JARDENIL VS. SOLAS – Art.

1956 –

Facts:

A)Solas entered into a mortgage with Jardenil, in connection with a loan from
Nov 1932 to March 1934.

B)Solas was unable to pay his obligation.

C)Jardenil extended to another year from the date of maturity within which to
make payment, without making any mention of any interest which the mortgagor
should pay during the additional period.

D)Still, Solas was unable to pay. Cu Unjieng vs Mabalacat

E)The original mortgage show that there was an agreement to pay interest only Facts:
up to thedate of maturity (first day of maturity), May 31, 1934.
Mabalacat was indebted to Hijos, with mortgage and interest. Hijos now seeks
Issue:W/N Solas is bound to pay the stipulated interest only up to the date of payment. He imposed compounded interest charges in estimating the amount of
maturity as fixed in thepromissory note, or up to the date payment is effected? indebtedness.
Held: Argument:
A)Pay interest only until the date of maturity. Hijos: In the mortgage, there had been a stipulation that, “Interest, to be
computed upon the still unpaid capital of the loan, shall be paid monthly, at the
B)Interest shall be due only when it has been expressly stipulated.
end of each month.” Thus, this justifies the imposition of compounded interest
C)There is nothing in the mortgage deed to show that the terms employed by the charges.
parties thereto are at war with their evident intent.

D)The true intention of the parties was that no interest should be paid during the
Issue: WON the imposition of compounded interest charges is justified.
period of grace.
Held:
E)There was no mutual mistake.

No. The provision in the mortgage quoted by Hijos merely requires the debtor to
pay interest monthly at the end of each month, such interest to be computed upon
the capital of the loan not already paid.

In the absence of express stipulation for the accumulation of compound interest,

no interest can be collected upon interest until the debt is judicially claimed, and
then the rate at which interest upon accrued interest must be computed is fixed But the exhibit referred to is merely a receipt showing that the sum of P256.28
at 6 per cent per annum. was, on March 19, 1928, paid by the debtor to the plaintiff as interest upon
interest. But where interest is improperly charged, at an unlawful rate, the mere
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voluntary payment of it to the creditor by the debtor is not binding.
Where interest is improperly charged, at an unlawful rate, the mere voluntary
it follows that the appealed judgment must be modified by deducting the sum of
payment of it to the creditor by the debtor is not binding. Such payment, in the
P1,136.12 from the principal debt, so that the amount of said indebtedness shall
case before us, was usurious, being in excess of 12 per cent which is allowed to
be P162,398.61, with interest at 12 per cent per annum
be charged, under section 2 of the Usury Law, when a debt is secured by
mortgage upon real property.

The first point assigned as error has relation to the question whether the action
was prematurely stated

non-compliance on the part of the mortgage debtor with any of the obligations
assumed in virtue of this contract will cause the entire debt to become due and
give occasion for the foreclosure of the mortgage.

the mortgage creditor, Cu Unjieng e Hijos, agreed to extend the time for payment
of the mortgage indebtedness until June 30, 1929

The second error is directed to the propriety of the interest charges made by the
plaintiff in estimating the amount of the indebtedness.

It is well settled that, under article 1109 of the Civil Code, as well as under section
5 of the Usury Law (Act No. 2655), the parties may stipulate that interest shall be
compounded; and rests for the computation of compound interest can certainly
be made monthly, as well as quarterly, semiannually, or annually. But in the
absence of express stipulation for the accumulation of compound interest, no
interest can be collected upon interest until the debt is judicially claimed

In the present case, however, the language which we have quoted above does
not justify the charging of interest upon interest, so far as interest on the capital
is concerned. The provision quoted merely requires the debtor to pay interest
monthly at the end of each month, such interest to be computed upon the
capital of the loan not already paid. Clearly this provision does not justify the
charging of compound interest upon the interest accruing upon the capital
monthly.
 The Court of Appeals decision is REVERSED and SET ASIDE.

GSIS vs CA HELD:

FACTS: 1. A careful perusal of the title, preamble, and body of the Amendment Real
Estate Mortgage taking into account the prior, contemporaneous, and
In 1961, private respondents spouses Nemencio Medina and Josefina Medina
subsequent acts of the parties, ineluctably shows that said Amendment
applied with GSIS for a loan of P600,000.00. The GSIS first approved only the
was never intended to completely supersede the original mortgage
amount of P350,000.00 then reduced the amount to P295,000.00. The Medinas
contract. The title recognizes the existence and effectivity of the previous
accepted the amount, executed a promissory note and a real estate mortgage in
mortgage contract. Nowhere in the Amendment did the party manifest
favor of GSIS. Then the amount of P350,000.00 was restored. The Medinas then
their intention to supersede the original contract and it does not embody
executed an Amendment of Real Estate Mortgage. In 1963, an additional loan of
the act of conveyancing the subject properties by way of mortgage.
P230,000.00 was approved on the security of the same mortgaged properties
and additional properties. 2. The Usury Law applies only to interest by way of compensation for the use
of forbearance of money. Interest by way of damages is governed by Art
Beginning 1965, the Medinas defaulted in the payment of the monthly
2209 of the Civil Code. The Civil Code permits the agreement upon a
amortization of their loan. And in 1967, they began defaulting in the payment of
penalty apart from the interest. The penalty does not include the interest,
fire insurance premiums. GSIS then imposed 9%/12% interest on all installments
and as such the two are different and distinct things that may be
due and unpaid and in 1975, they filed an Application of Foreclosure of Mortgage
demanded separately.
and the properties were sold at a public auction in 1976.

