Facts:

In this case, Banco Filipino Savings and Mortgage Bank (petitioner) seeks to reverse the Decision dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 57927, which affirmed the July 16, 1997 Decision of the Regional Trial Court (RTC), Branch 13 of Cebu City in Civil Case No. CEB-16548. The controversy arose when Juanita B. Ybañez, Charles B. Ybañez, Joseph B. Ybañez, and Jerome B. Ybañez (respondents) obtained a loan from the petitioner on March 7, 1978, secured by a Deed of Real Estate Mortgage over Transfer Certificate of Title (TCT) No. 69836. This loan was aimed at funding the construction of a commercial building in Cebu City. Respondents secured an additional loan on October 25, 1978, which elevated their total obligation to one million pesos, leading to an Amendment of Real Estate Mortgage. By December 24, 1982, the obligation further increased to P1,225,000 with a Promissory Note stipulating a 21% annual interest, alongside a penalty for late payments of 3% ba

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Facts:

Loan Origination and Subsequent Amendments

• On March 7, 1978, respondents secured a loan from Banco Filipino Savings and Mortgage Bank with a Deed of Real Estate Mortgage covering Transfer Certificate of Title (TCT) No. 69836.
• The proceeds were used for the construction of a commercial building in Cebu City.
• On October 25, 1978, respondents received an additional loan from the bank, which increased their total obligation to one million pesos; this was evidenced by the execution of a corresponding Amendment of Real Estate Mortgage.
• On December 24, 1982, the loan was restructured: the obligation increased to P1,225,000, and an amended mortgage was duly executed.
• Concurrently, respondents executed a Promissory Note for P1,225,000 payable in fifteen years, incorporating a stipulated interest of 21% per annum, with monthly payments fixed at P22,426 beginning on January 24, 1983.
• A provision in the note imposed a penalty of 3% of the due amount for any monthly default in payment.

Payment History and Subsequent Default

• From 1983 to 1988, respondents made substantial payments totaling P1,455,385.07, with detailed amounts recorded for each year.
• Despite these payments, starting in 1989, respondents failed to pay any amount.
• Respondents claimed that Banco Filipino had ceased operations and/or was placed under liquidation by the Central Bank, hence justifying their non-payment.
• On January 15, 1990, respondents’ lawyer formally requested the return of the mortgaged property, arguing that the bank had already profited sufficiently from the loan and that the imposed interest and penalty charges were excessive.
• Petitioner bank denied the request, noting its operational status despite periods of closure and subsequent reopening.

Bank’s Operational Status and Foreclosure Proceedings

• Banco Filipino was closed on January 1, 1985, and later re-opened on July 1, 1994.
• During its period of closure, the bank did not engage in any customer transactions.
• On August 24, 1994, respondents were served a Notice of Extra Judicial Sale for the mortgaged property, which aimed to recover an alleged indebtedness of P6,174,337.46 (inclusive of principal, interest, surcharges, and 10% attorney’s fees).
• The public auction was scheduled for September 22, 1994, prompting respondents to file a suit on September 19, 1994 for an injunction, accounting, and damages.
• A restraining order was issued by the lower court, halting the foreclosure proceedings pending resolution of the dispute.

Lower Courts’ Decision and Appeals Process

• On July 16, 1997, the Regional Trial Court rendered a Decision directing:
• The bank to render a correct accounting of the loan, eliminating interest accrued during its period of closure (January 1, 1985 to July 1, 1994).
• A reduction of the otherwise stipulated interest from 21% to 17% per annum during the period the bank was operational.
• The complete elimination of the 1% monthly surcharge.
• The decision also ordered that upon receipt of the corrected accounting, respondents had 30 days to pay the bank, otherwise the injunction would be lifted.
• Both parties appealed the RTC’s Decision to the Court of Appeals, with petitioner filing its Notice of Appeal on August 19, 1997, and respondents on August 22, 1997.
• On April 17, 2001, the Court of Appeals affirmed the RTC’s ruling for lack of merit in the appeals.

Issues Raised by the Petitioner in the Review

• Petitioner contested the correctness of the accounting statement and the imposition of a 21% per annum interest rate, arguing that the evidentiary documents were flawed.
• Petitioner questioned the basis for the deletion of the 3% monthly surcharge, contending that substantial payments made between 1983 and 1988 justified its retention.
• Petitioner argued that respondents could not be considered in default since the bank had ceased operations during part of the contractual period, thus challenging the foreclosure proceedings.

Issue:

What is the legal effect of Banco Filipino’s temporary closure (from January 1, 1985 to July 1, 1994) on the loan obligations, particularly regarding interest accrual?

• Does the closure excuse respondents from their payment obligations during that period?

Is the stipulated annual interest rate of 21% in the loan agreement legal and enforceable under the applicable Usury Law and monetary board circulars?

• Was the rate freely contracted and in conformity with prevailing law at the time of the transaction?

Is the imposition of a 3% monthly surcharge on default payments valid and legally sustainable?

• Does such a surcharge constitute a usurious penalty clause given the limitations imposed by the Usury Law?
• Can petitioner rely on CBP Circular No. 905-82 for the imposition of such surcharge despite its retroactive application issues?

Ruling:

• (Subscriber-Only)

Ratio:

• (Subscriber-Only)

Doctrine:

• (Subscriber-Only)