Case Summary (G.R. No. 148325)
Loan Terms and Escalation Clause
The parties executed a real estate mortgage over four parcels in Barangay Carmen, Cagayan de Oro City, to secure a P1 million working-capital loan. The promissory note stipulated 15.446% per annum interest for the first 30 days, subject to upward or downward adjustment every succeeding 30 days “without advance notice” in the event of changes in prescribed interest-rate benchmarks or funding costs. A penalty of 18% per annum applied to unpaid principal from default until payment.
Unilateral Interest Rate Increases and Consequences
Beginning July 11, 1997, MBTC unilaterally increased the monthly rate: 24.5% in July; 27% in August; 33% in October; peaking at 30.244% in February 1998; then fluctuating thereafter. Floirendo, unable to service the escalated charges, negotiated renewal, paid arrear interest of P163,138.33, but MBTC instead proceeded with judicial foreclosure and scheduled an auction for August 17, 1998.
RTC Proceedings and Preliminary Injunctive Relief
On August 11, 1998, petitioner filed for reformation of the mortgage and promissory note as contracts of adhesion, alleging the escalation clause was scandalous, immoral, illegal, unconscionable and left him powerless. The RTC granted a TRO on August 14 and a preliminary injunction on September 3, 1998, enjoining foreclosure and auction.
RTC Judgment and Rationale
On February 22, 2001, the RTC dismissed the reformation complaint, dissolved the injunction, and ordered sale at public auction. It found:
- A valid meeting of minds existed and the written instruments accurately reflected the parties’ agreement.
- No mistake, fraud, accident or inequitable conduct justified reformation.
- Escalation clauses are valid in commercial contracts (citing Llorin v. CA).
- Mortgage foreclosure upon default was proper under settled jurisprudence (Estate Investment House v. CA).
Issue before the Supreme Court
Whether the mortgage contract and promissory note truly expressed the parties’ agreement on interest rates, or whether the escalation clause unilaterally conferring rate-adjustment power on MBTC rendered the agreement void for lack of mutuality and necessitated reformation.
Principle of Mutuality under Civil Code Article 1308
Article 1308 requires contracts to bind both parties and prohibits leaving validity or compliance to the will of one party. The Court held that an escalation clause granting uncontrolled rate-adjustment power to the bank, without the borrower’s consent, violates mutuality, reduces the agreement to a contract of adhesion, and is therefore void.
Equitable Adjustment under Civil Code Article 1310 and Jurisprudence
Article 1310 permits courts t
...continue readingCase Syllabus (G.R. No. 148325)
Facts of the Case
- Petitioner Reynaldo P. Floirendo, Jr. is president and chairman of Reymill Realty Corporation, a real estate company.
- On March 20, 1996, he obtained a ₱1,000,000 loan from Metropolitan Bank and Trust Company (MBTC), Cagayan de Oro Branch, to infuse working capital.
- He executed a real estate mortgage over four parcels of land in Barangay Carmen, Cagayan de Oro City, as security for the loan.
- The loan was renewed after one year under the same mortgage.
- On March 14, 1997, petitioner signed a promissory note stipulating:
• Interest at 15.446% per annum for the first 30 days, subject to upward or downward adjustment every 30 days thereafter
• Penalty charge of 18% per annum on any unpaid principal from date of default until full payment
• A broad “escalation clause” allowing the Bank to change interest or charges without advance notice in response to changes in legal or market rates, reserve requirements, funding costs, etc.
• Express consent to extensions, renewals, or partial payments upon payment of corresponding fees
Post-Execution Developments
- Beginning July 11, 1997, MBTC unilaterally raised the interest rate month-to-month, peaking at 30.244% in October 1997.
- Petitioner could not keep up with the increasing charges and negotiated for renewal.
- MBTC demanded payment of accrued interest arrears amounting to ₱163,138.33 before renewal.
- Despite payment of arrears, MBTC filed a petition for foreclosure of the mortgage.
- The Regional Trial Court (RTC), Branch 39, Cagayan de Oro City, set the public auction for August 17, 1998.
Trial Court Proceedings
- On August 11, 1998, petitioner filed Civil Case No. 98-476 for reformation of the real estate mortgage and promissory note.
- He characterized both documents as contracts of adhesion and alleged that MBTC’s unilateral rate escalations were scandalous, immoral, illegal, and unconscionable.
- Petitioner prayed for:
• Reformation of the mortgage and promissory note to eliminate or restrain the escalation clause
• Issuance of a Temporary Restraining Order (TRO) and writ of preliminary injunction to halt foreclosure and auction - On August 14, 1