CARPO v.
CHUA-DY
(2005|Tinga)
FACTS
2 petitions (1) annulment of real estate mortgage and foreclosure
proceedings, (2) annul CA’s writ of execution
Sps. Carpo borrowed from respondents Eleanor Chua and Elma Dy Ng the
sum of P175,000, payable within 6 months with an interest rate of 6% per month,
secured by a mortgage the spouses executed over their residential house and lot. For
failure to pay, the said property was extra-judicially foreclosed and sold at public
auction to the respondents, who were the only bidders for the amount of
P367,457.80. Upon failure of the petitioners to exercise their right of redemption, a
certificate of sale was issued for P367, 457.80 and the old title over the property was
cancelled and a new one issued in the name of respondents. Petitioners did not
redeem the property.
Petitioners continued to occupy the premises, prompting the respondents to
file a petition for writ of possession with the RTC, which was granted and an order
was issued on March 23, 1999. RTC issued the writ (note for later that it is only after
execution that the mortgage was assailed).
It was only on July 23, 1999 that petitioners filed a complaint for annulment
of real estate mortgage and the consequent foreclosure proceedings, and thereupon
consigned the amount of P257,197.26 with the RTC.
 TRO was issued on 3 August 1999 the writ of execution in the first
complaint. On 6 January 2000 RTC suspended the enforcement of the writ
of possession pending the final disposition of the Civil Case (validity of
mortgage and foreclosure)
o Respondents: mandamus and certiorari
o CA: 30 April 2002 annulled the RTC orders of TRO on the ground
that it was the ministerial duty of the lower court to issue the writ of
possession when title over the mortgaged property had been
consolidated in the mortgagee.
o 2nd Petition for review, petitioners claim RTC orders could not be
questioned anymore as the reglementary period elapsed
 During the pendency of the case with the CA, RTC dismissed the complaint
in the annulment of real estate mortgage saying it was filed out of time and
barred by laches, saying that the complaint was one for annulment of a
voidable contract and thus barred by the four-year prescriptive period
(1391). It also based its conclusion that the petitioners’ consent due to was
undue influence.
o 1st Petittion for review to SC
P: (1) Following the ruling in Medel v. CA, the rate of interest stipulated in the
principal loan agreement is null and void. Consequently, real estate mortgage is
invalid.
 the agreed rate of interest of 6% per month or 72% per annum is so
excessive, iniquitous, unconscionable and exorbitant that it should have
been declared null and void. Instead of dismissing their complaint, they aver
that the lower court should have declared them liable to respondents for the
original amount of the loan plus 12% interest per annum and 1% monthly
penalty charge as liquidated damages
 Medel: 5.5. % per month or 66% annuma was iniquitous, void. Court shall
reduce.
 Imperial v. Jaucian: 16%/ annum to 14%
 Notably, while petitioners were silent in their petition on the issues of
prescription and laches on which the RTC grounded the dismissal of the
complaint, they belatedly raised the matters in their Memorandum.
(2) RTC did not gad when it issued the orders of TRO and the suspension of
enforcement. Whether CA could entertain the petition from a timeliness aspect.
HELD:
Iniquitous Interest
1. Yes, under MEdel the stipulated interest is excessive. Pursuant to the freedom of
contract principle embodied in Article 1306 of the Civil Code, contracting parties may
establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order,
or public policy. In the ordinary course, the codal provision may be invoked to annul
the excessive stipulated interest.
CAB: 6% per month or 72% per annum is iniquitous thus the stipulation is
valid. However, RTC did not apply this saying that Medel did not pertain to the
annulment of a real estate mortgage as it was a case for the annulment of the loan
contract. This leads to the following issue:
W/N the invalidity of the stipulation on interest carries with it the invalidity of
the principal obligation
Held:
 NO. While a mortgage contract is an accessory one, the validity of the
mortgage contract would depend on the validity of the loan secured by it.
 In Medel, the Court did not invalidate the entire loan obligation despite the
inequitability of the interest, but instead reduced the rate of interest to 12%
per annum. The same was done in other cases.
The invalidation of the interest rate is congruent with the rule that a
usurious loan transaction is not a complete nullity but defective only with indefinite and interlocutory and may be assailed through certiorari, not appeal.
respect to the agreed interest. Respondents were right.

 Past jurisprudence voided the whole obligation based on Article 1957

which provides that contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws against usury, shall be void, and
that in such cases "the borrower may recover in accordance with the laws on
usury."
o In a loan with usurious interest, may the creditor recover the
principal of the loan? It is argued that no, Art. 1411 said that in
pari delicto parties may not recover from each other.
Moreover, Art. 1413, allowing the borrower to recover interest paid
in excess of the interest allowed by the Usury Law.

SC: However, in a contract of loan with usurious interest, it consists of principal and
accessory stipulations; the principal one is to pay the debt; the accessory
stipulation is to pay interest thereon. The two stipulations are divisible since Article
1273, "The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force." Thus, the
contract of loan is valid, the only illegality is to the stipulation to pay the
interest.

 Art. 1420, CC allows the severance of the illegal terms of a divisible

contract, thereby allowing the legal ones to be enforced. The cause of
the contract is not illegal, the illegality is only in the stipulation to pay interest.

In the same way, since the mortgage contract derives its vitality from the
validity of the principal obligation, the invalid stipulation on interest rate is
similarly insufficient to render void the ancillary mortgage contract. The
principal obligation still stands and remains valid and the mortgage contract derives
its validity from the validity of the principal obligation, the invalid stipulation on interest
rate is similarly insufficient to render void the ancillary mortgage contract.

 As to prescription, since the loan and mortgage agreements void for being
contrary to public policy, no prescriptive period could have run. No showing
of undue influence even if they were financially distressed.
 However, petitioners are barred from laches to assail the validity of real
estate mortgage. If unwilling, they should’ve raised it in the foreclosure
proceedings.
o The remedy is not an action for annulment of mortgage, it should
have been the illegality of the interest.

2ND PETITION (not important)

Held: No sense in assailing the validity of the Order suspending the writ of
possession which had a period of effectivity of 20 days from Aug. 3, 1999 or until Aug.
23, 1999. Upon expiration, the writ of execution became effective. Rule 65 was filed
within 60 days following the receipt of the Order.

On the other hand, the Order on Jan. 6, 2000 in the writ of injunction is