Case Summary (G.R. No. 197861)
Principal loan transactions and instruments
On December 11, 1984, Florentino obtained a P300,000 loan evidenced by Promissory Note (PN) No. BD 84-055, bearing 21% per annum interest, attorney’s fees equivalent to 15% of the total amount due but not less than P200, and a 12% per annum penalty/collection charge in case of default; maturity initially January 10, 1985, renewed to February 17, 1985. Florentino executed a Deed of Assignment authorizing the bank to apply his P300,000 time deposit to the loan. On December 22, 1989, petitioners obtained a separate P1.7 million loan evidenced by PN No. BDS 606-89 due March 22, 1990, at 23% per annum interest, attorney’s fees equivalent to 15% of the total amount due but not less than P200, and 12% per annum penalty/collection charge; petitioners executed a Deed of Real Estate Mortgage on property under TCT No. T-215175 to secure the P1.7 million loan.
Defaults, account computations, and extrajudicial foreclosure
Petitioners defaulted. By January 31, 1992, computations showed PN No. BD 84-055 accumulated to P571,218.54 and PN No. BDS 606-89 to P2,991,294.82. The bank filed a petition for extrajudicial foreclosure on February 25, 1992 for satisfaction of the obligations secured by the real estate mortgage covering the P1.7 million loan; auction was set for April 23, 1992. On April 10, 1992 the bank sent statements of account indicating the P300,000 obligation had increased to P594,043.54 and the P1.7 million obligation to P3,171,836.18. After procedural litigation involving temporary restraining orders and lifts, the property was sold at sheriff’s sale; a certificate of sale was issued to the bank as highest bidder for P3,500,000 on July 7, 1993.
Petitioners’ claims in the complaint
In their April 20, 1992 complaint, petitioners sought annulment of the mortgage and related injunctive relief and damages. Their primary contentions included: (1) the P300,000 loan should have been considered paid because the P300,000 time deposit (Certificate of Time Deposit No. 284051) had been assigned to the bank; (2) the bank allegedly added the P300,000 loan to the P1.7 million loan for purposes of applying auction proceeds; and (3) the bank imposed onerous terms by unilaterally increasing charges and interest beyond those stipulated in the contracts. Petitioners sought to enjoin the foreclosure sale.
Respondent bank’s position and defenses
The bank answered and counterclaimed, asserting the promissory notes expressly fixed interest rates used in the computation; claimed that as early as January 1986 the time deposit was applied to pay interest on the P300,000 loan and that the April 10, 1992 statement of account accounted only for interest and penalties from May 26, 1989, because proceeds had been applied to earlier periods; and maintained petitioners were aware of the bank’s terms. The bank also asserted that foreclosure sought satisfaction of the P1.7 million loan secured by the mortgage, not the separate P300,000 loan.
RTC proceedings, evidentiary posture, and trial court findings
The RTC initially denied a writ of preliminary injunction, later issued a restraining order, then lifted it, allowing foreclosure to proceed. After prolonged litigation and trial with petitioners’ witness testimony (Florentino as lone plaintiffs’ witness), the bank filed a demurrer to evidence. On November 15, 1999 the RTC granted the demurrer and dismissed the case, reasoning, inter alia, that: (a) the P300,000 time deposit had been assigned and would have covered the principal but not accumulated interest and penalties—thus the P292,600 penalty charge claimed by petitioners was unjustified; (b) the P1.7 million obligation had grown to the amounts reflected in the statements of account by application of the agreed 23% interest and 12% penalty; (c) the bank had not improperly added the P300,000 loan to the P1.7 million loan for purposes of applying auction proceeds; (d) petitioners were not entitled to the difference between the bank’s P3.5 million bid and the P1.7 million principal because accumulated interest and penalties had already increased the obligation; (e) the stipulated 23% per annum interest rate was not unconscionable—banks are commercial entities and prevailing market rates were relevant; and (f) Article 1229 of the Civil Code (concerning reduction of interest) did not apply because petitioners paid nothing on the P1.7 million loan.
