Case Summary (G.R. No. 262938)
Petitioner
First Metro Investment Corporation extended financing to Este del Sol for development of a sports/resort complex and also entered into contemporaneous underwriting, supervision and consultancy agreements with the borrower.
Respondents
Este del Sol Mountain Reserve, Inc. (borrower) and its individual continuing sureties who guaranteed payment up to P7,500,000 each pursuant to separate continuing suretyship agreements.
Key Dates
- Loan and related agreements executed: January 31, 1978.
- Billing for fees: letters dated February 22, 1978 (deducted from first loan release).
- First partial release of loan: February 22, 1978 (P2,382,500.00).
- Statement of account reflecting default totals: June 23, 1980.
- Extrajudicial foreclosure and sheriff’s sale: June 23, 1980 (FMIC highest bidder at P9,000,000).
- Collection suit filed: November 11, 1980.
- Trial court decision in favor of FMIC: June 2, 1994.
- Court of Appeals reversal: November 8, 1999.
- Supreme Court decision (affirming CA): November 15, 2001.
Applicable Law
The 1987 Constitution governs the legal framework applicable to this decision (decision date is 2001). Primary substantive provisions applied in the ruling include the Usury Law as in force at the time of contract, relevant provisions of the New Civil Code (notably Articles 1229, 1957 and 2227), and procedural rules regarding admissibility of parol evidence (Rule 130, Section 3). Central Bank Circular No. 905 (effective January 1, 1983) and its relation to the Usury Law were considered but not held to retroactively validate otherwise usurious transactions entered in 1978.
Loan and Security Terms
FMIC granted a loan to Este del Sol in the principal amount of P7,385,500.00 to finance the development project. Interest was stipulated at 16% per annum on the diminishing balance, payable in 36 equal monthly amortizations to commence at the beginning of the thirteenth month from first release. Default provisions included acceleration, a one-time 20% penalty on the amount due, interest at the highest rate permitted by law from default, liquidated damages at 2% per month compounded quarterly on unpaid balance and accrued interest plus attorney’s fees of 25% of the sum sought (minimum P20,000 if counsel were engaged). Collateral and guarantees included a real estate mortgage over two parcels (approx. 1,028,029 sq.m., TCT Nos. N-24332 and N-24356) and individual continuing suretyship agreements of the named respondents.
Underwriting, Supervision and Consultancy Agreements and Billing
Simultaneously with the loan, Este del Sol executed: an Underwriting Agreement (FMIC to underwrite on best-efforts basis 120,000 common shares for a one-time underwriting fee of P200,000; supervision fee P200,000 per annum for four years) and a Consultancy Agreement (consultancy fee stated at P332,500 per annum for four years, with first-year fee due upon signing). On February 22, 1978 FMIC billed Este del Sol P200,000 (underwriting fee), P200,000 (first-year supervision fee) and P1,330,000 (consortium-stated consultancy fee billed as a lump amount representing four years), and deducted those amounts from the first partial loan release, effectively causing the lender to recapture P1,730,000 of the loan proceeds as purported fees.
Performance of Ancillary Agreements
The Court of Appeals and the Supreme Court found that FMIC failed to perform obligations under the underwriting and consultancy agreements: FMIC did not successfully organize an underwriting/selling syndicate nor did it meaningfully supervise such a syndicate; Este del Sol’s own marketing arm sold its shares. The consultancy functions were likewise not meaningfully rendered, and the borrower’s officers were reportedly competent to handle the project without the claimed consultancy services.
Default, Account Statement and Foreclosure Sale
Because Este del Sol defaulted under the revised amortization schedule, FMIC’s statement of account as of June 23, 1980 showed total obligations of P12,679,630.98 (including accumulated interest, penalties and past-due interest at escalating rates), prompting extrajudicial foreclosure. At auction FMIC bid P9,000,000; deductions for publication (P4,964), sheriff’s fees (P15,000) and attorney’s fees (P3,168,666.75) left P5,811,369.25 applied to interest, penalties and partly to principal, leaving an unpaid principal balance of P6,863,297.73 as of June 23, 1980, which FMIC sought to recover from the borrower and sureties.
Trial Court Judgment and Subsequent Appeals
The Regional Trial Court rendered judgment in favor of FMIC, ordering joint and several liability of defendants for P6,863,297.73 plus 21% interest per annum from June 24, 1980, plus attorney’s fees (25% of the amount) and costs. Defendants’ counterclaims were dismissed. The Court of Appeals reversed, finding the ancillary fee agreements to be subterfuges to camouflage usurious interest and ruling that stipulated penalties, liquidated damages and attorney’s fees were excessive. The CA reduced the penalty and attorney’s fees (to a one-time 20% penalty on amount due and 10% attorney’s fees of the foreclosure proceeds) and ordered FMIC to reimburse Este del Sol an aggregate net amount of P971,000 based on its computations. FMIC’s motion for reconsideration in the CA was denied.
