G.R. No. 235020 - Bulatao vs. Estonactoc

Case Summary (G.R. No. 235020)

Factual Background

Zenaida executed a Deed of Mortgage of Real Property (DMRP) in favor of Atty. Bulatao on June 3, 2008, ostensibly to secure a loan of P200,000.00 over a 42,727-square-meter parcel in Sto. Tomas, La Union. The DMRP stipulated interest at five percent (5%) per month and a one-year term to June 4, 2009. Zenaida defaulted and Atty. Bulatao initiated foreclosure, leading to an extrajudicial sale process and the issuance of a certificate of sale in his favor on October 10, 2011. Zenaida contended that she actually received only P80,000.00, that the interest term was unconscionable and usurious, and that the mortgage was defective for not being annotated on the title, for misrepresenting ownership, and for deficiencies in notarization.

Trial Court Proceedings

Zenaida filed a complaint for injunction, annulment of the mortgage, and damages against Atty. Bulatao and officials who conducted the foreclosure sale. Both parties presented documentary and testimonial evidence. The Regional Trial Court dismissed the complaint on May 4, 2015, finding the loan and mortgage valid, declaring Atty. Bulatao an innocent mortgagee for value, and holding that Zenaida was estopped from denying the contract terms. The RTC also upheld the foreclosure and awarded moral, exemplary, nominal damages and attorney’s fees in favor of the defendants. The RTC denied reconsideration and Zenaida appealed to the Court of Appeals.

Court of Appeals Ruling

The Court of Appeals partly granted Zenaida’s appeal and reversed the RTC. The CA held that Zenaida, as a co-owner, could validly mortgage or convey only her undivided share, so the mortgage was not wholly void but limited in scope. The CA found the 5% monthly interest to be excessive, unconscionable and void as contrary to morals and law. The CA reduced the rate equitably to 1% per month or 12% per annum from June 3, 2008, and declared the foreclosure sale and certificate of sale null and void because the demand and foreclosure were based on an overstated indebtedness. The CA thus modified obligations and set aside the RTC judgment.

Issues Presented

Whether the Court of Appeals erred in reversing and setting aside the Regional Trial Court Decision, particularly insofar as: (a) the stipulated 5% monthly interest was held void and equitably reduced; and (b) the DMRP and foreclosure sale were declared void or partially void given Zenaida’s co-ownership.

Parties’ Contentions on Appeal

Atty. Bulatao contended that the 5% monthly interest was voluntarily agreed and therefore valid absent fraud, and that, if the rate were void, it should apply as to a one-year term only with subsequent application of 12% per annum as in Prisma Construction & Development Corp. v. Menchavez. He also maintained that Zenaida conveyed a 3/4 undivided share and therefore he had the right to foreclose that portion. Zenaida urged dismissal of the petition on procedural grounds but otherwise defended the CA ruling that reduced the interest rate, partially voided the mortgage as to the co-owners’ shares, and nullified the foreclosure.

Supreme Court Ruling

The Supreme Court partly granted the petition but affirmed the CA judgment with modifications. The Court rejected Atty. Bulatao’s claim that voluntary agreement alone validated the 5% monthly rate, citing precedent that unconscionable interest is void even if agreed. The Court affirmed that the stipulation of 5% per month was void. The Court modified the CA’s interest computation method and applied the Bangko Sentral ng Pilipinas-prescribed rates as the legal surrogate: 12% per annum from execution of the DMRP on June 3, 2008 to June 30, 2013, and 6% per annum from July 1, 2013 until full payment; interest due as of judicial demand was to earn legal interest at those BSP rates from judicial demand until full payment. The Court agreed with the CA that the foreclosure and certificate of sale were void because the demand and foreclosure were premised on an overstated indebtedness arising from the iniquitous interest. The Court held that the DMRP was valid only with respect to the share actually belonging to Zenaida and amended the CA’s dispositive language accordingly. The petition was otherwise denied.

