complaint, which read: allowed by law." 
6. The interest collected by PETROPHIL out of the rentals for the first eight years was  
excessive and beyond that allowable by law, because the total interest on the said It has been held that the elements of usury are:
amount is only P33,755.90 at P4,219.4880 per yearly rental; and considering that the (1) a loan, express or implied;
interest should be computed excluding the first year rental because at the time the (2) an understanding between the parties that the money lent shall or may be returned;
amount of P281, 199.20 was paid it was already due under the lease contract hence (3) that for such loan a greater rate or interest that is allowed by law shall be paid, or agreed to be
no interest should be collected from the rental for the first year, the amount of paid, as the case may be; and
P29,536.42 only as the total interest should have been deducted by defendant from (4) a corrupt intent to take more than the legal rate for the use of money loaned.
the sum of P281,299.20.  
  Unless these four things concur in every transaction, it is safe to affirm that no case of usury
ESSO (PETROPHIL)’S DEFENSE: can be declared. 
The defendant maintains that the correct amount of the discount is P98,828.03 and that the  
same is not excessive and above that allowed by law. We do not agree with the trial court regarding the computation of the deductible discount. The
  computation appears to be too much technical mumbo-jumbo and could not have been the
ISSUE: WON the discount is correctly computed at P98,828.03 for the 8 years advance rental intention of the parties to the transaction. Had it been so, then it should have been clearly
payment -  NO stipulated in the contract. Contracts should be interpreted according to their literal meaning
WON the amount deducted is a usurious interest - NO and should not be interpreted beyond their obvious intendment. 
   
RULING: WHEREFORE, the decision of the trial court is hereby modified, and the defendant- The plaintfff-appellant simply understood that for every year of advance payment there would
appellee Petrophil Corporation is ordered to pay plaintiff-appellant the amount of Sixty Five Thousand be a deduction of 12% and this amount would be the same for each of the eight years. There is
One Hundred Fourteen pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal rate no showing that the intricate computation applied by the trial court was explained to him by the
until fully paid, plus Ten Thousand Pesos (P10,000.00) as attorney's fees. Costs against the defendant-appellee or that he knowingly accepted it.
defendant-appellee. SO ORDERED.  
  The lower court, following the defendant-appellee's formula, declared that the plaintiff-
RATIO: appellant had actually agreed to a 12% reduction for advance rentals for all of twenty eight
  years. That is absurd. It is not normal for a person to agree to a reduction corresponding to
As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is twenty eight years advance rentals when all he is receiving in advance rentals is for only eight
clearly denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that years.
the parties intended a loan rather than a lease. The provision for the payment of rentals in advance  
cannot be construed as a repayment of a loan because there was no grant or forbearance of The deduction shall be for only eight years because that was plainly what the parties intended at the
money as to constitute an indebtedness on the part of the lessor. On the contrary, the time they signed the lease agreement. "Simplistic" it may be, as the Solicitor General describes it, but
defendant-appellee was discharging its obligation in advance by paying the eight years rentals, and it that is how the lessor understood the arrangement. In fact, the Court will reject his subsequent
was for this advance payment that it was getting a rebate or discount. modification that the interest should be limited to only seven years because the first year rental was
  not being paid in advance. The agreement was for a uniform deduction for the advance rentals
The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that for each of the eight years, and neither of the parties can deviate from it now.
the parties may establish such stipulations, clauses, terms and condition as they may want to include;  
and as long as such agreements are not contrary to law, morals, good customs, public policy or public On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight
order, they shall have the force of law between them.  years, the total rental was P281,347.20 from which was deducted the total discount of
  P33,761.68, leaving a difference of P247,585.52. Subtracting from this amount, the sum of
There is no usury in this case because no money was given by the defendant-appellee to the P182,471.17 already paid will leave a balance of P65,114.35 still due the plaintiff-appellant.
plaintiff-appellant, nor did it allow him to use its money already in his possession.  There was  
neither loan nor forbearance but a mere discount which the plaintiff-appellant allowed the The above computation is based on the more reasonable interpretation of the contract as a
defendant-appellee to deduct from the total payments because they were being made in whole rather on the single stipulation invoked by the respondent for the flat reduction of
advance for eight years. The discount was in effect a reduction of the rentals which the lessor P130,288.47.
had the right to determine, and any reduction thereof, by any amount, would not contravene  
the Usury Law.
 
The difference between a discount and a loan or forbearance is that the former does not have
to be repaid. The loan or forbearance is subject to repayment and is therefore governed by the
laws on usury.
 
• Solidbank v. Permanent Homes G.R. No. 171925, July 23, 2010 - JESS they will not be at the losing end of the deal, so to speak, by the repricing of the interest rates
G.R. No. 171925. July 23, 2010.* every month; insists that PERMANENT HOMES should not be allowed to renege on its contractual
SOLIDBANK CORPORATION, (now Metropolitan Bank and Trust Company), petitioner, vs. obligations, as it freely and voluntarily bound itself to the provisions of the Omnibus Credit Line and
PERMANENT HOMES, INCORPORATED, respondent. the promissory notes.
Ponente: Carpio, J. ISSUE: WON the repriced interest rates were unconscionable (No, but Solidbank’s computation of
interest due from Permanent should be adjusted to take effect only upon Permanent’s receipt
The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of written notice from Solidbank)
of the Monetary Board of the Central Bank, and later by CBC No. 905 which took effect on 1 January SC: Although interest rates are no longer subject to a ceiling, the lender still does not have an
1983; These circulars removed the ceiling on interest rates for secured and unsecured loans unbridled license to impose increased interest rates. The lender and the borrower should
regardless of maturity; the effect of these circulars is to allow the parties to agree on any interest that agree on the imposed rate, and such imposed rate should be in writing.
may be charged on a loan, the virtual repeal of the Usury Law is within the range of judicial notice - The stipulations on interest rate repricing are valid because
which courts are bound to take into account. (1) the parties mutually agreed on said stipulations;
(2) repricing takes effect only upon Solidbank’s written notice to Permanent of the new interest
G.R. No. 171925 is a petition for review  assailing the Decision  promulgated on 29 June 2005 by the CA (appellate court) as well as the
1 2
rate; and
Resolution  promulgated on 14 March 2006 in CA-G.R. CV No. 75926. The CA granted the petition filed by Permanent Homes,
(3) Permanent has the option to prepay its loan if Permanent and Solidbank do not agree on
3

Incorporated (Permanent) and reversed the decision of the RTC of Makati City, Branch 58 (trial court) dated 5 July 2002 in Civil Case
No. 98-654. The CA ordered Solidbank Corporation (Solidbank) and Permanent to enter into an express agreement about the the new interest rate.
applicable interest rates on Permanent’s loan. Solidbank was also ordered to render an accounting of Permanent’s payments, not to - There was no showing that either Solidbank or Permanent coerced each other to enter into
impose interest on interest upon Permanent’s loans, and to release the remaining amount available under Permanent’s omnibus credit
line. the loan agreements. The terms of the Omnibus Line Agreement and the promissory notes
were mutually and freely agreed upon by the parties.
SUMMARY: - Solidbank’s range of lending rates were consistent with “prevailing rates in the local or international
- PERMANENT HOMES is a real estate development company, and to finance its housing project capital markets.”
known as the “Buena Vida Townhomes” located within Merville Subdivision, Parañaque City, it - The repriced interest rates from Sept 12 - Nov 21 1997 conformed to the range of Solidbank’s
applied and was subsequently granted by SOLIDBANK with an “Omnibus Line” credit facility in lending rates to other borrowers.
the total amount of P60 MILLION. - The Dec 12, 1997 - Feb 12, 1998 repriced interest rates were not unconscionably out of line
- To secure the aforesaid loan, PERMANENT HOMES initially mortgaged 3 townhouse units with the upper range of lending rates to other borrowers.
within the Buena Vida project in Parañaque. At the time, however, the instant complaint was filed The interest rate repricing happened at the height of the Asian financial crises in late 1997,
against SOLIDBANK, a total of 36 townhouse units were mortgaged with said bank. when banks clamped down on lendings because of higher credit risks across industries,
- Of the 60 million available to PERMANENT HOMES, it availed of a total of 41.5 million pesos, particularly the real estate industry.
covered by 3 promissory notes, which contain the following provisions, thus: - Solidbank admitted that it did not promptly send Permanent written repriced rates, but rather
verbally advised Permanent’s officers over the phone at the start of the period. Solidbank did not
“xxx
present any written memorandum to support its allegation. Solidbank advised Permanent on the
5.  We/I irrevocably authorize Solidbank to increase or decrease at any time
repriced interest rate only after the period had begun. Permanent presented a tabulation which
the interest rate agreed in this Note or Loan on the basis of, among others,
showed that Solidbank either did not send a billing statement/ sent a billing statement 6-33 days late,
prevailing rates in the local or international capital markets. For this purpose, We/I
- Solidbank’s computation of interest due from Permanent should be adjusted to take effect
authorize Solidbank to debit any deposit or placement account with Solidbank
only upon Permanent’s receipt of written notice from Solidbank
belonging to any one of us. The adjustment of the interest rate shall be effective
from the date indicated in the written notice sent to us by the bank, or if no date
is indicated, from the time the notice was sent. FACTS:
6.  Should We/I disagree to the interest rate adjustment, We/I shall prepay all - The records disclose that PERMANENT HOMES is a real estate development company, and to
amounts due under this Note or Loan within thirty (30) days from the receipt by finance its housing project known as the “Buena Vida Townhomes” located within Merville
anyone of us of the written notice. Otherwise, We/I shall be deemed to have given Subdivision, Parañaque City, it applied and was subsequently granted by SOLIDBANK with an
our consent to the interest rate adjustment.” “Omnibus Line” credit facility in the total amount of P60 MILLION.
- Of the entire loan, P 59 MILLION as [sic] time loan for a term of up to 360 days, with
interest thereon at prevailing market rates, and subject to monthly repricing.
- Contrary, however, to the specific provisions as afore-quoted, there was a standing agreement by - The remaining ONE MILLION was available for domestic bills purchase.
the parties that any increase or decrease in interest rates shall be subject to the mutual
agreement of the parties. - To secure the aforesaid loan, PERMANENT HOMES initially mortgaged 3 townhouse units
within the Buena Vida project in Parañaque.
Permanent Homes - SOLIDBANK unilaterally and arbitrarily accelerated the interest rates without
any declared basis of such increases, of which PERMANENT HOMES had not agreed to, or at the At the time, however, the instant complaint was filed against SOLIDBANK, a total of 36
very least, been informed of. townhouse units were mortgaged with said bank.
Solidbank - Avers that 4 days before July 15, 1997, the BSP declared that it could no longer support - Of the 60 million available to PERMANENT HOMES, it availed of a total of 41.5 million pesos,
the Philippine currency from external speculative forces, hence, the local currency was allowed to covered by 3 promissory notes, which contain the following provisions, thus:
seek its own exchange rate level. As a result of the volatile exchange rate ratio, banks were then
hesitant to extend loans, and in some instances that it granted loans, they had to ensure that “xxx
 PERMANENT. In addition, [Permanent] prays for the payment of compensatory, moral and
5.  We/I irrevocably authorize Solidbank to increase or decrease at any time
exemplary damages.
the interest rate agreed in this Note or Loan on the basis of, among others,
prevailing rates in the local or international capital markets. For this purpose, We/I
Solidbank:
authorize Solidbank to debit any deposit or placement account with Solidbank
- Avers that PERMANENT HOMES has no cause of action against it, in view of the pertinent
belonging to any one of us. The adjustment of the interest rate shall be effective
provisions of the Omnibus Credit Line and the promissory notes agreed to and signed by
from the date indicated in the written notice sent to us by the bank, or if no date is
PERMANENT HOMES. Thus, in accordance with said provisions, SOLIDBANK was authorized to,
indicated, from the time the notice was sent.
upon due notice, periodically adjust the interest rates on PERMANENT HOMES’ loan availments
6.  Should We/I disagree to the interest rate adjustment, We/I shall prepay all
during the monthly interest repricing dates, depending on the changes in prevailing interest rates in
amounts due under this Note or Loan within thirty (30) days from the receipt by
the local and international capital markets.
anyone of us of the written notice. Otherwise, We/I shall be deemed to have given
- In fact, SOLIDBANK avers that 4 days before July 15, 1997, the BSP declared that it could no longer
our consent to the interest rate adjustment.”
support the Philippine currency from external speculative forces, hence, the local currency was
allowed to seek its own exchange rate level. As a result of the volatile exchange rate ratio, banks
were then hesitant to extend loans, and in some instances that it granted loans, they had to
- Contrary, however, to the specific provisions as afore-quoted, there was a standing agreement by ensure that they will not be at the losing end of the deal, so to speak, by the repricing of the
the parties that any increase or decrease in interest rates shall be subject to the mutual interest rates every month.
agreement of the parties. - SOLIDBANK insists that PERMANENT HOMES should not be allowed to renege on its contractual
obligations, as it freely and voluntarily bound itself to the provisions of the Omnibus Credit Line and
the promissory notes.

1st loan availment of Permanent 2nd loan availment on June 24 3rd loan availment on July 15
Homes on March 20 1997 1997 1997
[19.6M, from the initial interest [18M, the rate was initially [3.9M, the interest rate was
rate of 14.25% per annum] pegged at 15.75% p.a.] initially pegged at 35% p.a.]

May 19 1997 15% p.a. July 1997 23.5% Aug 14-Sept 11 1997 21%
July 18 1997 26% p.a. Aug 24 1997 20% Sept 12 1997 23%
Aug 18 1997 20% p.a. Sept 24 1997 22.5% Oct 13 1997 27%
Sept 17 1997 24% p.a. Oct 1997 30% Nov 1997 27%
Oct 17 1997 30% p.a. Nov 1997 27% Dec 1997 26%
Nov 17 1997 34% p.a. Dec 1997 34% Jan 12 1998 30%
Jan 16 1998 30% p.a. Jan 22-Feb 20 1998 30% Feb 1998 29%

Permanent Homes:
- It is [Permanent’s] stand that SOLIDBANK unilaterally and arbitrarily accelerated the interest
rates without any declared basis of such increases, of which PERMANENT HOMES had not
agreed to, or at the very least, been informed of. This is contrary to their earlier agreement that
any interest rate changes will be subject to mutual agreement of the parties. PERMANENT HOMES
further admits that it was not able to protest such arbitrary increases at the time they were imposed by
SOLIDBANK, for fear that SOLIDBANK might cut off the credit facility it extended to PERMANENT
HOMES. Permanent was then in the midst of the construction of its project in Merville, Parañaque
City, and SOLIDBANK knew that it was relying substantially on the credit facility the latter extended to
it.

