Case Summary (G.R. No. 174433)
Key Dates and Procedural Milestones
- Original real estate mortgage executed: November 3, 1993.
- Renewal and increase of credit facility: September 20, 1996 (renewed to P7,000,000 and supplemental mortgage executed to add additional TCT).
- Alleged last payment of interest by borrowers: December 1997.
- Foreclosure sale and Certificate of Sale issued to PNB: November 13, 2000.
- Trial court (RTC) decision: rendered in favor of PNB (date not specified in prompt).
- Court of Appeals (CA) decision: promulgated March 28, 2006 (affirmed foreclosure validity but modified interest liability and ordered recomputation/refund if applicable).
- Supreme Court decision: affirmed CA on February 24, 2014 (decision uses 1987 Constitution as applicable).
Applicable Law and Legal Authorities
- 1987 Philippine Constitution (applicable by instruction given the decision date).
- Civil Code provisions cited: Article 1308 (mutuality of contracts) and Article 1956.
- Act No. 3135 (requirements for notice and publication in extrajudicial foreclosure of mortgages) — specifically Section 3.
- Rules of Court: Section 5, Rule 10 (amendment to conform to or authorize presentation of evidence) and Section 15, Rule 44 (errors on appeal limited to issues raised in trial court).
- Relevant jurisprudence invoked: Eastern Shipping Lines, Philippine Savings Bank v. Castillo, Philippine National Bank v. Court of Appeals, Floirendo, Jr. v. MBTC, and decisions concerning post-2013 legal interest rate changes (Nacar v. Gallery Frames; S.C. Megaworld Construction v. Parada).
Factual Background
The Spouses Manalo applied for and obtained a P1,000,000 All-Purpose Credit Facility from PNB to finance house construction. They executed a real estate mortgage as security. The loan and mortgage were renewed and increased over time, culminating in a P7,000,000 renewal in 1996 and a supplement to the mortgage adding another titled property (in the names of their children) as security. The parties agreed that the Spouses Manalo would pay interest monthly. PNB alleges the last recorded interest payment was December 1997; PNB issued demand letters for the overdue account and, after continued nonpayment, extrajudicially foreclosed the mortgage and purchased the foreclosed property at the sheriff’s sale for P15,127,000, receiving a Certificate of Sale dated November 13, 2000.
Plaintiffs’ Allegations and Reliefs Sought
More than a year after PNB received the Certificate of Sale, the Spouses Manalo filed suit to nullify the foreclosure proceedings and for damages. Key allegations included: (1) that the P1,000,000 disbursement involved a third party (Benito Tan) arranged by Yuvienco and was intended to update the account and restructure the loan into a long-term facility; (2) surprise at being declared in default and at the subsequent foreclosure and sale; and (3) that PNB failed to comply with the notice and publication requirements of Section 3 of Act No. 3135.
PNB’s and Yuvienco’s Defense
PNB and Yuvienco countered that the P1,000,000 loan from Benito Tan had been credited to the Spouses Manalo’s account; that no assurances were given regarding loan conversion or restructuring; that the validity of the loans and mortgage was unquestioned by the Spouses Manalo until after foreclosure; and that the Spouses Manalo did not allege full payment of the obligations. PNB maintained that foreclosure was warranted.
Trial Court (RTC) Findings
The RTC found for PNB. It observed that during pre-trial the Spouses Manalo had stipulated that PNB had the right to foreclose, while their main contention was invalidity of the foreclosure proceedings; later the plaintiffs shifted to argue the loan documents were contracts of adhesion and that interest and penalties were iniquitous. The RTC held that because the adhesion/interest issues were not raised at pre-trial they were presumptively excluded, but noted that PNB had not objected to these matters being presented as evidence and had even rebutted them in its memorandum. On the merits the RTC held: (a) the contracts were not contracts of adhesion because the Spouses Manalo accepted the terms and had attempted to pay; (b) the Spouses Manalo were estopped from contesting the interest rates because they had paid those rates for three years without protest; and (c) personal notice under Act No. 3135 was not required and the publication/notice allegations failed.
Court of Appeals (CA) Ruling
The CA affirmed the RTC’s finding as to the validity of the foreclosure but modified the Spouses Manalo’s liability for interest. The CA: (a) applied Article 1956 to hold that the express agreement to pay interest in the credit agreements did not excuse the omission of a specific rate, but construed the omission against PNB under the doctrine contra proferentem because the documents were contracts of adhesion prepared solely by PNB; (b) held that PNB could not unilaterally increase interest rates absent proof of prior notice to the borrowers as required in the contract; and (c) declared unilateral increases null and void as violative of Article 1308’s mutuality requirement. Relying on Eastern Shipping Lines, the CA fixed the interest payable by the Spouses Manalo at 12% per annum from default. The CA also found sufficient proof of compliance with Act No. 3135’s posting and publication requirements (sheriff’s testimony and affidavit of publication), and ordered recomputation of indebtedness with immediate refund to the Spouses Manalo if the recomputed amount was less than the winning bid, plus interest on any refund.
