G.R. No. 135046 - Spouses Bautista vs. Pilar Development Corp.

In 1978, petitioner spouses Florante and Laarni Bautista purchased a house and lot in Pilar Village, Las Piñas, Metro Manila.
To finance a portion of the purchase price, they obtained a loan of P100,180.00 from Apex Mortgage & Loan Corporation, evidenced by their execution of a promissory note on December 22, 1978.
The first promissory note provided:

A principal sum of P100,180.00 with an interest rate of 12% per annum and a 3% service charge.
A repayment period of 240 months (20 years) in monthly installments of P1,378.83.
Provision for late payments to incur a penalty of 1½% on the amount due.
An escalation clause authorizing Apex to increase the rate of interest and/or service charges if a law, Presidential Decree, or Central Bank regulation mandated a higher rate.

Petitioners failed to pay several installments under the first note.
Consequently, on September 20, 1982, they executed a second promissory note in favor of Apex:

The second note was for an amount of P142,326.43, reflecting the increased principal including unpaid amounts and accruing interest.
It provided for a higher interest rate of 21% per annum but omitted a service charge, maintaining a penalty rate of 1½% for late payments.
The repayment period was shortened to 196 months (approximately 16.33 years) with monthly installments of P2,576.68.
It included an escalation clause that allowed for increasing or decreasing interest or service charges should new laws or Central Bank regulations be enacted.
A typewritten entry on the upper right of the note declared: “This cancels PN # A-387-78 dated December 22, 1978,” thereby expressly cancelling the first note.
On the face of the first note, the word “Cancelled” was stamped with the cancellation date, confirming its novation by the second note.

Petitioners again defaulted on their payments, and in November 1983, further installments were missed.
On June 6, 1984, Apex assigned the second promissory note to the respondent, Pilar Development Corporation, without notifying petitioners.
On August 31, 1987, the respondent filed Civil Case No. 17702 before the Regional Trial Court, Makati, Branch 138 to collect the unpaid balance along with interest and attorney’s fees based on the terms of the second promissory note and the applicable Central Bank Circulars.

The trial court, in its judgment on September 22, 1995, held petitioner spouses liable for the unpaid amount of P140,515.11 plus interest at a rate of 12% per annum and the stipulated service charge.
Both parties appealed to the Court of Appeals.
The Court of Appeals reversed the trial court's judgment by:

Applying the 21% per annum interest rate as provided in the second promissory note.
Awarding attorney’s fees of 10% of the amount due.

Following a motion for reconsideration by petitioners, the appellate court reduced the principal amount slightly from P142,326.42 to P140,515.11 but upheld the application of the 21% interest rate and the attorney’s fees.

Petitioners argued that the two promissory notes should be considered as one singular loan transaction, with the second note serving as an extension of the first.
They claimed that the increase in the interest rate from 12% to 21% was unlawful because the note lacked a corresponding de-escalation clause.
Other contested issues included the propriety of awarding 10% attorney’s fees, the effect of the purported “lack of notice” of the assignment of credit, and the question of any entitlement to moral and exemplary damages.

Whether the two promissory notes constitute a single loan transaction or are independent legal obligations.
Whether the escalation of the interest rate from 12% per annum in the first promissory note to 21% per annum in the second note is valid and enforceable, in light of the absence of a de-escalation clause.
Whether the imposition of attorney’s fees amounting to 10% of the amount due is proper under the terms of the note and the circumstances of the case.
Whether the lack of notice to the petitioners regarding the assignment of credit from Apex to the respondent affects the enforceability of the obligations under the note.
Whether petitioners are entitled to moral and exemplary damages under the circumstances of the case.