- [Permanent] thus filed a case before the TC seeking the following:

(1) the annulment of the increases in interest rates on the loans it obtained from SOLIDBANK,
on the ground that it was violative of the principle of mutuality of agreement of the
parties, as enunciated in Article 1409 of the New Civil Code,
(2) the fixing of the interest rates at the applicable interest rate, and
(3) for the TC to order SOLIDBANK to make an accounting of the payments it made, so as
to determine the amount of refund PERMANENT is entitled to, as well as to order
SOLIDBANK to release the remaining available balance of the loan it extended to
 Solidbank:
Permanent Homes:
- SOLIDBANK, to establish its defense, presented its lone witness, Mr. Cesar Lugtu, who testified to
- PERMANENT HOMES presented as witnesses Jacqueline S. Lim, its Vice President and Chief
the effect that, contrary to PERMANENT HOMES’ assertions that it was not promptly informed of the
Financial Officer, Engr. Rey A. Romasanta, its Executive Vice President and Chief Operating Officer,
repriced interest rates, SOLIDBANK’s officers verbally advised PERMANENT HOMES of the
and Martha Julia Flores, its Treasury Officer
repriced rates at the start of the period, and even added that their transaction[s] were based on trust.
Aside from these allegations, however, no written memorandum or note was presented by
TC:
SOLIDBANK to support their assertion that PERMANENT HOMES was timely advised of the repriced
- On March 24, 1998, issued a TRO, after a summary hearing, which enjoined SOLIDBANK from
interests.”
4

implementing and collecting the increases in interest rates and from initiating any action, including the
foreclosure of the mortgaged properties.
TC: in favor of Solidbank
Ms. Lim (VP and CFO): - On 5 July 2002, the TC promulgated its Decision in favor of Solidbank.
- Ms. Lim’s testimony centered on PERMANENT HOMES’ allegations that the repricing of the interest
rates was done by SOLIDBANK without any written agreement entered into between the parties. “It becomes crystal clear that there is sufficient proof to show that the instant case was
- In fact, Ms. Lim accounted that SOLIDBANK will merely advise them of the interest rate for the instituted by [Permanent] as an after-thought and as an obvious subterfuge intended to
period, after said period had already commenced, and at times very late in the period, by fax completely lay on the defendant the blame for the debacle of its Buena Vida project. An
messages. When PERMANENT HOMES called SOLIDBANK’s attention to the seemingly surging afterthought because the records of the case show that the complaint was filed in March 16,
rates it imposed on its loan, SOLIDBANK will merely answer that it was the bank’s policy, 1998, already after it was having difficulty making the amortization payments, the last of which
without offering any basis for such increase. being in February 1998. A subterfuge because plaintiff, instead of blaming itself and its own
- Furthermore, Ms. Lim also mentioned SOLIDBANK’s alleged practice of imposing interest on unpaid business judgment that went sour, would rather put the blame on [Solidbank], taking advantage
interest, at the highest rate of 30% p.a. of every conceivable gray area of its contract with [Solidbank] to avoid its own liabilities. In fact,
- Ms. Lim also presented a tabulation, which presents the number of days their billing statements this complaint was made the very basis for [Permanent] to altogether stop the payment of its
were sent late, from the time the interest period started. It is PERMANENT HOMES’ stand that since loan from [Solidbank] including the interest payment (TSN, May 07, 1998, p. 60).
the purpose of the billing statements was to inform them beforehand of the applicable interest rate xxxx
for the period, the late billings will clearly show SOLIDBANK’s arbitrary imposition of the repriced WHEREFORE, finding the complaint not impressed with merit, judgment is hereby
interest rates, as well as its indifference to PERMANENT HOMES’ plight. rendered dismissing the said complaint. The Counterclaim is likewise dismissed for lack of
- To illustrate: evidence to support the same.
SO ORDERED.” 5

1st loan availment The billing statements which should have notified PERMANENT HOMES of
[P19.6M] the repriced interest rates were faxed to PERMANENT HOMES between 18- Permanent filed an appeal before the appellate court.
33 days late.
CA: set aside TC’s ruling
2nd loan availment The faxed billings were late between 6 to 21 days, and one instance where - The appellate court not only recognized the validity of escalation clauses, but also
[18M] PERMANENT HOMES received no billing at all. underscored the necessity of a basis for the increase in interest rates and of the
principle of mutuality of contracts.
3rd loan availment: The faxed billings were late between 7 to 29 days, and also an instance “THE FOREGOING CONSIDERED, the instant appeal is hereby GRANTED, the assailed
[3.9M] where PERMANENT HOMES received no billing at all. decision dated July 5, 2002 is REVERSED and SET ASIDE, and a new one is hereby entered
as follows:
- This practice, according to Ms. Lim, clearly affected its operations, as the completion of its (1) Unless the parties herein subsequently enter into an express agreement regarding the
construction project was unnecessarily delayed, to its prejudice and its buyers. This was the applicable interest rates on PERMANENT HOMES’ loan availments subsequent to the initial
import of the testimony of PERMANENT HOMES’ second witness, Engr. Rey A. Romasanta. thirty-day (30) period, the legal rate of twelve percent (12%) per annum is hereby FIXED, to be
applied on the outstanding balance of the loan;
Engr. Rey (Executive VP and COO): (2)  SOLIDBANK is ordered to render an accounting of all the payments made by
- According to Engr. Rey, the target date of completion was August 1997, but in view of the shortage PERMANENT HOMES, and in case there is excess payment by reason of the wrongful
of funds by reason of SOLIDBANK’s refusal for PERMANENT HOMES to make further availments on imposition of the repriced interest rates, to apply such amount to the interest payment at the
its omnibus credit line, the project was completed only on February 1998. legal rate, and thereafter to the outstanding principal amount;
(3)  SOLIDBANK is directed not to impose penalties, particularly interest on interest, upon
Martha Julia Flores (Treasury Officer): PERMANENT HOMES’ loan, there being no evidence that the latter was in default on its
- Explained that as such, it was her who received the late billings from SOLIDBANK. She would also payments;
call up SOLIDBANK to ask what the repriced interest rate for the coming interest period, to no avail, (4)  SOLIDBANK is hereby ordered to release the remaining amount available under the
as SOLIDBANK will merely fax its billings almost always, as abovementioned, late in the period. omnibus credit line, subject, however, to availability of funds on the part of SOLIDBANK.
- Ms. Flores admitted that she prepared the tabulation presented before the court, which showed how No pronouncement as to costs.
late SOLIDBANK’s billings were sent to PERMANENT HOMES, as well as the computation of interest SO ORDERED.” 6

rates that SOLIDBANK had allegedly overcharged on its loan, vis-a-vis the average of the high and
the low published lending rates of SOLIDBANK. The appellate court resolved to deny Solidbank’s MR for lack of merit. 7
ISSUES:
WON the repriced interest rates were unconscionable (No)

WON Solidbank promptly sent Permanent written repriced rates (No)

WON computation of interest due from Permanent should be adjusted to take effect only upon
Permanent’s receipt of written notice from Solidbank (Yes)

HELD:
WHEREFORE, we GRANT the petition in part.
We SET ASIDE the Decision of the CA promulgated on 29 June 2005 as well as the Resolution promulgated
on 14 March 2006 in CA-G.R. CV No. 75926 and AFFIRM the decision of the RTC of Makati City, Branch 58 dated 5
July 2002 in Civil Case No. 98-654 with the MODIFICATION that the repricing of the interest rates should take
effect only upon Permanent Homes, Incorporated’s receipt of the written notice from Solidbank Corporation
of the adjustment in interest rate. The records of this case are therefore remanded to the TC for the
computation of the proper interest payments based on the dates of receipt of written notice.

RULING: The petition has merit.

- The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 Dec 1982
of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which
took effect on 1 January 1983.
· These circulars removed the ceiling on interest rates for secured and unsecured loans
regardless of maturity. The effect of these circulars is to allow the parties to agree on any
interest that may be charged on a loan. The virtual repeal of the Usury Law is within the
range of judicial notice which courts are bound to take into account.  Although interest
9

rates are no longer subject to a ceiling, the lender still does not have an unbridled
license to impose increased interest rates. The lender and the borrower should agree
on the imposed rate, and such imposed rate should be in writing.

The 3 promissory notes between Solidbank and Permanent all contain the following provisions:
“5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate
agreed in this Note or Loan on the basis of, among others, prevailing rates in the local or
international capital markets. For this purpose, We/I authorize Solidbank to debit any deposit or
placement account with Solidbank belonging to any one of us. The adjustment of the interest
rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no
date is indicated, from the time the notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due
under this Note or Loan within thirty (30) days from the receipt by anyone of us of the written
notice. Otherwise, We/I shall be deemed to have given our consent to the interest rate
adjustment.”

- The stipulations on interest rate repricing are valid because

(4) the parties mutually agreed on said stipulations;
(4) repricing takes effect only upon Solidbank’s written notice to Permanent of the new interest
rate; and
(5) Permanent has the option to prepay its loan if Permanent and Solidbank do not agree on
the new interest rate.
- The phrases “irrevocably authorize,” “at any time” and “adjustment of the interest rate shall
be effective from the date indicated in the written notice sent to us by the bank, or if no date is
indicated, from the time the notice was sent,” emphasize that Permanent should receive a
written notice from Solidbank as a condition for the adjustment of the interest rates.
- In order that obligations arising from contracts may have the force of law between the parties, there
must be a mutuality between the parties based on their essential equality.  A contract containing a
10
- We also recognize that Solidbank admitted that it did not promptly send Permanent written
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the repriced rates, but rather verbally advised Permanent’s officers over the phone at the start of
contracting parties is void.  There was no showing that either Solidbank or Permanent coerced
11
the period. Solidbank did not present any written memorandum to support its allegation that it
each other to enter into the loan agreements. The terms of the Omnibus Line Agreement and promptly advised Permanent of the change in interest rates.  Solidbank advised Permanent on
13

the promissory notes were mutually and freely agreed upon by the parties. the repriced interest rate applicable for the 30-day interest period only after the period had begun.
- Moreover, Solidbank’s range of lending rates were consistent with “prevailing rates in the Permanent presented a tabulation which showed that Solidbank either did not send a billing
local or international capital markets.” statement, or sent a billing statement 6 to 33 days late.  We reproduce the tabulation below:
14

- Permanent presented a tabulation  of the range of Solidbank’s lending rates, as reported to BSP
12
PN #435 – P19.6MM
and compared the lending rates with the interest rates charged by Solidbank on Permanent’s loans:
Reference No. Interest Period Date Billing Statements were faxed to Number of days Billing Statement
  Solidbank’s range of    
Permanent was Late
lending rates as per BSP
records
1 03/20/97 04/18/97 04/17/97 28
  High Low Interest rates charged by Solidbank Excess Interest Rate Over the
on Permanent’s loans Average of High and Low Rates 2 04/18/97 05/19/97 05/16/97 28

Sept. 12, 1997 25.0% 22.0% 23.0%     05/19/97 06/19/97   no statement received

Sept. 17, 1997 27.0% 24.0% 24.0%   3 06/19/97 07/18/97 07/12/97 23

Sept. 22, 1997 26.0% 23.0% 22.5%   4 07/18/97 08/18/97 08/05/97 18

Oct. 13, 1997 29.0% 26.0% 28.0%   5 08/18/97 09/17/97 09/10/97 23

Oct. 17, 1997 30.0% 27.0% 30.0%   6 09/17/97 10/17/97 10/06/97 19

Oct. 22, 1997 32.0% 29.0% 30.0%   7 10/17/97 11/17/97 11/11/97 25

Nov. 12, 1997 28.0% 25.0% 27.0%   8 11/17/97 12/17/97 12/12/97 25

Nov. 17, 1997 28.0% 25.0% 27.0%   9 12/17/97 01/16/98 01/09/98 23

Nov. 21, 1997 27.0% 24.0% 27.0%   14 01/16/98 02/20/98 02/18/98 33

Dec. 12, 1997 25.0% 23.0% 26.0% 2.0%

 
Dec. 17, 1997 25.0% 23.0% 34.0% 10.0% PN #969 – P18MM

Dec. 22, 1997 25.0% 23.0% 32.0% 8.0% Reference No. Interest Period Date Billing Statements were faxed to Number of days Billing Statement
Permanent was Late
Jan. 12, 1998 26.0% 24.0% 30.0% 5.0%
3 06/24/97 07/24/97 07/12/97 18
Jan. 16, 1998 28.0% 25.0% 30.0% 3.5%
4 07/24/97 08/22/97 08/05/97 12
Jan. 22, 1998 28.0% 25.0% 30.0% 3.5%
5 08/22/97 09/22/97 09/10/97 19
Feb. 9, 1998 27.0% 24.0% 30.0% 3.5%
6 09/22/97 10/22/97 10/06/97 14
Feb. 11, 1998 27.0% 24.0% 29.0% 4.5%
7 10/22/97 11/21/97 11/11/97 20
Feb. 12, 1998 27.0% 24.0% 30.0% 4.5%
8 11/21/97 12/22/97 12/12/97 21

9 12/22/97 01/22/98 01/09/98 18

- The repriced interest rates from Sept 12 - Nov 21 1997 conformed to the range of Solidbank’s
  01/22/98 02/12/97   no state-
lending rates to other borrowers. ment re-
ceived
- The Dec 12, 1997 - Feb 12, 1998 repriced interest rates were not unconscionably out of line
14 02/12/98 02/20/98 02/18/98 6
with the upper range of lending rates to other borrowers.

The interest rate repricing happened at the height of the Asian financial crises in late 1997,  

when banks clamped down on lendings because of higher credit risks across industries,
particularly the real estate industry.
 PN #1077 – P3.9MM

Reference Interest Period Date Billing Statements were Number of days Billing
No. faxed to Permanent Statement was Late

10 07/15/97 08/14/97 08/14/97 30

11 08/14/97 08/26/97 08/26/97 12

 
5 08/26/97 09/12/97 09/10/97 15

6 09/12/97 10/13/97 10/06/97 24

7 10/13/97 11/12/97 11/11/97 29

12 11/12/97 12/12/97 12/10/97 28

9 12/12/97 01/12/98 01/09/98 28

13 01/12/98 02/09/98 02/09/98 28

  02/09/98 02/11/98   no statement

received

14 02/11/98 03/13/98 02/18/98 7

- We rule that Solidbank’s computation of the interest due from Permanent should be adjusted
to take effect only upon Permanent’s receipt of the written notice from Solidbank.
• Silos v. PNB G.R. No. 181045, July 02, 2014 - ALVIN Similarly, contract changes must be made with the consent of the contracting parties. The minds of all
G.R. No. 181045. July 2, 2014 the parties must meet as to the proposed modification, especially when it affects an important aspect
SPOUSES EDUARDO and LYDIA SILOS, Petitioners, vs. PHILIPPINE NATIONAL BANK, Respondent. of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always
  a vital component, for it can make or break a capital venture. Thus, any change must be mutually
Doctrine: In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most agreed upon, otherwise, it is bereft of any binding effect.
important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding
effect. Moreover, the Court cannot consider a stipulation granting a party the option to prepay the loan if said party is
 
not agreeable to the arbitrary interest rates imposed. Premium may not be placed upon a stipulation in a contract We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it
which grants one party the right to choose whether to continue with or withdraw from the agreement if it discovers unbridled right to unilaterally upwardly adjust the interest on private respondents’ loan. That would
that what the other party has been doing all along is improper or illegal. completely take away from private respondents the right to assent to an important modification in their
  agreement, and would negate the element of mutuality in contracts.
Summary: Spouses Silos, who have been in business for about 2 decades of operating a department  
store and buying and selling ready-to-wear apparel, secured a revolving credit line with PNB through Art. 1308 of the Civil Code provides that the contract must bind both contracting parties; its validity or
a real estate mortgage as a security. After 2 years, their credit line increased. They then signed a compliance cannot be left to the will of one of them.
Credit Agreement, which was also amended 2 years later, and several Promissory Notes (PN) as  
regards their Credit Agreements with PNB. The said loan was initially subjected to a 19.5% interest These stipulations must be once more invalidated, as was done in previous cases. The common
rate per annum.  denominator in these cases is the lack of agreement of the parties to the imposed interest rates. For
  this case, this lack of consent by the petitioners has been made obvious by the fact that they signed
In the Credit Agreements, Spouses Silos bound themselves to the power of PNB to modify the the promissory notes in blank for the respondent to fill.
interest rate depending on whatever policy that PNB may adopt in the future without need of notice  
upon them. Thus, the said interest rates played from 16% to as high as 32% per annum.  Estoppel should not apply to petitioners, for "estoppel cannot be predicated on an illegal act. As
  between the parties to a contract, validity cannot be given to it by estoppel if it is prohibited by law or
Spouses Silos acceded to the policy by pre-signing a total of 26 PNs leaving the individual applicable is against public policy."
interest rates at hand blank since it would be subject to modification by PNB. Spouses Silos regularly  
renewed and made good on their PNs, religiously paid the interests without objection or fail. However, The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes are DECLARED
during the 1997 Asian Financial Crisis, Spouses Silos faltered when the interest rates soared due to NULL AND VOID, and such notes shall instead be subject to interest at the rate of 12% per annum up
the Asian Financial Crisis. The 26th PN (25%) became past due and despite repeated demands by to June 30, 2013, and starting July 1, 2013, 6% per annum until full satisfaction;
PNB, they failed to make good on the note. Thus, PNB foreclosed and auctioned the involved security  
for the mortgage.  DEL CASTILLO, J.:
  Facts:
Spouses Silos instituted an action to annul the foreclosure sale on the ground that the succeeding  
interest rates used in their loan agreements was left to the sole will of PNB, the same fixed by the Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades
latter without their prior consent and thus, void.  of operating a department store and buying and selling of ready-to-wear apparel. Respondent
  Philippine National Bank (PNB) is a banking corporation organized and existing under
The RTC ruled that such stipulation authorizing both the increase and decrease of interest rates as Philippine laws.
may be applicable is valid. The CA affirmed the RTC decision.  
  To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB, petitioners
PNB disputes petitioners’ claim that interest rates were unilaterally fixed by it, taking relief in the CA constituted in Aug. 1987 a Real Estate Mortgage over a 370-square meter lot in Kalibo, Aklan
pronouncement that petitioners are deemed estopped by their failure to question the imposed rates covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the credit line was
and their continued payment thereof without opposition. increased to ₱1.8 million and the mortgage was correspondingly increased to ₱1.8 million.
   
