G.R. No. 177348 - Spouses Patron vs. Union Bank of the Philippines

On September 9, 1988, the Spouses Ramon and Luzviminda Patron, doing business as Ala Golden Grains Rice Mill, obtained a P2,000,000 quedan loan from the International Corporate Bank (Interbank), which was guaranteed by Quedan and Rural Credit Guarantee Corporation (Quedancor).
The original loan matured on March 8, 1989 and was renewed to mature on September 4, 1989.
On its subsequent maturity, the loan was again renewed, establishing a practice of successive renewals.
Additional advances were made: on September 6, 1989, a P1,500,000 loan was obtained and, on March 1, 1990, another P1,500,000 loan was secured.
The cumulative loans, amounting to P5,000,000, were consolidated under Promissory Note No. AGL90-0011 with a maturity date of August 28, 1990.

The consolidated loans underwent several renewals. A significant renewal was executed on February 10, 1993 via Promissory Note No. AGL93-0004, set to mature on August 9, 1993.
In or before August 9, 1993, the petitioners applied for another renewal of the loan. They executed Promissory Note No. AGL93-0022 for P4,900,000 (the balance remaining after partial payments), with a maturity date on February 4, 1994.
Though the petitioners submitted the renewal requirements, including the duly accomplished Promissory Note No. AGL93-0022, the bank informed them that it had been acquired by Union Bank of the Philippines (UBP) and that all quedan loan applications had been stopped, disapproved, and/or cancelled.
Petitioners did not receive the documents they were promised to be returned, and were later confronted with a demand for payment on the basis of the renewed loan application.

Before or around August 9, 1993, Interbank merged with UBP.
On September 14, 1994, UBP, on demand, received payment of P3,771,348.89 from Quedancor under its guarantee for part of the loan.
Subsequently, UBP demanded from the petitioners the balance of P2,645,889.84, computed as the unpaid remainder.
The petitioners did not comply with the payment demand leading them to file a complaint in November 1994 before the Regional Trial Court (RTC) of Iloilo City for cancellation of documents, declaration of nullity, injunction, and damages (Civil Case No. 22072).
UBP subsequently initiated a collection case (Civil Case No. 22105) for the balance, and both cases were consolidated.

In a RTC decision dated March 23, 2004, the court found that there existed a valid, mature loan obligation between the petitioners and the bank, specifically from the instrument Promissory Note No. AGL93-0004.
The RTC rendered judgment affirming the petitioners’ liability for P2,645,889.84 plus 12% interest per annum from September 14, 1994, and dismissed the petitioners’ counterclaims.
On September 11, 2006, the Court of Appeals affirmed the RTC decision but modified the computation of the interest applicable to the period between August 9, 1993 and September 30, 1994.
The appellate court noted a discrepancy: while the promissory note originally stipulated 16.5% per annum interest, UBP had applied 24% per annum in its statement of account.
It was held that the petitioners’ liability should not be based on Promissory Note No. AGL93-0022—which pertained to a disapproved renewal application—but on Promissory Note No. AGL93-0004, the instrument evidencing their continuing obligation.
The petitioners sought reconsideration and filed a Petition for Review on Certiorari, raising several issues regarding the nature of the renewal, the basis for liability, and the imposition of penalty charges.

UBP’s witness testified that each renewal of the loan was merely an exchange of paper, with the proceeds of the renewed loan automatically applied to the maturing obligation—there was no actual cash disbursement.
The testimony clarified that even though the renewal application in August 1993 (reflected by PN No. AGL93-0022) was disapproved, the pre-existing obligation under Promissory Note No. AGL93-0004 continued to exist.
Petitioners, through their correspondence with UBP (including a letter from Ramon Patron dated January 31, 1994 and a counsel’s letter dated January 10, 1994), evidenced their awareness of and de facto acceptance of the continuing obligation.

The Court determined that petitioners’ liability should be recalculated based on Promissory Note No. AGL93-0004, which originally provided for a 23% per annum interest rate.
Considering unconscionability, the interest rate was reduced to 12% per annum.
The monthly penalty charge of 2% was also deemed unconscionable and was eliminated, particularly in light of partial principal payments made by petitioners.
The final liability was fixed at P1,634,464.44, with interest computed at 12% per annum from September 30, 1994, until full payment.
Additionally, in accordance with the stipulations in the promissory note regarding attorney’s fees, UBP was awarded P163,446.44 (10% of the amount due).

Whether the disapproval of the petitioners’ August 1993 loan renewal application (reflected by PN No. AGL93-0022) absolved them of their existing loan obligation under the previously executed Promissory Note No. AGL93-0004.
Whether the computation of the petitioners’ liability should be based on the disapproved renewal note (PN No. AGL93-0022) or the valid and continuing note (PN No. AGL93-0004).
Whether the imposition of an interest rate of 23% per annum (as originally stipulated) and a monthly penalty charge of 2% per month constituted unconscionable terms that warranted judicial modification.
Whether the evidences, including admissions in pleadings and testimonial accounts, conclusively demonstrated petitioners’ awareness of and continued liability despite the non-release of funds under the disapproved renewal.