Title
Marilag vs. Martinez
Case
G.R. No. 201892
Decision Date
Jul 22, 2015
A loan with excessive 5% monthly interest led to judicial foreclosure. Overpayment by respondent triggered solutio indebiti; litis pendentia barred petitioner’s collection suit. Interest reduced to 1% monthly.

Case Summary (G.R. No. 201892)

Key Dates

Loan and mortgage executed: July 30, 1992.
RTC‑Imus foreclosure decision (reducing interest): January 30, 1998.
Promissory note by respondent: February 20, 1998.
Collection complaint filed before court a quo: July 2, 1998.
Court a quo Decision (favoring respondent/refund): August 28, 2003.
Court a quo Orders reversing decision: November 3, 2003 and January 14, 2004.
CA Decision reinstating August 28, 2003: November 4, 2011; CA Resolution denying reconsideration: May 14, 2012.
Supreme Court final disposition affirmed with modifications: July 22, 2015.

Applicable Law and Authorities

Constitutional basis: 1987 Philippine Constitution (applicable to decisions dated 1990 or later).
Relevant statutory and code provisions and rules cited in the record: Rule 68, Rules of Court (judicial foreclosure); Articles 2154 and 2163 (solutio indebiti / mistake in payment); Article 1293 (novation); Article 2208 (attorney’s fees); Central Bank Circular No. 905 (suspension of Usury Law). Precedent authorities cited include Bachrach Motor Co. v. Icarangal, Suico Rattan & Buri Interiors, Agner v. BPI Family Savings Bank, and others as appearing in the record.

Underlying Facts

Rafael obtained a loan of P160,000 on July 30, 1992, secured by a real estate mortgage, with a stipulated interest of 5% per month and a six‑month maturity. Rafael defaulted. Petitioner instituted judicial foreclosure (RTC‑Imus) on November 10, 1995. The RTC‑Imus, after ex parte proceedings, issued a decision on January 30, 1998 declaring the stipulated 5% monthly interest usurious and reducing it to 12% per annum, and adjudging Rafael liable for P229,200 (principal plus reduced interest). The record does not show that the RTC‑Imus decision became final.

Promissory Note, Payments and Subsequent Events

Respondent agreed to pay Rafael’s obligation and made payments totaling P400,000. He executed a promissory note dated February 20, 1998 for P289,000 representing the balance allegedly owed. After learning of the RTC‑Imus January 30, 1998 decision, respondent refused further payment on the PN. Petitioner then filed a collection suit against respondent on July 2, 1998. Respondent answered and filed a compulsory counterclaim seeking the return of excess payments and other relief.

Court a Quo: Initial Decision and Reconsideration

In its August 28, 2003 Decision the court a quo denied petitioner recovery on the PN, reasoning that the foreclosure proceeding and the judicial determination in RTC‑Imus established the amount due on the original loan (P229,200), and respondent had already paid sums in excess of that amount; the court therefore found a quasi‑contract (solutio indebiti) and ordered petitioner to refund the excess (with 6% interest) and pay costs and attorney’s fees. On petitioner’s motion for reconsideration, the court a quo recalled and set aside the August 28, 2003 Decision (November 3, 2003 Order), holding that foreclosure and collection are distinct remedies, that the 5% monthly interest was no longer usurious due to Central Bank Circular 905, and directing respondent to pay P289,000 plus legal interest, attorney’s fees and costs. A subsequent motion for reconsideration by respondent was denied (January 14, 2004).

Court of Appeals Ruling

The Court of Appeals recalled the court a quo’s November 3 and January 14 orders and reinstated the August 28, 2003 Decision. The CA invoked res judicata (as broadly stated in its decision) on the ground of substantial identity between the judicial foreclosure and the collection claims, concluding that the judgment in the foreclosure case was final and conclusive on the collection suit.

Issue Before the Supreme Court

Whether the Court of Appeals erred in upholding dismissal of the collection case and reinstating the court a quo’s August 28, 2003 Decision that ordered refund of excess payments.

Supreme Court: Res Judicata and Litis Pendentia Analysis

The Supreme Court denied the petition. It began by stating the elements of res judicata: finality of the prior judgment; jurisdiction; disposition on the merits; and identity of parties, subject matter and causes of action. The Court found res judicata inapplicable because the records did not show that the RTC‑Imus foreclosure decision had attained finality (no entry of judgment was shown), so the first element (finality) was missing. Notwithstanding that finding, the Court held the collection suit was barred by litis pendentia because the foreclosure action was pending and there existed substantial identity of parties, rights asserted and relief sought. The Court explained that litis pendentia applies where two actions between the same parties for the same cause are simultaneously pending such that a second action becomes unnecessary and vexatious; the requisites are identity of parties (or parties representing same interests), identity of rights and relief founded on same facts, and that any judgment in the pending case would amount to res judicata in the other. The Court applied the rule that a creditor‑mortgagee has a single cause of action for recovery of the debt (by personal action) or foreclosure of mortgage (real action under Rule 68); these remedies are alternative and exclusive such that the filing of foreclosure precludes a subsequent personal action for the same debt (except for recovery of a deficiency after auction). Because petitioner had chosen foreclosure, her subsequent collection action was barred under litis pendentia even though the foreclosure decision was not final.

Novation and the Nature of the Promissory Note

The Supreme Court rejected petitioner’s argument that the collection action enforced independent rights because the promissory note constituted a separate contract. The Court found no evidence of novation. Novation is never presumed and must be shown by express agreement or equivalent acts; the record did not show extinguishment of the original loan. Rather, the promissory note’s text and surrounding circumstances indicated that the PN was executed in behalf of Rafael and reflected the same consideration as the original loan: respondent assumed payment on Rafael’s obligation and made payments; acceptance of payment by a creditor from a third person ordinarily results in addition of debtors, not novation. Therefore the PN did not create a distinct cause of action permitting a separate collection suit.

Interest Rate: Usury, Reduction and Legal Basis

Although several courts had addressed Central Bank Circular No. 905 and the suspension of the Usury Law, the Supreme Court held that stipulated interest at 5% per month was excessive and unconscionable under prevailing jurisprudence cited in the record. The Court reaffirmed that rates of 3% per month or higher have been declared excessive in prior cases and that Circular 905 does not authorize unconscionable rates. Equitably, the Court reduced the 5% monthly rate to 1% per month, equivalent to 12% per annum, reckoned from the execution of the mortgage (July 30, 1992). The Court applied t

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