Case Summary (G.R. No. 183399)
Applicable Law
Constitutional framework: 1987 Philippine Constitution (applicable by virtue of the decision date being after 1990). Civil Code provisions expressly relied upon: Article 1308 (contracts must bind both contracting parties; validity or compliance cannot be left to the will of one of them) and Article 1310 (court discretion to modify determinations that are evidently inequitable). Administrative guidance referenced in the decision: Central Bank Circular No. 905 (lifting of the Usury Law ceiling), as discussed in the jurisprudence cited. Controlling jurisprudence cited in the decision: Philippine National Bank v. Court of Appeals and subsequent cases (including New Sampaguita Builders Construction, Inc. v. PNB), and various decisions addressing escalation clauses and excessive interest (e.g., Almeda, Medel, Solangon, Imperial).
Procedural History
Petitioner filed Civil Case No. 98-476 (reformation of real estate mortgage contract and promissory note) in RTC Branch 39, Cagayan de Oro City on or about August 11, 1998. MBTC had earlier initiated foreclosure proceedings and scheduled auction sale for August 17, 1998. The RTC issued a TRO on August 14, 1998 and a writ of preliminary injunction on September 3, 1998. MBTC answered, asserting the terms of the note were clear and that the 15.446% rate applied only to the first 30 days, with subsequent monthly adjustments. On February 22, 2001 the RTC dismissed the complaint, dissolved the injunction, and ordered public auction of the mortgaged properties. Petitioner’s motion for reconsideration was denied on May 2, 2001. Petitioner filed a petition for review on certiorari under Rule 45 of the Rules of Court to the Supreme Court.
Factual Background Relevant to the Dispute
Beginning July 11, 1997, MBTC imposed monthly increases on the loan’s interest rate that varied month to month and reached as high as 30.244% in October 1997. The record reflects a sequence of monthly rates showing steep increases through May 21, 1998. Petitioner negotiated renewal and paid arrears in interest totaling P163,138.33 as a condition to renewal, but MBTC nonetheless proceeded to foreclose. Petitioner characterized the mortgage and note as contracts of adhesion and alleged that the unilateral increases were scandalous, immoral, illegal and unconscionable.
RTC Findings and Rationale
The RTC found (1) there was a meeting of the minds and the promissory note and mortgage clearly and unequivocally expressed the parties’ agreement on rates; (2) the escalation clause was a valid stipulation in commercial contracts intended to maintain fiscal stability and retain value of money over loan terms (citing Llorin v. CA); and (3) MBTC, as mortgagee, had the right to foreclose when the obligation was not paid when due. On that basis the RTC dismissed petitioner’s reformation action, dissolved the injunction and authorized sale.
Supreme Court’s Analysis — Mutuality and Unilateral Adjustment
The Supreme Court examined whether the mortgage and promissory note expressed the true agreement concerning interest. The Court held that the clause authorizing MBTC to increase, decrease or change interest rates and/or bank charges “without advance notice” and effectively at the bank’s unilateral will violated Article 1308’s mutuality requirement. The Court reiterated the principle that obligations arising from contracts must bind both parties equally and that a contractual condition making performance or compliance dependent exclusively upon the uncontrolled will of one party is void. The Court relied on prior decisions holding that escalation clauses are permissible to preserve fiscal stability only so long as they do not vest an unbridled, unilateral power to adjust interest that eliminates the borrower’s right to assent to important contract modifications.
Supreme Court’s Analysis — Equitable Power to Adjust and Precedents
The Court noted Article 1310’s grant to courts to adjust determinations that are evidently inequitable and surveyed controlling precedents where courts reduced or disallowed extreme or arbitrary interest hikes (cases cited include Philippine National Bank decisions, Almeda, Medel, Solangon, and Imperial). The Court found the empirical pattern of monthly increases imposed by MBTC—from 24.5% in July 1997 up to 30.244% and other high rates thereafter—was excessive and arbitrary, and that these increases were implemented without petitioner’s knowledge or consent.
Supreme Court’s Findings on Bank Conduct and Reformation Requisites
The Court concluded that the requisi
...continue readingCase Syllabus (G.R. No. 183399)
Case Caption, Source and Procedural Posture
- Reported at 558 Phil. 654, First Division; G.R. No. 148325; Decision dated September 03, 2007.
- Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing:
- RTC, Branch 39, Cagayan de Oro City — Decision dated February 22, 2001 (Civil Case No. 98-476) and
- RTC Order dated May 2, 2001 denying motion for reconsideration.
- Petitioner: Reynaldo P. Floirendo, Jr.
- Respondent: Metropolitan Bank and Trust Company (Metrobank), Cagayan de Oro City Branch.