Also in 1976, the Medinas filed an Amended Complaint praying for the
declaration of nullity of the 2 real estate mortgage contracts as well as of the
extra-judicial foreclosure proceedings and the refund of excess payments,
damages and attorney’s fees. The trial court ruled in the favor of the Medinas.
Both parties appealed with the Court of Appeals and the Court of Appeals
affirmed the trial courts decision.
ISSUES:
1. Whether or not the Court of Appeals erred in holding that the
amendment of Real Estate Mortgage dated July 6, 1962, superseded the
Mortgage contract dated April 4, 1962, particularly with respect to
compounding of interest.
2. Whether or not the Court of Appeals erred in holding that the interest
rates on the loan accounts are usurious.
RULING:
Ligutan vs. CA G.R#138677
Facts: Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the
amount of P120,000.00 from respondent Security Bank and Trust
Company. Petitioners executed a promissory note binding themselves, jointly and
severally, with an interest of 15.189% per annum upon maturity and to pay a
penalty of 5% every month on the outstanding principal and interest in case of
default and also a 10% attorney’s fees if the matter were indorsed to a lawyer for
collection.
The obligation matured, the petitioners were not able to settle the
obligation; The bank gave an extension, still the same happened. Since the
petitioners still defaulted, the former filed a complaint for recovery of the due
amount.
Issue: Whether the interest and penalty charge imposed by private respondent
bank on petitioners’ loan are manifestly exorbitant, iniquitous and
unconscionable?
Ruling: The obligor would then be bound to pay the stipulated indemnity without Eastern Shipping vs CA
the necessity of proof on the existence and on the measure of damages caused
FACTS
by the breach. Although a court may not at liberty ignore the freedom of the
parties to agree on such terms and conditions as they see fit that contravene Two fiber drums were shipped owned by Eastern Shipping from Japan. The
neither law nor morals, good customs, public order or public policy, a stipulated shipment as insured with a marine policy. Upon arrival in Manila unto the custody
penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or of metro Port Service, which excepted to one drum, said to be in bad order and
unconscionable or if the principal obligation has been partly or irregularly which damage was unknown the Mercantile Insurance Company. Allied Brokerage
complied with. Corporation received the shipment from Metro, one drum opened and without
seal. Allied delivered the shipment to the consignee’s warehouse. The latter
The question of whether a penalty is reasonable or iniquitous can be partly
excepted to one drum which contained spillages while the rest of the contents was
subjective and partly objective. Its resolution would depend on such factors as,
adulterated/fake. As consequence of the loss, the insurance company paid the
but not necessarily confined to, the type, extent and purpose of the penalty, the
consignee, so that it became subrogated to all the rights of action of consignee
nature of the obligation, the mode of breach and its consequences, the
against the defendants Eastern Shipping, Metro Port and Allied Brokerage. The
supervening realities, the standing and relationship of the parties, and the like,
insurance company filed before the trial court. The trial court ruled in favor of
the application of which, by and large, is addressed to the sound discretion of the
plaintiff an ordered defendants to pay the former with present legal interest of
court.
12% per annum from the date of the filing of the complaint. On appeal by
The CA exercised good judgment in reducing the stipulated penalty interest from defendants, the appellate court denied the same and affirmed in toto the decision
5% to 3% a month. It was also been held that the 15.189% per annum stipulated of the trial court.
interest and the 10% attorney’s is reasonable and not excessive. The interest
ISSUE
prescribed in loan financing arrangements is a fundamental part of the banking
business and the core of a bank's existence. (1) Whether the applicable rate of legal interest is 12% or 6%.

(2) Whether the payment of legal interest on the award for loss or damage is to
be computed from the time the complaint is filed from the date the decision
appealed from is rendered.

HELD

(1) The Court held that the legal interest is 6% computed from the decision of
the court a quo. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damaes awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No interest
shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty.

When the judgment of the court awarding a sum of money becomes final and
executor, the rate of legal interest shall be 12% per annum from such finality until
satisfaction, this interim period being deemed to be by then an equivalent to a also found that the penaty harges of 1% per day of delay as highly unconscionable.
forbearance of money. Thus, it was reduced to 1% per month or 12% per annum.

The interest due shall be 12% PA to be computed fro default, J or EJD. ISSUE

(2) From the date the judgment is made. Where the demand is established
with reasonable certainty, the interest shall begin to run from the time the claim the legal interest of 12% PA despite the clear agreement of the parties.
is made judicially or EJ but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shll begin to run only
from the date of judgment of the court is made.
(3) The Court held that it should be computed from the decision rendered by
the court a quo
Whether or not the CA erred in finding that the applicable interest should be
HELD
The Court held in the negative. When the terms of the agreement are clear
and explicit that they do not justify an attempt to reas into it any alleged intention
of the paies, the terms are to be understood literally just as they appear on the
face pf the contract. Perusal of the PNs and the disclosure statements, loan
obligations of respondent clearly and unambiguously provide interest rates of 4.5%
per annum and 5% PA. Nowhere was it stated that the interest rates shall be
applied on a monthly basis.

The same PN provides that “xxx any and all remaining amount due on the
First Fil-In Lending Corp. vs Padillo, GR No. 160533, 12 January 2005, 448 principal upon maturity shall earn interest at the rate of _____ from date of
SCRA 71 maturity until fully paid”. The CA thus properly imposed the legal interest of 12%PA
from the time the loans matured until the same has been fully paid. As held in
FACTS Eastern Shipping Lines vs CA, “In the absence of stipulation, the interest due shall
Gloria Padillo obtained a P500,000 loan from petitioner First-Fil Lending be 12% PA to be computed fro default”.
Corp. She also obtained another loan from petitioner in the same amount. In
both loans, Padillo executed a promissory note and disclosure agreement. Padillo
filed an action for sum of money before the RTC of Manila seeking to recover the
amounts she allegedly paid in excess of her obligation, alleging that she only
agreed to pay interest at the rates of 4.5% and 5% per annum for the two loans
and not 4.5% and 5% per month. The trial court dismissed the complaint ordering
her to pay her obligation. the court also ruled that by issuing checks representing
interest payment sat 4.5% and 5% monthly interest rates, Padillo is stopped from
questioning the provisions of the PNs.

