Title
Frias vs. San Diego-Sison
Case
G.R. No. 155223
Decision Date
Apr 3, 2007
Petitioner failed to repay a loan secured by property, committed fraud by falsely reporting title loss, and was held liable for compounded interest, moral and exemplary damages, but attorney’s fees were deleted.
court ruling
interest on loan
loan
A

Case Summary (G.R. No. 215954)

Factual Background

Petitioner owned a house and lot at No. 589 Batangas East, Ayala Alabang, Muntinlupa which she had acquired from Island Masters Realty and Development Corporation and which was covered by TCT No. 168173. On December 7, 1990 petitioner and respondent executed a Memorandum of Agreement whereby respondent gave petitioner P3,000,000 as consideration and was accorded a six-month option to purchase the property at P6,400,000, with a further six-month period for petitioner to pay the remaining P3.4 million if respondent exercised the option. The agreement provided that, if respondent decided not to purchase, the amount given shall be treated as a loan and the property shall be security for a mortgage, and that the amount would earn compounded bank interest “for the last six months only.” Respondent paid two million pesos in cash and one million pesos by a post-dated check bearing the incorrect date. Petitioner delivered to respondent the title and deed of sale, but respondent later notified that she would not buy the property. Petitioner failed to repay the two million pesos.

Procedural History in the Trial Court

On April 1, 1993 respondent filed a complaint for sum of money with preliminary attachment against petitioner, docketed as Civil Case No. 93-65367 before RTC Manila, Branch 30. The RTC issued a writ of preliminary attachment upon bond. Petitioner answered and later filed an amended answer alleging that the Memorandum of Agreement had been prepared and handled by her lawyer, Atty. Carmelita Lozada, that she had not properly read the agreement and that the handling and disposition of the funds and title were the results of manipulations by Atty. Lozada and respondent. Petitioner denied fraudulent intent and raised claims of lack of consummation and deception. Trial ensued.

Trial Court Ruling

On January 31, 1996 the RTC rendered judgment ordering petitioner to pay respondent P2,000,000 with interest at thirty-two percent per annum from December 7, 1991 until fully paid; to reimburse P70,000 representing premiums on the attachment bond with legal interest; to pay P100,000 by way of moral, corrective and exemplary damages; and to pay attorney’s fees of P100,000 plus costs. The RTC found that the Memorandum of Agreement transformed the amount given into a loan upon respondent’s decision not to purchase, that petitioner engaged in a fraudulent scheme to deprive respondent of her security by executing an affidavit of loss and by initiating proceedings for the issuance of an owner’s duplicate title despite respondent’s possession of the title, and that petitioner’s testimony and that of her witness lacked credibility.

Court of Appeals Ruling

The Court of Appeals affirmed the RTC judgment with modification. The CA reduced the interest rate from 32% to 25% per annum, effective June 7, 1991 until fully paid, but otherwise affirmed the RTC findings including the award of moral and exemplary damages and reimbursement for attachment bond premiums. The CA interpreted the phrase “for the last six months only” in the Memorandum of Agreement to refer to the second six-month period given to petitioner to repay the loan and held that the parties contemplated interest during that period and that interest continued to accrue thereafter until actual payment. The CA rejected petitioner’s contention that interest was limited to six months only and concluded that a compounded bank interest rate of 25% per annum was fair given Prudential Bank’s certification that rates in 1991 ranged from 25% to 32%.

Issues Presented to the Supreme Court

Petitioner raised three issues: whether the compounded bank interest should be limited to six months as provided in the Memorandum of Agreement; whether respondent was entitled to moral damages; and whether the grant of corrective and exemplary damages and attorney’s fees was proper when attorney’s fees were not justified in the text of the trial court’s decision.

Petitioner's Contentions

Petitioner argued that the Memorandum of Agreement limited interest to the last six months only and that neither the 32% interest awarded by the RTC nor the 25% awarded by the CA could run beyond that six-month period. Petitioner invoked Article 1956 of the New Civil Code [sic: the source cites Article 1933 and others] to argue that interest is not due unless expressly stipulated in writing. Petitioner contested the award of moral damages by asserting that she had been acquitted in the criminal proceedings for perjury and false testimony and that those acquittals undermined the finding of fraudulent conduct. Petitioner further contended that the award of attorney’s fees lacked proper factual and legal findings in the body of the trial court decision and thus could not stand.

Supreme Court Ruling

The Supreme Court affirmed the Court of Appeals’ Decision dated June 18, 2002 and Resolution dated September 11, 2002 with modification. The Court sustained the CA’s interpretation that the phrase “for the last six months only” referred to the second six-month period and that interest, contemplated for that last six-month period, continued to accrue beyond that period until actual payment because the debtor continued to use the principal. The Court upheld the reduction of the interest rate to 25% per annum as fair and reasonable. The Court affirmed the awards of moral and exemplary damages. The Court agreed that the award of attorney’s fees must be deleted because the trial court failed to justify such award in the body of its decision as required by Article 2208 of the Civil Code and pertinent precedent; the Court therefore deleted the award of attorney’s fees. No pronouncement as to costs was made.

Legal Basis and Reasoning

The Court applied established principles of contract interpretation, citing Civil Code, Article 1370 and Article 1374, and held that a contract’s stipulations must be read in context and construed together. The Court accepted the CA’s reading that interest was not chargeable during the first six-month option period but was chargeable during the second six-month repayment period, and that the expectation of payment within that period did not preclude the accrual of interest after maturity where the debtor remained in possession of the principal. The Court referenced precedent that continued possession of loan principal without payment constitutes unjust enrichment and that interest constitutes the price for the use of money. The Court found the 25% per annum compounded bank interest rate reasonable by analogy to its prior decisions upholding high contractual interest rates in commercial loans, citing Bautista v. P

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