Issues on Appeal to the Supreme Court
PNB’s principal contentions raised questions of (1) procedure: whether the CA erred by adjudicating the validity of interest rates and increasing them on grounds not raised at trial and first invoked on appeal; and (2) substance: whether the CA correctly found a lack of mutuality in the imposition and increases of interest rates and whether the Spouses Manalo’s conduct (payment without protest and repeated renewals) estopped them from challenging the rates.
Supreme Court — Procedural Analysis and Ruling
The Supreme Court held that the validity of the interest rates, the increases, and the mutuality issue were not raised for the first time on appeal. The Judicial Affidavit of Enrique Manalo introduced factual allegations addressing the preparation of promissory instruments by PNB, the absence of stipulation of interest rate, the range and variability of rates imposed, and lack of notice or consent to rate changes. PNB cross-examined Enrique Manalo on that affidavit without timely objection to its substantive import; hence the issues were tried by implied consent. The Court relied on Section 5, Rule 10 of the Rules of Court and controlling authority establishing that issues tried with the express or implied consent of the parties are to be treated as if they had been pleaded, and that failure to formally amend pleadings does not vitiate adjudication on such issues if no surprise or prejudice resulted. The Court also rejected PNB’s contention that the affidavit was admissible only for identification, finding the situation fell within the first scenario under Section 5, Rule 10 (evidence on an unpleaded issue offered and not objected to), making the evidence properly part of the record for adjudication.
Supreme Court — Substantive Analysis on Interest and Mutuality
On the substantive point, the Supreme Court accepted the CA’s characterization of the credit agreements as contracts of adhesion inasmuch as they were prepared solely by PNB and permitted PNB unilateral discretion to determine and change applicable interest (stated as “prime rate plus spread, prevailing at the current month”). The Court reaffirmed that Article 1308 requires mutuality and that contractual validity or compliance cannot be left to the will of one party. A stipulation that allows unilateral determination of a contract’s essential terms (here, the interest rate) vitiates mutuality and tends to render the provision void as partaking of a contract of adhesion. The Court cited precedent (including Philippine Savings Bank v. Castillo and Philippine National Bank v. Court of Appeals) holding that a borrower is not estopped from assailing unilateral interest increases and that silence does not amount to assent to modifications of contractual terms. The Court additionally emphasized that the credit agreements themselves required prior notice before interest increases and found that PNB did not prove that such notice was given; thus the unilateral increases violated express contractual stipulations and were null and void.
Remedy Adopted and Rationale for the Interest Rate Fixing
Because the varying interest rates imposed by PNB were vacated, the Court upheld the CA’s decision to fix an interest rate of 12% per annum computed from default for the Spouses Manalo’s obligations, relying on Eastern Shipping Lines precedent. The Court explained that the refund ordered
Case Syllabus (G.R. No. 174433)
Procedural Posture and Ultimate Disposition
- Petition for review to the Supreme Court from the decision of the Court of Appeals in CA-G.R. CV No. 84396 promulgated March 28, 2006.
- The Supreme Court affirmed the Court of Appeals decision insofar as it upheld the validity of the foreclosure but modified the remedy concerning the interest and refund computation.
- The Supreme Court directed petitioner Philippine National Bank (PNB) to recompute respondents' indebtedness under RTC supervision, to refund any excess of the winning bid over recomputed indebtedness, with prescribed interest rates and costs of suit; ordered interest chronology for refunds and post-judgment accrual consistent with Nacar v. Gallery Frames and MB Circular No. 799 applications.
Antecedent Facts (Loans, Mortgages, Renewals)
- Respondent Spouses Enrique Manalo and Rosalinda Jacinto applied for an All-Purpose Credit Facility with PNB for P1,000,000.00 to finance house construction.
- A Real Estate Mortgage was executed on November 3, 1993 in favor of PNB over property covered by Transfer Certificate of Title No. S-23191 as security for the loan.
- The credit facility was renewed and increased several times; on September 20, 1996 the facility was renewed for P7,000,000.00.
- A Supplement to and Amendment of Existing Real Estate Mortgage was executed adding the property covered by TCT No. 171859 as security; additional security was registered in the names of Arnold, Arnel, Anthony, and Arma Manalo—children of the Spouses Manalo.
- It was agreed Spouses Manalo would make monthly payments on interest; PNB claimed last recorded payment was December 1997.
