INSULAR BANK OF ASIA AND AMERICA,

VS.
SPOUSES RICARDO AND EPIFANIA SALAZAR.

GR. NO. 82082 March 25, 1988

FACTS:
On November 22, 1978, defendants-appellees Epifania and
Ricardo Salazar obtained a loan from the plaintiff-appellant in the
amount of P42, 050.00, payable on or before December 12, 1980.
This loan transaction was evidenced by a promissory note where
the defendants-appellees bound themselves jointly to pay the
amount with interest at 19% per annum and with the express
authority to increase without notice the role of interest up to the
maximum allowed by law and subject further to penalty charges
or liquidated damages upon default equivalent to 2% per month
on any amount due and unpaid. In the event the account was
referred to an attorney for collection, the defendants-appellees
were also bound to pay 25% of any amount due as attorney’s fees
plus expenses of litigation and costs.

In accordance with the agreement, the plaintiff-appelant

increased the rate of interest to 21% pursuant to Central Bank
Circular No. 705 dated December 1, 1979.

The promissory note had matured but the defendants-

appellees failed to pay their account. It was only after several
demands that the defendants-appellees were able to make partial
payment. As of November 25, 1983, they were able to pay a total
amount of P68,675.75 which payments were applied to partially
satisfy the penalty and interest changes.

On September 12, 1984, the plaintiff-appellant filed a

complaint with the Regional Trial Court alleging that the
defendant-appellees were indebted to IBAA in the amount of
P87,647.19 as of September 15, 1984, including interest at 21%
per annum penalty changes and Attorney’s fees.

At the pre-trial on October 31, 1984, the parties and their

counsel appeared. The defendant-spouses admitted the execution
of the promissory note in consideration of P48,050.00. The trial
court rendered a summary judgment which reads;
“Judgment is hereby ordered in favour of the plaintiff-ordering the
defendant spouses Ricardo and Epifania Salazar, to pay Insular
Bank of Asia and America the sum of P11, 252.25 with interest
thereon at the rate of 19%per annum from the filing of the
complaint on September 12, 1984 until fully paid. The defendants
are further ordered to pay the plaintiff; Attorney’s fees in the
amount of P1,000.00 and to pay the costs.
ISSUES:

1. Whether or not the lower court erred the plaintiff appellant

penalties charges or liquidated damages of 2% per month
on all amount dues and unpaid?
2. Whether or not the lower court erred in the computation
of the amount of obligation due from defendants-appellees
in favour of plaintiff- appellant?

RULING:
Article 1229 states that; “The Judge shall equitably reduce
the penalty when the principal obligation has been partly or
irregularly complied with the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it
is iniquitous or unconscionable.

The defendants- appellees, in the instant case failed to pay

the loan on due date. However, with earnest efforts, they tried to
pay the loan little by little, so that as of November 25, 1983, a
total of P68,676.75 had been paid.

But there is no any evidence of bad faith on their part in their

failure to pay the loan on time. Efforts were indeed made t make
good in their promise.

The plaintiff-appellant on the other, merely apply their

payments to satisfy the penalty and interest charges.

They also did not even state in the complaint that the
defendants-appellees had made partial payments, making it
appear that the spouses Salazar refused to pay the loan
intentionally.

The defendants-appellees alleged that the bank neglected to

credit said payments in the defendants account folio and subjected
it as it did to the additional changes.

The trial court also consider the fact that the bank has
already profiled considerably from the loan.

Therefore, the Court is constrained to reduce the penalty, for

being highly iniquitous.

The decision of the Lower Court is modified. The defendants-

appellants, Ricardo and Epifania Salazar are ordered to pay
Insular Bank of Asia and America the sum of P38,915.18 with
interest thereon at the rate of 12% per annum from the filing of
the complaint until fully paid.