Legal Basis and Reasoning

The Court relied on settled doctrine that unconscionable interest stipulations are void ab initio as contrary to morals and law, citing Sps. Abella v. Sps. Abella, Castro v. Tan, and consolidated authorities where 5% per month had been characterized as iniquitous. The Court explained that voluntariness of agreement does not cure an unconscionable term. The Court further applied the rule that when an interest stipulation is void, the BSP-prescribed rate serves as the substitute rate for the duration that the debt remains unpaid, as exemplified by Vasquez v. Philippine National Bank, Menchavez v. Bermudez, and recent en banc authority cited. The Court reasoned that Article 1252’s rule that payment of principal is not deemed made until interest is covered means that an illegal, non-demandable interest renders the principal not yet due, so foreclosure predicated on such demand is premature and inequitable. The Court invoked the three characteristics of valid demand and payment—integrity, id

Case Syllabus (G.R. No. 235020)

Parties and Posture

ATTY. LEONARD FLORENT O. BULATAO, PETITIONER appealed to the Supreme Court from the decision of the Court of Appeals reversing the Regional Trial Court judgment.
ZENAIDA C. ESTONACTOC, RESPONDENT filed the complaint below seeking annulment of a mortgage, injunctive relief, and damages and opposed the petition.
The appeal was brought under Rule 45, Rules of Court from the Court of Appeals decision in CA-G.R. CV No. 105581.
The case reached the Supreme Court on a legal appeal contesting the CA's reduction of interest, partial nullification of the mortgage, and cancellation of the foreclosure sale.

Key Factual Allegations

Zenaida executed a Deed of Mortgage of Real Property dated June 3, 2008 to secure a loan of P200,000 with a stipulation of five percent (5%) interest per month for twelve months.
Zenaida alleged that she received only P80,000 of the purported P200,000 loan and that the 5% monthly interest was excessive, unconscionable, and contrary to public policy.
Atty. Bulatao foreclosed the mortgage after default and a Notice of Sale was issued on July 15, 2011 with a Certificate of Sale issued October 10, 2011.
Atty. Bulatao denied wrongdoing, asserted that he relied on representations of ownership by Zenaida, and contended that the full P200,000 was received and that the parties consented to the 5% monthly interest.
Zenaida additionally alleged defects in the mortgage including lack of annotation on the title, false representation of sole ownership, and absence of personal appearance before the notary public.

Procedural History

Zenaida filed a complaint for injunction, annulment of the mortgage, and damages and later amended the complaint to include annulment of the foreclosure sale.
The Regional Trial Court, Branch 31, Agoo, La Union rendered judgment on May 4, 2015 dismissing the complaint and awarded moral, exemplary, nominal damages and attorney's fees to Atty. Bulatao and other defendants.
Zenaida appealed to the Court of Appeals which, in a Decision dated October 19, 2017, partly granted her appeal by declaring the mortgage void as to the share of the deceased co-owner, reducing the stipulated 5% monthly interest to 1% per month (12% per annum), and declaring the foreclosure sale and certificate of sale null and void.
Atty. Bulatao filed the present Rule 45 appeal to the Supreme Court contesting the CA's rulings.

Issues

Whether the Court of Appeals erred in invalidating or reducing the stipulated 5% monthly interest in the Deed of Mortgage of Real Property.
Whether the mortgage was valid as to Zenaida's undivided share and whether the foreclosure sale and certificate of sale could be given effect.
Whether the Regional Trial Court's award of damages to the defendants should stand.

Parties' Contentions

Atty. Bulatao contended that the 5% monthly interest was voluntarily agreed upon and enforceable absent fraud and that, if infirm, the 5% should apply only to the one-year term and thereafter the legal rate should apply as in Prisma Construction & Development Corp. v. Menchavez.
Zenaida argued that the Court of Appeals correctly held the interest unconscionable and void and that the foreclosure was invalid because the demand and amounts relied upon were inflated by the illegal interest.

Ruling and Disposition

The Supreme Court partly granted the petition and affirmed the Court of Appeals with m