G.R. No. 258526 - Manila Credit Corporation vs. Ramon S. Viroomal and Anita S. Viroomal

Case Summary (G.R. No. 258526)

Factual Background

In September 2009 respondents obtained a loan from MCC evidenced by Promissory Note No. 7155 (PN No. 7155) for PHP 467,600.00 payable in sixty months with a stipulated interest rate of 23.36% per annum and secured by a real estate mortgage over TCT No. (92517) 72248. Respondents later restructured the loan and executed Promissory Note No. 8351 (PN No. 8351) for PHP 495,840.00 payable in eighty-four months at 24.99% per annum, which purportedly represented the unpaid balance of PN No. 7155 plus interests and penalties. Respondents made numerous payments and later claimed they had paid a total of PHP 1,175,638.12; MCC demanded PHP 549,029.69 as outstanding as of October 15, 2016 and proceeded to extra-judicial foreclosure.

Trial Court Proceedings

Respondents filed Civil Case No. 2017-79 for declaration of nullity of the real estate mortgage, injunction, and specific performance, with prayer for injunctive relief. The RTC found that MCC had unilaterally imposed an effective interest rate of three percent per month (an annual EIR of 36%) in addition to the stipulated 23.36% per annum and other penalty and collection charges, and that the compounded interests and penalties were grossly excessive, unconscionable, and contrary to law and morals. The RTC reduced the interest to the legal rate of 12% per annum on the original principal, declared PN No. 7155 fully paid, held PN No. 8351 void ab initio for lack of consideration, ordered return of overpayment, and directed cancellation of the title consolidated in MCC’s name.

Court of Appeals Decision

The Court of Appeals affirmed the RTC. The CA found that MCC charged an additional 3% monthly EIR on delayed balances on top of the stipulated monetary interest, daily interest of 1/10 of 1% for every day overdue, a monthly penalty of 1.5%, and a PHP 100 collection fee, resulting in an aggregate rate the CA computed as exorbitant and unconscionable. Applying equitable reduction, the CA concluded that the compounded interests and penalty charges were void, that PN No. 7155 had been fully paid after accounting for payments made, that PN No. 8351 lacked consideration, and that the foreclosure and consolidation of title in MCC were void.

Issues Presented

The principal issues were whether the additional EIR and the compounded penalty and charges imposed by MCC were valid and enforceable; whether PN No. 7155 remained unpaid or had been fully settled after equitable reduction of unconscionable interest; whether PN No. 8351 was a valid instrument supported by consideration; and whether the foreclosure and consolidation of title were void.

Parties' Contentions

MCC contended that the contractual terms, including the stipulated interest and penalty charges, had the force of law between the parties, that the EIR and other charges were expressly disclosed and imposed for definite periods, and that respondents were estopped from assailing the contract after having benefited from the loan proceeds. Respondents maintained that MCC operated a predatory lending scheme, that the EIR and compounded penalties were surreptitiously imposed and rendered the obligations unconscionable and immoral, and that the payments they made exceeded the lawful indebtedness.

Supreme Court's Ruling

The Supreme Court denied the petition and affirmed the CA decision with modification. The Court held that the three percent monthly EIR was not binding because it was not stipulated in PN No. 7155 and was unilaterally imposed by MCC, thus violating mutuality under Article 1308 of the Civil Code. The Court further declared the compounded penalty rates and other iniquitous charges void as contrary to morals and public policy under Article 1409, equitably reduced the rates to the applicable legal interest, and found that upon application of the legal rate and deduction of payments the obligation under PN No. 7155 had been fully paid. Consequently, PN No. 8351 was void for lack of consideration and the foreclosure and consolidated title in MCC were void.

Legal Reasoning

The Court applied the principle of autonomy of contracts tempered by Article 1306, holding that parties may stipulate terms except where contrary to law, morals, good customs, public order, or public policy. The Court relied on precedent that a rate of three percent per month (36% per annum) is excessive and unconscionable when it far exceeds the prevailing legal rate and other market benchmarks, citing Megalopolis Properties, Inc. v. D 'Nhew Lending Corporation and earlier cases such as Chua v. Timan. The Court observed that the EIR here was compounded monthly and was charged in addition to the stipulated interest and penalties, causing exponential growth of the indebtedness and misleading respondents. The Court invoked Article 1409 to declare contracts or stipulations contrary to morals void ab initio and Article 1420 to separate and enforce the legal terms from the illegal ones. The Court further relied on Article 1229 to equitably reduce penalties when the debtor has substantially complied. Having found no justification offered by MCC for the exorbitant rates, the Court reduced the interest to the legal rate and treated the unconscionable stipulations as if not written.