On appeal , the CA reversed the trial court ruling that, based on disclosure
statements, the interest rates should be imposed on a monthly basis but only for
the 3-month term of the loan. legal interest rate will apply thereafter. The CA Bataan Seedling vs Republic, GR No. 141009, 2 July 2002, 383 SCRA 590

FACTS
 Petitioner entered into a contract with respondent, represented by the
DENR for the reforestation of a forest land within a period of 3 years. Petitioner
undertook to report to DENR any event or condition which delays or may delay
the project. With the contract was the release of mobilization fund but the fund
was to be returned upon completion or deducted from periodic release of
mhoneys to petitioner. Believing that petitioners failed to comply with their
obligations, respondent sent a notice of cancellation. Petitioners failed to
respond to the notice, thus, respondent filed a complaint for damages against
petitioners. The RTC held that respondent had sufficient grounds to cancel the
contract but saw no reason why the mobilization fund and the cash advances
should be refunded or that petitioners are liable for liquidated damages. Both
parties appealed to the CA, which affirmed the trial court and that the balnce of
the fund should be returned with 12% interest.
THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK) v. CA 356
ISSUE SCRA 671

Whether the order to refund the balance of the fund with 12% interest pa Topic: Characteristics of Simple Loan or Mutuum
is proper.
Facts:
HELD
Private respondent Continental Cement Corporation obtained from Consolidated
No. Interest at the rate of 12% pa is impossible if there is no stipulation in Bank letter of credit used to purchase 500,000 liters of bunker fuel oil from
the contract. Herein subject contract does not contain any stipulation as to Petrophil Corporation, which the latter delivered directly to respondent
interest. However, the amount due to respondent does not represent a loan or Corporation in its Bulacan plant. Respondent Corporation made a marginal deposit
forbearance of money. The word “forbearance” is defined, within, the context of to petitioner. A trust receipt was executed by respondent corporation, with
usury law, as a contractual obligation of lender or creditor to refrain, during given respondent Gregory Lim as signatory. Claiming that respondents failed to turn over
period of time, from requiring borrower or debtor to repay loan or debt then due the goods or proceeds, petitioner filed a complaint for sum of money before the
and payable. In the absence of stipulation, the legal interest is 6% pa on the RTC of Manila. In their answer, respondents aver that the transaction was a simple
amount finally adjudged by the Court. loan and not a trust receipt one, and that the amount claimed by petitioner did not
take into account payments already made by them. The trial court dismissed the
complaint, CA affirmed the same.

Issue: WON the transaction between petitioner Solidbank and private respondent
Continental Cement Corp. is a trust receipt transaction instead of merely a simple
loan.

Ruling:
 Inasmuch as the debtor received the goods subject of the trust receipt
before the trust receipt itself was entered into, the transaction in question was a
simple loan and not a trust receipt agreement. Prior to the date of execution of
the trust receipt, ownership over the goods was already transferred to the
debtor. This situation is inconsistent with what normally obtains in a pure trust
receipt transaction, wherein the goods belong 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 delivery to respondent 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 respondent Corporations
Bulacan plant commenced on July 7, 1982 and was completed by July 19, 1982.
Further, the oil was used up by respondent Corporation in its normal operations
by August, 1982. On the other hand, the subject trust receipt was only executed
nearly two months after full delivery of the oil was made to respondent
Corporation, or on September 2, 1982.
The danger in characterizing a simple loan as a trust receipt transaction was
explained in Colinares v. CA, to wit:
The Trust Receipts Law does not seek to enforce payment of the loan, rather it
punishes the dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of another regardless of 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 continually endeavored to meet their obligations, as shown by
several receipts issued by PBC acknowledging payment of the loan.
as provided for by the Loan Agreement, an Underwriting Agreement with
underwriting fee, annual supervision fee and consultancy fee with Consultancy
Agreement for four (4) years, coinciding with the term of the loan. The said fees
were deducted from the first release of loan. Respondent failed to meet the
schedule of repayment. Petitioner instituted an instant collection suit. The trial
court rendered its decision in favor of petitioner. The Court of Appeals reversed
the decision of the trial court in favor of herein respondents after its factual
findings and conclusion.
ISSUE:
Whether or not the Underwriting and Consultancy Agreements were mere
subterfuges to camouflage the usurious interest charged by the petitioner.
RULING:
YES. In the instant case, several facts and circumstances taken altogether show
that the Underwriting and Consultancy Agreements were simply cloaks or devices
to cover an illegal scheme employed by petitioner FMIC to conceal and collect
excessively usurious interest. “Art. 1957. Contracts and stipulations, under any
cloak or device whatever, intended to circumvent the laws against usury shall be
void. 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. Hence, the instant petition
was denied and the assailed decision of the appellate court is affirmed.

First Metro Investment Corporation vs. Este del Sol Mountain Reserve, Inc. (362
SCRA 101)

FACTS:

Petitioner FMIC granted respondent a loan of Seven Million Three Hundred

Eighty Five Thousand Five Hundred Pesos (P7,385,500.00) to finance the
construction of a sports complex at Montalban, Rizal. Respondent also executed,
 principal amount. Thus, a dismissal of the case would cause great injustice to
respondent BPI. Similarly, a remand of the case for further reception of evidence
would unduly prolong the proceedings of the instant case and render inutile the
proceedings conducted before the lower courts.

