Case Summary (G.R. No. 168940)
Factual Background
On February 17, 1994, Angelina de Leon Tan and her husband Ruben executed a document styled Kasulatan ng Sanglaan ng Lupa at Bahay to secure a P30,000.00 loan from Sps. Isagani and Diosdada Castro. The Kasulatan stipulated payment within six months or until August 17, 1994, and fixed interest at five percent per month, compounded monthly. After Ruben Tan died on September 2, 1994, respondent Angelina became solely responsible for the debt but failed to pay upon maturity. She offered to pay the P30,000.00 principal and a portion of interest, but petitioners demanded a total allegedly due amount of P359,000.00. Petitioners conducted an extrajudicial foreclosure on February 5, 1999, bought the property at auction, and, following the lapse of the statutory period of redemption, procured consolidation of title and possession, which the Sheriff delivered on June 21, 2000.
Trial Court Proceedings
On September 26, 2000, Angelina de Leon Tan and the other respondents filed a Complaint for Nullification of Mortgage and Foreclosure and/or Partial Rescission of Documents and Damages before the Regional Trial Court of Malolos, Bulacan. The respondents alleged, inter alia, that the stipulated five percent monthly interest was unconscionable. On June 11, 2002, Judge Arturo G. Tayag held that while the mortgage and foreclosure could not be declared wholly void, the Kasulatan was partially rescinded and the stipulated interest was reduced to twelve percent per annum, with an additional one percent per month penalty as liquidated damages from February 17, 1994 until June 21, 2000; the counterclaim was dismissed and costs were taxed against the defendants.
Court of Appeals Decision
Petitioners appealed to the Court of Appeals. The CA affirmed the trial court’s finding that the five percent monthly compounded interest was iniquitous and unconscionable and therefore subject to equitable reduction to the legal rate of twelve percent per annum. The CA further modified the judgment by expressly allowing respondents to redeem the mortgaged property notwithstanding the expiration of the statutory redemption period, in the interest of equity and substantial justice. Petitioners’ motion for reconsideration was denied by CA resolution dated July 18, 2005.
Issues Presented to the Supreme Court
The petition raised three principal issues: whether the CA erred in nullifying the interest rate voluntarily agreed upon by the parties; whether the CA improperly altered the terms of the mortgage contract by reducing the agreed interest rate; and whether the CA erred in extending the period of redemption in violation of Act No. 3135, which provides only one year for redemption after foreclosure.
Petitioners’ Contentions
Sps. Isagani and Diosdada Castro argued that, pursuant to Central Bank Circular No. 905, s. 1982, the ceiling set by the Usury Law had been suspended and parties therefore had wide latitude to stipulate any interest rate. They maintained that the Kasulatan reflected a freely and voluntarily agreed stipulation, that the Court of Appeals had no authority to nullify an expressly stipulated compounded interest, and that extension of the redemption period contravened the clear one-year limit under Act No. 3135.
Respondents’ Contentions
Angelina de Leon Tan and the co-respondents contended that the stipulated interest was excessive, contrary to morals, and thus void. They emphasized that contractual stipulations bind parties only so long as they are not contrary to law, morals, good customs, public order, or public policy, and argued that equity required that they be allowed to redeem once the unconscionable interest was struck down.
The Supreme Court’s Ruling
The Supreme Court denied the petition and affirmed the CA decision with modifications. The Court held that the five percent monthly interest, compounded monthly (sixty percent per annum), was excessive, iniquitous, unconscionable and contrary to morals and therefore void ab initio under Article 1306 of the Civil Code. The Court ordered that the legal interest of twelve percent per annum be imposed in lieu of the void stipulated rate. The Court deleted the award of one percent per month as liquidated damages for lack of any contractual stipulation. The Court also nullified the foreclosure sale and its registration and ordered reconveyance of the subject property to respondents conditioned upon payment of the loan plus interest at the imposed legal rate.