Computation and Monetary Relief

The Court applied the legal interest rate of 12% per annum as the benchmark from the date of the contract in September 2009 to compute whether PN No. 7155 remained outstanding after applying payments shown in MCC’s statements of account. The Court concluded that respondents had fully paid PN No. 7155 as early as August 2012 and had an overpayment of PHP 203,532.47 by January 2014. The Court ordered MCC to refund respondents PHP 203,532.47 for PN No. 7155 in addition to PHP 417,859.58 representing payments under PN No. 8351, with legal interest at six percent per annum from the date of filing of the complaint until finality, and with all monetary awards to earn six percent per annum from finality until f

Case Syllabus (G.R. No. 258526)

Parties and Posture

Manila Credit Corporation filed a Petition for Review on Certiorari under Rule 45 assailing the Court of Appeals' decision and resolution.
Ramon S. Viroomal and Anita S. Viroomal are the borrowers and respondents in the petition who opposed the foreclosure and sought declaration of nullity of the real estate mortgage.
The Regional Trial Court, Paranaque City, Branch 258, rendered the judgment in favor of the respondents on March 3, 2020, which the Court of Appeals affirmed on July 6, 2021 and denied reconsideration on December 22, 2021.
The Supreme Court denied the petition and affirmed the CA decision with modification in the dispositive reliefs.

Key Factual Allegations

The respondents obtained a loan under Promissory Note No. 7155 for PHP 467,600.00 payable in sixty months with a stated interest rate of 23.36% per annum.
The loan was secured by a real estate mortgage covering Transfer Certificate of Title No. (92517) 72248 in Paranaque City.
The respondents executed a second promissory note, PN No. 8351, for PHP 495,840.00 payable in eighty-four months at 24.99% per annum, which MCC stated represented unpaid balance, interests, and penalties.
MCC imposed additional charges including a company policy 3% per month effective interest rate (EIR), a daily interest of 1/10 of 1%, a penalty of 1.5% per month, and a PHP 100 collection fee, all compounded monthly.
MCC proceeded with extra-judicial foreclosure after demanding full payment, and the mortgaged title was consolidated in MCC's name as TCT No. 010-2019001298.

Contract Terms

PN No. 7155 provided for monetary interest of 23.36% per annum and monthly amortizations of PHP 16,895.77 over five years.
PN No. 7155 also contained a stipulation for "an interest of 1/10th of 1% for every day" of delay, "penalty of 1.5% per month," and a "collection fee of P100.00," all of which were to be compounded monthly.
The 3% per month EIR was not stated in PN No. 7155 and was reflected only in MCC's disclosure statement according to the record.

Trial Court Findings

The RTC declared the compounded interests imposed in PN No. 7155 void as grossly excessive, unconscionable, and contrary to law, and equitably reduced the interest to the legal rate of 12% per annum.
The RTC concluded that PN No. 7155 had been fully paid and that PN No. 8351 was void ab initio for lack of consideration because it represented illegally compounded interests.
The RTC ordered restitution for overpayment and directed the Registry of Deeds to cancel MCC's title and reinstate TCT No. 72248 in the name of Ramon.

Court of Appeals Ruling

The CA affirmed the RTC ruling and held that MCC imposed an EIR of 36% per annum equivalent to 3% per month which was charged on top of other penalties and charges.
The CA found that the total charges amounted to an effective rate of approximately 77.36% per annum and were therefore exorbitant and unconscionable.
The CA declared the compounded interests and penalty charges void, held PN No. 7155 fully paid after reduction to legal interest, and voided PN No. 8351, reinstating the mortgagor's title.

Issues Presented

Whether the 3% per month EIR and the compounded penalties and charges imposed by petitioner are valid and enforceable.
Whether PN No. 7155 was fully paid after applying a lawful interest rate and deducting payments.
Whether PN No. 8351 is void for lack of conside