Can the PNB, on its own, modify the interest rate in a loan agreement without violating the mutuality And in July 1989, a Supplement to the Existing Real Estate Mortgage was executed to cover
of contracts? the same credit line, which was increased to ₱2.5 million, and additional security was given in the
  form of a 134-square meter lot covered by TCT T-16208. In addition, petitioners issued eight
NO. In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause Promissory Notes and signed a Credit Agreement.This July 1989 Credit Agreement contained
contained in their credit agreement. Said clause is authorized by P.D. No. 1684 and C.B. Circular No. a stipulation on interest which provides as follows:
905, which no more than allow contracting parties to stipulate freely regarding any subsequent  
adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. 1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum. Interest shall be payable in
advance every one hundred twenty days at the rate prevailing at the time of the renewal.
In fine, they can agree to adjust, upward or downward, the interest previously stipulated. However,  
contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize either (b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever
party to unilaterally raise the interest rate without the other’s consent. policy the Bank may adopt in the future, including without limitation, the shifting from the floating interest
  rate system to the fixed interest rate system, or vice versa . Where the Bank has imposed on the Loan interest
It is basic that there can be no contract in the true sense in the absence of the element of agreement, at a rate per annum, which is equal to the Bank’s spread over the current floating interest rate, the Borrower
or of mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his hereby agrees that the Bank may, without need of notice to the Borrower, increase or decrease its spread over
act has no more efficacy than if it had been done under duress or by a person of unsound mind. the floating interest rate at any time depending on whatever policy it may adopt in the future.10 (Emphases
supplied)
 
 
The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right petitioners faltered when the interest rates soared due to the Asian financial crisis. Petitioners’
to increase or reduce interest rates "within the limits allowed by law or by the Monetary sole outstanding promissory note for ₱2.5 million – PN 9707237 executed in July 1997 and due
Board." 120 days later or on Oct. 28, 1997 – became past due, and despite repeated demands,
  petitioners failed to make good on the note.
The Real Estate Mortgage agreement provided the same right to increase or reduce interest  
rates "at any time depending on whatever policy PNB may adopt in the future." Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default, as
  follows:
Petitioners religiously paid interest on the notes at the following rates:  
  Without need for notice or demand, failure to pay this note or any installment thereon, when due, shall constitute
1. 1st Promissory Note dated July 24, 1989 – 19.5%; default and in such cases or in case of garnishment, receivership or bankruptcy or suit of any kind filed against
2. 2nd Promissory Note dated Nov. 22, 1989 – 23%; me/us by the Bank, the outstanding principal of this note, at the option of the Bank and without prior notice of
3. 3rd Promissory Note dated Mar. 21, 1990 – 22%; demand, shall immediately become due and payable and shall be subject to a penalty charge of twenty four
4. 4th Promissory Note dated July 19, 1990 – 24%;
percent (24%) per annum based on the defaulted principal amount.
5. 5th Promissory Note dated Dec. 17, 1990 – 28%;
6. 6th Promissory Note dated Feb. 14, 1991 – 32%;  
7. 7th Promissory Note dated Mar. 1, 1991 – 30%; and PNB prepared a Statement of Account as of Oct. 12, 1998, detailing the amount due and
8. 8th Promissory Note dated July 11, 1991 – 24%.13 demandable from petitioners in the total amount of ₱3,620,541.60, broken down as follows:
   
In Aug. 1991, an Amendment to Credit Agreement was executed by the parties, with the Principal   P 2,500,000.00
following stipulation regarding interest: Interest 538,874.94
Penalties  581,666.66
  Total    P 3,620,541.60
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each  
Availment up to but not including the date of full payment thereof at the rate per annum which is determined by the Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the
Bank to be prime rate plus applicable spread in effect as of the date of each Availment.15 (Emphases supplied)
mortgage, and on Jan. 14, 1999, TCTs T-14250 and T-16208 were sold to it at auction for the
 
amount of ₱4,324,172.96.21 The sheriff’s certificate of sale was registered on Mar. 11, 1999.
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following
 
18 Promissory Notes, which petitioners settled – except the last (the note covering the
More than a year later, or on Mar. 24, 2000, petitioners filed Civil Case No. 5975, seeking
principal) – at the following interest rates:
  annulment of the foreclosure sale and an accounting of the PNB credit. Petitioners theorized
1. 9th Promissory Note dated Nov. 8, 1991 – 26% that after the first promissory note where they agreed to pay 19.5% interest, the succeeding
2. 10th Promissory Note dated Mar. 19, 1992 – 25%; stipulations for the payment of interest in their loan agreements with PNB – which allegedly
3. 11th Promissory Note dated July 11, 1992 – 23%;
4. 12th Promissory Note dated Nov. 10, 1992 – 21%; left to the latter the sole will to determine the interest rate – became null and void.
5. 13th Promissory Note dated Mar. 15, 1993 – 21%;  
6. 14th Promissory Note dated July 12, 1993 – 17.5%; Petitioners added that because the interest rates were fixed by respondent without their prior
7. 15th Promissory Note dated Nov. 17, 1993 – 21%;
8. 16th Promissory Note dated Mar. 28, 1994 – 21%; consent or agreement, these rates are void, and as a result, petitioners should only be made
9. 17th Promissory Note dated July 13, 1994 – 21%; liable for interest at the legal rate of 12%. They claimed further that they overpaid interests on the
10. 18th Promissory Note dated Nov. 16, 1994 – 16%; credit, and concluded that due to this overpayment of steep interest charges, their debt should now
11. 19th Promissory Note dated Apr. 10, 1995 – 21%;
12. 20th Promissory Note dated July 19, 1995 – 18.5%; be deemed paid, and the foreclosure and sale of TCTs T-14250 and T-16208 became unnecessary
13. 21st Promissory Note dated Dec. 18, 1995 – 18.75%; and wrongful. As for the imposed penalty of ₱581,666.66, petitioners alleged that since the Real
14. 22nd Promissory Note dated Apr. 22, 1996 – 18.5%; Estate Mortgage and the Supplement thereto did not include penalties as part of the secured amount,
15. 23rd Promissory Note dated July 22, 1996 – 18.5%;
16. 24th Promissory Note dated Nov. 25, 1996 – 18%; the same should be excluded from the foreclosure amount or bid price, even if such penalties are
17. 25th Promissory Note dated May 30, 1997 – 17.5%; and provided for in the final Promissory Note, or PN 9707237.22
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.  
  In addition, petitioners sought to be reimbursed an alleged overpayment of ₱848,285.00 made during
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time the period Aug. 21, 1991 to Mar. 5, 1998, resulting from respondent’s imposition of the alleged illegal
without notice, raise within the limits allowed by law x x x."
and steep interest rates. They also prayed to be awarded ₱200,000.00 by way of attorney’s fees.
 
 
On the other hand, the 18th up to the 26th promissory notes – including PN 9707237, which is
In its Answer, PNB denied that it unilaterally imposed or fixed interest rates; that petitioners
the 26th promissory note – carried the following provision:
agreed that without prior notice, PNB may modify interest rates depending on future policy
 
For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the
adopted by it; and that the imposition of penalties was agreed upon in the Credit Agreement. It
subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest rate prescribed added that the imposition of penalties is supported by the all-inclusive clause in the Real Estate
by law or the Monetary Board of the Central Bank of the Philippines, or in the Bank’s overall cost of funds. I/We Mortgage agreement which provides that the mortgage shall stand as security for any and all other
hereby agree that in the event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we shall obligations of whatever kind and nature owing to respondent, which thus includes penalties imposed
have the option top repay the loan or credit facility without penalty within ten (10) calendar days from the Interest upon default or non-payment of the principal and interest on due date.
Setting Date.  
  On pre-trial, the parties mutually agreed to the following material facts, among others:
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on  
the promissory notes, religiously paying the interests without objection or fail. But in 1997, a) That since 1991 up to 1998, petitioners had paid PNB the total amount of ₱3,484,287.00; and
 b) That PNB sent, and petitioners received, a Mar. 10, 2000 demand letter.  
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent and against the petitioners by DISMISSING
  the latter’s petition.
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the Amendment to  
Credit Agreement, Real Estate Mortgage and the Supplement thereto were all prepared by Costs against the petitioners.
 
respondent PNB and were presented to her and her husband Eduardo only for signature; that she SO ORDERED.
was told by PNB that the latter alone would determine the interest rate; that as to the Amendment to  
Credit Agreement, she was told that PNB would fill up the interest rate portion thereof; that at the time Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the TC granted only a modification in the award of
attorney’s fees, reducing the same from 10% to 1%. Thus, PNB was ordered to refund to petitioner the excess in attorney’s fees in
the parties executed the said Credit Agreement, she was not informed about the applicable spread the amount of ₱356,589.90, viz:
that PNB would impose on her account; that the interest rate portion of all Promissory Notes she and  
Eduardo issued were always left in blank when they executed them, with respondent’s mere WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate charged by the respondent as well as the
extra-judicial foreclosure proceedings and the Certificate of Sale. However, respondent is directed to refund to the petitioner the
assurance that it would be the one to enter or indicate thereon the prevailing interest rate at the time amount of ₱356,589.90 representing the excess interest charged against the latter.
of availment; and that they agreed to such arrangement. She further testified that the two Real Estate  
Mortgage agreements she signed did not stipulate the payment of penalties; that she and Eduardo No pronouncement as to costs.
consulted with a lawyer, and were told that PNB’s actions were improper, and so on Mar. 20, 2000,  
they wrote to the latter seeking a recomputation of their outstanding obligation; and when PNB did not Ruling of the CA
oblige, they instituted Civil Case No. 5975.27 Petitioners appealed to the CA, which issued the questioned Decision with the following decretal
  portion:
On cross-examination, Lydia testified that she has been in business for 20 years; that she also  
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The modified Decision of the RTC per Order
borrowed from other individuals and another bank; that it was only with banks that she was asked to dated June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit:
sign loan documents with no indicated interest rate; that she did not bother to read the terms of the  
loan documents which she signed; and that she received several PNB statements of account detailing 1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest period for PN. No. 9707237 should be 12% per
annum;
their outstanding obligations, but she did not complain; that she assumed instead that what was  
written therein is correct.28 2. [T]hat the attorney’s fees of10% is valid and binding; and
   
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price of ₱377,505.99 which is the difference
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for respondent, between the total amount due [PNB] and the amount of its bid price.
stated on cross-examination that as a practice, the determination of the prime rates of interest was  
the responsibility solely of PNB’s Treasury Department which is based in Manila; that these prime On the other hand, respondent did not appeal the June 4,2003 Order of the TC which reduced its
rates were simply communicated to all PNB branches for implementation; that there are a multitude of award of attorney’s fees. It simply raised the issue in its appellee’s brief in the CA, and included a
considerations which determine the interest rate, such as the cost of money, foreign currency values, prayer for the reversal of said Order.
PNB’s spread, bank administrative costs, profitability, and the practice in the banking industry; that in  
every repricing of each loan availment, the borrower has the right to question the rates, but that this In effect, the CA limited petitioners’ appeal to the following issues:
was not done by the petitioners; and that anything that is not found in the Promissory Note may be  
supplemented by the Credit Agreement. 1) Whether the interest rates on petitioners’ outstanding obligation were unilaterally and arbitrarily imposed by PNB;
  2) Whether the penalty charges were secured by the real estate mortgage; and
3) Whether the extrajudicial foreclosure and sale are valid.
Ruling of the RTC
On Feb. 28, 2003, the TC rendered judgment dismissing Civil Case No. 5975.  
  The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully paid a
It ruled that: total of ₱3,027,324.60 in interest for the period Aug. 7, 1991 to Aug. 6, 1997, over and above the
  ₱2.5 million principal obligation. And this is exclusive of payments for insurance premiums,
1. While the Credit Agreement allows PNB to unilaterally increase its spread over the floating interest rate at any time depending on documentary stamp taxes, and penalty. All the while, petitioners did not complain nor object to the
whatever policy it may adopt in the future, it likewise allows for the decrease at any time of the same. Thus, such stipulation imposition of interest; they in fact paid the same religiously and without fail for seven years. The
authorizing both the increase and decrease of interest rates as may be applicable is valid,31 as was held in Consolidated Bank and
Trust Corporation (SOLIDBANK) v. CA;
appellate court ruled that petitioners are thus estopped from questioning the same.
   
2. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead be made dependent on prevailing rates The CA nevertheless noted that for the period July 30, 1997 to Aug. 14, 1997, PNB wrongly applied
upon which to peg such variable interest rates;
 
an interest rate of 25.72% instead of the agreed 25%; thus it overcharged petitioners, and the latter
3. The Promissory Note, as the principal contract evidencing petitioners’ loan, prevails over the Credit Agreement and the Real paid, an excess of ₱736.56 in interest.
Estate Mortgage.  
 
As such, the rate of interest, penalties and attorney’s fees stipulated in the Promissory Note prevail over those mentioned in the
On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage
Credit Agreement and the Real Estate Mortgage agreements; agreements contemplated the inclusion of the PN 9707237-stipulated 24% penalty in the amount to
  be secured by the mortgaged property, thus –
4. Roughly, PNB’s computation of the total amount of petitioners’ obligation is correct;
 
