Case Number: 23

Case Topic / Doctrine: Mortgage Law

Facts:

On June 3, 2008, Zenaida executed a Deed of Mortgage of real property in favor of

Atty Bulatao covering a subject property located at La Union, as a security loan amounting to
200,000. The Deed contained stipulations that the mortgagee shall pay the amount of 200,000
pesos with an interest rate of 5% per month within a period of 12 months before June 4, 2009.
When Zenaida defaulted in her obligation, Atty Bulatao foreclosed the mortgage and filed a
petition to the court the sail of the subject property through public auction. Zenaida filed a
complaint of the said petition made by Atty Bulatao asserting that Atty Bulatao took
advantage of her financial difficulties and urgent financial needs by imposing the 5% interest
for which she contends that it is excessive, unconscionable and contrary to public policy
contending the contract to be null and void. Zenaida also raised that the contract with Atty
Bulatao was invalid because it failed to mention that the subject property is registered under
TCT – No. T- 6288, the mortgage is not registered and therefore not annotated in the title of
the subject property and it falsely indicated that Zenaida is the registered owner of the said
property in fact it is co – owned by her and her late husband and has not yet transferred in
favor of their son.

Atty Bulatao responded and claimed that Zenaida was guilty of misinterpretation and
in bad faith. In reference with the interest rates, Atty Bulatao said that Zenaida agreed to the
5% monthly interest, with 2.5% to be paid directly to FRB Credit and Financial Services and
the other half as his own profit. Atty Bulatao denied that the interest is usurious which leaves
the parties with the liberty to mutually agree on the interest rate.

RTC Ruled in favor of Atty Bulatao that Zenaida is bound to the terms of the contract
of loan and mortgage. The trial court declared that Atty Bulatao is an innocent purchaser for
value, who merely relied to the sole ownership of Zenaida of the subject property as
demonstrated in the tax declaration, and that the mortgage of the co-owned property by one
of the co-owners, Zenaida, is without any participation of their son, as co-owner, did not
invalidate the mortgage. And the mortgage was valid for it was made by proper authorities.

The Court of Appeals partly granted the appeal with modifications therein. The Deed
of Mortgage of Real Property dated June 4, 2008 is declared void only with respect to the
shares of the deceased Adolfo Estonactoc. 5% interest imposed upon by Atty Bulatao in the
Deed of Mortgage of Real Property is excessive, unconscionable and exorbitant, which
renders the stipulation on interest void for being contrary to morals and to the law itself. The
monthly interest of the Deed of Mortgage of Real Property was reduced to 1% per month or
12% per annum.

Issue:
 Whether or not the Deed of Mortgage of Real Property is entirely void and whether
or not the interest imposed in the contract is valid.

Held:

The court agreed with the appellate court’s decision that it limited the validity of the
said Deed of Mortgage of Real Property only on the portion belonging to Zenaida, being a
co-owner of the subject property to the extent of ¾ undivided portion, could validly convey
through the sale or mortgage to the portion belonging to her, and, thus the estate mortgage
belonging to Atty Bulatao is not entirely void.

The interest imposed in the contract is void for being excessive, iniquitous,
unconscionable, and exorbitant contrary to morals and the law. The argument that Atty
Bulatao on the voluntariness in their agreement regarding the 5% monthly cannot be
sustained. As emphasized in Castro VS Tan, the willingness of the parties to enter into a
relation involving an unconscionable interest rate is inconsequential to the validity of the
stipulated rate. Since the interest rate agreed upon is void, the rate of interest should be 12%
per annum from the date of judicial or extrajudicial demand.

Thus, the 5% monthly interest is void for being excessive, iniquitous, unconscionable,
and exorbitant contrary to morals and the law, the interest rate prescribed by the Bangko
Sentral ng Pilipinas for loans or forbearances of money, credits will be the substitute rate not
only for the one year interest agreed upon but also to the entirety of the loan that Zenaida
remains unpaid.