LEANA DR. MACALINAO v. BANK OF THE PHILIPPINE ISLANDS

G.R. No. 175490, September 17, 2009, Velasco, Jr., J.A plaintiff should not be The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should
made to suffer for the respondent’s failure to file an answer and concomitantly, Be Reduced to 2% Per Month or 24% Per Annum
to allow the latter to submit additional evidence by dismissing or remanding the
case for further reception of evidence.

Facts: Macalinao is a card holder of a BPI credit facility. Upon failure of Macalinao
to pay for its balance when it became due, BPI demanded payment of 3% per
month interest and an additional 3%per month penalty charge. After the
summons and a copy of the complaint were served upon petitioner Macalinao
and her husband, they failed to file their Answer. Thus, respondent BPI moved
that judgment be rendered in accordance with Section 6 of the Rule on Summary
Procedure, which was granted. The MTC ruled in favor of BPI. Macalinao claims
that the basis of the re-computation of the CA was not the amount of the
principal obligation. Thus, this allegedly necessitates a re-examination of the
evidence presented by the parties. For this reason, Macalinao further contends CASTRO v DE LEON TAN
that the dismissal of the case or its remand to the lower court would be a more G.R. No. 168940
appropriate disposition of the case.
November 24, 2009
Issue: Whether or not the case shall be dismissed.
Respondent Angelina de Leon Tan, and her husband Ruben Tan were the
Ruling:No. Based on the records, the summons and a copy of the complaint were former registered owners of a 240-square meter residential lot, situated at a barrio
served upon petitioner Macalinao and her husband on May 4, 2004. in Bulacan.
Nevertheless, they failed to file their Answer despite such service. Thus,
respondent BPI moved that judgment be rendered accordingly. Consequently, a On February 17, 1994, they entered into an agreement with petitioners spouses
decision was rendered by the MeTC on the basis of the evidence submitted by Isagani and Diosdada Castro denominated as Kasulatan ng Sanglaan ng Lupa at
respondent BPI.Thus, respondent BPI should not be made to suffer for petitioner Bahay (Kasulatan) to secure a loan of P30,000.00 they obtained from the latter.
Macalinao's failure to filean answer and concomitantly, to allow the latter to Under the Kasulatan, the spouses Tan undertook to pay the mortgage debt within
submit additional evidence by dismissing or remanding the case for further six months or until August 17, 1994, with an interest rate of 5% per month,
reception of evidence. Significantly, petitioner Macalinao herself admitted the compounded monthly.
existence of her obligation to respondent BPI, albeit with reservation as to the
When her husband died on September 2, 1994, respondent Tan was left to pay
the loan. However, she failed to pay the same upon maturity. Thereafter, she
offered to pay petitioners the principal amount of P30,000.00 plus a portion of
the interest but petitioners refused and instead demanded payment of the total
accumulated sum of P359,000.00.
In this case, the 5% monthly interest rate, or 60% per annum, compounded
monthly, stipulated in the Kasulatan is even higher than the 3% monthly interest
rate imposed in the Ruiz case. Thus, the 5% monthly interest is excessive,
iniquitous, unconscionable and exorbitant, contrary to morals, and the law. It is
therefore void ab initio for being violative of Article 1306 of the Civil Code.

February 5, 1999, petitioners caused the extrajudicial foreclosure and emerged The Court of Appeals did not unilaterally change the terms and conditions of the
as the only bidder in the auction sale that ensued. Contract of Mortgage entered into between the petitioners and the respondents.

On September 26, 2000, respondent Tan, joined by respondents Sps. , Clemente, Petitioners allege that the Kasulatan was entered into by the parties freely and
Sps. Carpio, Sps. Soliman, and Julius Amiel Tan filed a Complaint for Nullification voluntarily. They maintain that there was already a meeting of the minds between
of Mortgage and Foreclosure and/or Partial Rescission of Documents and the parties
Damages before the RTC. They alleged, inter alia, that the interest rate imposed
Petitioners’ contentions deserve scant consideration. In Abe v. Foster Wheeler
is unconscionable.
Corporation, we held that the freedom of contract is not absolute. The same is
understood to be subject to reasonable legislative regulation aimed at the
promotion of public health, morals, safety and welfare. One such legislative
RTC- declared the foreclosure null and void.interest lowered to 12% a year from
regulation is found in Article 1306 of the Civil Code which allows the contracting
5% a mo.
parties to “establish such stipulations, clauses, terms and conditions as they may
CA- affirmed deem convenient, provided they are not contrary to law, morals, good customs,
public order or public policy.” It is from jurisprudence that interest was reduced by
Sps Castro petitioned to SC the lower court. It was not an alteration of terms. The additional 1% per month
WN the judgement nullifying the the interest rate voluntarily agreed penalty awarded as liquidated damages does not have any legal basis.
upon by the petitioners and respondents and expressly stipulated in the contract In its June 11, 2002 Decision, the trial court granted an additional 1% per month
was proper Yes. The Court of Appeals correctly found that the 5% monthly penalty as liquidated damages beginning February 17, 1994 up to June 21, 2000.
interest, compounded monthly, is unconscionable and should be equitably Since respondents did not file their appellees’ brief despite notice, the appellate
reduced to the legal rate of 12% per annum. court declared this to be not in issue. But the SC ruled on it as an exercise of their
The imposition of an unconscionable rate of interest on a money debt, even if appellate jurisdiction.
knowingly and voluntarily assumed, is immoral and unjust. But for want of any stipulation on liquidated damages in the Kasulatan entered
While we agree with petitioners that parties to a loan agreement have wide into by the parties, we hold that the liquidated damages awarded by the trial court
latitude to stipulate on any interest rate in view of the Central Bank Circular No. and affirmed by the Court of Appeals to be without legal basis and must be
905 s. 1982 which suspended the Usury Law ceiling on interest effective January deleted.
1, 1983, it is also worth stressing that interest rates whenever unconscionable The foreclosure proceedings held on March 3, 1999 cannot be given effect.It is
may still be declared illegal. undisputed that sometime after the maturity of the loan, respondent Tan
attempted to pay the mortgage debt of P30,000.00 as principal and some interest.
Said offer was refused by petitioners because they demanded payment of the total
accumulated amount of P359,000.00. Moreover, the trial court also mentioned with interest thereon at the rate indicative of DBD retail rate or as determined by
an offer by respondent Tan of the amount of P200,000.00 to petitioners in order the Branch Head.
for her to redeem or re-acquire the property in litis.

