FACTS:

Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the amount
of P120,000.00 from Security Bank and Trust Co. The obligation matured and the
bank granted an extension. Despite several demands from the Bank, petitioners failed
to settle the debt which then amounted to P114,416.10. The Bank sent a final demand
letter however petitioners still defaulted on their obligation. The Bank then filed a
complaint for recovery of the due amount. Petitioners instead of presenting their
evidence had the schedule reset for two consecutive occasions. On the third hearing
date, the trial court resolved to consider the case submitted for decision.
Two years later petitioners filed a motion for reconsideration which was denied by the
trial court. Petitioners then interposed an appeal with the Court of Appeals, the
appellate court affirmed the judgement of the trial court except the 2% service charge
which was deleted pursuant to Central Bank Circular No. 763. The two parties filed
their motions for reconsiderations and the Court of Appeals resolved the two motions:
that the payment of interest and penalty commence on the date when the obligation
became due and a penalty of 3% per month would suffice. The petitioners filed an
omnibus motion for reconsideration which was then denied by the Court of Appeals.

ISSUE:
Whether or not the 15.189% interest and the penalty of 3% per month (36% per
annum) is exorbitant, iniquitous, and unconscionable.

RULING:
Petition is DENIED.

HELD:
The question of whether a penalty is reasonable or iniquitous can be partly subjective
and partly objective. Its resolution will depend on such factors as, but not confined to,
the type, extent and purpose of the penalty, the nature of the obligation, the mode of
breach and its consequences, the supervening realities, the standing and relationship
of the parties, and the like, the application of which, by and large, is addressed to the
sound discretion of the court.
The Court of Appeals, exercising its good judgement has reduced the penalty interest
from 5% a month to 3% a month. Given the circumstances and the repeated acts of
breach by petitioners of their contractual obligation, the Court sees no cogent ground
to modify the ruling of the appellate court.
The stipulated interest of 15.189% per annum, does not appear as being excessive.
The essence or rationale for the payment of interest, quite often referred to as cost of
money, is not exactly the same as that as a surcharge or a penalty. A penalty
stipulation is not necessarily preclusive of interest, if there is an agreement to that
effect, the two being distinct concepts which may separately be demanded. The
interest prescribed in loan financing arrangements is a fundamental part of the
banking business and the core of a banks existence.