G.R. No. 141811 - 1st Metro Investment Corp. vs. Este Del Sol Mountain Reserve, Inc.

Case Summary (G.R. No. 141811)

Factual Background

On January 31, 1978 FMIC loaned Este del Sol P7,385,500.00 to finance the construction of a resort project in Montalban, Rizal. The Loan Agreement provided interest at sixteen (16%) percent per annum on the diminishing balance, with repayment in thirty-six equal monthly amortizations beginning in the thirteenth month after the first release. The Loan Agreement contained an acceleration clause and contractual remedies in case of default including a one-time twenty (20%) percent penalty on the amount due, interest at the highest lawful rate from default, liquidated damages at two (2%) percent per month compounded quarterly, and attorney’s fees equal to twenty-five (25%) percent of the sum sought but not less than Twenty Thousand Pesos (P20,000.00). As security, Este del Sol executed a real estate mortgage covering identified parcels reflected in TCT Nos. N-24332 and N-24356 and several ancillary assignments, and the individual respondents executed continuing suretyship agreements each guaranteeing obligations up to P7,500,000.00.

Ancillary Agreements and Deductions

Simultaneously with the loan, Este del Sol executed an Underwriting Agreement and a Consultancy Agreement dated January 31, 1978. The Underwriting Agreement provided for a one-time underwriting fee of P200,000.00, annual supervision fees of P200,000.00 for four years, and an annual consultancy fee of P332,500.00 for four years. FMIC billed Este del Sol in three letters dated February 22, 1978 for P200,000.00 (underwriting), P1,330,000.00 (consultancy for four years), and P200,000.00 (supervision for the first year), and deducted those amounts from the first partial loan release of P2,382,500.00, effectively returning P1,730,000.00 to FMIC as part of the loan proceeds.

Extrajudicial Foreclosure and Deficiency Claim

When Este del Sol defaulted on the revised amortization schedule, FMIC claimed total obligations of P12,679,630.98 as of June 23, 1980 and instituted extrajudicial foreclosure of the mortgage. At the auction on June 23, 1980 FMIC was the highest bidder at P9,000,000.00. After deducting publication, sheriff’s fees, and attorney’s fees claimed to be P3,168,666.75, FMIC applied the remaining proceeds against interest, penalties and partially against principal, leaving a claimed unpaid principal balance of P6,863,297.73. FMIC demanded payment from the individual sureties and, upon failure of collection, filed Civil Case No. 39224 on November 11, 1980 seeking that deficiency with interest at twenty-one (21%) percent per annum from June 24, 1980 and attorney’s fees of twenty-five (25%) percent.

Trial Court Proceedings

At trial FMIC offered testimony from its former Senior Vice-President Cesar Valenzuela, Vice-President Felipe Neri, and Account Manager Dennis Aragon, together with documentary evidence. Respondents produced testimony from co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and from former FMIC officer Perfecto Doroja. The Regional Trial Court rendered judgment for FMIC ordering defendants jointly and severally to pay P6,863,297.73 plus twenty-one (21%) percent interest per annum from June 24, 1980 until paid, plus attorney’s fees equivalent to twenty-five (25%) percent of the total amount due, and costs. The trial court dismissed respondents’ counterclaims.

Court of Appeals Decision

On appeal the Court of Appeals reversed on November 8, 1999. The appellate court concluded that the Underwriting and Consultancy Agreements were not independent transactions but were executed as part of the loan scheme and served as subterfuges to conceal usurious interest. The appellate court held the stipulations on penalties, liquidated damages and attorney’s fees to be “excessive, iniquitous, unconscionable and revolting to the conscience.” It reduced the penalty to a one-time twenty (20%) percent on the amount due and fixed attorney’s fees at ten (10%) percent of the proceeds of the foreclosure sale, found FMIC’s claim against the individual sureties unenforceable, and ordered FMIC to reimburse Este del Sol P971,000.00 representing the excess of billed fees over the deficiency as computed by the appellate court.

Petition for Review and Assigned Errors

FMIC filed a petition for review on certiorari attacking the Court of Appeals’ factual and legal conclusions. The petition asserted that the Underwriting and Consultancy Agreements were separate and valid independent contracts; that they were not subterfuges to mask usury; that the appellate court improperly disregarded FMIC’s witnesses and documentary evidence of services performed; that respondents had waived recovery of the fees and admitted the validity of the agreements; that the appellate court erred in its computation of amounts due after foreclosure; and that the appellate court wrongly held Este del Sol and the individual respondents not obliged to FMIC.

Issues Presented to the Supreme Court

The principal legal issues presented were whether the Underwriting and Consultancy Agreements executed contemporaneously with the Loan Agreement were independent contracts or artifices employed to cloak usurious interest; whether Central Bank Circular No. 905, which removed ceilings on interest rates effective January 1, 1983, applied retroactively to a loan executed in 1978; whether the appellate court properly exercised its equitable power to reduce penalties and attorney’s fees; and whether the appellate court awarded relief not prayed for.

Standard of Review

The Supreme Court observed that it is not a trier of facts and ordinarily does not disturb concurrent findings of fact by trial and appellate courts. The Court will re-examine factual findings only when the trial court and the appellate court are in conflict or when the record indicates clear error. The Court reviewed the record and evidence to determine whether departure from the appellate court’s findings was warranted.

