Case Summary (G.R. No. 168940)
Foreclosure and Redemption
Petitioners extrajudicially foreclosed on February 5, 1999, bought the property at auction, and obtained consolidation. Respondents failed to redeem within one year; sheriff’s possession was delivered to petitioners.
RTC Proceedings
Respondents sued for nullification of mortgage and foreclosure or partial rescission, alleging unconscionable interest. On June 11, 2002, the RTC:
• Declined to void the mortgage but rescinded the 5% monthly interest clause;
• Imposed 12% per annum interest plus 1% monthly penalty damages;
• Denied moral damages and attorney’s fees;
• Dismissed respondents’ counterclaim.
CA Ruling
The Court of Appeals affirmed the equitable reduction of interest to 12% per annum and allowed respondents to redeem the property beyond the statutory redemption period “in equity.” It declined to address liquidated damages.
Issues on Review
- Whether the agreed 5% monthly interest may be judicially nullified.
- Whether the CA impermissibly altered mortgage terms.
- Whether redemption may extend beyond one year under Act No. 3135.
Petitioners’ Contentions
They argue Central Bank Circular 905 removed usury ceilings and parties are free to contract interest rates; thus the stipulated 5% per month was valid and the CA exceeded its authority.
Respondents’ Contentions
They maintain that unconscionable or iniquitous interest violates Article 1306, being contrary to law and morals, justifying equitable reduction and extension of redemption.
Supreme Court on Interest Rate
The SC held that despite Circular 905’s suspension of the Usury Law, interest stipulations remain subject to Article 1306 limits. Citing Medel v. CA and Ruiz v. CA, the Court found 5% per month (60% p.a.) grossly exorbitant and void ab initio. The legal rate of 12% per annum was imposed in its place.
Deletion of Liquidated Damages
No stipulation for liquidated damages existed in the Kasulatan. Under Civil Code Art. 2226, damages must be agreed upon. The 1% monthly penalty lacked legal basis and was deleted.
Invalidity of Foreclosure and Redemption Rights
Drawing on Heirs of Zoilo Espiritu v. Landrito, the SC held that foreclosure predicated on an overstated debt is null. Respondents
Case Syllabus (G.R. No. 168940)
Procedural History
- Petition for Review on Certiorari filed by petitioners before the Supreme Court from:
• October 29, 2004 Decision of the Court of Appeals in CA-G.R. CV No. 76842
• July 18, 2005 Resolution of the Court of Appeals denying reconsideration - The Court of Appeals had affirmed and modified the June 11, 2002 Decision of the Regional Trial Court of Bulacan, Branch 79.
- Petitioners challenged the equitable reduction of interest, the imposition of new terms, and the extension of the redemption period.
Factual Background
- Angelina de Leon Tan and Ruben Tan owned a 240-sqm residential lot in Malolos, Bulacan (TCT No. T-8540).
- On February 17, 1994, they mortgaged the property to spouses Castro to secure a ₱30,000 loan at 5% monthly interest, compounded monthly, due within six months.
- Ruben Tan died September 2, 1994; respondent Angelina Tan failed to pay upon maturity.
- Respondent offered to pay principal plus partial interest; petitioners refused and demanded ₱359,000.
- On February 5, 1999, petitioners extrajudicially foreclosed, bought the property at auction, and obtained a writ of possession after the one-year redemption expired.
Issues
- Whether the 5% per month compounded interest rate is unconscionable, immoral, and void despite voluntary agreement.
- Whether the appellate court improperly altered contract terms and imposed a 12% per annum rate.
- Whether respondents may redeem the mortgaged property after the one-year redemption period under Act No. 3135.
- Whether the award of 1% per month liquidated damages has legal basis.
Petitioners’ Contentions
- Central Bank Circular No. 905 (1982) removed interest rate ceilings, allowing parties to freely stipulate any rate.
- The Court of Appeals erred in nullifying and equitably reducing the agreed 5% monthly interest.
- The appellate court unlawfully rewrote the mortgage contract.