 
5. Because the loan was admittedly due and demandable, the foreclosure was regularly made; For and in consideration of certain loans, overdrafts and other credit accommodations obtained from
  the MORTGAGEE and to secure the payment of the same and those others that the MORTGAGEE
6. By the admission of petitioners during pre-trial, all payments made to PNB were properly applied to the principal, interest and
penalties.
may extend to the MORTGAGOR, including interest and expenses, and other obligations owing by
  the MORTGAGOR to the MORTGAGEE, whether direct or indirect, principal or secondary, as
The dispositive portion of the TC’s Decision reads:
appearing in the accounts, books and records of the MORTGAGEE, the MORTGAGOR does hereby against any future loss or damage by being compelled to retain counsel x x x to institute judicial
transfer and convey by way of mortgage unto the MORTGAGEE x x x43 (Emphasis supplied) proceedings for the collection of its credit."55 And because the instant case involves a simple
  extrajudicial foreclosure, attorney’s fees may be equitably tempered.
The CA believes that the 24% penalty is covered by the phrase "and other obligations owing by the  
mortgagor to the mortgagee" and should thus be added to the amount secured by the mortgages.44 Respondent’s Arguments
  For its part, respondent disputes petitioners’ claim that interest rates were unilaterally fixed by
The CA then proceeded to declare valid the foreclosure and sale of properties covered by TCTs T- it, taking relief in the CA pronouncement that petitioners are deemed estopped by their failure
14250 and T-16208, which came as a necessary result of petitioners’ failure to pay the outstanding to question the imposed rates and their continued payment thereof without opposition. It adds
obligation upon demand.45 The CA saw fit to increase the TC’s award of 1% to 10%, finding the latter that because the Credit Agreement and promissory notes contained both an escalation clause
rate to be reasonable and citing the Real Estate Mortgage agreement which authorized the collection and a de-escalation clause, it may not be said that the bank violated the principle of mutuality.
of the higher rate.46 Besides, the increase or decrease in interest rates have been mutually agreed upon by the
  parties, as shown by petitioners’ continuous payment without protest. Respondent adds that
Finally, the CA ruled that petitioners are entitled to ₱377,505.09 surplus, which is the difference the alleged unilateral imposition of interest rates is not a proper subject for review by the Court
between PNB’s bid price of ₱4,324,172.96 and petitioners’ total computed obligation as of Jan. 14, because the issue was never raised in the lower court.
1999, or the date of the auction sale, in the amount of ₱3,946,667.87.  
  As for petitioners’ claim that interest rates imposed by it are null and void for the reasons that 1) the
Hence, the present Petition. Credit Agreements and the promissory notes were signed in blank; 2) interest rates were at short
  periods; 3) no interest rates could be charged where no agreement on interest rates was made in
Petitioners’ Arguments writing; 4) PNB fixed interest rates on the basis of arbitrary policies and standards left to its choosing;
Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment and 5) interest rates based on prime rate plus applicable spread are indeterminate and arbitrary –
to Credit Agreement should be declared null and void, for they relegated to PNB the sole PNB counters:
power to fix interest rates based on arbitrary criteria or factors such as bank policy, profitability,  
cost of money, foreign currency values, and bank administrative costs; spaces for interest rates in the a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank – Respondent claims that
two Credit Agreements and the promissory notes were left blank for PNB to unilaterally fill, and their this issue was never raised in the lower court. Besides, documentary evidence prevails over testimonial evidence;
consent or agreement to the interest rates imposed thereafter was not obtained; the interest rate, Lydia Silos’ testimony in this regard is self-serving, unsupported and uncorroborated, and for being the lone
evidence on this issue. The fact remains that these documents are in proper form, presumed regular, and endure,
which consists of the prime rate plus the bank spread, is determined not by agreement of the parties against arbitrary claims by Silos – who is an experienced business person – that she signed questionable loan
but by PNB’s Treasury Department in Manila. Petitioners conclude that by this method of fixing the documents whose provisions for interest rates were left blank, and yet she continued to pay the interests without
interest rates, the principle of mutuality of contracts is violated, and public policy as well as Circular protest for a number of years.
90549 of the then Central Bank had been breached.  
  b. That interest rates were at short periods – Respondent argues that the law which governs and prohibits
Petitioners question the CA’s application of the principle of estoppel, saying that no estoppel can changes in interest rates made more than once every twelve months has been removed with the issuance of
proceed from an illegal act. Though they failed to timely question the imposition of the alleged illegal Presidential Decree No. 858.
 
interest rates and continued to pay the loan on the basis of these rates, they cannot be deemed to c. That no interest rates could be charged where no agreement on interest rates was made in writing in violation
have acquiesced, and hence could recover what they erroneously paid.50 of Article 1956 of the Civil Code, which provides that no interest shall be due unless it has been expressly
  stipulated in writing – Respondent insists that the stipulated 25% per annum as embodied in PN 9707237 should
Petitioners argue that if the interest rates were nullified, then their obligation to PNB is deemed be imposed during the interim, or the period after the loan became due and while it remains unpaid, and not the
extinguished as of July 1997; moreover, it would appear that they even made an over payment to the legal interest of 12% as claimed by petitioners.
bank in the amount of ₱984,287.00.  
  d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its choosing – According to
respondent, interest rates were fixed taking into consideration increases or decreases as provided by law or by
Next, petitioners suggest that since the Real Estate Mortgage agreements did not include nor specify, the Monetary Board, the bank’s overall costs of funds, and upon agreement of the parties.
as part of the secured amount, the penalty of 24% authorized in PN 9707237, such amount of  
₱581,666.66 could not be made answerable by or collected from the mortgages covering TCTs T- e. That interest rates based on prime rate plus applicable spread are indeterminate and arbitrary – On this score,
14250 and T-16208. Claiming support from Philippine Bank of Communications [PBCom] v. CA,51 respondent submits there are various factors that influence interest rates, from political events to economic
petitioners insist that the phrase "and other obligations owing by the mortgagor to the mortgagee"52 developments, etc.; the cost of money, profitability and foreign currency transactions may not be discounted.
in the mortgage agreements cannot embrace the ₱581,666.66 penalty, because, as held in the  
PBCom case, "[a] penalty charge does not belong to the species of obligations enumerated in the On the issue of penalties, respondent reiterates the TC’s finding that during pre-trial, petitioners
mortgage, hence, the said contract cannot be understood to secure the penalty";53 while the admitted that the Statement of Account as of Oct. 12, 1998 – which detailed and included penalty
mortgages are the accessory contracts, what items are secured may only be determined from the charges as part of the total outstanding obligation owing to the bank – was correct. Respondent
provisions of the mortgage contracts, and not from the Credit Agreement or the promissory notes. justifies the imposition and collection of a penalty as a normal banking practice, and the standard rate
  per annum for all commercial banks, at the time, was 24%.
Finally, petitioners submit that the TC’s award of 1% attorney’s fees should be maintained, given that  
in foreclosures, a lawyer’s work consists merely in the preparation and filing of the petition, and Respondent adds that the purpose of the penalty or a penal clause for that matter is to ensure the
involves minimal study.54 To allow the imposition of a staggering ₱396,211.00 for such work would performance of the obligation and substitute for damages and the payment of interest in the event of
be contrary to equity. Petitioners state that the purpose of attorney’s fees in cases of this nature "is non-compliance.62 And the promissory note – being the principal agreement as opposed to the
not to give respondent a larger compensation for the loan than the law already allows, but to protect it
mortgage, which is a mere accessory – should prevail. This being the case, its inclusion as part of the The Credit Agreement provided inter alia, that —
secured amount in the mortgage agreements is valid and necessary.  
  (a) The BANK reserves the right to increase the interest rate within the limits allowed by law at any time
Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting depending on whatever policy it may adopt in the future; Provided, that the interest rate on this accommodation
consolidation of its ownership over TCTs T-14250 and T-16208; that petitioners filed Civil Case No. shall be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity
5975 ostensibly to question the foreclosure and sale of properties covered by TCTs T-14250 and T- date of the increase or decrease in the maximum interest rate.
16208 in a desperate move to retain ownership over these properties, because they failed to timely  
redeem them. The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without
  notice, beyond the stipulated rate of 12% but only "within the limits allowed by law."
Respondent directs the attention of the Court to its petition in G.R. No. 181046,63 where the propriety  
of the CA’s ruling on the following issues is squarely raised: The Real Estate Mortgage contract likewise provided that —
 
1. That the interest rate to be applied after the expiration of the first 30-day interest period for PN 9707237 should
 
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as well as the interest
be 12% per annum; and on the amount which may have been advanced by the MORTGAGEE, in accordance with the provision hereof, shall be subject
2. That PNB should reimburse petitioners the excess in the bid price of ₱377,505.99 which is the difference during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may
between the total amount due to PNB and the amount of its bid price. prescribe for its debtors.
   
Issues: In making the unilateral increases in interest rates, petitioner bank relied on the escalation
1. WON interest rate provision in the credit agreement should be nullified. (YES) clause contained in their credit agreement which provides, as follows:
2. WON PNB is entitled to any interest except the legal rate from date of demand  
3.  WON the penalties are included in the secured amount, subject to foreclosure, when no penalties The Bank reserves the right to increase the interest rate within the limits allowed by law at any time
are mentioned [nor] provided for in the real estate mortgage as a secured amount and therefore the depending on whatever policy it may adopt in the future and provided, that, the interest rate on this
amount of penalties should have been excluded from [the] foreclosure amount. (NO) accommodation shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed
4. WON the CA erred in reversing the ruling of the lower court, which reduced the attorney’s fees of upon shall take effect on the effectivity date of the increase or decrease in maximum interest rate.
10% of the total indebtedness charged in the extrajudicial foreclosure to only 1%, and [awarding] 10%  
attorney’s fees. (YES) This clause is authorized by Section 2 of PD 1684 which further amended Act No. 2655 ("The
  Usury Law"), as amended, thus:
Held:  
The Court grants the Petition. Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:
   
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of
Before anything else, it must be said that it is not the function of the Court to re-examine or re- interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased bylaw or by
evaluate evidence adduced by the parties in the proceedings below. The rule admits of certain well- the Monetary Board; Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of
recognized exceptions, though, as when the lower courts’ findings are not supported by the evidence interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary
Board; Provided further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the
on record or are based on a misapprehension of facts, or when certain relevant and undisputed facts increase or decrease in the maximum rate of interest.
were manifestly overlooked that, if properly considered, would justify a different conclusion. This case  
falls within such exceptions. Section 1 of P.D. No. 1684 also empowered the Central Bank’s Monetary Board to prescribe
  the maximum rates of interest for loans and certain forbearances. Pursuant to such authority,
The Court notes that on Mar. 5, 2008, a Resolution was issued by the Court’s First Division denying the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of
respondent’s petition in G.R. No. 181046, due to late filing, failure to attach the required affidavit of which provides:
service of the petition on the TC and the petitioners, and submission of a defective verification and  
certification of non-forum shopping. On June 25, 2008, the Court issued another Resolution denying Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby
with finality respondent’s MR of the Mar. 5, 2008 Resolution. And on Aug. 15, 2008, entry of judgment amended to read as follows:
was made. This thus settles the issues, as above-stated, covering a) the interest rate – or 12% per  
annum– that applies upon expiration of the first 30 days interest period provided under PN 9707237, Sec. 1303. Interest and Other Charges.
and b)the CA’s decree that PNB should reimburse petitioner the excess in the bid price of  
₱377,505.09. — The rate of interest, including commissions, premiums, fees and other charges, on any loan, or
forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured,
  shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.
It appears that respondent’s practice, more than once proscribed by the Court, has been carried over  
once more to the petitioners. In a number of decided cases, the Court struck down provisions in credit P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate
documents issued by PNB to, or required of, its borrowers which allow the bank to increase or freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or
decrease interest rates "within the limits allowed by law at any time depending on whatever policy it forbearance of money, goods or credits. In fine, they can agree to adjust, upward or
may adopt in the future." Thus, in Philippine National Bank v. CA,64 such stipulation and similar ones downward, the interest previously stipulated. However, contrary to the stubborn insistence of
were declared in violation of Article 130865 of the Civil Code. In a second case, Philippine National petitioner bank, the said law and circular did not authorize either party to unilaterally raise the
Bank v. CA,66 the very same stipulations found in the credit agreement and the promissory notes interest rate without the other’s consent.
prepared and issued by the respondent were again invalidated. The Court therein said:  
 
It is basic that there can be no contract in the true sense in the absence of the element of equivalent to virtually half of the entire principal (₱7,735,004.66) which was applied to interest alone. By the time
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one the spouses tendered the amount of ₱40,142,518.00 in settlement of their obligations; respondent bank was
who contracts, his act has no more efficacy than if it had been done under duress or by a demanding ₱58,377,487.00 over and above those amounts already previously paid by the spouses.
 
person of unsound mind. Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but
  based on reasonable and valid grounds. Here, as clearly demonstrated above, not only [are] the increases of the
Similarly, contract changes must be made with the consent of the contracting parties. The interest rates on the basis of the escalation clause patently unreasonable and unconscionable, but also there are
minds of all the parties must meet as to the proposed modification, especially when it affects no valid and reasonable standards upon which the increases are anchored.
an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that  
the rate of interest is always a vital component, for it can make or break a capital venture. In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties
Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect. to agree to changes in the interest rate in writing, we hold that the unilateral and progressive increases imposed
by respondent PNB were null and void. Their effect was to increase the total obligation on an P8M loan to an
  amount way over three times that which was originally granted to the borrowers. That these increases,
We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives occasioned by crafty manipulations in the interest rates is unconscionable and neutralizes the salutary policies of
it unbridled right to unilaterally upwardly adjust the interest on private respondents’ loan. That extending loans to spur business cannot be disputed.
would completely take away from private respondents the right to assent to an important  
modification in their agreement, and would negate the element of mutuality in contracts. In Still, in a fourth case, Philippine National Bank v. CA, the above doctrine was reiterated:
Philippine National Bank v. CA, et al., (1991) we held —  
  The promissory note contained the following stipulation:
The unilateral action of the PNB in increasing the interest rate on the private respondent’s loan violated  
the mutuality of contracts ordained in Article 1308 of the Civil Code: For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER of the PHILIPPINE NATIONAL
  BANK, at its office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY (₱15,000.00), Philippine Currency,
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the together with interest thereon at the rate of 12% per annum until paid, which interest rate the Bank may at any time without notice,
will of one of them. raise within the limits allowed by law, and I/we also agree to pay jointly and severally ____% per annum penalty charge, by way of
liquidated damages should this note be unpaid or is not renewed on due dated.
   
In order that obligations arising from contracts may have the force of law between the parties, there must be Payment of this note shall be as follows:
mutuality between the parties based on their essential equality. A contract containing a condition which makes its  
fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void. Hence, even *THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a license  
(although in fact there was none) to increase the interest rate at will during the term of the loan, that license would On the reverse side of the note the following condition was stamped:
have been null and void for being violative of the principle of mutuality essential in contracts. It would have  
invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on All short-term loans to be granted starting Jan. 1, 1978 shall be made subject to the condition that any and/or all
equal footing, the weaker party’s (the debtor) participation being reduced to the alternative "to take it or leave it" extensions hereof that will leave any portion of the amount still unpaid after 730 days shall automatically convert
Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and the outstanding balance into a medium or long-term obligation as the case may be and give the Bank the right to
imposition. charge the interest rates prescribed under its policies from the date the account was originally granted.
   
Then again, in a third case, Spouses Almeda v. CA, the Court invalidated the very same To secure payment of the loan the parties executed a real estate mortgage contract which provided:
provisions in the respondent’s prepared Credit Agreement, declaring thus:  
  (k) INCREASE OF INTEREST RATE:
 
The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that
any obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount
which may have been advanced by the MORTGAGEE, in accordance with the provision hereof, shall be subject
between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor
of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid.
   
To begin with, PNB’s argument rests on a misapprehension of the import of the appellate court’s ruling. The CA
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the
terms of its contract with petitioners by increasing the interest rates on the loan without the prior assent of the nullified the interest rate increases not because the promissory note did not comply with P.D. No. 1684 by
providing for a de-escalation, but because the absence of such provision made the clause so one-sided as to
latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article
1956 that "No interest shall be due unless it has been expressly stipulated in writing." What has been "stipulated make it unreasonable.
 
in writing" from a perusal of interest rate provision of the credit agreement signed between the parties is that
petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v. Navarro that
although P.D. No. 1684 is not to be retroactively applied to loans granted before its effectivity, there must
circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon
agreement. nevertheless be a de-escalation clause to mitigate the one-sidedness of the escalation clause. Indeed because of
concern for the unequal status of borrowers vis-à-vis the banks, our cases after Banco Filipino have fashioned the
 
Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was rule that any increase in the rate of interest made pursuant to an escalation clause must be the result of
agreement between the parties.
the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily resolved by a careful
reading of the credit agreement because the same plainly uses the phrase "interest rate agreed upon," in  
Thus in Philippine National Bank v. CA, two promissory notes authorized PNB to increase the stipulated interest
reference to the original 21% interest rate.
per annum" within the limits allowed by law at any time depending on whatever policy [PNB] may adopt in the
  future; Provided, that the interest rate on this note shall be correspondingly decreased in the event that the
Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in applicable maximum interest rate is reduced by law or by the Monetary Board." The real estate mortgage likewise
contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to as much as provided:
68% is excessive and unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an amount  
 The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount issued by banks, even if stipulated in the promissory notes, cannot be given effect under the Truth in Lending
which may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject Act.73
during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the  
MORTGAGEE may prescribe for its debtors. Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora, the above
  pronouncements were reiterated to debunk PNB’s repeated reliance on its invalidated contract
Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41% and then to
48%. This Court declared the increases unilaterally imposed by [PNB] to be in violation of the principle of
stipulations:
mutuality as embodied in Art.1308 of the Civil Code, which provides that "[t]he contract must bind both contracting  
parties; its validity or compliance cannot be left to the will of one of them." As the Court explained: We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996 case of PNB v. CA and
  Spouses Basco. Taking no heed of these rulings, the escalation clause PNB used in the present case to justify the
In order that obligations arising from contracts may have the force of law between the parties, there must be increased interest rates is no different from the escalation clause assailed in the 1996 PNB case; in both, the
mutuality between the parties based on their essential equality. A contract containing a condition which makes its interest rates were increased from the agreed 12% per annum rate to 42%.
fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs.  
Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the ₱1.8 million loan agreement between the PNB On the strength of this ruling, PNB’s argument – that the spouses Rocamora’s failure to contest the
and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate increased interest rates that were purportedly reflected in the statements of account and the demand
at will during the term of the loan, that license would have been null and void for being violative of the principle of letters sent by the bank amounted to their implied acceptance of the increase – should likewise fail.
mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of  
adhesion, where the parties do not bargain on equal footing, the weaker party’s (the debtor) participation being Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the increased interest rates
reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a prompted the lower courts to declare excessive and illegal the interest rates imposed. Togo around this
contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and lower court finding, PNB alleges that the ₱206,297.47 deficiency claim was computed using only the original 12%
imposition. per annum interest rate. We find this unlikely. Our examination of PNB’s own ledgers, included in the records of
  the case, clearly indicates that PNB imposed interest rates higher than the agreed 12% per annum rate. This
A similar ruling was made in Philippine National Bank v. CA. The credit agreement in that case confirmatory finding, albeit based solely on ledgers found in the records, reinforces the application in this case of
the rule that findings of the RTC, when affirmed by the CA, are binding upon this Court.75 (Emphases supplied)
provided:
 
