Puerto v.

Court of Appeals
[G.R. NO. 138210 June 6, 2002]

FACTS:

On May 8, 1972, petitioner-spouses PUERTO and respondent-spouses CORTES – a pawn shop

operator – entered into a Deed of Real Estate Mortgage on a house and lot located at 89 Kapiligan,
Araneta Subdivision, Quezon City. Accompanying said agreement was a loan from respondents to
petitioners in the amount of P200,000. Said agreement lacked any stipulated interest; in its stead,
respondents could foreclose the mortgage should the petitioners fail to repay the loan after a year.

Said agreement was contended by petitioner as having been entered with usurious intent on
both sides. Petitioners alleged that the property subject of the loan was only worth P150,000, and that
the remaining P50,000 was an advance payment to cover the loan’s lack of interest. The usurious
agreement involved a monthly payment of P4000 after one year, uncredited (no receipts) in order to
conceal its illegal nature.

Due to petitioners’ failure to pay the sum after a year, respondent foreclosed on the property,
and repurchased it in the subsequent auction, becoming its owners on October 4, 1973. Respondents
permitted petitioner to stay on the property until such time that petitioners could find a new home.
After failing to transfer, respondents entered a lease contract with petitioners effective January 1, 1975.
The contract would see petitioners pay respondents P3000 monthly in rental fees. On September 16,
1976, respondents filed an ejectment case after petitioners failed to pay said rental fees.

Petitioners contend that the rental fees paid were P4000 covering the period from October 1973
to December 1975 – from which it was changed to a formal lease agreement – and again were without
receipts to conceal their usurious nature. Petitioners filed a case against respondents to declare the
initial Deed of Real Estate Mortgage null and void, and for the cancellation of the foreclosure by
respondents conducted in 1973.

ISSUE:

Whether or not the Deed of Real Estate Mortgage is null and void for having violated P.D. 116,
the Usury Law.

Whether or not the petition is invalid for raising questions of fact not reviewable under Rule 45
of the Rules of Court.

HELD:

YES. The Deed of Real Estate Mortgage is null and void; foreclosure on property has no effect.
Petitioners are to pay respondents P150,000 with the legal rate of interest from the time of demand.
 NO. The Court admits of exceptions. One such is the overlooking of relevant facts, which is
apparent in this case.

RATIO:

The Usury Law – in effect during the case’s pendency – provides that:

“...the legal rate of interest for the loan or forbearance of any money, goods or credits, where
such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real
estate the title to which is duly registered, in the absence of express contract as to such rate of
interest, shall be 12% per annum. Any amount of interest paid or stipulated to be paid in excess
of that fixed by law is considered usurious, therefore unlawful.”

The value of the mortgage was determined to be P150,000, with the additional P50,000 serving
as advance interest. This was the stem of the agreement’s usurious nature, with P50,000 being well
above the 12% legal rate of interest. As a result, the agreement was held null and void. The foreclosure
necessarily shared it fate, also becoming null and void by virtue of stemming from a nullified agreement.

In reaching this conclusion, the Court took special cognizance of the facts surrounding the case
to ascertain the presence of usury. In doing so, the Court overturned an evaluation by the appellate
court in which petitioners were held to have manipulated the worth of jewelry involved in the loan,
casting doubt on petitioners’ assertion that the agreement was usurious. The Court looked to
respondents’ profession, Eleuteria Cortes being a successful pawn shop businesswoman, to determine
that there was no gallant intention on respondents’ part. It was determined that respondents’ actions –
the issuing of the loan that was higher than the value of the property, and the fact that part of the
P200,000 was in jewelry of debatable and easily-manipulated value – were intended as purely business
transactions. The Court dismissed respondents’ contention that such agreement was due to a
longstanding friendship between petitioner Esperanza Puerto and respondent Eleuteria.

The parties must then restore what is validly owned to one another, to prevent enrichment of
the petitioners at the expense of the respondents. Thus, petitioners must pay the principal loan of
P150,000, along with the legal rate of interest from the time of respondents’ judicial or extrajudicial
demand. Respondents must return the property that was invalidly foreclosed.