- PNB sent at least two demand letters for the overdue account; Spouses Manalo failed to settle; PNB foreclosed the mortgage.
Foreclosure Sale and Certificate of Sale
- At foreclosure sale PNB was the highest bidder for P15,127,000.00 for the mortgaged properties.
- The sheriff issued to PNB a Certificate of Sale dated November 13, 2000.
- More than a year after issuance of the Certificate of Sale, the Spouses Manalo instituted an action for nullification of the foreclosure proceedings and for damages.
Plaintiffs' (Spouses Manalo) Claims in Their Complaint
- Alleged they obtained a P1,000,000.00 loan from Benito Tan arranged by Antoninus Yuvienco, then General Manager of PNB Bangkal Branch.
- Alleged they were made to understand and were assured the P1,000,000.00 would be used to update their account and that their loan would be restructured and converted into a long-term loan.
- Claimed surprise at being declared in default, foreclosure of mortgage, and sale of property.
- Alleged PNB did not comply with Section 3 of Act No. 3135, as amended (notice and publication requirements for sheriff’s sale).
Defenses and Counter-Assertions by PNB and Yuvienco
- PNB and Yuvienco asserted the P1,000,000.00 obtained from Benito Tan had been credited to the Spouses Manalo account.
- They denied making assurances on restructuring and conversion into a long-term loan.
- PNB asserted its right to foreclose was clear, Spouses Manalo had not assailed validity of loans or mortgage, and Spouses Manalo did not allege full payment of indebtedness.
- PNB and Yuvienco did not file appellate briefs despite notice at Court of Appeals.
Trial Court (RTC) Findings and Rationale
- During pre-trial (September 8, 2003) plaintiffs agreed to stipulate that defendants had the right to foreclose and that plaintiffs’ main thrust was to prove foreclosure invalidity.
- Plaintiffs later modified position during trial, alleging loan documents were contracts of adhesion prepared entirely under PNB supervision, and challenged interest rates and penalties as iniquitous and unconscionable.
- The RTC noted plaintiffs did not raise these issues at pre-trial, and thus were presumed estopped from using them; nonetheless, because PNB did not object to these matters being part of evidence, the court included these issues in resolution.
- RTC held plaintiffs’ contract-of-adhesion argument unfounded because they accepted terms and conditions and exerted efforts to pay obligations.
- RTC held plaintiffs were estopped from questioning interest rates since they had paid at those rates for three years without protest.
- RTC found allegation of PNB’s failure to comply with Act No. 3135 notice/publication requirements untenable, holding personal notice to the mortgagee was not required.
Court of Appeals Ruling and Modifications
- The CA affirmed the RTC insofar as it upheld the validity of the foreclosure proceedings, but modified the Spouses Manalo’s liability for interest.
- The CA directed the RTC to recompute indebtedness; if recomputed amount is less than winning bid in foreclosure sale, PNB must return the difference immediately to the Spouses Manalo.
- The CA addressed issues of PNB’s failure to specify applicable interest and lack of mutuality in credit agreements.
- Applying Article 1956 of the Civil Code, the CA held that the absence of a specified interest rate did not excuse payment because credit agreements expressly provided for payment of interest.
- The CA construed PNB’s inadvertence to specify the rate against PNB because credit agreements were contracts of adhesion prepared solely by PNB.
- The CA found PNB could not unilaterally increase interest rates because credit agreements required prior notice before increase; PNB failed to prove notice was given; unilateral imposition of increased rates was null and void as violative of mutuality of contracts (Article 1308).
- The CA characterized the credit agreements as contracts of adhesion and emphasized the borrowers’ inferior bargaining position due to dire need of funds.
- Relying on Eastern Shipping Lines v. Court of Appeals, the CA fixed the interest rate at 12% per annum computed from default.
- On notice and publication under Act No. 3135, the CA found sheriff’s testimony and notarized affidavit of publication sufficient; the affidavit enjoyed presumption of regularity and plaintiffs’ bare allegation of non-publication did not overcome presumption.
- CA denied Spouses Manalo’s motion for reconsideration and PNB’s partial motion for reconsideration on August 29, 2006.
Issues Raised by Petitioner PNB in the Supreme Court Memorandum
- Issue I: Whether the CA was correct in nullifying the interest rates imposed on respondents’ loan and fixing them at 12% per annum despite assertions that (i) the matter was raised only on appeal, (ii) it was never part of the complaint, (iii) was excluded during pre-trial, and (iv) no formal offer of evidence was made during trial.
- Issue II: Whether the CA correctly ruled there was no mutuality of consent in imposition of interest rates despite facts showing respondents’ assent (continuous payment of interest, renewals).