From these, it is evident that despite considerable effort on her part, respondent
The Sps Beluso availed themselves of the credit line.
Tan failed to redeem the mortgaged property because she was unable to raise
the total amount of P359,000.00, an amount grossly inflated by the excessive UCPB applied interest rates on the different P/Ns ranging from 18% to 34%. From
interest imposed. Thus, it is only proper that respondents be given the 1996 to Feb '98 the Sps Beluso were able to pay the total sum of P763,692.03.
opportunity to repay the real amount of their indebtedness.

Basis: Case of Heirs of Zoilo Espiritu v. Landrito, which is on all fours with the
instant case, we held that: From Feb 28 1998 to June 10 1998, UCPB continued to charge interest and penalty
()21% to 36%) on the obligations of the Sps Beluso.
Since the Spouses Landrito, the debtors in this case, were not given an
opportunity to settle their debt, at the correct amount and without the iniquitous
interest imposed, no foreclosure proceedings may be instituted. As a result, the Sept 2 1998, UCPB demanded that the Sps Beluso pay their total obligation of
subsequent registration of the foreclosure sale cannot transfer any rights over
the mortgaged property to the Spouses Espiritu. The registration of the
foreclosure sale, herein declared invalid, cannot vest title over the mortgaged
property.

(53) UNITED COCONUT PLANTERS BANK v SPS SAMUEL and ODETTE BELUSO, Aug
17, 2007

Summary:

Apr 16 1996, UCPB granted the Sps Beluso a Promissory Notes Line under a
Credit Agreement whereby the Sps could avail from the Bank credit of up to a
maximum amount of P1.2 M for a term ending on Apr 30 1997. The Sps Beluso
constituted, other than their P/Ns, a REM over parcels of land in Roxas City, as
addt'l security for the obligation. The Credit Agreement was subsequently
amended to increase the amount of the Promissory Notes Line to a maximum of
P2.35M and to extend the term thereof to Feb 28 1998. The P/N provides:

FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND
ODETTE BELUSO (BORROWER), jointly and severally promise to pay to UNITED
COCONUT PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati Avenue,
Makati City, Philippines, the sum of PESOS, (P ), Philippine Currency,
 and to pay the Sps P50k by way of attorneys fees; and to pay the costs of suit. of UCPB. A contract containing a condition which makes its fulfillment dependent
The Sps was ordered to pay UCPB the sum of P1,560,308.00. UCPB's MR-> exclusively upon the uncontrolled will of one of the contracting parties, is void. It
denied. violates the principle of mutuality which is essential in contracts.

CA affirmed the RTC Decision. MR-> denied. UCPB thus filed the present petition. (2) The Sps Beluso are still subject to 12% interest and compounding interest
stipulations even if declared amount by UCPB was excessive.
SC affirmed the decision of the CA w/ mod.
The excess amount in such a demand does not nullify the demand itself, which is
(1) The interest rate stipulated was void. A1308 of the Civil Code provides:
valid with respect to the proper amount. There being a valid demand on the part of
Art. 1308. The contract must bind both contracting parties; its validity or UCPB, albeit excessive, the Sps Beluso are considered in default with respect to the
compliance cannot be left to the will of one of them. proper amount and, therefore, the interests and the penalties began to run at that
point.
The provision stating that the interest shall be at the rate indicative of DBD retail
rate or as determined by the Branch Head is indeed dependent solely on the will
P2,932,543.00 plus 25% atty's fees, but the Sps Beluso failed to comply therewith. (3) The foreclosure and Sheriffs Certificate of Sale were valid.

The foreclosure proceedings are valid since there was a valid demand made by

UCPB foreclosed the properties mortgaged by the Sps Beluso to secure their credit UCPB upon the Sps Beluso. Despite being excessive, the Sps Beluso are considered
line, which, by that time, already ballooned to P3,784,603.00. in default with respect to the proper amount of their obligation to UCPB and,
thus, the property they mortgaged to secure such amounts may be foreclosed.
Consequently, proceeds of the foreclosure sale should be applied to the extent of
Sps Beluso filed a Petition for Annulment, Accounting and Damages against UCPB the amounts to which UCPB is rightfully entitled.
with the RTC Makati City.

Note: SC affirmed RTC and CA decision, finding UCPB has violated the Truth in
RTC Makati ruled in favor of the Sps Beluso, declaring: Lending Act - UCPB failed to disclose the true finance charges in connection with
the extensions of credit
- the interest rate used by UCPB void

- the foreclosure and Sheriffs Certificate of Sale void.

It ordered UCPB to return to Sps Beluso the properties subject of the foreclosure;
CHICO-NAZARIO, J. FACTS principal indebtedness was only P2M.