- Case below: Civil Case No. 98-476, captioned "REYNALDO P. FLOIRENDO, JR., plaintiff, v. METROPOLITAN BANK AND TRUST COMPANY, ET AL., defendants."
Facts: Loan, Security and Documents
- Petitioner is president and chairman of the board of Reymill Realty Corporation, a domestic real estate corporation.
- On March 20, 1996, petitioner obtained a loan of P1,000,000.00 from respondent bank to infuse working capital into his company.
- As security for the loan, petitioner executed a real estate mortgage in favor of respondent over four parcels of land in Barangay Carmen, Cagayan de Oro City.
- The loan was renewed for another year and secured by the same real estate mortgage.
- Petitioner signed a promissory note dated March 14, 1997 containing, among other provisions:
- Interest fixed at "15.446% per annum for the first 30 days, subject to upward/downward adjustment every 30 days thereafter";
- A penalty charge of 18% per annum "based on any unpaid principal to be computed from date of default until payment of the obligation";
- A clause stating the rate of interest and/or bank charges may be increased, decreased, or otherwise changed from time to time by the Bank without advance notice in the event of changes in various monetary or cost-of-funding factors;
- An express consent to extensions/renewals/partial payments requested/granted to any borrower upon payment of corresponding renewal/extension fees.
Facts: Bank Conduct, Borrower Reaction and Foreclosure
- Beginning July 11, 1997, respondent bank began imposing higher interest rates on petitioner’s loan, varying month-to-month, reaching as high as 30.244% (noted for October 1997 in the record).
- Specific monthly rates imposed by respondent as reflected in the record include:
- 24.5% on July 11, 1997;
- 27% on August 11, 1997;
- 26% on September 10, 1997;
- 33% on October 15, 1997;
- 26.5% on November 27, 1997;
- 27% in December 1997;
- 29% on January 13, 1998;
- 30.244% on February 7, 1998;
- 24.49% on March 9, 1998;
- 22.9% on April 18, 1998;
- 18% on May 21, 1998.
- Due to the higher rates, petitioner could no longer pay interest and negotiated renewal. Respondent agreed to renew only upon payment of arrears in interest amounting to P163,138.33.
- Petitioner paid the arrears required by respondent. Instead of renewing, respondent filed with the Office of the Clerk of Court and Provincial Sheriff of the RTC a petition for foreclosure of mortgage, which was granted and an auction sale set for August 17, 1998.
Procedural Relief Sought by Petitioner and Interim Relief Granted by RTC
- On or about August 11, 1998, petitioner filed a complaint for reformation of real estate mortgage contract and promissory note (Civil Case No. 98-476), alleging:
- The promissory note and mortgage are contracts of adhesion;
- The unilateral increases in interest by respondent are scandalous, immoral, illegal and unconscionable;
- The terms were susceptible of manipulative interpretation by respondent, leaving petitioner at the bank’s mercy.
- Petitioner prayed for reformation of the documents and for injunctive relief to enjoin foreclosure and public auction of the mortgaged properties.
- The RTC issued a temporary restraining order on August 14, 1998, and a writ of preliminary injunction on September 3, 1998.
Respondent Bank’s Position in Trial Court
- Respondent asserted the promissory note plainly provided that the 15.446% figure applied only for the first 30 days and that the rate was subject to upward/downward adjustment every 30 days thereafter, arguing:
- The interest stipulation is monthly in character, not an annual fixed rate beyond the first 30 days;
- The terms of the mortgage and promissory note were voluntarily entered into and were clear and unequivocal;
- There was no legal or factual basis for reformation of instruments.
RTC Decision (February 22, 2001) and Reasoning
- The RTC rendered judgment that:
- Dismissed petitioner’s complaint for reformation of instruments;
- Dissolved the writ of preliminary injunction; and
- Directed sale at public auction of petitioner’s mortgaged properties.
- RTC articulated the requisites for reformation of an instrument as:
- There must have been a meeting of the minds upon the contract;
- The instrument does not express the true agreement between the parties; and
- The failure of the instrument to express the agreement must be due to mistake, fraud, inequitable conduct or accident. (Citing National Irrigation Administration v. Gamit.)
- The RTC found a meeting of the minds between the parties, considered the promissory note clear on rates, and concluded there was no mistake, fraud or defect in mutual assent.
- The RTC upheld the validity of the escalation clause, citing that escalation clauses are valid in commercial contracts to maintain fiscal stability and retain the value of money in loan contracts (citing Llorin v. CA).
- Accordingly, the RTC concluded the bank was allowed to impose the interest rates it charged under the terms of the instruments.
- On foreclosure, the RTC relied on the settled