G.R. No. 28320 - San Juan vs. Abordo

On October 17, 1984, petitioners (Spouses Tagumpay N. Albos and Aida C. Albos) entered into a Loan with Real Estate Mortgage with respondent Spouses Nestor M. Embisan and Iluminada A. Embisan for the amount of ₱84,000.00, with a payment period initially set at 90 days and a monthly interest rate of 5%.
To secure the indebtedness, petitioners mortgaged a parcel of land in Project 3, Quezon City measuring approximately 207.6 square meters, registered under Transfer Certificate of Title No. 257697.

After the initial due date, petitioners failed to settle the loan, prompting petitioner Aida Albos to request an extension of 11 months (until December 17, 1985).
Upon another default, the parties agreed to an additional 5-month extension (until May 17, 1986).
When petitioners defaulted again, a third extension of 8 months was granted with the stipulation that, starting June 1986, the 5% monthly interest would be compounded; however, this modification was not reduced to writing.

On February 9, 1987, respondent spouses sent a letter demanding the payment of ₱234,021.90 as the outstanding balance with accrued interests, followed by a similar demand on April 14, 1987 for ₱258,009.15.
In an attempt to forestall a foreclosure, petitioners made a partial payment of ₱44,500.00 on October 2, 1987, which was accepted by the respondents as part of the principal based on their Statement of Account evidencing an increasing balance.
Due to petitioners’ repeated default, respondent spouses extrajudicially foreclosed the mortgaged property on October 12, 1987. At the subsequent auction conducted by the sheriff, the respondent spouses emerged as the highest bidders with a bid of ₱330,000.00 and were issued a Sheriff’s Certificate of Sale.

The foreclosure sale was consolidated by respondent spouses when they executed an Affidavit of Consolidation on November 23, 1988, followed by registration with the Registry of Deeds of Quezon City which transferred ownership.
Petitioners alleged that on February 4, 1989, they were pressured into executing a Contract of Lease over the foreclosed property, making them liable for a monthly rent of ₱2,500.00.
Later, petitioners initiated a complaint before the Regional Trial Court (RTC) of Quezon City (Civil Case No. 89-3246), contending that the foreclosure sale was void because, according to their claim, respondents had only released ₱60,000.00 of the ₱84,000.00 loaned amount which they assert had been paid.

The RTC ruled on December 15, 2008, dismissing petitioners’ complaint for lack of merit, finding that petitioners only paid a total of ₱56,000.00 from October 17, 1984, to October 28, 1987, which was insufficient to cover the principal and accrued interest.
The RTC also rejected petitioners’ contention regarding the forced execution of the Contract of Lease, invoking the doctrine of estoppel.
A subsequent Motion for Reconsideration by petitioners was denied through a Resolution dated January 13, 2014.

On appeal, petitioners argued that the imposition of compounded interest without written consent was fraudulent and contrary to public morals, while respondents contended that the compounding was an agreed condition following repeated defaults.
The CA, through its Decision dated May 29, 2013, affirmed the RTC ruling, holding that given petitioners’ repeated non-compliance, the imposition of a compounded interest rate was just and reasonable.
The CA also denied petitioners’ Motion for Reconsideration via its Resolution dated January 13, 2014, which eventually led to the elevation of the case to the Supreme Court.

Whether there was an unequivocal, express written agreement to impose a 5% compounded monthly interest on the loan, in compliance with Article 1956 of the Civil Code.
Whether the imposition of a 5% compounded monthly interest, as unilaterally applied by the respondent spouses without a proper written stipulation regarding the manner of interest accrual, is excessive, unconscionable, and void for being contrary to law and public morals.
Whether, as a consequence of the erroneous computation of the outstanding loan balance (resulting from the compounded interest), the extrajudicial foreclosure proceedings and the subsequent registration of documents (Certificate of Sale, Affidavit of Consolidation, Deed of Final Sale, and Contract of Lease) should be nullified.