Apr 16 1996, UCPB granted the Sps Beluso a Promissory Notes Line under a
Credit Agreement whereby the Sps could avail from the Bank credit of up to a
In any case, UCPB applied interest rates on the different P/Ns ranging from 18% to
maximum amount of P1.2 M for a term ending on Apr 30 1997. The Sps Beluso
34%. From 1996 to Feb '98 the Sps Beluso were able to pay the total sum of
constituted, other than their P/Ns, a REM over parcels of land in Roxas City, as
P763,692.03.
addt'l security for the obligation. The Credit Agreement was subsequently
amended to increase the amount of the Promissory Notes Line to a maximum of
PN # Amount Interest Penalty Total
P2.35M and to extend the term thereof to Feb 28 1998. Secured
From Feb 28 1998 to June 10 1998, UCPB continued to charge interest and penalty
97-00363-1
on the obligationsPof
200,000 31.00% as follows:
the spouses Beluso, 36.00% P 225,313.24
97-00366-6 P 700,000 30.17%(7 days) 32.786% (102 P 795,294.72
The Sps Beluso availed themselves of the credit line under the following days)
PN #
Promissory Notes: Date of PN Maturity Date Amount Secured
97-00368-2 P 1,300,000 28.00%(2 days) 30.41% (102 P 1,462,124.54
8314-96-00083-3 04/29/96 08/27/96 P 700,000 days)
8314-96-00085-0 05/02/96 08/30/96 P 500,000 98-00002-4 P 150,000 33% 36% P 170,034.71
8314-96-000292-2 11/20/96 03/20/97 P 800,000 (102 days)

The 3 P/Ns were renewed several times. The Sps Beluso, however, failed to make any payment of the foregoing amounts.

Apr 30 1997, the payment of the principal and interest of the latter 2 P/Ns were
debited from the Sps Belusos account with UCPB; yet, a consolidated loan for
Sept 2 1998, UCPB demanded that the Sps Beluso pay their total obligation of
P1.3 M was again released to the Sps Beluso under 1 P/N with a due date of Feb
P2,932,543.00 plus 25% atty's fees, but the Sps Beluso failed to comply therewith.
28 1998.

Dec 28 1998, UCPB foreclosed the properties mortgaged by the Sps Beluso to

To completely avail themselves of the P2.35 Million credit line extended to them secure their credit line, which, by that time, already ballooned to P3,784,603.00.
by UCPB, the Sps Beluso executed 2 more promissory notes for a total of P350k: Sps Beluso filed a Petition for Annulment, Accounting and Damages against UCPB
with the RTC Makati City.
PN # Date of PN Maturity Date Amount Secured
97-00363-1 12/11/97 02/28/98 P 200,000
98-00002-4 01/02/98 02/28/98 P 150,000 RTC Makati ruled in favor of the Sps Beluso, declaring:

- the interest rate used by UCPB void

- the foreclosure and Sheriffs Certificate of Sale void.

It ordered UCPB to return to Sps Beluso the properties subject of the foreclosure;
and to pay the Sps P50k by way of attorneys fees; and to pay the costs of suit.
However, the Sps Beluso alleged that the amounts covered by these last 2 P/Ns
The Sps was ordered to pay UCPB the sum of P1,560,308.00. UCPB's MR-> denied.
were never released or credited to their account and, thus, claimed that the
 CA affirmed the RTC Decision. MR-> denied. UCPB thus filed the present petition. availing themselves of the credit line from April 1996 to February 1998 without
airing any protest with respect to the interest rates imposed by UCPB. The Sps
----------------------------------------
Beluso are in estoppel.
UCPB's Position:

(1) The imposition of interest was valid.

(2) None of the grounds for the annulment of a foreclosure sale are present in the
- While the interest rate was not numerically quantified in the face of the P/Ns, it case at bar.
was nonetheless categorically fixed, at the time of execution thereof, at the rate
-------------------------------------------
indicative of the DBD retail rate. Provisions in the P/Ns must be read with
another stipulation in the P/Ns subjecting to review the interest rate as fixed: WON the Interest Rates were valid.

The interest rate shall be subject to review and may be increased or decreased by
the LENDER considering among others the prevailing financial and monetary
conditions; or the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with
the BORROWER.

In this regard, these are valid reference rates akin to a prevailing rate or prime
rate allowed by this Court in Polotan v. CA.

- Furthermore, even if the proviso as determined by the branch head is

considered void, such a declaration would not ipso facto render the connecting
clause indicative of DBD retail rate void in view of the separability clause of the
Credit Agreement.

- The imposition of the questioned interest rates did not infringe on the principle
of mutuality of contracts, because the Sps Beluso had the liberty to choose
whether or not to renew their credit line at the new interest rates pegged by
UCPB.

- Assuming there was any defect in the mutuality of the contract at the time of its
inception, such defect was cured by the subsequent conduct of the Sps Beluso in
Held: No The provision stating that the interest shall be at the rate indicative of DBD retail
rate or as determined by the Branch Head is indeed dependent solely on the will
CA held that the imposition of interest in the ff provision found in the P/Ns of the
of UCPB. Under such provision, UCPB has two choices on what the interest rate
Sps is void, as the interest rates and the bases therefor were determined solely by
shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by
UCPB:
the Branch Head. As UCPB is given this choice, the rate should be categorically
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND determinable in both choices. If either of these two choices presents an
ODETTE BELUSO (BORROWER), jointly and severally promise to pay to UNITED opportunity for UCPB to fix the rate at will, the bank can easily choose such an
COCONUT PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati Avenue, option, thus making the entire interest rate provision violative
Makati City, Philippines, the sum of PESOS, (P ), Philippine Currency,
with interest thereon at the rate indicative of DBD retail rate or as determined by
the Branch Head.

CA is correct. A1308 of the Civil Code provides:

Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.