 
The BANK reserves the right to increase the interest rate within the limits allowed by law at any time depending on
Verily, all these cases, including the present one, involve identical or similar provisions found
whatever policy it may adopt in the future: Provided, that the interest rate on this accommodation shall be in respondent’s credit agreements and promissory notes. Thus, the July 1989 Credit Agreement
correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the executed by petitioners and respondent contained the following stipulation on interest:
Monetary Board.  
  1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum]. Interest shall be payable
As in the first case, PNB successively increased the stipulated interest so that what was in advance every one hundred twenty days at the rate prevailing at the time of the renewal.
originally 12% per annum became, after only two years, 42%. In declaring the increases  
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the
invalid, we held: Bank may adopt in the future, including without limitation, the shifting from the floating interest rate system to the
  fixed interest rate system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per annum
We cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it unbridled right to which is equal to the Bank’s spread over the current floating interest rate, the Borrower hereby agrees that the
unilaterally upwardly adjust the interest on private respondents’ loan. That would completely take away from Bank may, without need of notice to the Borrower, increase or decrease its spread over the floating interest rate at
private respondents the right to assent to an important modification in their agreement, and would negate the any time depending on whatever policy it may adopt in the future.76 (Emphases supplied)
element of mutuality in contracts.  
  while the eight promissory notes issued pursuant thereto granted PNB the right to increase or reduce interest
Only recently we invalidated another round of interest increases decreed by PNB pursuant to rates "within the limits allowed by law or the Monetary Board"77 and the Real Estate Mortgage agreement
a similar agreement it had with other borrowers: included the same right to increase or reduce interest rates "at any time depending on whatever policy PNB may
  adopt in the future."
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could  
possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels which would On the basis of the Credit Agreement, petitioners issued promissory notes which they signed in blank,
either enslave its borrowers or lead to a hemorrhaging of their assets. and respondent later on entered their corresponding interest rates, as follows:
   
In this case no attempt was made by PNB to secure the conformity of private respondents to the successive 1st Promissory Note dated July 24, 1989 – 19.5%;
increases in the interest rate. Private respondents’ assent to the increases can not be implied from their lack of 2nd Promissory Note dated Nov. 22, 1989 – 23%;
response to the letters sent by PNB, informing them of the increases. For as stated in one case, no one receiving 3rd Promissory Note dated Mar. 21, 1990 – 22%;
a proposal to change a contract is obliged to answer the proposal. 4th Promissory Note dated July 19, 1990 – 24%;
5th Promissory Note dated Dec. 17, 1990 – 28%;
  6th Promissory Note dated Feb. 14, 1991 – 32%;
We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, 7th Promissory Note dated Mar. 1, 1991 – 30%; and
Inc. v. Philippine National Bank, thus – 8th Promissory Note dated July 11, 1991 – 24%.79
   
Courts have the authority to strike down or to modify provisions in promissory notes that grant the lenders On the other hand, the Aug. 1991 Amendment to Credit Agreement contains the following stipulation
unrestrained power to increase interest rates, penalties and other charges at the latter’s sole discretion and regarding interest:
without giving prior notice to and securing the consent of the borrowers. This unilateral authority is anathema to  
the mutuality of contracts and enable lenders to take undue advantage of borrowers. Although the Usury Law has 1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each
been effectively repealed, courts may still reduce iniquitous or unconscionable rates charged for the use of Availment up to but not including the date of full payment thereof at the rate per annum which is determined by the
money. Furthermore, excessive interests, penalties and other charges not revealed in disclosure statements Bank to be prime rate plus applicable spread in effect as of the date of each Availment.
 
and under this Amendment to Credit Agreement, petitioners again executed and signed the following banks or financial institutions charge or offer to charge for similar accommodations; and/or the resulting
promissory notes in blank, for the respondent to later on enter the corresponding interest rates, which profitability to the LENDER after due consideration of all dealings with the BORROWER.
it did, as follows:  
It should be pointed out that the authority to review the interest rate was given [to] UCPB alone as the lender.
  Moreover, UCPB may apply the considerations enumerated in this provision as it wishes. As worded in the above
9th Promissory Note dated Nov. 8, 1991 – 26%;
10th Promissory Note dated Mar. 19, 1992 – 25%; provision, UCPB may give as much weight as it desires to each of the following considerations: (1) the prevailing
11th Promissory Note dated July 11, 1992 – 23%; financial and monetary condition;(2) the rate of interest and charges which other banks or financial institutions
12th Promissory Note dated Nov. 10, 1992 – 21%; charge or offer to charge for similar accommodations; and/or(3) the resulting profitability to the LENDER (UCPB)
13th Promissory Note dated Mar. 15, 1993 – 21%; after due consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of the
14th Promissory Note dated July 12, 1993 – 17.5%; interest rate provision, there is no fixed margin above or below these considerations.
15th Promissory Note dated Nov. 17, 1993 – 21%;
 
16th Promissory Note dated Mar. 28, 1994 – 21%;
17th Promissory Note dated July 13, 1994 – 21%; In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as to the interest
18th Promissory Note dated Nov. 16, 1994 – 16%; to be imposed, as both options violate the principle of mutuality of contracts.
19th Promissory Note dated Apr. 10, 1995 – 21%;  
20th Promissory Note dated July 19, 1995 – 18.5%;
21st Promissory Note dated Dec. 18, 1995 – 18.75%;
To repeat what has been said in the above-cited cases, any modification in the contract, such
22nd Promissory Note dated Apr. 22, 1996 – 18.5%; as the interest rates, must be made with the consent of the contracting parties.The minds of
23rd Promissory Note dated July 22, 1996 – 18.5%; all the parties must meet as to the proposed modification, especially when it affects an
24th Promissory Note dated Nov. 25, 1996 – 18%;
25th Promissory Note dated May 30, 1997 – 17.5%; and
important aspect of the agreement. In the case of loan agreements, the rate of interest is a
26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%. principal condition, if not the most important component. Thus, any modification thereof must
  be mutually agreed upon; otherwise, it has no binding effect.
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may  
at any time without notice, raise within the limits allowed by law x x x."82 On the other hand, the 18th What is even more glaring in the present case is that, the stipulations in question no longer
up to the 26th promissory notes – which includes PN 9707237 – carried the following provision: provide that the parties shall agree upon the interest rate to be fixed; -instead, they are worded
  in such a way that the borrower shall agree to whatever interest rate respondent fixes. In
For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the credit agreements covered by the above-cited cases, it is provided that:
subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest rate prescribed  
by law or the Monetary Board of the Central Bank of the Philippines, or in the Bank’s overall cost of funds. I/We The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on
hereby agree that in the event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we shall whatever policy it may adopt in the future: Provided, that, the interest rate on this accommodation shall be
have the option to prepay the loan or credit facility without penalty within ten (10) calendar days from the Interest correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the
Setting Date. Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity
  date of the increase or decrease in maximum interest rate.
These stipulations must be once more invalidated, as was done in previous cases. The  
common denominator in these cases is the lack of agreement of the parties to the imposed Whereas, in the present credit agreements under scrutiny, it is stated that:
interest rates. For this case, this lack of consent by the petitioners has been made obvious by  
the fact that they signed the promissory notes in blank for the respondent to fill. We find IN THE JULY 1989 CREDIT AGREEMENT
credible the testimony of Lydia in this respect. Respondent failed to discredit her; in fact, its witness  
PNB Kalibo Branch Manager Aspa admitted that interest rates were fixed solely by its Treasury (b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on whatever policy the
Bank may adopt in the future, including without limitation, the shifting from the floating interest rate system to the
Department in Manila, which were then simply communicated to all PNB branches for fixed interest rate system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per annum,
implementation. If this were the case, then this would explain why petitioners had to sign the which is equal to the Bank’s spread over the current floating interest rate, the Borrower hereby agrees that the
promissory notes in blank, since the imposable interest rates have yet to be determined and Bank may, without need of notice to the Borrower, increase or decrease its spread over the floating interest rate at
fixed by respondent’s Treasury Department in Manila. any time depending on whatever policy it may adopt in the future.86 (Emphases supplied)
   
Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB fixes – IN THE AUG. 1991 AMENDMENT TO CREDIT AGREEMENT
such as cost of money, foreign currency values, bank administrative costs, profitability, and  
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each
considerations which affect the banking industry – it can be seen that considerations which Availment up to but not including the date of full payment thereof at the rate per annum which is determined by the
affect PNB’s borrowers are ignored. A borrower’s current financial state, his feedback or opinions, Bank to be prime rate plus applicable spread in effect as of the date of each Availment.
the nature and purpose of his borrowings, the effect of foreign currency values or fluctuations on his  
business or borrowing, etc. – these are not factors which influence the fixing of interest rates to be Plainly, with the present credit agreement, the element of consent or agreement by the
imposed on him. Clearly, respondent’s method of fixing interest rates based on one-sided, borrower is now completely lacking, which makes respondent’s unlawful act all the more
indeterminate, and subjective criteria such as profitability, cost of money, bank costs, etc. is arbitrary reprehensible.
for there is no fixed standard or margin above or below these considerations.  
  Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for
The stipulation in the promissory notes subjecting the interest rate to review does not render "[e]stoppel cannot be predicated on an illegal act. As between the parties to a contract,
the imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. validity cannot be given to it by estoppel if it is prohibited by law or is against public policy."
According to said stipulation:  
  It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No. 3765,
The interest rate shall be subject to review and may be increased or decreased by the LENDER considering which was enacted "to protect x x x citizens from a lack of awareness of the true cost of credit to the
among others the prevailing financial and monetary conditions; or the rate of interest and charges which other
user by using a full disclosure of such cost with a view of preventing the uninformed use of credit to receiving a proposal to modify a loan contract, especially regarding interest, is obliged to answer the
the detriment of the national economy."89 The law "gives a detailed enumeration of the specific proposal."
information required to be disclosed, among which are the interest and other charges incident to the  
extension of credit."90 Section 4 thereof provides that a disclosure statement must be furnished prior Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial
to the consummation of the transaction, thus: interest rates, but actually accompanied by provisions written in fine print that allow lenders to later on
  increase or decrease interest rates unilaterally, without the consent of the borrower, and depending
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, on complex and subjective factors. Because they have been lured into these contracts by initially low
a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed
by the Board, the following information: interest rates, borrowers get caught and stuck in the web of subsequent steep rates and penalties,
  surcharges and the like. Being ordinary individuals or entities, they naturally dread legal complications
(1) the cash price or delivered price of the property or service to be acquired; and cannot afford court litigation; they succumb to whatever charges the lenders impose. At the very
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2); least, borrowers should be charged rightly; but then again this is not possible in a one-sided credit
(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are system where the temptation to abuse is strong and the willingness to rectify is made weak by the
not incident to the extension of credit; eternal desire for profit.
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and  
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding Given the above supposition, the Court cannot subscribe to respondent’s argument that in every
unpaid balance of the obligation. repricing of petitioners’ loan availment, they are given the right to question the interest rates imposed.
  The import of respondent’s line of reasoning cannot be other than that if one out of every hundred
Under Section 4(6), "finance charge" represents the amount to be paid by the debtor incident to the borrowers questions respondent’s practice of unilaterally fixing interest rates, then only the loan
extension of credit such as interest or discounts, collection fees, credit investigation fees, attorney’s arrangement with that lone complaining borrower will enjoy the benefit of review or re-negotiation; as
fees, and other service charges. The total finance charge represents the difference between (1) the to the 99 others, the questionable practice will continue unchecked, and respondent will continue to
aggregate consideration (down payment plus installments) on the part of the debtor, and (2) the sum reap the profits from such unscrupulous practice. The Court can no more condone a view so
of the cash price and non-finance charges. perverse. This is exactly what the Court meant in the immediately preceding cited case when it said
  that "the belated discovery of the true cost of credit does not reverse the ill effects of an already
By requiring the petitioners to sign the credit documents and the promissory notes in blank, and then consummated business decision;"95 as to the 99 borrowers who did not or could not complain, the
unilaterally filling them up later on, respondent violated the Truth in Lending Act, and was remiss in its illegal act shall have become a fait accompli– to their detriment, they have already suffered the
disclosure obligations. In one case, which the Court finds applicable here, it was held: oppressive rates.
   
UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes after Besides, that petitioners are given the right to question the interest rates imposed is, under the
their execution, then they were duly notified of the terms thereof, in substantial compliance with the Truth in
Lending Act.
circumstances, irrelevant; we have a situation where the petitioners do not stand on equal footing with
  the respondent. It is doubtful that any borrower who finds himself in petitioners’ position would dare
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must question respondent’s power to arbitrarily modify interest rates at any time. In the second place, on
be furnished prior to the consummation of the transaction. what basis could any borrower question such power, when the criteria or standards – which are really
  one-sided, arbitrary and subjective – for the exercise of such power are precisely lost on him?
The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof,  
proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the 26th
interest rates, deduction of interests from the loaned amount, and the like. The law thereby seeks to protect
debtors by permitting them to fully appreciate the true cost of their loan, to enable them to give full consent to the
promissory notes, petitioners are granted the option to prepay the loan or credit facility without penalty
contract, and to properly evaluate their options in arriving at business decisions. Upholding UCPB’s claim of within 10 calendar days from the Interest Setting Date if they are not agreeable to the interest rate
substantial compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of the true fixed. It has been shown that the promissory notes are executed and signed in blank, meaning that by
cost of credit will too often not be able to reverse the ill effects of an already consummated business decision. the time petitioners learn of the interest rate, they are already bound to pay it because they have
  already pre-signed the note where the rate is subsequently entered.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso after execution, are  
not sufficient notification from UCPB. As earlier discussed, the interest rate provision therein does not sufficiently Besides, premium may not be placed upon a stipulation in a contract which grants one party the right
indicate with particularity the interest rate to be applied to the loan covered by said promissory notes.
to choose whether to continue with or withdraw from the agreement if it discovers that what the other
 
party has been doing all along is improper or illegal.
However, the one-year period within which an action for violation of the Truth in Lending Act may be
 
filed evidently prescribed long ago, or sometime in 2001, one year after petitioners received the Mar.
Thus said, respondent’s arguments relative to the credit documents – that documentary evidence
2000 demand letter which contained the illegal charges.
prevails over testimonial evidence; that the credit documents are in proper form, presumed regular,
 
and endure, against arbitrary claims by petitioners, experienced business persons that they are, they
The fact that petitioners later received several statements of account detailing its outstanding
signed questionable loan documents whose provisions for interest rates were left blank, and yet they
obligations does not cure respondent’s breach. To repeat, the belated discovery of the true cost of
continued to pay the interests without protest for a number of years – deserve no consideration.
credit does not reverse the ill effects of an already consummated business decision.
 