Issues Presented to the Supreme Court
FMIC’s petition for review challenged principally factual and legal conclusions of the CA, asserting among others that: the underwriting and consultancy agreements were separate and independent contracts; the CA wrongly characterized those agreements as devices to cloak usury; trial testimony and proof of services rendered were improperly disregarded; respondents had waived recovery or admitted the agreements’ validity; the CA made erroneous post-foreclosure computations; and respondents remained obligated to FMIC.
Standard of Review and Approach to Factual Findings
The Supreme Court reiterated that it is not a trier of facts and generally will not re-examine factual findings established by the trial and appellate courts. Only if findings of fact are in conflict between the trial and appellate courts or if findings are unsupported by record will the Supreme Court reweigh evidence. After reviewing the record, the Court found no reason to depart from the Court of Appeals’ factual determinations.
Central Bank Circular No. 905 and Retroactivity
FMIC argued that Central Bank Circular No. 905 (effective January 1, 1983) removed ceilings on interest rates and should retroactively validate the loan terms. The Supreme Court rejected retroactive application. It applied the elementary contract rule that the law in force at the time the contract was made governs the contract. Circular No. 905 did not repeal the Usury Law; it merely suspended its effectivity and a circular cannot repeal a statute. Therefore the Usury Law as in force in 1978 governed the transaction and Circular No. 905 could not validate otherwise usurious stipulations made in 1978.
Parol Evidence and Substance Over Form
The Court reiterated that written instruments generally constitute the best evidence of contractual terms, but the rule is subject to exceptions where written form is used as a cloak to conceal usury. Parol evidence is admissible to show that a written instrument was a device to cover usurious interest. If, from the entire transaction, a corrupt intention to evade the Usury Law is apparent, courts will not permit artful devices to cloak usury. The Court found multiple indicia (temporal coincidence of agreements, condition precedent language in the loan agreement, contemporaneous billing and deduction of
...continue readingCase Syllabus (G.R. No. 262938)
Nature and Procedural Posture
- Petition for review on certiorari to the Supreme Court from a Decision of the Court of Appeals (Special Seventh Division) dated November 8, 1999 in CA-G.R. CV No. 53328.
- The Court of Appeals reversed the Regional Trial Court of Pasig City, Branch 159 (Judge Willelmo C. Fortun) Decision dated June 2, 1994 in Civil Case No. 39224.
- The Supreme Court docketed the petition as G.R. No. 141811 and rendered its Decision on November 15, 2001 (420 Phil. 902).
- The petition raises errors assigned by petitioner First Metro Investment Corporation (FMIC) challenging the appellate court’s factual findings, legal conclusions and computations, and contesting the characterization of certain agreements as devices to camouflage usury.
- The Supreme Court denied the petition and affirmed the Court of Appeals’ decision, assessing costs against petitioner.
Parties
- Petitioner: First Metro Investment Corporation (FMIC).
- Main Respondent/Borrower: Este del Sol Mountain Reserve, Inc. (Este del Sol).
- Co-respondents/Sureties: Valentin S. Daez, Jr.; Manuel Q. Salientes; Ma. Rocio A. De Vega; Alexander G. Asuncion; Alberto M. Ladores (also spelled Albert in records); Vicente M. De Vera, Jr.; Felipe B. Sese.
- Counseling and witness roles: FMIC presented its employees and officers as witnesses; certain co-respondents and a former FMIC manager/testified for the respondents.
Underlying Transaction: Loan Agreement (January 31, 1978)
- FMIC granted Este del Sol a loan of P7,385,500.00 on January 31, 1978 to finance construction/development of Este del Sol Mountain Reserve (sports/resort complex in Barrio Puray, Montalban, Rizal).
- Loan proceeds were to be released on a staggered basis.
- Interest was fixed at 16% per annum, computed on the diminishing balance.
- Repayment: 36 equal and consecutive monthly amortizations, commencing at beginning of the 13th month from the date of first release as per Schedule of Amortization.
- Default provisions included acceleration, a one-time 20% penalty on the amount due, interest at the highest rate permitted by law from date of default, liquidated damages at 2% per month compounded quarterly on unpaid balance and accrued interest plus all penalties/fees/expenses until full payment, and attorney's fees of 25% of the sum sought to be recovered (not less than P20,000 if counsel was hired).