Legal Basis and Reasoning
The Court acknowledged that Central Bank Circular No. 905, s. 1982 removed the statutory ceiling prescribed by the Usury Law and thereby broadened contractual freedom in interest stipulations. The Court held, however, that such freedom was not absolute. The Court reiterated established doctrine that stipulations authorizing iniquitous or unconscionable interest remain contrary to morals and may be declared illegal. The Court relied on prior decisions, notably Medel v. Court of Appeals and Ruiz v. Court of Appeals, where grossly excessive monthly rates were struck down and reduced to twelve percent per annum. Applying that jurisprudence, the Court found the five percent monthly rate to be substantially greater than interest rates previously upheld and therefore unconscionable. Pursuant to Article 1306, the void stipulation was treated as non-existent and replaced by the statutory legal interest.
On Liquidated Damages
The Court examined the trial court’s grant of one percent per month as liquidated damages and noted that Article 2226 of the Civil Code defines liquidated damages as those agreed upon by the parties. The Court observed that the Kasulatan contained no stipulation for liquidated damages, and that neither party proved any separate agreement imposing such damages. The Court therefore held that the award of liquidated damages lacked legal basis and deleted it from the judgment.
On Redemption and Foreclosure
The Court addressed the foreclosure proceedings and the statutory period of redemption under Act No. 3135. It found that respondents had attempted to pay the principal after maturity but petitioners had refused and demanded the grossly inflated amount. The Court cited Heirs of Zoilo Espiritu v. Landrito for the proposition that foreclosure conducted upon an overstated demand cannot stand. Because the
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Case Syllabus (G.R. No. 168940)
Parties and Posture
- Spouses Isagani and Diosdada Castro were the petitioners below and sought review of the Court of Appeals' affirmance of the trial court's decision reducing a stipulated interest rate.
- Angelina de Leon Tan and co-respondents were the mortgagors and plaintiffs below who challenged the foreclosure and the stipulated interest as unconscionable.
- The petition assailed the Court of Appeals' October 29, 2004 Decision and July 18, 2005 Resolution which affirmed the June 11, 2002 Decision of the Regional Trial Court of Bulacan, Branch 79.
- The relief sought was review by way of a Petition for Review on Certiorari under Rule 45 of the Rules of Court as reflected in the record of this case.
Key Factual Allegations
- Spouses Tan were the registered owners of a 240-square meter residential lot covered by Transfer Certificate of Title No. T-8540 which was mortgaged to secure a loan.
- On February 17, 1994, the parties executed a Kasulatan ng Sanglaan ng Lupa at Bahay for a loan of P30,000 with a stipulated interest of 5% per month, compounded monthly, payable within six months.
- Ruben Tan died on September 2, 1994, leaving Angelina de Leon Tan responsible for the debt, and she failed to pay the full amount at maturity.
- Petitioners rejected respondent Tan's offers to pay the principal and part of the interest and instead demanded a purported accumulated balance of P359,000.
- On February 5, 1999, petitioners initiated an extrajudicial foreclosure, were the sole bidder at the auction, consolidated title, and obtained possession after the redemption period lapsed.
Trial Court Ruling
- The Regional Trial Court partially rescinded the Kasulatan by declaring the 5% per month interest void and imposing 12% per annum interest in its stead.
- The trial court also awarded an additional one percent per month penalty as liquidated damages from February 17, 1994 to June 21, 2000.
- The trial court denied moral damages and attorney's fees and dismissed the defendants' counterclaim, with costs against the defendants as reflected in its June 11, 2002 Decision.
Court of Appeals
- The Court of Appeals affirmed the trial court's finding that the 5% monthly compounded interest was iniquitous and unconscionable and warranted equitable reduction to 12% per annum.
- The Court of Appeals further held that respondents could redeem the mortgaged property notwithstanding the expiration of the statutory redemption period on grounds of equity and substantial justice.
- The Court of Appeals' dispositive portion ordered redemption by payment of P30,000 with interest at 12% per annum from February 17, 1994 plus penalty charges, and denied petitioners' motion for reconsideration dated July 18, 2005.
Issues Presented
- Whether the Court of Appeals erred in nullifying the interest rate voluntarily agreed upon by the parties and expressly stipulated in the mortgage contract.
- Whether the Court of Appeals erred in effectively altering the terms of the parties' contract by unilaterally changing the stipulated interest.
- Whether the Court of Appeals erred in extending the period of redemption beyond the one-year period provided under Act No. 3135.