 
With regard to interest, the Court finds that since the escalation clause is annulled, the principal
Neither may the statements be considered proposals sent to secure the petitioners’ conformity; they
amount of the loan is subject to the original or stipulated rate of interest, and upon maturity, the
were sent after the imposition and application of the interest rate, and not before. And even if it were
amount due shall be subject to legal interest at the rate of 12% per annum. This is the uniform ruling
to be presumed that these are proposals or offers, there was no acceptance by petitioners. "No one
adopted in previous cases, including those cited here.96 The interests paid by petitioners should be
applied first to the payment of the stipulated or legal and unpaid interest, as the case may be, and For the fixing of the proper amounts due and owing to the parties – to the respondent as creditor and
later, to the capital or principal.97 Respondent should then refund the excess amount of interest that to the petitioners who are entitled to a refund as a consequence of overpayment considering that they
it has illegally imposed upon petitioners; "[t]he amount to be refunded refers to that paid by petitioners paid more by way of interest charges than the 12% per annum103 herein allowed – the case should
when they had no obligation to do so."98 Thus, the parties’ original agreement stipulated the payment be remanded to the lower court for proper accounting and computation, applying the following
of 19.5% interest; however, this rate was intended to apply only to the first promissory note which procedure:
expired on Nov. 21, 1989 and was paid by petitioners; it was not intended to apply to the whole  
duration of the loan. Subsequent higher interest rates have been declared illegal; but because only 1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;
 
the rates are found to be improper, the obligation to pay interest subsists, the same to be fixed at the 2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall carry an interest rate of only 12% per
legal rate of 12% per annum. However, the 12% interest shall apply only until June 30, 2013. Starting annum.104 Thus, interest payment made in excess of 12% on the 2nd promissory note shall immediately be applied to the principal,
July1, 2013, the prevailing rate of interest shall be 6% per annum pursuant to our ruling in Nacar v. and the principal shall be accordingly reduced. The reduced principal shall then be subjected to the 12%105 interest on the 3rd
promissory note, and the excess over 12% interest payment on the 3rd promissory note shall again be applied to the principal, which
Gallery Frames99 and Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799. shall again be reduced accordingly. The reduced principal shall then be subjected to the 12% interest on the 4th promissory note,
  and the excess over12% interest payment on the 4th promissory note shall again be applied to the principal, which shall again be
3. Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment thereon, reduced accordingly. And so on and so forth;
 
when due, shall constitute default, and a penalty charge of 24% per annum based on the defaulted 3. After the above procedure is carried out, the TC shall be able to conclude if petitioners a) still have an OUTSTANDING
principal amount shall be imposed. Petitioners claim that this penalty should be excluded from the BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION (principal and interest);
foreclosure amount or bid price because the Real Estate Mortgage and the Supplement thereto did  
4. Such outstanding balance/obligation, if there be any, shall then be subjected to a 12% per annum interest from Oct. 28, 1997 until
not specifically include it as part of the secured amount. Respondent justifies its inclusion in the Jan. 14, 1999, which is the date of the auction sale;
secured amount, saying that the purpose of the penalty or a penal clause is to ensure the  
performance of the obligation and substitute for damages and the payment of interest in the event of 5. Such outstanding balance/obligation shall also be charged a 24% per annum penalty from Aug. 14, 1997 until Jan. 14, 1999. But
from this total penalty, the petitioners’ previous payment of penalties in the amount of ₱202,000.00made on Jan. 27, 1998106 shall
non-compliance. Respondent adds that the imposition and collection of a penalty is a normal banking be DEDUCTED;
practice, and the standard rate per annum for all commercial banks, at the time, was 24%. Its  
inclusion as part of the secured amount in the mortgage agreements is thus valid and necessary. 6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and executory award of 1% attorney’s fees shall be
ADDED;
   
The Court sustains petitioners’ view that the penalty may not be included as part of the 7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney’s fees (6.) shall be DEDUCTED from the bid price of
secured amount. Having found the credit agreements and promissory notes to be tainted, we must ₱4,324,172.96. The penalties (5.) are not included because they are not included in the secured amount;
 
accord the same treatment to the mortgages. After all, "[a] mortgage and a note secured by it are 8. The difference in (7.) [₱4,324,172.96 LESS sum total of the outstanding balance (3.), interest (4.), and 1% attorney’s fees (6.)]
deemed parts of one transaction and are construed together."101 Being so tainted and having the shall be DELIVERED TO THE PETITIONERS;
attributes of a contract of adhesion as the principal credit documents, we must construe the mortgage  
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208;
contracts strictly, and against the party who drafted it. An examination of the mortgage agreements  
reveals that nowhere is it stated that penalties are to be included in the secured amount. Construing 10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that petitioners made an OVERPAYMENT, the
this silence strictly against the respondent, the Court can only conclude that the parties did not intend interest (4.), penalties (5.), and the award of 1% attorney’s fees (6.) shall be DEDUCTED from the overpayment. There is no
outstanding balance/obligation precisely because petitioners have paid beyond the amount of the principal and interest;
to include the penalty allowed under PN 9707237 as part of the secured amount. Given its resources,  
respondent could have – if it truly wanted to – conveniently prepared and executed an amended 11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and award of 1% attorney’s fees (6.), the excess shall
mortgage agreement with the petitioners, thereby including penalties in the amount to be secured by be RETURNED to the petitioners, with legal interest, under the principle of solutio indebiti;107
 
the encumbered properties. Yet it did not. 12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award of 1% attorney’s fees (6.), the TC shall
  INVALIDATE THE EXTRAJUDICIAL FORECLOSURE AND SALE;
With regard to attorney’s fees, it was plain error for the CA to have passed upon the issue since it was  
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney’s fees (6.) exceed petitioners’ overpayment, then the
not raised by the petitioners in their appeal; it was the respondent that improperly brought it up in its excess shall be DEDUCTED from the bid price of ₱4,324,172.96;
appellee’s brief, when it should have interposed an appeal, since the TC’s Decision on this issue is  
adverse to it. It is an elementary principle in the subject of appeals that an appellee who does not 14. The difference in (13.) [₱4,324,172.96 LESS sum total of the interest (4.) and 1% attorney’s fees (6.)] shall be DELIVERED TO
THE PETITIONERS;
himself appeal cannot obtain from the appellate court any affirmative relief other than those granted in  
the decision of the court below. 15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208. The outstanding penalties, if any, shall be
  collected by other means.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to make  
counter assignments of error in ordinary actions, when the purpose is merely to defend himself From the above, it will be seen that if, after proper accounting, it turns out that the petitioners made
against an appeal in which errors are alleged to have been committed by the TC both in the payments exceeding what they actually owe by way of principal, interest, and attorney’s fees, then the
appreciation of facts and in the interpretation of the law, in order to sustain the judgment in his favor mortgaged properties need not answer for any outstanding secured amount, because there is not
but not when his purpose is to seek modification or reversal of the judgment, in which case it is any; quite the contrary, respondent must refund the excess to petitioners.1âwphi1 In such case, the
necessary for him to have excepted to and appealed from the judgment.102 extrajudicial foreclosure and sale of the properties shall be declared null and void for obvious lack of
  basis, the case being one of solutio indebiti instead. If, on the other hand, it turns out that petitioners’
4. Since petitioners did not raise the issue of reduction of attorney’s fees, the CA possessed overpayments in interests do not exceed their total obligation, then the respondent may consolidate
no authority to pass upon it at the instance of respondent. The ruling of the TC in this respect its ownership over the properties, since the period for redemption has expired. Its only obligation will
should remain undisturbed. be to return the difference between its bid price (₱4,324,172.96) and petitioners’ total obligation
  outstanding – except penalties – after applying the latter’s overpayments.
 
WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of the CA
in CA-G.R. CV No. 79650 is ANNULLED and SET ASIDE. Judgment is hereby rendered as follows:
 
1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes are DECLARED NULL AND VOID, and such
notes shall instead be subject to interest at the rate of twelve percent (12%) per annum up to June 30, 2013, and starting July 1,
2013, six percent (6%) per annum until full satisfaction;
 
2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED from the amounts secured by the real estate
mortgages;
 
3. The TC’s award of one per cent (1%) attorney’s fees is REINSTATED;
 
4. The case is ordered REMANDED to the RTC, Branch 6 of Kalibo, Aklan for the computation of overpayments made by
petitioners spouses Eduardo and Lydia Silos to respondent Philippine National Bank, taking into consideration the
foregoing dispositions, and applying the procedure hereinabove set forth;
 
5. Thereafter, the TC is ORDERED to make a determination as to the validity of the extrajudicial foreclosure and sale, declaring the
same null and void in case of overpayment and ordering the release and return of Transfer Certificates of Title Nos. T-14250 and
TCT T-16208 to petitioners, or ordering the delivery to the petitioners of the difference between the bid price and the total remaining
obligation of petitioners, if any;
 
6. In the meantime, the respondent Philippine National Bank is ENJOINED from consolidating title to Transfer Certificates of Title
Nos. T-14250 and T-16208 until all the steps in the procedure above set forth have been taken and applied;
 
7. The reimbursement of the excess in the bid price of ₱377,505.99, which respondent Philippine National Bank is ordered to
reimburse petitioners, should be HELD IN ABEYANCE until the true amount owing to or owed by the parties as against each other is
determined;
 
8. Considering that this case has been pending for such a long time and that further proceedings, albeit uncomplicated, are required,
the TC is ORDERED to proceed with dispatch.
SO ORDERED.

 
• Imperial v. Jaucian G.R. No. 149004, April 14, 2004 - RINA carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead
to a hemorrhaging of their assets."
G.R. No. 149004             April 14, 2004
RESTITUTA M. IMPERIAL, petitioner, Medel v. CA: the Court found the stipulated interest rate of 5.5% per month, or 66% per annum,
vs. unconscionable. In the present case, the rate is even more iniquitous and unconscionable, as it
ALEX A. JAUCIAN, respondent. amounts to 192% per annum. When the agreed rate is iniquitous or unconscionable, it is
PANGANIBAN, J.: considered "contrary to morals, if not against the law. Such stipulation is void.

SUMMARY: Since the stipulation on the interest rate is void, it is as if there were no express contract thereon.
Hence, courts may reduce the interest rate as reason and equity demand. We find no justification
FACTS: to reverse or modify the rate imposed by the two lower courts.

Imperial obtained from Jaucian 6 separate loans for which the former executed in favor of the latter 6 Article 1229 of the Civil Code: "The judge shall equitably reduce the penalty when the principal
separate promissory notes and issued several checks as guarantee for payment. When the said obligation has been partly or irregularly complied with by the debtor. Even if there has been no
loans became overdue and unpaid, especially when Imperial’s checks were dishonored, Jaucian performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable."
made repeated oral and written demands for payment. In the written agreement, they agreed upon
the 16% interest per month plus penalty charge of 5% per month and the 25% attorney’s fee, failure In exercising this power to determine what is iniquitous and unconscionable, courts must
to pay the said loans on the stipulated date. The 6 separate loans obtained on various dates totaled consider the circumstances of each case. What may be iniquitous and unconscionable in one may
up to: P320 000. be totally just and equitable in another. In the present case, iniquitous and unconscionable was the
parties’ stipulated penalty charge of 5% per month or 60% per annum, in addition to regular interests
The face value of each promissory note is bigger than the amount released to Imperial because said and attorney’s fees. Also, there was partial performance by petitioner when she remitted
face value already included the interest from date of note to date of maturity. Although Imperial made ₱116,540 as partial payment of her principal obligation of ₱320,000. Under the circumstances,
several payments, the same were not enough and she always defaulted whenever her loans the trial court was justified in reducing the stipulated penalty charge to the more equitable rate of 14%
matured. As of August 16, 1991, the total unpaid amount, including accrued interest, penalties and per annum.
attorney’s fees, was ₱2,807,784.20.
The Promissory Note carried a stipulation for attorney’s fees of 25% of the principal amount
Imperial: claims that she was extended loans by Jaucian on several occasions, in the total sum of and accrued interests. Strictly speaking, this covenant on attorney’s fees is different from that
₱320,000.00 at the rate of 16% per month. The notes matured every 4 months with unearned interest mentioned in and regulated by the Rules of Court. Rather, the attorney’s fees here are in the nature of
compounding every 4 months if the loan was not fully paid. Further, Imperial claims that as of January liquidated damages and the stipulation therefor is aptly called a penal clause. So long as the
25, 1989, the total payments made by her was P 441 780. She contends that the excess payment of stipulation does not contravene the law, morals, public order or public policy, it is binding upon the
₱121,780.00 is more than the interest that could be legally charged, and as of January 25, 1989, the obligor. It is the litigant, not the counsel, who is the judgment creditor entitled to enforce the judgment
total releases have been fully paid. by execution.

ISSUE: W/N the charging of interest of 16% per month, 5% per month for penalty charge and 25% Nevertheless, it appears that petitioner’s failure to comply fully with her obligation was not motivated
attorney’s fee are usurious (YES) by ill will or malice. The 29 partial payments she made were a manifestation of her good faith.
Again, Article 1229 of the Civil Code specifically empowers the judge to reduce the civil penalty
equitably, when the principal obligation has been partly or irregularly complied with. Upon this
RULING: WHEREFORE, the Petition is DENIED. Costs against petitioner. premise, we hold that the RTC’s reduction of attorney’s fees -- from 25% to 10% of the total
amount due and payable -- is reasonable.
Rate of Interest
FACTS:
The trial court, as affirmed by the CA, reduced the interest rate from 16% to 1.167% per month
or 14% per annum; and the stipulated penalty charge, from 5% to 1.167% per month or 14% The present controversy arose from a case for collection of money, filed by Alex A. Jaucian against
per annum. Restituta Imperial, on October 26, 1989. The complaint alleges that Imperial obtained from Jaucian
6 separate loans for which the former executed in favor of the latter 6 separate promissory
Petitioner: alleges that absent any written stipulation between the parties, the lower courts should notes and issued several checks as guarantee for payment. When the said loans became
have imposed the rate of 12 percent per annum only. overdue and unpaid, especially when Imperial’s checks were dishonored, Jaucian made repeated
oral and written demands for payment.
The records show that there was a written agreement between the parties for the payment of interest
on the loans at the rate of 16% per month. As decreed by the lower courts, this rate must be Specifically, the 6 separate loans obtained on various dates are as follows:
equitably reduced for being iniquitous, unconscionable and exorbitant. While the Usury Law
ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders
 Nov 13, 1987 50 000
Further, Imperial claims that as of January 25, 1989, the total payments made by defendants [were]
Dec 28, 1987 40 000 as follows

Jan 6, 1988 30 000

Jan 11, 1988 50 000 Paid releases on November 13, 1987 of ₱50,000.00 and January 6, 1988 of ₱30,000.00 these two items 80 000
were not included in the complaint affirming the fact that these were paid 
Jan 12, 1988 50 000
Exhibit 26 Receipt 231
Jan 13, 1988 100 000 000