Retroactivity of Central Bank Circular No. 905

The Court rejected FMIC’s contention that Central Bank Circular No. 905 should be applied retroactively to validate the loan terms. The Court held that the law in force at the time the contract was executed governs the contract and that Circular No. 905 did not repeal or amend the Usury Law but merely suspended its effectivity; a circular cannot repeal a statute. Accordingly, retroactive application of the Circular to a contract of January 31, 1978 could not be presumed.

Parol Evidence and the Usury Exception

The Court reaffirmed that written instruments ordinarily control, but that the rule yields where a written form is used to disguise a usurious transaction. Parol evidence is admissible to demonstrate that ostensibly separate written agreements are devices to circumvent the laws against usury. The Court relied on the exception to the best-evidence rule to permit inquiry into the whole transaction when corrupt intent to evade the Usury Law appears.

Factors Demonstrating Subterfuge

The Court enumerated facts and circumstances that, taken together, demonstrated that the Underwriting and Consultancy Agreements were cloaks for usury: the ancillary agreements bore the same date as the Loan Agreement; the supervision and consultancy fees were structured to coincide with the loan term; the Loan Agreement expressly conditioned the loan on execution of an underwriting agreement, showing the ancillary agreements were integral to the lending transaction; FMIC billed and collected P1,730,000.00 in fees by deducting them from the first disbursement; FMIC billed an aggregate consultancy amount of P1,330,000.00 although the Consultancy Agreement provided for P332,500.00 per annum and only the first year was due upon signing; FMIC failed to organize any underwriting syndicate or to perform the consultancy services of substance; and there was in fact no necessity for the underwriting and consultancy services because Este del Sol had its own marketing capacity. These facts undercut FMIC’s assertion that the agreements were independent and amounted to legitimate compensation.

Legal Effect of Usurious Stipulations

Invoking Article 1957, New Civil Code, the Court stated that contracts and stipulations intended to circumvent the laws against usury are void and that the borrower may recover under the laws on usury. The Court explained the established rule that an agreement fixing usurious interest does not void the principal obligation: the pr

Case Syllabus (G.R. No. 141811)

Parties and Posture

FIRST METRO INVESTMENT CORPORATION (FMIC) was the plaintiff-appellant below and the petitioner before the Supreme Court.
ESTE DEL SOL MOUNTAIN RESERVE, INC. (Este del Sol) and the seven individual sureties were the defendants-appellees below and the respondents here.
FMIC sought collection of a deficiency allegedly remaining after extrajudicial foreclosure under a mortgage and guaranty agreements.
The Regional Trial Court rendered judgment for FMIC, and the Court of Appeals reversed that judgment.
FMIC filed a petition for review on certiorari seeking reversal of the Court of Appeals' decision.

Key Facts

FMIC granted Este del Sol a loan dated January 31, 1978 in the principal amount of P7,385,500.00 to finance a resort development project.
The Loan Agreement provided interest at sixteen percent per annum on a diminishing balance and repayment in thirty-six equal monthly amortizations commencing in the thirteenth month after the first release.
The Loan Agreement included default clauses providing acceleration, a one-time twenty percent penalty, interest at the highest rate permitted by law from default, liquidated damages at two percent per month compounded quarterly, and attorney's fees equivalent to twenty-five percent of the sum sought.
As security, Este del Sol executed a real estate mortgage covering parcels described in TCT Nos. N-24332 and N-24356 and continuing suretyship agreements by the seven individual respondents each guaranteeing up to P7,500,000.00.
Simultaneously with the Loan Agreement, Este del Sol executed an Underwriting Agreement and a Consultancy Agreement under which FMIC purportedly earned a one-time underwriting fee of P200,000.00, annual supervision fees of P200,000.00 for four years, and consultancy fees aggregating P332,500.00 per annum for four years.
FMIC billed Este del Sol by three letters dated February 22, 1978 for P200,000.00 underwriting fee, P1,330,000.00 consultancy fee for four years, and P200,000.00 supervision fee, and FMIC deducted these amounts from the first loan release.
Este del Sol defaulted under a revised amortization schedule and, per FMIC's Statement of Account dated June 23, 1980, allegedly owed P12,679,630.98 as of that date.
FMIC conducted an extrajudicial foreclosure and purchased the mortgaged properties at public auction for P9,000,000.00 on June 23, 1980, applied deductions including attorney's fees totaling P3,188,630.75, and claimed a remaining principal balance of P6,863,297.73.
FMIC then instituted a collection suit on November 11, 1980 against the individual sureties to recover the alleged deficiency.

Claims and Defenses

FMIC claimed the individual sureties were jointly and severally liable for the deficiency of P6,863,297.73 plus post-default interest at twenty-one percent per annum and twenty-five percent attorney's fees.
Este del Sol and the individual respondents denied liability and asserted affirmative defenses including that the Underwriting and Consultancy Agreements were sham transactions intended to camouflage usurious interest by FMIC.
Respondents also contended that the fees billed and deducted constituted usurious interest recoverable by the borrower.

Trial Record

FMIC offered testimony from Cesar Valenzuela, Felipe Neri, and Dennis Aragon and presented documentary evidence of the loan, fees, and foreclosure.
Respondents presented testimony from co-respondents Vicente M. De Vera, Jr., Valentin S. Daez, Jr., and former FMIC officer Perfecto Doroja challenging the legitimacy and performance of the underwriting and consultancy services.
The trial court rendered judgment for FMIC, ordering payment of the alleged deficiency plus contractual interest and attorney's fees.

Issues

Whether the Underwriting and Consultancy Agreements executed contemporaneously with the Loan Agreement were separate, valid transactions or mere subterfuges to disguise usurious interest.
Whether th