Court of Appeals ruling
The CA affirmed the RTC in a June 17, 2010 decision, holding that the P300,000 time deposit covered only principal and was insufficient to satisfy accrued interest, penalties, and fees; that the bank did not improperly consolidate the two loans for application of auction proceeds; and that the contractual interest (23% p.a.) and the 12% p.a. penalty were not unconscionable. The CA adopted the RTC’s factual and legal findings in toto and denied petitioners’ motion for reconsideration on July 20, 2011.
Issue on appeal to the Supreme Court
The sole issue presented to the Supreme Court was whether the agreed 23% per annum interest and the 12% per annum penalty charge on the P1.7 million loan were excessive or unconscionable under the circumstances, such that they should be reduced or declared void.
Legal principles applied: freedom of contract and limits
The Court reiterated the principle of freedom of contract under Article 1306 of the Civil Code: contracting parties may stipulate terms they deem convenient provided such stipulations are not contrary to law, morals, good customs, public order, or public policy. A valid stipulation binds the parties as the contract is the law between them. However, jurisprudence has recognized that stipulated interest rates and penalty clauses can be struck down or reduced when unconscionable or contrary to morals.
Jurisprudential benchmarks on unconscionable interest rates
The Court examined prior jurisprudence cited by petitioners:
- Medel v. Court of Appeals: a 66% p.a. (5.5% per month) rate on P500,000 was declared excessive and void.
- Toring v. Spouses Ganzon-Olan and Chua v. Timan: monthly rates of 3% and higher (equivalent to 36% p.a. or more) were held excessive; the Court reduced such rates to 12% p.a. (1% per month) in those contexts.
The Court contrasted these precedents with the present case,
Case Syllabus (G.R. No. 197861)
Case Citation, Panel and Procedural Posture
- Supreme Court Decision: G.R. No. 197861, June 05, 2013; reported at 710 Phil. 490; 110 OG No. 7, 942 (February 17, 2014); Third Division.
- Decision authored by Justice Peralta, J.
- Concurrence by Justices Velasco, Jr. (Chairperson), Abad, Mendoza, and Leonen, JJ.
- Petition: Petition for Review on Certiorari under Rule 45, assailing the Court of Appeals Decision dated June 17, 2010 and Resolution dated July 20, 2011 in CA-G.R. CV No. 65993.
- Final disposition at the Supreme Court: Petition denied; the Court of Appeals Decision and Resolution affirmed.
Parties
- Petitioners: Spouses Florentino T. Mallari and Aurea V. Mallari.
- Respondent: Prudential Bank (now Bank of the Philippine Islands), Tarlac Branch.
- Principal individual actor for petitioners at trial: petitioner Florentino T. Mallari (presented as lone witness).
Instruments, Loans and Contractual Terms
- Promissory Note No. BD 84-055 (December 11, 1984): principal P300,000.00; interest at 21% per annum; attorney's fees equivalent to 15% of total amount due but not less than P200.00; penalty and collection charges of 12% p.a.; original maturity January 10, 1985, renewed up to February 17, 1985.
- Deed of Assignment executed by petitioner Florentino: authorized respondent bank to apply his time deposit (Certificate of Time Deposit No. 284051) in the amount of P300,000.00 to the P300,000.00 loan.
- Promissory Note No. BDS 606-89 (December 22, 1989): principal P1,700,000.00; interest at 23% per annum; attorney's fees equivalent to 15% p.a. of total amount due but not less than P200.00; penalty and collection charges of 12% p.a.; maturity date March 22, 1990.
- Deed of Real Estate Mortgage executed by petitioners covering property under Transfer Certificate of Title No. T-215175 (Register of Deeds of Tarlac) as security for the P1,700,000.00 loan.
Pre-Foreclosure Accountings and Demand
- Respondent bank sent demand letter after petitioners failed to settle loan obligations; computations as of January 31, 1992 showed:
- PN No. BD 84-055 (P300,000.00) amounted to P571,218.54.
- PN No. BDS 606-89 (P1,700,000.00) amounted to P2,991,294.82.
- On April 10, 1992, respondent bank’s Assistant Manager sent petitioners two separate Statements of Account (as of April 23, 1992):
- P300,000.00 loan increased to P594,043.54.
- P1,700,000.00 loan increased to P3,171,836.18.
- Respondent bank contended that the Statement of Account reflected computations of interest and penalty charges only from May 26, 1989, because proceeds of petitioners’ time deposit had earlier been applied to pay interest and penalty charges for the preceding period.
Extrajudicial Foreclosure, Auction and Related Dates
- February 25, 1992: Respondent bank filed a petition for extrajudicial foreclosure with the Regional Trial Court (RTC) of Tarlac for satisfaction of the P1,700,000.00 obligation secured by the mortgage; auction sale initially set by the Provincial Sheriff for April 23, 1992.
- April 23, 1992: Scheduled auction (as initially set).
- April 20, 1992: Petitioners filed a complaint seeking annulment of mortgage and other reliefs and prayed for restraint of the scheduled foreclosure sale.
- RTC Orders on injunctions and restraining orders:
- November 10, 1992: RTC denied Application for Writ of Preliminary Injunction.
- January 14, 1993: RTC reversed its earlier order and issued a restraining order in response to petitioners’ Supplemental Motion.
- March 9, 1993: RTC granted respondent bank’s Motion to Lift Restraining Order.
- July 7, 1993: Certificate of Sale issued to respondent bank as highest bidder in the amount of P3,500,000.00, following lifting of restraining order and completion of extrajudicial foreclosure process.
Petitioners’ Claims, Reliefs Sought and Core Contentions
- Complaints and remedies sought in petitioners’ April 20, 1992 complaint:
- Annulment of mortgage and deeds; injunction, preliminary injunction and temporary restraining order; damages.
- Principal factual and legal claims advanced by petitioners:
- The P300,000.00 loan obligation should have been considered paid because the time deposit ( Certificate of Time Deposit No. 284051 ) in the amount of P300,000.00 had been assigned to respondent bank.
- Respondent bank improperly added the P300,000.00 loan to the P1,700,000.00 loan obligation for purposes of applying the proceeds of the auction sale.
- Respondent bank imposed onerous terms and attempted to unilaterally increase charges and interest over and above those stipulated in the promissory notes and related instruments.
Respondent Bank’s Answer, Counterclaim and Defenses
- Respondent bank’s principal arguments in its Answer with counterclaim:
- The interest rates and other charges were clearly provided in the promissory notes and were used in computing interest charges.
- As early as January 1986, petitioners’ time deposit was applied to the payment of interest on the P300,000.00 loan.
- The Statement of Account of April 10, 1992 reflected computations of interest and penalty only from May 26, 1989, because proceeds of time deposit had been applied to earlier interest and penalty obligations.
- Petitioners were fully apprised of the bank’s terms and conditions.
- The extrajudicial foreclosure was pursued to satisfy the P1,700,000.00 loan (PN No. BDS 606-89) secured by the mortgage, not the P300,000.00 loan (PN No. BD 84-055).
RTC Trial, Evidence Disposition and Findings of Fact
- Procedural and trial highlights at RTC, Branch 64, Tarlac City, Civil Case No. 7550:
- Respondent bank filed Motion to Dismiss for failure to prosecute; RTC denied Motion to Dismiss on November 19, 1998.
- Trial ensued; petitioner Florentino was the lone witness for plaintiffs.
- Respondent bank filed a Demurrer to Evidence.
- November 15, 1999: RTC granted respondent’s demurrer to evidence and dismissed the case. The court found no evidence of bad faith and therefore declined to award damages; ordered no costs.
- RTC’s principal factual and legal findings:
- P300,000.00 loan: petitioners had assigned the time deposit of P300,000.00 in favor of