Case Summary (G.R. No. 183360)
MeTC Decision
The MeTC upheld the payment of interest but equitably reduced post-Complaint interest to 12% per annum. It denied moral damages and dismissed Atty. Salonga’s personal liability. Judgment ordered L & J to pay P 350,000.00 plus 12% p.a. interest from January 20, 2005, attorney’s fees of P 5,000.00, and costs.
RTC Ruling
On appeal, L & J argued that total interest paid (P 576,000.00) exceeded legal interest at 12% p.a. (P 105,000.00), producing an overpayment of P 471,000.00 to be set off against the principal. The RTC, however, affirmed the MeTC decision in all respects.
CA Decision
The Court of Appeals reversed. Relying on Civil Code Article 1956, it held that no interest is due absent a written stipulation. Even if written, a 6% monthly rate is unconscionable and void. The CA applied legal compensation (Article 1279) and solutio indebiti, offsetting the P 350,000.00 principal against the P 576,000.00 interest payments, resulting in an excess of P 226,000.00. It ordered Rolando to pay that amount plus 12% p.a. interest.
Issue
Whether the 6% monthly interest is valid and enforceable, given (a) the lack of a written stipulation under Article 1956 and (b) the alleged unconscionability of the rate.
Supreme Court’s Ruling
- Written Stipulation Requirement. Article 1956 mandates that interest agreements be in writing. No written instrument existed; thus no interest can be lawfully charged.
- Estoppel and Bad Bargains. Even though L & J paid interest for years, estoppel cannot validate a transaction prohibited by law or public policy. Creditor Rolando, an educated professional, had the means to demand a written contract. Courts will not protect parties from imprudent bargains.
- Unconscionability of 6% Monthly Interest. Although the Usury Law is suspended, courts may equitably temper excessive rates. Jurisprudence consistently voids rates of 3% per month or higher when applied indefinitely without a fixed maturity. A 6% monthly rate (72% p.a.) on an open-ended loan is “outrageous and inordinate.” Voluntariness does not cure immorality.
- Application of Compensation and Solutio Indebiti. With no lawful interest due, the P 576,000.00 paid constitutes undue pay
Case Syllabus (G.R. No. 183360)
Parties
- Petitioner: Architect Rolando C. De La Paz, lender of P350,000.00
- Respondent: L & J Development Company, Inc., a property developer
- Co–respondent in lower courts: Atty. Esteban Salonga, President and General Manager of L & J (sued in personal capacity)
- Other persons of interest:
- Arlene San Juan, secretary/treasurer of L & J who negotiated loan terms
- Nilo Velasco, associate of Rolando and resident of Brentwood Subdivision
Factual Background
- On December 27, 2000, Rolando advanced an unsecured loan of P350,000.00 to L & J without a written agreement or fixed maturity date
- The parties agreed—through Atty. Salonga’s suggestion—to a 6% monthly interest rate (equivalent to P21,000.00 per month)
- Between December 2000 and August 2003, L & J made thirty interest payments totaling P576,000.00
- Beginning in 2003, L & J encountered financial difficulties and ceased payment of the 6% monthly interest
- Rolando filed a Complaint for Collection of Sum of Money with Damages (MeTC Civil Case No. 05-7755) alleging unpaid principal and interest, and asserting that the interest agreement was never reduced to writing
Procedural History
- Metropolitan Trial Court (Branch 75, Marikina City)
- Decision dated June 30, 2006 in Civil Case No. 05-7755
- Regional Trial Court (Branch 192, Marikina City)
- Appeal in Civil Case No. 06-1145-MK
- Decision dated April 19, 2007 affirmed MeTC ruling in toto
- Court of Appeals (CA-G.R. SP No. 100094)
- Decision dated February 27, 2008 reversed RTC and set aside interest award
- Resolution dated June 6, 2008 denied Rolando’s Motion for Reconsideration
- Supreme Court (G.R. No. 183360)
- Decision promulgated September 8, 2014
Issues
- Whether the 6% monthly interest on an unsecured, unwritten loan agreement is valid and collectible
- Whether the absence of a written stipulation renders all interest payments void under Article 1956 of the Civil Code
- Whether a 6% monthly interest rate is unconscionable and contrary to morals and public policy
- Proper application of compensation (solutio indebiti) for excess interest payments
Arguments of the Petitioner (Rolando C. De La Paz)
- The high interest rate was suggested and insisted upon by L & J through Atty. Salonga and Arlene San Juan
- Atty. Salonga’s legal