Total 320 000 Exhibit 8-25 Receipt 65 300

Exhibit 27 Receipt 65 000

Total 441
780
The loans were covered by 6 separate promissory notes executed by Imperial. The face value of
each promissory note is bigger than the amount released to Imperial because said face value Less 320
already included the interest from date of note to date of maturity. Said promissory notes, 000
which indicate the interest of 16% per month, date of issue, due date, the corresponding
guarantee checks issued by defendant, penalties and attorney’s fees, are the following: Excess Payment  121
780
1. Exhibit ‘D’ – for loan of ₱40,000.00 on December 28, 1987, with face value of ₱65,000.00;
2. Exhibit ‘E’ – for loan of ₱50,000.00 on January 11, 1988, with face value of ₱82,000.00;
3. Exhibit ‘F’ – for loan of ₱50,000.00 on January 12, 1988, with face value of ₱82,000.00;
4. Exhibit ‘G’ – for loan of ₱100,000.00 on January 13, 1988, with face value of ₱164,000.00;
5. Exhibit ‘H’ – This particular promissory note covers the second renewal of the original loan of ₱50,000.00 on Imperial: contends that from all perspectives the above excess payment of ₱121,780.00 is more
November 13, 1987, which was renewed for the first time on March 16, 1988 after certain payments, and which was than the interest that could be legally charged, and in fact as of January 25, 1989, the total
renewed finally for the second time on January 4, 1988 also after certain payments, with a face value of ₱56,240.00; releases have been fully paid.
6. Exhibit ‘I’ – This particular promissory note covers the second renewal of the original loan of ₱30,000.00 on
January 6, 1988, which was renewed for the first time on June 4, 1988 after certain payments, and which was finally
renewed for the second time on August 6, 1988, also after certain payments, with [a] face value of ₱12,760.00; TC: Wherefore, Judgment is hereby rendered declaring Section I, Central Bank Circular No. 905,
series of 1982 to be of no force and legal effect, it having been promulgated by the Monetary Board of
The particulars about the postdated checks, i.e., number, amount, date, etc., are indicated in each of the Central Bank of the Philippines with grave abuse of discretion amounting to excess of jurisdiction;
the promissory notes. Thus, for Exhibit ‘D’, 4 PB checks were issued; for Exhibit ‘E’ 4 checks; for declaring that the rate of interest, penalty, and charges for attorney’s fees agreed upon between the
Exhibit ‘F’ 4 checks; for Exhibit ‘G’ 4 checks; for Exhibit ‘H’ 1 check; for Exhibit ‘I’ 1 check; parties are unconscionable, iniquitous, and in violation of the Usury Law; and ordering Imperial to pay
Jaucian the amount of ₱478,194.54, with regular and compensatory interests thereon at the rate of
28% per centum per annum, computed from August 31, 1993 until full payment of the said amount,
The arrangement between the two regarding these guarantee checks was that each time a check
and in addition, an amount equivalent to 10% per centum of the total amount due and payable, for
matures Imperial would exchange it with cash.
attorney’s fees, without pronouncement as to costs.
Although, admittedly, Imperial made several payments, the same were not enough and she
CA: held that without judicial inquiry, it was improper for the RTC to rule on the constitutionality of
always defaulted whenever her loans matured. As of August 16, 1991, the total unpaid amount,
Section 1, Central Bank Circular No. 905, Series of 1982. Nonetheless, it affirmed the judgment of the
including accrued interest, penalties and attorney’s fees, was ₱2,807,784.20.
trial court, holding that the latter’s clear and detailed computation of petitioner’s outstanding obligation
to respondent was convincing and satisfactory.
Imperial: claims that she was extended loans by Jaucian on several occasions, i.e., from
November 13, 1987 to January 13, 1988, in the total sum of ₱320,000.00 at the rate of 16% per
ISSUES:
month. The notes matured every 4 months with unearned interest compounding every 4
1. W/N the petitioner has fully paid her obligations even before filing of this case. (NO)
months if the loan was not fully paid. The loan releases were as follows (see table above)
2. W/N the charging of interest of 16% per month, 5% per month for penalty charge and 25%
attorney’s fee are usurious (YES)
Imperial alleges that all the above amounts were released respectively by checks drawn by 3. W/N the non-inclusion of the husband of the petitioner at the time the case was filed should have
Jaucian, and the latter must produce these checks as these were returned to him being the drawer if dismissed this case. (NO --- but moot in this instance)
only to serve the truth. The above amount are the real amounts released to Imperial but Jaucian RULING: WHEREFORE, the Petition is DENIED. Costs against petitioner.
made it appear that the total amount released was ₱462,600.00. Because in his computation he
made it appear that the true amounts released was not the original amount, since it included
First Issue: Computation of Outstanding Obligation
the unconscionable interest for four months.
 and attorney’s fees. Also, there was partial performance by petitioner when she remitted
Petitioner: Argues that she had already fully paid the loan before the filing of the case; alleges that the ₱116,540 as partial payment of her principal obligation of ₱320,000. Under the circumstances,
two lower courts misappreciated the facts when they ruled that she still had an outstanding balance of the trial court was justified in reducing the stipulated penalty charge to the more equitable rate of 14%
₱208,430. per annum.

This issue involves a question of fact. It is a well-entrenched rule that pure questions of fact may not The Promissory Note carried a stipulation for attorney’s fees of 25% of the principal amount
be the subject of an appeal by certiorari under Rule 45, as this remedy is generally confined to and accrued interests. Strictly speaking, this covenant on attorney’s fees is different from that
questions of law. The jurisdiction of this Court over cases brought to it is limited to the review and mentioned in and regulated by the Rules of Court. Rather, the attorney’s fees here are in the nature of
rectification of errors of law allegedly committed by the lower court. As a rule, the latter’s factual liquidated damages and the stipulation therefor is aptly called a penal clause. So long as the
findings, when adopted and affirmed by the CA, are final and conclusive and may not be reviewed on stipulation does not contravene the law, morals, public order or public policy, it is binding upon the
appeal. obligor. It is the litigant, not the counsel, who is the judgment creditor entitled to enforce the judgment
by execution.
Generally, this Court is not required to analyze and weigh all over again the evidence already
considered in the proceedings below. In the present case, we find no compelling reason to Nevertheless, it appears that petitioner’s failure to comply fully with her obligation was not motivated
overturn the factual findings of the RTC -- that the total amount of the loans extended to by ill will or malice. The 29 partial payments she made were a manifestation of her good faith.
petitioner was ₱320,000, and that she paid a total of only ₱116,540 on twenty-nine dates. These Again, Article 1229 of the Civil Code specifically empowers the judge to reduce the civil penalty
findings are supported by a preponderance of evidence. Moreover, the amount of the outstanding equitably, when the principal obligation has been partly or irregularly complied with. Upon this
obligation has been meticulously computed by the trial court and affirmed by the CA. Petitioner has premise, we hold that the RTC’s reduction of attorney’s fees -- from 25% to 10% of the total
not given us sufficient reason why her cause falls under any of the exceptions to this rule on the amount due and payable -- is reasonable.
finality of factual findings.
Third Issue: Non-Inclusion of Petitioner’s Husband
Second Issue: Rate of Interest Petitioner: contends that the case against her should have been dismissed, because her husband
was not included in the proceedings before the RTC.
The trial court, as affirmed by the CA, reduced the interest rate from 16% to 1.167% per month
or 14% per annum; and the stipulated penalty charge, from 5% to 1.167% per month or 14% The husband’s non-joinder does not warrant dismissal, as it is merely a formal requirement that may
per annum. be cured by amendment. Since petitioner alleges that her husband has already passed away, such an
amendment has thus become moot.
Petitioner: alleges that absent any written stipulation between the parties, the lower courts should
have imposed the rate of 12% per annum only.

The records show that there was a written agreement between the parties for the payment of interest
on the loans at the rate of 16% per month. As decreed by the lower courts, this rate must be
equitably reduced for being iniquitous, unconscionable and exorbitant. While the Usury Law
ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders
carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead
to a hemorrhaging of their assets."

Medel v. CA: the Court found the stipulated interest rate of 5.5% per month, or 66% per annum,
unconscionable. In the present case, the rate is even more iniquitous and unconscionable, as it
amounts to 192% per annum. When the agreed rate is iniquitous or unconscionable, it is
considered "contrary to morals, if not against the law. Such stipulation is void.

Since the stipulation on the interest rate is void, it is as if there were no express contract thereon.
Hence, courts may reduce the interest rate as reason and equity demand. We find no justification
to reverse or modify the rate imposed by the two lower courts.

Article 1229 of the Civil Code: "The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable."

In exercising this power to determine what is iniquitous and unconscionable, courts must
consider the circumstances of each case. What may be iniquitous and unconscionable in one may
be totally just and equitable in another. In the present case, iniquitous and unconscionable was the
parties’ stipulated penalty charge of 5% per month or 60% per annum, in addition to regular interests
• Advocates for TILA v. BSMB G.R. No. 192986, January 15, 2013 - VAL by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings, including deposits and
G.R. No. 192986               January 15, 2013 deposit substitutes, or loans of financial intermediaries.
ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO B. OLAGUER, Petitioners, vs.  
BANGKO SENTRAL MONETARY BOARD, represented by its Chairman, GOVERNOR Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No. 265, now R.A. No. 7653,
ARMANDO M. TETANGCO, JR., and its incumbent members: JUANITA D. AMATONG, merely supplemented it as it concerns loans by banks and other financial institutions. Had R.A. No.
ALFREDO C. ANTONIO, PETER FA VILA, NELLY F. VILLAFUERTE, IGNACIO R. BUNYE and 7653 been intended to repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal
CESAR V. PURISIMA, Respondents. terms.
   
REYES, J.: The lifting of the ceilings for interest rates does not authorize stipulations charging excessive,
  unconscionable, and iniquitous interest. It is settled that nothing in CB Circular No. 905 grants lenders
SUMMARY: R.A. No. 265, which created the Central Bank of the Philippines on June 15, 1948, a carte blanche authority to raise interest rates to levels which will either enslave their borrowers or
empowered the CB-MB to, among others, set the maximum interest rates which banks may charge lead to a hemorrhaging of their assets.48 As held in Castro v. Tan:
for all types of loans and other credit operations, within limits prescribed by the Usury Law. The Usury The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
Law was amended by PD No. 1684, giving the CB-MB authority to prescribe different maximum rates voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
of interest which may be imposed for a loan or renewal thereof or the forbearance of any money, iniquitous deprivation of property, repulsive to the common sense of man. It has no support in
goods or credits, provided that the changes are effected gradually and announced in advance. In its law, in principles of justice, or in the human conscience nor is there any reason whatsoever
Resolution No. 2224 the CB-MB issued CB Circular No. 905, Series of 1982, effective on January 1, which may justify such imposition as righteous and as one that may be sustained within the
1983. Section 1 of the Circular, under its General Provisions, removed the ceilings on interest rates sphere of public or private morals.50
on loans or forbearance of any money, goods or credits. In this Petition for Certiorari, petitioners  
contend that under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, the CB-MB was Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for
authorized only to prescribe or set the maximum rates of interest for a loan or renewal thereof or for being contrary to morals, if not against the law.51 Indeed, under Article 1409 of the Civil Code, these
the forbearance of any money, goods or credits, and to change such rates whenever warranted by contracts are deemed inexistent and void ab initio, and therefore cannot be ratified, nor may the right
prevailing economic and social conditions, the changes to be effected gradually and on scheduled to set up their illegality as a defense be waived.
dates; that nothing in P.D. No. 1684 authorized the CB-MB to lift or suspend the limits of interest on  
all credit transactions, when it issued CB Circular No. 905. They further insist that under Section 109 Nonetheless, the nullity of the stipulation of usurious interest does not affect the lender’s right to
of R.A. No. 265, the authority of the CB-MB was clearly only to fix the banks’ maximum rates of recover the principal of a loan, nor affect the other terms thereof.52 Thus, in a usurious loan with
interest, but always within the limits prescribed by the Usury Law. mortgage, the right to foreclose the mortgage subsists, and this right can be exercised by the creditor
  upon failure by the debtor to pay the debt due. The debt due is considered as without the stipulated
SC: The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No. excessive interest, and a legal interest of 12% per annum will be added in place of the excessive
905. The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long interest formerly imposed,53following the guidelines laid down in the landmark case of Eastern
been recognized and upheld in many cases. As the Court explained in the landmark case of Medel v. Shipping Lines, Inc. v. Court of Appeals,54 regarding the manner of computing legal interest.
CA,36 citing several cases, CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law  
but simply suspended the latter’s effectivity;"37 that "a CB Circular cannot repeal a law, [for] only a  
law can repeal another law;"38 that "by virtue of CB Circular No. 905, the Usury Law has been  
rendered ineffective;"39 and "Usury has been legally non-existent in our jurisdiction. Interest can now FACTS: Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non-profit, non-stock
be charged as lender and borrower may agree upon."40 corporation organized to engage in pro bono concerns and activities relating to money lending issues.
  It was incorporated on July 9, 2010,2 and a month later, it filed this petition, joined by its founder and
Thus, according to the Court, by lifting the interest ceiling, CB Circular No. 905 merely upheld the president, Eduardo B. Olaguer, suing as a taxpayer and a citizen.
parties’ freedom of contract to agree freely on the rate of interest. It cited Article 1306 of the New Civil  
Code, under which the contracting parties may establish such stipulations, clauses, terms and R.A. No. 265, which created the Central Bank of the Philippines on June 15, 1948, empowered the
conditions as they may deem convenient, provided they are not contrary to law, morals, good CB-MB to, among others, set the maximum interest rates which banks may charge for all types
customs, public order, or public policy. of loans and other credit operations, within limits prescribed by the Usury Law. Section 109 of
  R.A. No. 265 reads:
The BSP-MB has authority to enforce CB Circular No. 905. Section 1 of CB Circular No. 905 provides Sec. 109. Interest Rates, Commissions and Charges. — The Monetary Board may fix the maximum rates of
interest which banks may pay on deposits and on other obligations.
that "The rate of interest, including commissions, premiums, fees and other charges, on a loan or The Monetary Board may, within the limits prescribed in the Usury Law fix the maximum rates of interest
forbearance of any money, goods, or credits, regardless of maturity and whether secured or which banks may charge for different types of loans and for any other credit operations, or may fix the
unsecured, that may be charged or collected by any person, whether natural or juridical, shall not be maximum differences which may exist between the interest or rediscount rates of the Central Bank and the
subject to any ceiling prescribed under or pursuant to the Usury Law, as amended." It does not rates which the banks may charge their customers if the respective credit documents are not to lose their
purport to suspend the Usury Law only as it applies to banks, but to all lenders. eligibility for rediscount or advances in the Central Bank.
  Any modifications in the maximum interest rates permitted for the borrowing or lending operations of the
A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks, banks shall apply only to future operations and not to those made prior to the date on which the modification
becomes effective.
whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the maximum In order to avoid possible evasion of maximum interest rates set by the Monetary Board, the Board may also
rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or fix the maximum rates that banks may pay to or collect from their customers in the form of commissions,
credits, including those for loans of low priority such as consumer loans, as well as such loans made discounts, charges, fees or payments of any sort. (Underlining ours)
  Sotto III and the late Senator Blas F. Ople, respectively, sought to amend Act No. 2655 by fixing the
On March 17, 1980, the Usury Law was amended by PD No. 1684, giving the CB-MB authority to rates of interest on loans and forbearance of credit; Philippine Senate Resolution (SR) No. 1053,8
prescribe different maximum rates of interest which may be imposed for a loan or renewal 10739 and 1102,10 filed by Senators Ramon B. Magsaysay, Jr., Gregorio B. Honasan and Franklin
thereof or the forbearance of any money, goods or credits, provided that the changes are M. Drilon, respectively, urged the aforesaid Senate Committee to investigate ways to curb the high
effected gradually and announced in advance. Thus, Section 1-a of Act No. 2655 now reads: commercial interest rates then obtaining in the country; Senator Ernesto Maceda filed SB No. 1151 to
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the prohibit the collection of more than two months of advance interest on any loan of money; and
loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates Senator Raul Roco filed SR No. 114411 seeking an investigation into an alleged cartel of commercial
whenever warranted by prevailing economic and social conditions: Provided, That changes in such rate or
rates may be effected gradually on scheduled dates announced in advance.
banks, called "Club 1821", reportedly behind the regime of high interest rates. The petitioners also
In the exercise of the authority herein granted the Monetary Board may prescribe higher maximum rates for attached news clippings12 showing that in February 1998 the banks’ prime lending rates, or interests
loans of low priority, such as consumer loans or renewals thereof as well as such loans made by pawnshops, on loans to their best borrowers, ranged from 26% to 31%.
finance companies and other similar credit institutions although the rates prescribed for these institutions  
need not necessarily be uniform. The Monetary Board is also authorized to prescribe different maximum rate Petitioners contend that under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, the CB-
or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial MB was authorized only to prescribe or set the maximum rates of interest for a loan or renewal
intermediaries. (Underlining and emphasis ours) thereof or for the forbearance of any money, goods or credits, and to change such rates
  whenever warranted by prevailing economic and social conditions, the changes to be effected
In its Resolution No. 2224 the CB-MB issued CB Circular No. 905, Series of 1982, effective on gradually and on scheduled dates; that nothing in P.D. No. 1684 authorized the CB-MB to lift or
January 1, 1983. Section 1 of the Circular, under its General Provisions, removed the ceilings suspend the limits of interest on all credit transactions, when it issued CB Circular No. 905.
on interest rates on loans or forbearance of any money, goods or credits, to wit: They further insist that under Section 109 of R.A. No. 265, the authority of the CB-MB was
Sec. 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan or
forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured, that
clearly only to fix the banks’ maximum rates of interest, but always within the limits prescribed
may be charged or collected by any person, whether natural or juridical, shall not be subject to any ceiling by the Usury Law.
prescribed under or pursuant to the Usury Law, as amended. (Underscoring and emphasis ours)  
  Thus, according to petitioners, CB Circular No. 905, which was promulgated without the
The Circular then went on to amend Books I to IV of the CB’s "Manual of Regulations for Banks and benefit of any prior public hearing, is void because it violated Article 5 of the New Civil Code,
Other Financial Intermediaries" (Manual of Regulations) by removing the applicable ceilings on which provides that "Acts executed against the provisions of mandatory or prohibitory laws
specific interest rates. Thus, Sections 5, 9 and 10 of CB Circular No. 905 amended Book I, shall be void, except when the law itself authorizes their validity."
Subsections 1303, 1349, 1388.1 of the Manual of Regulations, by removing the ceilings for interest  
and other charges, commissions, premiums, and fees applicable to commercial banks; Sections 12 They further claim that just weeks after the issuance of CB Circular No. 905, the benchmark 91-day
and 17 removed the interest ceilings for thrift banks (Book II, Subsections 2303, 2349); Sections 19 Treasury bills (T-bills),13 then known as "Jobo" bills14 shot up to 40% per annum, as a result. The
and 21 removed the ceilings applicable to rural banks (Book III, Subsection 3152.3-c); and, Sections banks immediately followed suit and re-priced their loans to rates which were even higher than those
26, 28, 30 and 32 removed the ceilings for non-bank financial intermediaries (Book IV, Subsections of the "Jobo" bills. Petitioners thus assert that CB Circular No. 905 is also unconstitutional in light of
4303Q.1 to 4303Q.9, 4303N.1, 4303P).4 Section 1 of the Bill of Rights, which commands that "no person shall be deprived of life, liberty or
  property without due process of law, nor shall any person be denied the equal protection of the laws."
On June 14, 1993, President Ramos signed into law R.A. No. 7653 establishing the BSP to replace  
the CB. The repealing clause thereof, Section 135, reads: Finally, petitioners point out that R.A. No. 7653 did not re-enact a provision similar to Section
Sec. 135. Repealing Clause. — Except as may be provided for in Sections 46 and 132 of this Act, Republic 109 of R.A. No. 265, and therefore, in view of the repealing clause in Section 135 of R.A. No.
Act No. 265, as amended, the provisions of any other law, special charters, rule or regulation issued 7653, the BSP-MB has been stripped of the power either to prescribe the maximum rates of
pursuant to said Republic Act No. 265, as amended, or parts thereof, which may be inconsistent with the interest which banks may charge for different kinds of loans and credit transactions, or to
provisions of this Act are hereby repealed. Presidential Decree No. 1792 is likewise repealed. suspend Act No. 2655 and continue enforcing CB Circular No. 905.
   