- The Loan Agreement expressly provided for execution and delivery of an Underwriting Agreement as a condition precedent and covenant of the borrower.
Security and Collateral Documents Executed (contemporaneous with Loan)
- Real Estate Mortgage dated January 31, 1978 over two parcels (approx. 1,028,029 sq. meters) described in TCT Nos. N-24332 and N-24356 inclusive of improvements and chattels.
- Individual Continuing Suretyship agreements dated February 2, 1978 by each co-respondent to guarantee payment up to the aggregate sum of P7,500,000.00 each.
- Additional required documents: Assignment of Receivables from share sales; Assignment of Realty Rights and Interests over nine parcels (aggregate ~767,074 sq. meters) described in several TCT/OCT numbers and Tax Declaration No. 3956; Assignment of Subscription Rights with an irrevocable Voting Trust Agreement.
Underwriting Agreement (January 31, 1978)
- FMIC to underwrite, on a best-efforts basis, the public offering of 120,000 common shares of Este del Sol.
- One-time underwriting fee: P200,000.00.
- Annual supervision fee for supervising public offering: P200,000.00 per annum for four consecutive years.
- Consultancy fee under the Underwriting Agreement referenced additionally the consultancy arrangements (and was executed simultaneously).
Consultancy Agreement (January 31, 1978)
- FMIC engaged as consultant for general consultancy services.
- Fee stipulated: P332,500.00 per annum for four consecutive years, with only first year’s consultancy fee due upon signing (per the Consultancy Agreement).
- Consultancy functions specified: (a) professional counseling/assistance on management issues and objectives; (b) advice on planning, structuring and arranging specific projects; (c) recommendations to resolve unique or recurring problems; (d) services related to the foregoing matters as required by the client.
Billing, Deduction and Payment Mechanics (February 22, 1978 billing)
- On February 22, 1978 FMIC billed Este del Sol for:
- Underwriting fee: P200,000.00.
- Consultancy fee (four years aggregate billed as P1,330,000.00): invoiced though the Consultancy Agreement specified P332,500.00 per annum with only the first year due on signing.
- Supervision fee for the year beginning February 1978: P200,000.00.
- These billed fees (totaling P1,730,000.00) were deemed paid and were deducted by FMIC from the first partial release of the loan on the same day (first release amount: P2,382,500.00).
- The deduction effectively reduced the immediate cash available to Este del Sol and resulted in FMIC’s retention/recapture of P1,730,000.00 as part of the loan proceeds.
Performance and Compliance Issues Re: Underwriting and Consultancy
- FMIC failed to organize an underwriting/selling syndicate or to sell any shares of Este del Sol; it did not supervise any such syndicate.
- There was evidence that Este del Sol had its own licensed marketing arm that sold the shares; therefore, FMIC’s underwriting services were unnecessary.
- FMIC failed to comply with obligations under the Consultancy Agreement; Este del Sol’s officers were found by the record to be competent to provide the advisory services themselves.
- These failures were adduced through testimony at trial and TSNs referenced in the record (including multiple dates).
Default, Statement of Account and Foreclosure (as of June 23, 1980)
- Revised amortization schedule issues caused Este del Sol to default on repayments.
- Petitioner’s Statement of Account dated June 23, 1980 calculated total obligation at P12,679,630.98 with particulars:
- Total amount due as of 11-22-78 per revised amortization schedule: P7,999,631.42.
- Interest on that principal at 16% p.a. for 92 days: P327,096.04 → balance P8,326,727.46.
- One-time 20% penalty on entire unpaid obligations: P1,665,345.49.
- Past due interest under Loan Agreement: 19% p.a. from 2-22-79 to 11-30-79 (281 days): P1,481,879.93; 21% p.a. from 11-30-79 to 6-23-80 (206 days): P1,200,714.10.
- Other charges: publications for extrajudicial foreclosure (5-23-80 & 6-6-80): P4,964.00.
- Total amount due and collectible as of June 23, 1980: P12,679,630.98.
- FMIC initiated extrajudicial foreclosure of the Real Estate Mortgage on June 23, 1980.
- At the public auction, FMIC was the highest bidder at P9,000,000.00 for the mortgaged properties.
Application of Foreclosure Proceeds and Deficiency
- From the P9,000,000.00 bid, FMIC deducted P3,188,630.75 comprising:
- Publication fee (Sheriff’s Notice): P4,964.00.
- Sheriff’s fees: P15,000.00.
- Attorney’s fees: P3,168,666.75 (equivalent to 25% of the sum sought to be recovered as of auction date).
- Remaining balance after these deductions: P5,811,369.25 applied to interest, penalty charges and partly against principal as of June 23, 1980.
- Resulting outstanding princ