CARPO v.

CHUA and DY
G.R. Nos. September 30, 2005

Doctrine:

Art 1957:
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."

However in Art 1273:

"The renunciation of the principal debt shall extinguish the accessory obligations; but
the waiver of the latter shall leave the former in force."

An excessive stipulated interest rate may be void for being contrary to public policy, an action to
annul said interest rate does not prescribe. Such indeed is the remedy; it is not the action for
annulment of the ancillary real estate mortgage.

FACTS:

1. Sps. Carpo borrowed from Chua and Dy P175,000 payable in 6 mos at 6%/MONTH
2. They mortgaged their house and lot to secure the loan.
3. They however defaulted and so Chua and Dy caused the foreclosure. Latter were the
highest bidder.
4. After the redemption period, Sps remained in possession so the creditors filed a petition
for writ of possession which was GRANTED.
5. Sps Carpo filed a (2nd case) complaint for annulment of real estate mortgage and the
foreclosure. And they consigned P257,197.
6. Meanwhile the RTC in the (1st case) issued a TRO to implement the writ of possession
and suspended its proceedings while the 2nd case is pending resolution. Hence the
creditors filed a petition for certiorari before the CA. CA reversed RTC on the ground that
the issuance of the writ of possession is ministerial.
7. Back to the 2nd case, the RTC dismissed Sps Carpo’s case on the ground of
prescription. The annulment of a voidable contract allegedly due to undue influence
when the Sps were financial distressed prescribes in 4 years. Hence the petition for
review before the SC.
8. The 2 cases were consolidated.

RULING #1 – The interest in invalid being Usurious. BUT the LOAN IS STILL VALID. The RE
mortgage which is an accessory contract that derives its validity from the contract of loan, is
likewise valid. (Accessory follows Principal).

- Gui v Rivera / Lopez v. El Hogar

 Even if the the contracts are tainted with usury, the creditor still has the right to
collect the principal.

- Debtors argue that per Art 1957: 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."
  The Court held that there are 2 stipulations in a Contract of loan:
1. Principal stipulation – to pay the principal
2. Accessory stipulation – to pay the interest.

 These 2 stipulations are divisible as illustrated in:

1. Art 1273: "The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force."
2. Art 1420: In case of a divisible contract, if the illegal terms can be separated from
the legal ones, the latter may be enforced."
 Thus only the illegal interest is void and the principal debt is valid.

- The issue on the validity of the stipulated interest rates, regrettably for petitioners,
was not raised at the earliest possible opportunity. It should be pointed out
though that since an excessive stipulated interest rate may be void for being
contrary to public policy, an action to annul said interest rate does not prescribe.
Such indeed is the remedy; it is not the action for annulment of the ancillary real
estate mortgage. Despite the nullity of the stipulated interest rate, the principal
loan obligation subsists, and along with it the mortgage that serves as collateral
security for it.

Ruling #2 – No undue influence hence the contract is not voidable. Thus, the prescription
argument based on a voidable contract is unsustainable.

- Article 1337 defines the concept of undue influence, as follows:

There is undue influence when a person takes improper advantage of his power
over the will of another, depriving the latter of a reasonable freedom of choice.
The following circumstances shall be considered: the confidential, family, spiritual
and other relations between the parties or the fact that the person alleged to have
been unduly influenced was suffering from mental weakness, or was ignorant or in
financial distress.

- The Sps argued that they were financially distressed.

- Held: While petitioners were allegedly financially distressed, it must be proven that there
is deprivation of their free agency. In other words, for undue influence to be present, the
influence exerted must have so overpowered or subjugated the mind of a contracting
party as to destroy his free agency, making him express the will of another rather than
his own.[21] The alleged lingering financial woes of petitioners per se cannot be equated
with the presence of undue influence.
Ruling # 3 – Sps. action to annul the RE mortage is barred by laches. Because they slept on
their rights when they assailed the validity of the RE mortgage only when the writ of possession
(after the redemption period) was granted IFO the creditors.