  ISSUE: W/N THE SUSPENSION OF THE USURY LAW BY VIRTUE OF CB NO 905 IS VALID- YES
In this Petition for Certiorari, petitioners contend that the transcendental importance of their  
Petition can readily be seen in the issues raised therein, to wit: RULING: WHEREFORE, premises considered, the Petition for certiorari is DISMISSED.
a) Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-MB had the statutory or  
constitutional authority to prescribe the maximum rates of interest for all kinds of credit RATIO: The petition must fail.
transactions and forbearance of money, goods or credit beyond the limits prescribed in A. The Petition is procedurally infirm.
the Usury Law; The decision on whether or not to accept a petition for certiorari, as well as to grant due course
b) If so, whether the CB-MB exceeded its authority when it issued CB Circular No. 905, thereto, is addressed to the sound discretion of the court.15 A petition for certiorari being an
which removed all interest ceilings and thus suspended Act No. 2655 as regards extraordinary remedy, the party seeking to avail of the same must strictly observe the procedural
usurious interest rates; rules laid down by law, and non-observance thereof may not be brushed aside as mere
c) Whether under R.A. No. 7653, the new BSP-MB may continue to enforce CB Circular technicality.16
No. 905.5 As provided in Section 1 of Rule 65, a writ of certiorari is directed against a tribunal exercising judicial
  or quasi-judicial functions.17 Judicial functions are exercised by a body or officer clothed with
Petitioners attached to their petition copies of several Senate Bills and Resolutions of the 10th authority to determine what the law is and what the legal rights of the parties are with respect to the
Congress, which held its sessions from 1995 to 1998, calling for investigations by the Senate matter in controversy. Quasi-judicial function is a term that applies to the action or discretion of public
Committee on Banks and Financial Institutions into alleged unconscionable commercial rates of administrative officers or bodies given the authority to investigate facts or ascertain the existence of
interest imposed by these entities. Senate Bill (SB) Nos. 376 and 1860,7 filed by Senator Vicente C.
facts, hold hearings, and draw conclusions from them as a basis for their official action using transcendental importance of the issues has been established, notwithstanding the petitioners’ failure
discretion of a judicial nature.18 to show a direct injury.27 In CREBA v. ERC,28 the Court set out the following instructive guides as
The CB-MB (now BSP-MB) was created to perform executive functions with respect to the determinants on whether a matter is of transcendental importance, namely: (1) the character of the
establishment, operation or liquidation of banking and credit institutions, and branches and agencies funds or other assets involved in the case; (2) the presence of a clear case of disregard of a
thereof.19 It does not perform judicial or quasi-judicial functions. Certainly, the issuance of CB constitutional or statutory prohibition by the public respondent agency or instrumentality of the
Circular No. 905 was done in the exercise of an executive function. Certiorari will not lie in the instant government; and (3) the lack of any other party with a more direct and specific interest in the
case.20 questions being raised. Further, the Court stated in Anak Mindanao Party-List Group v. The Executive
  Secretary29 that the rule on standing will not be waived where these determinants are not
B. Petitioners have no locus standi to file the Petition established.
Locus standi is defined as "a right of appearance in a court of justice on a given question." In private  
suits, Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides that "every action must be In the instant case, there is no allegation of misuse of public funds in the implementation of CB
prosecuted or defended in the name of the real party in interest," who is "the party who stands to be Circular No. 905. Neither were borrowers who were actually affected by the suspension of the Usury
benefited or injured by the judgment in the suit or the party entitled to the avails of the suit." Succinctly Law joined in this petition. Absent any showing of transcendental importance, the petition must fail.
put, a party’s standing is based on his own right to the relief sought.21 More importantly, the Court notes that the instant petition adverted to the regime of high interest rates
Even in public interest cases such as this petition, the Court has generally adopted the "direct injury" which obtained at least 15 years ago, when the banks’ prime lending rates ranged from 26% to
test that the person who impugns the validity of a statute must have "a personal and substantial 31%,30 or even 29 years ago, when the 91-day Jobo bills reached 40% per annum. In contrast,
interest in the case such that he has sustained, or will sustain direct injury as a result."22 Thus, while according to the BSP, in the first two (2) months of 2012 the bank lending rates averaged 5.91%,
petitioners assert a public right to assail CB Circular No. 905 as an illegal executive action, it is which implies that the banks’ prime lending rates were lower; moreover, deposit interests on savings
nonetheless required of them to make out a sufficient interest in the vindication of the public order and long-term deposits have also gone very low, averaging 1.75% and 1.62%, respectively.31
and the securing of relief. It is significant that in this petition, the petitioners do not allege that they Judging from the most recent auctions of T-bills, the savings rates must be approaching 0%.1âwphi1
sustained any personal injury from the issuance of CB Circular No. 905. In the auctions held on November 12, 2012, the rates of 3-month, 6-month and 1-year T-bills have
  dropped to 0.150%, 0.450% and 0.680%, respectively.32 According to Manila Bulletin, this very low
Petitioners also do not claim that public funds were being misused in the enforcement of CB Circular interest regime has been attributed to "high liquidity and strong investor demand amid positive
No. 905. In Kilosbayan, Inc. v. Morato,23 involving the on-line lottery contract of the PCSO, there was economic indicators of the country."33
no allegation that public funds were being misspent, which according to the Court would have made  
the action a public one, "and justify relaxation of the requirement that an action must be prosecuted in While the Court acknowledges that cases of transcendental importance demand that they be settled
the name of the real party-in-interest." The Court held, moreover, that the status of Kilosbayan as a promptly and definitely, brushing aside, if we must, technicalities of procedure,34 the delay of at least
people’s organization did not give it the requisite personality to question the validity of the contract. 15 years in the filing of the instant petition has actually rendered moot and academic the issues it now
Thus: raises.
Petitioners do not in fact show what particularized interest they have for bringing this suit. It does not  
detract from the high regard for petitioners as civic leaders to say that their interest falls short of that For its part, BSP-MB maintains that the petitioners’ allegations of constitutional and statutory
required to maintain an action under the Rule 3, Sec. 2.24 violations of CB Circular No. 905 are really mere challenges made by petitioners concerning the
  wisdom of the Circular. It explains that it was in view of the global economic downturn in the early
C. The Petition raises no issues of transcendental importance. 1980’s that the executive department through the CB-MB had to formulate policies to achieve
In the 1993 case of Joya v. Presidential Commission on Good Government,25 it was held that no economic recovery, and among these policies was the establishment of a market-oriented interest
question involving the constitutionality or validity of a law or governmental act may be heard and rate structure which would require the removal of the government-imposed interest rate ceilings.35
decided by the court unless there is compliance with the legal requisites for judicial inquiry, namely:  
(a) that the question must be raised by the proper party; (b) that there must be an actual case or D. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No. 905.
controversy; (c) that the question must be raised at the earliest possible opportunity; and (d) that the The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long
decision on the constitutional or legal question must be necessary to the determination of the case been recognized and upheld in many cases. As the Court explained in the landmark case of
itself. Medel v. CA,36 citing several cases, CB Circular No. 905 "did not repeal nor in anyway amend
In Prof. David v. Pres. Macapagal-Arroyo,26 the Court summarized the requirements before the Usury Law but simply suspended the latter’s effectivity;"37 that "a CB Circular cannot
taxpayers, voters, concerned citizens, and legislators can be accorded a standing to sue, viz: repeal a law, [for] only a law can repeal another law;"38 that "by virtue of CB Circular No. 905,
(1) the cases involve constitutional issues; the Usury Law has been rendered ineffective;"39 and "Usury has been legally non-existent in
(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax our jurisdiction. Interest can now be charged as lender and borrower may agree upon."40
measure is unconstitutional;  
(3) for voters, there must be a showing of obvious interest in the validity of the election law in In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc.41 cited in DBP v.
question; Perez,42 we also belied the contention that the CB was engaged in self-legislation. Thus:
(4) for concerned citizens, there must be a showing that the issues raised are of Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but
transcendental importance which must be settled early; and simply suspended the latter’s effectivity. The illegality of usury is wholly the creature of
(5) for legislators, there must be a claim that the official action complained of infringes upon legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another
their prerogatives as legislators. law. x x x.43
   
While the Court may have shown in recent decisions a certain toughening in its attitude concerning In PNB v. Court of Appeals,44 an escalation clause in a loan agreement authorized the PNB to
the question of legal standing, it has nonetheless always made an exception where the unilaterally increase the rate of interest to 25% per annum, plus a penalty of 6% per annum on
past dues, then to 30% on October 15, 1984, and to 42% on October 25, 1984. The Supreme repugnant spoliation and an iniquitous deprivation of property, repulsive to the
Court invalidated the rate increases made by the PNB and upheld the 12% interest imposed by common sense of man. It has no support in law, in principles of justice, or in the human
the CA, in this wise: conscience nor is there any reason whatsoever which may justify such imposition as righteous
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to and as one that may be sustained within the sphere of public or private morals.50
stipulate freely regarding any subsequent adjustment in the interest rate that shall  
accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to Stipulations authorizing iniquitous or unconscionable interests have been invariably struck
adjust, upward or downward, the interest previously stipulated. x x x.45 down for being contrary to morals, if not against the law.51 Indeed, under Article 1409 of the
  Civil Code, these contracts are deemed inexistent and void ab initio, and therefore cannot be
Thus, according to the Court, by lifting the interest ceiling, CB Circular No. 905 merely upheld ratified, nor may the right to set up their illegality as a defense be waived.
the parties’ freedom of contract to agree freely on the rate of interest. It cited Article 1306 of  
the New Civil Code, under which the contracting parties may establish such stipulations, Nonetheless, the nullity of the stipulation of usurious interest does not affect the lender’s right
clauses, terms and conditions as they may deem convenient, provided they are not contrary to to recover the principal of a loan, nor affect the other terms thereof.52 Thus, in a usurious loan
law, morals, good customs, public order, or public policy. with mortgage, the right to foreclose the mortgage subsists, and this right can be exercised by
  the creditor upon failure by the debtor to pay the debt due. The debt due is considered as
E. The BSP-MB has authority to enforce CB Circular No. 905. without the stipulated excessive interest, and a legal interest of 12% per annum will be added
Section 1 of CB Circular No. 905 provides that "The rate of interest, including commissions, in place of the excessive interest formerly imposed,53following the guidelines laid down in the
premiums, fees and other charges, on a loan or forbearance of any money, goods, or credits, landmark case of Eastern Shipping Lines, Inc. v. Court of Appeals,54 regarding the manner of
regardless of maturity and whether secured or unsecured, that may be charged or collected by any computing legal interest:
person, whether natural or juridical, shall not be subject to any ceiling prescribed under or pursuant to II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
the Usury Law, as amended." It does not purport to suspend the Usury Law only as it applies to rate of interest, as well as the accrual thereof, is imposed, as follows:
banks, but to all lenders. 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
  Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
Petitioners contend that, granting that the CB had power to "suspend" the Usury Law, the new BSP- absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
MB did not retain this power of its predecessor, in view of Section 135 of R.A. No. 7653, which judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
expressly repealed R.A. No. 265. The petitioners point out that R.A. No. 7653 did not reenact a 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
provision similar to Section 109 of R.A. No. 265. amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No
  interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand
A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks, can be established with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made,
maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any the interest shall begin to run only from the date the judgment of the court is made (at which time the
money, goods or credits, including those for loans of low priority such as consumer loans, as quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
well as such loans made by pawnshops, finance companies and similar credit institutions. It computation of legal interest shall, in any case, be on the amount finally adjudged.
even authorizes the BSP-MB to prescribe different maximum rate or rates for different types of 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
borrowings, including deposits and deposit substitutes, or loans of financial intermediaries. interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
  finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.55 (Citations omitted)
Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No. 265, now R.A. No.  
7653, merely supplemented it as it concerns loans by banks and other financial institutions. The foregoing rules were further clarified in Sunga-Chan v. Court of Appeals, 56 as follows:
Had R.A. No. 7653 been intended to repeal Section 1-a of Act No. 2655, it would have so stated Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable
in unequivocal terms. rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance
  of money, goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or
Moreover, the rule is settled that repeals by implication are not favored, because laws are presumed credit, while the 6% per annum under Art. 2209 of the Civil Code applies "when the transaction involves the
to be passed with deliberation and full knowledge of all laws existing pertaining to the subject.46 An payment of indemnities in the concept of damage arising from the breach or a delay in the performance of
implied repeal is predicated upon the condition that a substantial conflict or repugnancy is found obligations in general," with the application of both rates reckoned "from the time the complaint was filed until
the [adjudged] amount is fully paid." In either instance, the reckoning period for the commencement of the
between the new and prior laws. Thus, in the absence of an express repeal, a subsequent law cannot running of the legal interest shall be subject to the condition "that the courts are vested with discretion,
be construed as repealing a prior law unless an irreconcilable inconsistency and repugnancy exists in depending on the equities of each case, on the award of interest."57 (Citations omitted)
the terms of the new and old laws.47 We find no such conflict between the provisions of Act 2655 and
R.A. No. 7653.
 
F. The lifting of the ceilings for interest rates does not authorize stipulations charging excessive,
unconscionable, and iniquitous interest.
It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of
their assets.48 As held in Castro v. Tan:
The imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a