Case Summary (G.R. No. 40681)
Petitioner
Philippine National Bank, a government-chartered banking institution that determined variable interest rates based on its prime rate plus a spread, applied unilaterally determined rates to the loan.
Respondents
AIC Construction Corporation and spouses Rodolfo C. Bacani and Ma. Aurora C. Bacani, borrowers and guarantors who challenged the validity and excessiveness of interest and penalty charges and sought exemption of their family home from foreclosure.
Key Dates
• 1988: Current account opened; July 4, 1989: P10 million credit line granted.
• September 1998: Loan maturity—principal and capitalized interest totaled ₱65 million.
• April 30, 2001: Final demand for ₱140,837,511.29.
• January–February 2002: Foreclosure notices issued; complaint filed February 27, 2002.
• December 5, 2013: RTC decision dismissing complaint; February 5, 2015: denial of reconsideration.
• October 11, 2016: Court of Appeals decision modifying interest and penalties; December 28, 2016: denial of CA reconsideration.
• October 13, 2021: Supreme Court decision.
Applicable Law
• 1987 Philippine Constitution – equitable protection, freedom to contract subject to public welfare.
• Civil Code Articles 1306 (freedom of contract) and 1308 (mutuality principle).
• Republic Act No. 3765 (Truth in Lending Act).
• Nacar v. Gallery Frames (legal interest rate).
• Jurisprudence on unconscionable interest (Vitug v. Abuda; Castro v. Tan; Spouses Silos v. PNB).
Factual Background
PNB’s credit agreement provided that interest would accrue at “the rate per annum which is determined by the Bank to be the Bank’s prime rate plus applicable spread in effect as of the date of the relevant availment.” Over ten years, PNB capitalized interest and continuously increased the credit line to ₱65 million. Respondents’ proposals to extinguish the debt by dacion en pago were not accepted. Foreclosure ensued, including the family home.
Procedural History
Respondents filed for annulment of interest and penalty charges, accounting, exemption of family home, and damages. The Regional Trial Court dismissed their complaint for lack of proof of inequitable interest. On appeal, the Court of Appeals held PNB acted in good faith but found the interest and penalties unconscionable, applied the 12% legal rate, and excluded penalties from the secured amount. PNB petitioned for certiorari.
Issue
Whether the Court of Appeals erred in declaring PNB’s variable interest rates and penalty charges usurious and unconscionable and in applying the legal interest rate in lieu of the contractual rates.
Supreme Court’s Analysis
The Court affirmed the CA ruling under the 1987 Constitution. It reaffirmed the principle of mutuality (Art. 1308): contractual validity or compliance cannot be left to one party’s will. Monetary interest may be stipulated freely (Art. 1306) but must not be iniquitous or unconscionable. The Court cited Vitug v. Abuda and Castro v. Tan to underscore judicial power to equitably reduce unfair interest and cited Nacar for the 12% legal rate where market rates violate public morals.
Principle of Mutuality and Equitable Reduction of Unconscionable Interest
Interest provisions that allow unilateral, subjective determination by the lender—without true meeting of the minds on rate or spread—violate mutuality and public policy. Even knowing and voluntary agreements may be equitably reduced if found “immoral and unjust,” given market imperfections and unequal bargaining power. Truth in Lending Act (RA 3765) requires full disclosure of credit costs; failure to do so exposes the lender to sanctions.
Application to the Present C
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Facts of the Case
- In 1988, AIC Construction Corporation opened a current account with Philippine National Bank (PNB); in 1989, PNB granted an omnibus credit line of ₱10 million.
- The loan agreement provided that interest on each availment would be “at the rate per annum which is determined by the Bank to be the Bank’s prime rate plus applicable spread in effect as of the date of the relevant availment.”
- The spouses Rodolfo and Ma. Aurora C. Bacani executed a real estate mortgage over several parcels as security and bound themselves as joint and several debtors.
- Over the years the credit line grew to ₱65 million—₱40 million principal plus ₱25 million interest capitalized into the principal—when it matured in September 1998.
- AIC Construction proposed to settle the loan by dacion en pago of its properties; the parties failed to agree on valuation and terms.
- On April 30, 2001, PNB made final demand for ₱140,837,511.29; upon nonpayment, the mortgaged properties were foreclosed, and a sheriff’s sale was scheduled for February 26, 2002.
- On February 27, 2002, respondents filed suit for annulment of interest and penalty increases, accounting, exemption of family home, and damages, alleging bad faith delay in accepting the dacion proposal, arbitrary valuation policies, inclusion of an exempt family home in the mortgage, and unconscionable interest and penalties.
Procedural History
- The Regional Trial Court (RTC) dismissed the complaint on December 5, 2013 for failure to prove iniquitous or unconscionable interest and unspecified rates; its denial of reconsideration followed on February 5, 2015.
- AIC Construction and the Bacani Spouses appealed to the Court of Appeals (CA).
- On October 11, 2016, the CA affirmed that there was no binding dacion en pago and that PNB acted in good faith but found the interest rates and penalty charge unconscionable and usurious. It applied the 12% legal rate and struck down penalties.
- The CA denied reconsideration on December 28, 2016.
- PNB filed a Petition for Review on Certiorari under Rule 45, which was docketed as G.R. No. 228904.
Issue
- Whether the CA erred in holding that PNB’s interest charges were usurious and unconscionable and in applying the legal rate of interest to the parties’ loan.
RTC Ruling
- Dismissed respondents’ complaint for failing to prove that the interest and penalties were iniquitous or unconscionable.
- Held that plai