Case Summary (G.R. No. 233974)
Key Dates and Procedural Posture
Loan and mortgage executed December 6, 2004; Kasulatan ng Pautang executed December 8, 2005; extrajudicial demand dated November 16, 2006; complaint for judicial foreclosure filed July 19, 2007 (judicial demand recorded July 24, 2007); RTC decision rendered December 10, 2012; CA decision rendered May 31, 2017; CA resolution denying partial reconsideration dated August 24, 2017; Supreme Court disposition filed July 2, 2018.
Applicable Law and Precedents
Governing civil-law provisions and principles applied include the Civil Code rules on loans and interest (including the legal rate applied in the absence of a valid stipulation), Article 2212 on interest earning interest from judicial demand, and Article 2208 on attorney’s fees. The decision applies established jurisprudence such as Eastern Shipping Lines, Security Bank, Spouses Toring, Spouses Abella, Nacar v. Gallery Frames, and related authorities addressing (a) the distinction between monetary (contractual) interest and compensatory (penal) interest, (b) the court’s power to strike unconscionable stipulated interest and substitute the prevailing legal rate as of the time the loan was perfected, and (c) the requisites for awarding attorney’s fees.
Factual Background
Petitioners obtained P100,000 from respondent, with a stipulated interest of 10% per month and a mortgage over the subject TCT as security. Petitioners defaulted; respondent sought barangay assistance and executed a Kasulatan ng Pautang. After continued nonpayment, respondent issued a demand letter (signed receipt evidence), and ultimately filed a petition for judicial foreclosure. Petitioners contended the instrument was a mere loan (not a real estate mortgage), asserted the 10% per month rate was unconscionable, and argued lack of authority to mortgage the property because title was in Edilberto’s name.
RTC Ruling
The Regional Trial Court found petitioners admitted the loan and that the mortgage was annotated on the TCT. Recognizing a real estate mortgage as security (not satisfaction), the RTC held petitioners solidarily liable for the debt and granted judicial foreclosure. The RTC ordered payment of P100,000 with 12% interest per annum from December 2007 until fully paid and awarded P20,000 attorney’s fees; it alternatively provided for foreclosure and sale of the mortgaged property if the amounts were not paid or deposited within six months.
Court of Appeals Ruling
The Court of Appeals affirmed with modifications. It ordered payment of P100,000 principal; monetary interest of 12% per annum computed from November 16, 2006 until full payment; legal interest of 6% per annum on sums due from finality of CA decision until full payment; and P20,000 attorney’s fees. The CA found proof that the demand letter was received, struck down the 10% per month stipulated rate as exorbitant, and rejected the RTC’s alternative remedies as mutually exclusive (treating the action essentially as an action to collect sums rather than an immediate foreclosure).
Issues Presented to the Supreme Court
The Supreme Court addressed whether the CA erred (a) in imposing 12% per annum interest on the principal obligation until full payment, and (b) in awarding attorney’s fees to respondent.
Supreme Court Analysis — Interest
The Court reiterated the distinction between monetary (contractual) interest—established by agreement—and compensatory interest—imposed by law or court as indemnity for delay. Parties may stipulate monetary interest but courts may strike down rates that are excessive, unconscionable, or usurious; when the stipulated rate is nullified, the parties’ agreement to pay interest survives but the applicable rate becomes the legal rate in force at the time the loan was perfected. Applying that principle here, the Court found the 10% per month stipulation unconscionable and therefore struck it down, substituting the prevailing legal rate at the time of contracting (12% per annum as of December 6, 2004). The Court therefore upheld the CA’s imposition of a straight monetary interest rate of 12% per annum on the principal, reckoned from extrajudicial demand (November 16, 2006) until finality of the Supreme Court ruling. The Court further held that the principal and the monetary interest themselves earn compensatory (legal) interest under Article 2212 from judicial demand—i.e., the monetary interest accrues interest from the filing of the complaint (July 24, 2007). Specifically, the Court ordered compensatory interest on the monetary interest at 12% per annum from July 24, 2007 to June 30, 2013, and ther
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Parties and Nature of Proceeding
- Petitioners: Catalina F. Isla, Elizabeth Isla, and Gilbert F. Isla (collectively, petitioners).
- Respondent: Genevira P. Estorga (also spelled "Genevera" in some parts of the rollo).
- Relief sought in Supreme Court: petition for review on certiorari from the Decision dated May 31, 2017 and the Resolution dated August 24, 2017 of the Court of Appeals (CA) in CA-G.R. CV No. 101743, which had affirmed with modification the Regional Trial Court (RTC) Decision dated December 10, 2012 in Civil Case No. 07-0014.
- Subject matter: enforcement/collection of a loan secured by a real estate mortgage and attendant interest and costs (including attorney’s fees).
Relevant Documentary and Transactional Background
- Date of loan: December 6, 2004.
- Principal amount: P100,000.00.
- Terms as stipulated by parties: payable anytime from six (6) months to one (1) year; stipulated interest of ten percent (10%) per month, payable on or before the end of each month.
