G.R. No. 164549 - Philippine National Bank vs. Spouses Rocamora

On September 25, 1981, the spouses Agustin and Pilar Rocamora secured a loan of P100,000.00 from the Philippine National Bank (PNB) under the Cottage Industry Guarantee and Loan Fund (CIGLF).
The loan was structured for a five-year term with two components of repayment:

Alongside the principal, the spouses agreed to an interest rate of 12% per annum and an additional 5% per annum as a penalty in case of delayed payments.
Two promissory notes were executed evidencing the loan, and to secure the obligation:

A real estate mortgage over a property (TCT No. 7160) in the amount of P10,000; and
A chattel mortgage over various machineries in the amount of P25,000.

Both the promissory note and the real estate mortgage deed contained escalation clauses:

The promissory note allowed PNB to increase the stated 12% interest rate “at any time, without notice,” within the limits allowed by law.
The mortgage deed provided that the interest rate could be increased depending on future policy changes but would be decreased correspondingly if the applicable maximum interest rate was lowered by law or the Monetary Board.

PNB commenced foreclosure proceedings in August and October 1990.
The foreclosure of the mortgaged properties yielded total proceeds of P75,500.00.

After foreclosure, PNB determined that the proceeds along with the partial payments did not cover the full obligations of the loan.
PNB filed a complaint for deficiency judgment on January 18, 1994, claiming a remaining balance of P206,297.47, which included:

Argued that the escalation clause in the parties’ agreements was valid because it specifically permitted an increase in the interest rate, so long as it complied with legal limits and included a de-escalation provision.
Claimed it did not unreasonably delay the foreclosure, contending that foreclosure was initiated only three years after the default and that its actions fell within the 10-year prescription period under Articles 1142 and 1144(1) of the Civil Code.
Maintained that the decision to foreclose and the subsequent deficiency judgment were proper exercises of its rights under the contractual agreements.

Increasing the interest rate unilaterally from 12% to as high as 42% per annum;
Failing to promptly foreclose the mortgages as mandated under Presidential Decree No. 385 (PD 385), thereby allowing additional interest and penalty charges to accrue.

Argued that the unilateral increase in interest rates violated the principle of mutuality of contracts since no affirmative assent was given for such modifications.
Asserted that the bank’s delay in foreclosure, as well as the purported “ballooning” of their loan obligation, rendered the deficiency claim illegitimate.

The Regional Trial Court (RTC) dismissed PNB’s complaint for deficiency judgment in its decision dated November 10, 1999.

The RTC invalidated the escalation clause and held that the increased interest rates were excessive.
The RTC also ruled that the delay in foreclosure was contrary to the mandatory provisions of PD 385, which require immediate action.
As a result, the RTC ordered PNB to pay actual, moral, and exemplary damages, as well as attorney’s fees and costs.

The Court of Appeals (CA), in a decision dated March 23, 2004, affirmed the RTC ruling (with modifications in the awarded damages) by holding that:

The unilateral increase of interest rates negated the mutual assent requirement.
The bank’s delay prejudiced the spouses’ interests.
There was insufficient evidence to support the alleged deficiency as computed by PNB.

In its petition for review on certiorari, PNB raised additional arguments defending its actions regarding the escalation clause and the foreclosure delay.

Whether the deficiency judgment as computed by PNB is valid given the conflicting evidences and discrepancies in the accounting of the claimed amounts.
Whether the unilateral increase of the interest rate from the agreed 12% per annum to a rate allegedly as high as 42% per annum, without the spouses’ consent, violates the principle of mutuality of contracts.
Whether PNB’s delay in instituting foreclosure proceedings, in contravention of the mandatory provisions of PD 385, adversely affects its right to claim a deficiency.
Whether the escalation clause, despite containing a de-escalation provision, can justify unilaterally adjusting the interest rate in a manner that results in a one-sided contractual obligation.
Whether the actions of PNB warrant the recovery of moral, exemplary damages, and attorney’s fees in connection with its deficiency claim.