A1308 was applied in PNB v. CA, where it was held that:

In order that obligations arising from contracts may have the force of law between
the parties, there must be 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 assuming that the P1.8M loan agreement between the PNB and the
pR 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 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 equal footing, the weaker party's
(the debtor) participation being reduced to the alternative "to take it or leave it"
(Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect
against abuse and imposition.
 of the principle of mutuality of contracts.
Not just one, but rather both, of these choices are dependent solely on the will ofcontract, validity cannot be given to it by estoppel if it is prohibited by law or is
UCPB. Clearly, a rate as determined by the Branch Head gives the latter
unfettered discretion on what the rate may be. The Branch Head may choose any
rate he or she desires. As regards the rate indicative of the DBD retail rate, the
same cannot be considered as valid for being akin to a prevailing rate or prime
rate allowed by this Court in Polotan. The interest rate in Polotan reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of
Security Bank and Trust Company. x x x.
In this provision in Polotan, there is a fixed margin over the reference rate: 3%.
Thus, the parties can easily determine the interest rate by applying simple
arithmetic. On the other hand, the provision in the case at bar does not specify
any margin above or below the DBD retail rate. UCPB can peg the interest at any
percentage above or below the DBD retail rate, again giving it unfettered
discretion in determining the interest rate.
(2) The stipulation in the P/Ns subjecting the interest rate to review does not
render the imposition by UCPB of interest rates valid.
It should be pointed out that the authority to review the interest rate was given
UCPB alone as the lender. Moreover, UCPB may apply the considerations
enumerated in this provision as it wishes. As worded in the above provision,
UCPB may give as much weight as it desires to each of the ff considerations: (1)
the prevailing financial and monetary condition; (2) the rate of interest and
charges which other banks or financial institutions charge or offer to charge for such a demand does not nullify the demand itself, which is valid with respect to
(4) UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act. As between the parties to a
against public policy.
The interest rate provisions in the case at bar are illegal not only because of the
provisions of the Civil Code on mutuality of contracts, but also because they violate
the Truth in Lending Act. Not disclosing the true finance charges in connection with
the extensions of credit is a form of deception which we cannot countenance. The
policy of the State as stated in the Truth in Lending Act:
Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to
protect its citizens from a lack of awareness of the true cost of credit to the user by
assuring a full disclosure of such cost with a view of preventing the uninformed use
of credit to the detriment of the national economy.
Moreover, while the Sps Beluso indeed agreed to renew the credit line, the
offending provisions are found in the P/Ns themselves, not in the credit line. In
fixing the interest rates in the P/Ns to cover the renewed credit line, UCPB still
reserved to itself the same 2 options (1) a rate indicative of the DBD retail rate; or
(2) a rate as determined by the Branch Head.
Whether or not Spouses Beluso are subject to 12% interest and compounding
interest stipulations even if declared amount by UCPB was excessive.
Held: Yes
Default commences upon judicial or extrajudicial demand. The excess amount in
 similar accommodations; and/or (3) the resulting profitability to the LENDER
(UCPB) after due consideration of all dealings with the BORROWER (the Sps
Beluso). Again, as in the case of the interest rate provision, there is no fixed
margin above or below these considerations.
(3) In view of the foregoing, the Separability Clause cannot save either of the 2
options of UCPB as to the interest to be imposed, as both options violate the
principle of mutuality of contracts.
the proper amount. There being a valid demand on the part of UCPB, albeit
excessive, the Sps Beluso are considered in default with respect to the proper
amount and, therefore, the interests and the penalties began to run at that point.
As regards the award of 12% legal interest in favor of UCPB, the RTC actually
recognized that said legal interest should be imposed, thus: “There being no valid
stipulation as to interest, the legal rate of interest shall be charged.”It seems that
the RTC inadvertently overlooked its non-inclusion in its computation.
Likewise the contract stipulation providing the compounding of interest must
be uphold. The provisions in the Credit Agreement and in the P/Ns providing foraccrue when such finance charge is required. In the case at bar, the date of the

the compounding of interest were neither nullified by the RTC or the CA, nor demand for payment of the finance charge is Sept 2 1998, while the foreclosure
assailed by the SPs Beluso in their petition with the RTC. was made on Dec 2 1998. The filing of the case on Feb 9 1999 is therefore within
the one-year prescriptive period.

WON the foreclosure was void

Held: No.
The foreclosure proceedings are valid since there was a valid demand made by
UCPB upon the Sps Beluso. Despite being excessive, the Sps Beluso are
considered in default with respect to the proper amount of their obligation to
UCPB and, thus, the property they mortgaged to secure such amounts may be
foreclosed. Consequently, proceeds of the foreclosure sale should be applied to
the extent of the amounts to which UCPB is rightfully entitled.
Others: Truth Lending Act
In re: allegation of the violation of the Truth in Lending Act.
- the original complaint did not explicitly allege a violation of the Truth in
Lending Act, but its infringement may be inferred or implied from allegations x x x x
that when Sps Beluso executed the P/Ns, the interest rate chargeable thereon
were left blank. Thus, UCPB failed to discharge its duty to disclose in full to Sps (c) Any person who willfully violates any provision of this Act or any regulation
Beluso the charges applicable on their loans.
In re: the violation of the Truth in Lending Act, being a criminal offense, cannot be
inferred nor implied from the allegations made in the complaint.
- Pertinent provisions of the Act read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation
issued thereunder shall be liable to such person in the amount of P100 or in an
amount equal to twice the finance charge required by such creditor in connection
with such transaction, whichever is the greater, except that such liability shall not
exceed P2,000 on any credit transaction. Action to recover such penalty may be
brought by such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. In any action under this subsection
in which any person is entitled to a recovery, the creditor shall be liable for
reasonable attorneys fees and court costs as determined by the court.
issued thereunder shall be fined by not less than P1,000 or more than P5,000 or
imprisonment for

- the allegation of violation of the Truth in Lending Act can also be inferred from not less than 6 months, nor more than one year or both.

the P/Ns grant UCPB the power to unilaterally fix the interest rates. This

certainly also means that the P/Ns do not contain a clear statement in writing of As can be gleaned from S6(a) and (c) of the Truth in Lending Act, the violation of the
finance charge expressed in terms of pesos and centavos; and the percentagethe said Act gives rise to both criminal and civil liabilities. S6(c) considers a

that the finance charge bears to the amount to be financed expressed as a simplecriminal offense the willful violation of the Act, imposing the penalty therefor of

annual rate on the outstanding unpaid balance of the obligation.