- Security: a Deed of Real Estate Mortgage dated December 6, 2004 over a parcel of land in Pasay City, covered by Transfer Certificate of Title (TCT) No. 132673, registered under the name of Edilberto Isla (Edilberto), who is married to petitioner Catalina (referred to in the source as the subject property and the subject mortgage).
- Extrajudicial and intermediate steps: barangay-assisted compromise resulting in a Kasulatan ng Pautang dated December 8, 2005; demand letter dated November 16, 2006 (registry return receipt bearing Catalina’s signature acknowledged by the CA); Petition for Judicial Foreclosure filed (petition dated July 19, 2007; complaint filing dated July 24, 2007 per judicial demand reference).
Petitioners’ Primary Contentions (as presented in the record)
- The annotated instrument over TCT No. 132673 is not a real estate mortgage but a mere loan.
- The stipulated interest rate of ten percent (10%) per month is exorbitant and grossly unconscionable.
- Petitioners were not absolute owners of the subject property (it was registered in Edilberto’s name), hence they could not have validly constituted a mortgage thereon.
RTC Decision (Regional Trial Court, Pasay City, Branch 112)
- Date of decision: December 10, 2012 (Presiding Judge Jesus B. Mupas).
- Findings:
- Petitioners admitted they obtained a P100,000.00 loan secured by a real estate mortgage and that the mortgage was annotated on TCT No. 132673.
- The real estate mortgage is a security and not a satisfaction of indebtedness.
- Petitioners are solidarily liable to pay the indebtedness and respondent may foreclose the subject mortgage should they fail to fulfill their obligation.
- Directives/awards:
- Order petitioners to pay respondent P100,000.00 with twelve percent (12%) interest per annum from December 2007 until fully paid.
- Award attorney’s fees of P20,000.00.
- Alternative remedy: if petitioners failed to pay or deposit the amounts within six (6) months from receipt of a copy of the RTC Decision, the subject property would be foreclosed and sold at public auction to satisfy the mortgage debt; surplus, if any, to be delivered to petitioners with reasonable interest under the law.
- Appeal: respondent (as prevailing party in RTC) appealed to the Court of Appeals.
Court of Appeals Decision and Rationale
- Date of CA decision: May 31, 2017 (Associate Justice Nina G. Antonio-Valenzuela, with Associate Justices Jose C. Reyes, Jr. and Stephen C. Cruz concurring).
- Ruling (affirmed with modification):
- Ordered petitioners to pay respondent:
- (a) P100,000.00 (principal);
- (b) interest equivalent to twelve percent (12%) of P100,000.00 computed per year from November 16, 2006 until full payment (interest on the loan);
- (c) legal interest equivalent to six percent (6%) per annum on sums due in (a) and (b) from finality of CA Decision until full payment; and
- (d) P20,000.00 as attorney’s fees.
- Ordered petitioners to pay respondent:
- Key factual finding: registry return receipt bearing Catalina’s signature established that petitioners received the demand letter dated November 16, 2006.
- Legal determinations:
- Disagreed with RTC’s alternative remedies (holding foreclosure and collection together as mutually exclusive) and reasoned that because the Petition for Judicial Foreclosure functioned as an action to collect a sum of money, respondent was barred from causing foreclosure of the subject mortgage.
- Determined the RTC erred in imposing 12% per annum from December 2007 and deemed the stipulated 10% per month exorbitant.
- Exercised its equitable discretion to award attorney’s fees in the amount of P20,000.00, stating the award was made "upon equity and in the exercise of [its] discretion."
- Procedural follow-up: petitioners filed a motion for partial reconsideration (June 23, 2017) seeking deletion of attorney’s fees; CA denied the motion in a Resolution dated August 24, 2017.
Issues Presented to the Supreme Court
- Whether the Court of Appeals erred in awarding:
- (a) twelve percent (12%) interest on the principal obligation until full payment; and
- (b) attorney’s fees in the amount of P20,000.00.
Supreme Court Ruling — Overview and Disposition
- Decision date: July 02, 2018 (Second Division; Perlas-Bernabe, J., penned the decision; Carpio (Chairperson), Peralta, Caguioa, and Reyes, Jr., JJ., concur).
- Disposition: petition is PARTIALLY GRANTED; the CA Decision dated May 31, 2017 and the CA Resolution dated August 24, 2017 are MODIFIED.
- Specific orders as modified by the Supreme Court:
- Petitioners are ORDERED to pay respondent:
- (a) P100,000.00 representing the principal loan obligation;
- (b) Monetary interest on the principal loan obligation at the rate of twelve percent (12%) per annum from the date of default, i.e., extrajudicial demand on November 16, 2006, until finality of this ruling;
- (c) Compensatory interest on the monetary interest as stated in letter (b) at the rate of twelve percent (12%) per annum from judicial demand, i.e., July 24, 2007, to June 30, 2013, and thereafter at the rate of six percent (6%) per annum from July 1, 2013 until finality of this ruling;
- (d) Legal interest at the rate of six percent (6%) per annum imposed on the sums due in letters (a), (b), and (c) from finality of this ruling until full payment.
- The award of
- Petitioners are ORDERED to pay respondent: