G.R. No. 206459 - Spouses Jonsay vs. Solidbank Corp.

Case Summary (G.R. No. 206459)

Factual Background

Momarco Import Co., Inc., controlled by the Spouses Florante E. Jonsay and Luzviminda L. Jonsay, acquired two bank loans totaling PHP 60,000,000.00 and secured them with a blanket mortgage over three parcels totaling 23,733 square meters in Calamba City. The parties executed a consolidated promissory note on November 3, 1997 with a stipulated interest rate of 18.75% per annum and an escalation clause authorizing the bank to adjust interest upward in response to changes in Central Bank rates; Solidbank in practice raised monthly rates to as high as 30% per annum. Momarco paid monthly interest from loan inception until April 1998 but thereafter defaulted. Solidbank initiated extrajudicial foreclosure; at the auction on March 5, 1999 it submitted the winning bid (recorded in the papers as approximately PHP 82,327,249.54, and reflected elsewhere in the records as PHP 82,327,000.00). The petitioners alleged that Solidbank inflated the indebtedness, charged illegal or unconscionable interest, imposed excessive attorney’s fees, neglected to account for prior payments totaling over PHP 24,277,000.00, and published the auction notice in a newspaper not of general circulation in Calamba City.

Trial Court Proceedings and Findings

The petitioners filed a complaint for annulment of extrajudicial foreclosure, injunction, accounting and damages on March 9, 2000, and obtained a writ of preliminary prohibitory injunction on May 2, 2000. After trial, the RTC issued an Amended Decision dated July 7, 2009 annulling the foreclosure proceedings, ordering that the interest rates be reduced to 12% per annum, declaring attorney’s fees and filing fees charged by Solidbank devoid of legal basis, awarding moral damages of PHP 20,000,000.00, exemplary damages of PHP 2,500,000.00 and attorney’s fees of PHP 1,500,000.00, and dismissing the bank’s counterclaim. The RTC found the loan documents to be contracts of adhesion, held that Solidbank failed to account for payments totaling PHP 24,277,293.22, characterized the bank’s interest charges and penalties as excessive and unconscionable, found defects in the sheriff’s verification and publication of the auction notice, and concluded that the Morning Chronicle was not a newspaper of general circulation in Calamba City.

Court of Appeals Decisions

On appeal, the Court of Appeals initially affirmed the RTC in a Decision dated April 27, 2012, agreeing that publication did not comply with Section 3 of Act No. 3135 because the Morning Chronicle was not shown to be a newspaper of general circulation in Calamba City and that the promissory note’s escalation clause violated Article 1308. The CA held that the mortgagors were not estopped for their failure to seasonably challenge the loan documents because their cause of action accrued only upon issuance of statements showing unilateral increases. Solidbank filed a motion for reconsideration, which the CA granted in part by an Amended Decision dated November 26, 2012. The CA then reversed portions of the RTC ruling, holding that the extrajudicial foreclosure enjoyed the presumption of regularity, that Solidbank’s publication in the Morning Chronicle was entitled to deference in view of the publisher’s affidavit, the court’s accreditation of the paper, and a court-supervised raffle of publications, and that Solidbank acted within its contractual right when it refused the petitioners’ offer of dacion en pago. The CA nonetheless affirmed the reduction of interest to 12% and set aside the RTC’s awards of moral and exemplary damages and the attorney’s fees award to the petitioners.

Issues Presented on Review

The petitioners urged that the CA gravely erred in issuing two conflicting decisions on the same evidence and in misapplying the law on extrajudicial foreclosure, contracts of adhesion, damages and the validity of unilateral escalation clauses. The legal and factual issues distilled for the Supreme Court were whether Solidbank complied with the posting and publication requirements of Act No. 3135 and whether the foreclosure therefore enjoyed the presumption of regularity; whether the escalation clause permitting unilateral interest increases was enforceable; whether the petitioners were entitled to annulment, damages or refund; and the proper computation of any excess from the auction proceeds.

The Supreme Court’s Ruling

The Supreme Court found merit in the petition only to the extent of modifying the CA’s Amended Decision; it affirmed the CA insofar as the CA had, on reconsideration, validated the extrajudicial foreclosure and recognized the presumption of regularity. The Court held that the CA properly corrected its earlier view pursuant to Rule 37, Rules of Court, and that a court may, on motion for reconsideration, amend its judgment when it finds that the prior judgment was contrary to law or evidence. On the publication issue the Court ruled that Solidbank had sufficiently complied with Section 3 of Act No. 3135 because the publisher’s affidavit of publication, the Clerk of Court’s certification of accreditation of the Morning Chronicle, and the record of a court-supervised raffle gave rise to the presumption of regularity which the petitioners failed to overcome with more than the principal borrower’s bare testimony. The Court held that the petitioners’ unaccepted offer of dacion en pago did not effect novation; Solidbank’s refusal to accept it did not establish bad faith or warrant damages.

Legal Basis and Reasoning

The Court anchored its conclusions on settled rules and precedent. It reiterated that extrajudicial foreclosure proceedings enjoy a presumption of regularity and that the mortgagor who alleges noncompliance bears the burden of proof, citing Cristobal v. CA and related authorities. The Court applied the line of cases invalidating one-sided escalation clauses that allow unilateral interest increases without the borrower’s assent, including New Sampaguita Builders Construction, Inc. v. PNB, Floirendo, Jr. v. Metropolitan Bank and Trust Co., and PNB v. CA, while distinguishing the appropriate remedial measure. Finding that an 18.75% contractual rate was not per se unconscionable given market conditions prevailing in the relevant period, the Court refused to reduce interest to the RTC’s 12% across the board and instead enforced the stipulated 18.75% up to the date of auction. The Court excluded penalties and surcharges and substantially reduced attorney’s fees, following the principle that attorney’s fees in collection actions are subject to quantum meruit and equitable reduction as in New Sampaguita. The Court further invoked Article 1310 of the Civil Code as authority for equitable adjustment where determinations are evidently inequitable.

Disposition and Monetary Computation

The Court affirmed the CA’s Amended Decision with modification as to monetary computation and awards. Applying the stipulated 18.75% interest to the two loans for the periods up to March 5, 1999, the Court computed total interest earned by Solidbank at PHP 31,828,500.00 and total indebtedness (principal plus interest) at PHP 91,828,500.00. After crediting pet

Case Syllabus (G.R. No. 206459)

Parties and Procedural Posture

Spouses Florante E. Jonsay and Luzviminda L. Jonsay and Momarco Import Co., Inc. filed Civil Case No. 2912-2000-C in the RTC of Calamba City seeking annulment of an extrajudicial foreclosure, injunctive relief, accounting and damages against Solidbank Corporation, Sheriff Adelio Perocho and the Register of Deeds of Calamba, Laguna.
The RTC, Branch 35, rendered an Amended Decision dated July 7, 2009 annulling the extrajudicial foreclosure and awarding damages and reliefs in favor of the petitioners.
Solidbank Corporation appealed to the Court of Appeals in CA-G.R. CV No. 94012, which initially affirmed the RTC in a Decision dated April 27, 2012 and thereafter granted a motion for reconsideration in part in an Amended Decision dated November 26, 2012.
The petitioners elevated the case to the Supreme Court by a Petition for Review under Rule 45 attacking the CA's Amended Decision dated November 26, 2012 and seeking reinstatement of the RTC's rulings.

Key Factual Allegations

Momarco Import Co., Inc. obtained loans from Solidbank on November 9, 1995 for PHP 40,000,000 and on April 28, 1997 for PHP 20,000,000 secured by a blanket mortgage on three parcels in Calamba City registered under TCT Nos. T-224751, T-210327 and T-269668 totaling 23,733 square meters.
The loans were consolidated under a promissory note dated November 3, 1997 for PHP 60,000,000 signed by Florante as President of Momarco with Luzviminda as co-maker, stipulating interest at 18.75% per annum and containing an escalation clause permitting variable unilateral adjustments tied to Central Bank-declared rates.
Momarco made regular interest payments from November 1995 until April 1998 and claimed total payments in the two years preceding 1998 amounting to approximately PHP 24,277,293.22.
Solidbank conducted an extrajudicial foreclosure and submitted the winning auction bid of PHP 82,327,249.54 on March 5, 1999 and obtained a certificate of sale dated March 22, 1999 which was annotated on the titles on April 15, 1999.
The petitioners alleged defects in the foreclosure for inflated indebtedness, illegal interest charges above the legal rate, defective publication of auction notice in the Morning Chronicle, invalid sheriff’s posting, failure to account prior payments and unconscionable attorney’s fees and filing fees.

Issues Presented

Whether the extrajudicial foreclosure complied with the publication and posting requirements of Section 3, Act No. 3135.
Whether the promissory note and mortgage constituted a contract of adhesion and whether the escalation clause permitting unilateral interest increases was valid.
Whether the unilateral increases in interest and imposed penalties and attorney’s fees were unconscionable or void.
Whether the petitioners were estopped for failing to timely challenge the loan documents.
Whether damages and attorney’s fees awarded by the RTC were supportable.

Contentions of the Parties

The petitioners contended that the foreclosure was null for defective publication because the Morning Chronicle was not a newspaper of general circulation in Calamba City, that Solidbank failed to account prior payments, and that the interest increases, penalties and attorney’s fees were illegal and unconscionable.
Solidbank argued that it complied with the publication and posting requirements, that the foreclosure enjoyed the presumption of regularity, that the escalation clause was contractually valid, and that its exercise of contractual rights did not constitute bad faith warranting damages.
On appeal the CA identified specific alleged errors of the RTC advanced by Solidbank, including the characterization of the mortgage as a contract of adhesion and the finding of defective publication.

Statutory and Procedural Framework

Section 3, Act No. 3135 governs posting and publication requirements for extrajudicial foreclosure of mortgage sales.
Rule 37, Rules of Court (Sections 1 to 3) governs motions for new trial or reconsideration and the power of a court to amend its judgment upon such motion.
Article 1308, Civil Code embodies the principle of mutuality of contracts.
Article 1310, Civil Code empowers courts to make equitable determinations on interest when a stipulated rate is evidently inequitable.
A.M. No. 01-1-07-SC prescribes accreditation of local newspapers for publication of legal notices.
Monetary Board Circular No. 799 sets interest rate rules for loans or forbearance of money in the absence of stipulation.

Ruling of the RTC

The RTC declared the extrajudicial foreclosure proceedings null and void and enjoined consolidation of titles in Solidbank's name while allowing a separate action for collection or recovery of the secured sum.
The RTC reduced the interest rate to 12% per annum on the petitioners' indebtedness.
The RTC declared the a