- Furthermore, the Sps Beluso's prayer for such other reliefs just and equitable in fine, imprisonment or both. S6(a), on the other hand, clearly provides for a civil
the premises should be deemed to include the civil penalty provided for in cause of action for failure to disclose any information of the required information
Section 6(a) of the Truth in Lending Act. to any person in violation of the Act. The penalty therefor is an amount of P100 or
in an amount equal to twice the finance charge required by the creditor in
connection with such transaction, whichever is greater, except that the liability
In re: the action to recover the penalty for the violation of the Truth in Lending shall not exceed P2,000.00 on any credit transaction. The action to recover such
Act has already prescribed. penalty may be instituted by the aggrieved private person separately and
independently from the criminal case for the same offense.
- without merit. The penalty for the violation of the act is P100 or an amount
equal to twice the finance charge required by such creditor in connection with
such transaction, whichever is greater, except that such liability shall not
In the case at bar, therefore, the civil action to recover the penalty under S6(a) of
exceed P2k on any credit transaction. As this penalty depends on the finance
the Truth in Lending Act had been jointly instituted with (1) the action to declare
charge required of the borrower, the borrowers cause of action would only
the interests in the P/Ns void, and (2) the action to declare the
foreclosure void. This joinder is allowed under R2, Se5 of the RoC.
In re: Since the violation of the Truth in Lending Act was not alleged in the
complaint, UCPB's right to due process was violated.
- in the 1 July 1999 pre-trial brief filed by the Sps Beluso before the RTC, the
claim for civil sanctions for violation of the Truth in Lending Act was expressly
alleged.
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 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 contract, and to properly evaluate their options in arriving
at business decisions. Upholding UCPBs claim of substantial compliance would
defeat these purposes of the Truth in Lending Act. The belated discovery of the true
cost of credit will too often not be able to reverse the ill effects of an already
consummated business decision.

In re: MeTC has jurisdiction to try and adjudicate the alleged violation of the - In addition, the P/Ns, the copies of which were presented to the spouses Beluso
Truth in Lending Act, considering that the present action allegedly involved a after execution, are not sufficient notification from UCPB. The interest rate
single credit transaction as there was only one Promissory Note Line. provision therein does not sufficiently indicate with particularity the interest rate
to be applied to the loan covered by said promissory notes.
- No. The action to recover the penalty under S6(a) of the Truth in Lending Act
had been jointly instituted with (1) the action to declare the interests in the
promissory notes void, and (2) the action to declare the foreclosure void. There WHEREFORE, the Decision of the CA is hereby AFFIRMED with the following
had been no question that the above actions belong to the jurisdiction of the MODIFICATIONS:
RTC. Subsection (c) of the above-quoted S5 of the RoC on Joinder of Causes of
Action provides: 1. In addition to the sum of P2,350,000.00 as determined by the courts a quo,
respondent spouses Samuel and Odette Beluso are also liable for the following
(c) Where the causes of action are between the same parties but pertain to amounts:
different venues or jurisdictions, the joinder may be allowed in the Regional Trial
Court provided one of the causes of action falls within the jurisdiction of said a. Penalty of 12% per annum on the amount due[46] from the date of demand;
court and the venue lies therein.

- Furthermore, opening a credit line does not create a credit transaction of loan and

or mutuum, since the former is merely a preparatory contract to the contract of b. Compounded legal interest of 12% per annum on the amount due[47] from

loan or mutuum. Under such credit line, the bank is merely obliged, for the date of demand;
considerations specified therefor, to lend to the other party amounts not

exceeding the limit provided. The credit transaction thus occurred not when the 2. The following amounts shall be deducted from the liability of the spouses
credit line was opened, but rather when the credit line was availed of. In the case Samuel and Odette Beluso:
at bar, the violation of the Truth in Lending Act allegedly occurred not when the
a. Payments made by the spouses in the amount of P763,692.00. These payments
parties executed the Credit Agreement, where no interest rate was mentioned,
shall be applied to the date of actual payment of the following in the order that
but when the parties executed the P/Ns, where the allegedly offending interest
they are listed, to wit:
rate was stipulated.
i. penalty charges due and demandable as of the time of payment;

ii. interest due and demandable as of the time of payment;

In re: since the spouses Beluso were duly given copies of the subject P/Ns after
their execution, then they were duly notified of the terms thereof, in substantial iii. principal amortization/payment in arrears as of the time of
compliance with the Truth in Lending Act. payment;
- S4 of the Truth in Lending Act clearly provides that the disclosure statement iv. outstanding balance.
must be furnished prior to the consummation of the transaction. The rationale
b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount
shall be deducted from the liability of the spouses Samuel and Odette Beluso on 9
February 1999 to the following in the order that they are listed, to wit:
 i. penalty charges due and demandable as of time of payment;

ii. interest due and demandable as of the time of payment;

iii. principal amortization/payment in arrears as of the time of payment;

iv. outstanding balance.

3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts which the Regional
Trial Court and the Court of Appeals ordered respondents to pay, as modified in this Decision, shall be
deducted from the proceeds of the foreclosure sale.