Title
Spouses Silos vs. Philippine National Bank
Case
G.R. No. 181045
Decision Date
Jul 2, 2014
Spouses contested PNB’s unilateral interest rate hikes in a mortgage-backed loan; court nullified rates, excluded penalties, and remanded for foreclosure reassessment.
spouses silos
interest rate provisions
null and void
A

Case Summary (G.R. No. 181045)

Factual background and loan security

The Siloses obtained a revolving credit line from PNB beginning in 1987, with successive increases leading to a P2.5 million line by July 1989. To secure the credit, they executed a real estate mortgage over a 370-square-meter lot (TCT T-14250) and, in 1989, a supplement adding another lot (TCT T-16208). They issued a series of promissory notes (a total of 26 notes between 1989 and 1997) and executed a Credit Agreement (July 1989) and an Amendment (August 1991). They made consistent interest payments over several years but defaulted on the last outstanding note PN 9707237 (dated July 30, 1997), which became due October 28, 1997. PNB computed a total demand as of October 12, 1998 and foreclosed, purchasing the mortgaged titles at auction on January 14, 1999.

Contractual interest clauses and documentary practice

The July 1989 Credit Agreement initially stipulated a 19.5% per annum rate for the loan but also contained language allowing the bank to “modify the interest rate … depending on whatever policy the Bank may adopt in the future,” including changing the bank’s spread over a floating reference rate without notice. The August 1991 Amendment provided that interest on each availment would be “the rate per annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the date of each Availment.” Many promissory notes were signed by the petitioners in blank and later filled in by the bank with the applicable interest rates; several notes also contained clauses allowing increases “within the limits allowed by law” or by giving an option to prepay within ten days if the borrower was not agreeable to a fixed rate.

Payments, default, and foreclosure

The petitioners paid interest and other charges regularly from 1990 to 1997, as reflected in receipts and account records. PN 9707237 remained unpaid after maturity, and PNB applied default penalties provided in that promissory note (24% per annum) and proceeded with extrajudicial foreclosure. PNB’s bid at the sheriff’s sale amounted to P4,324,172.96; the bank’s Statement of Account as of October 12, 1998 showed principal, interest and penalties totaling P3,620,541.60.

Procedural history in the courts below

The Siloses filed Civil Case No. 5975 (annulment of foreclosure sale and accounting) on March 24, 2000. The RTC (Branch 6, Kalibo) dismissed their petition on February 28, 2003 but later, by order dated June 4, 2003, reduced PNB’s award of attorney’s fees from 10% to 1% and ordered a refund of the excess. On appeal, the Court of Appeals (May 8, 2007) partly granted the appeal: it ordered that post-first-30-day interest for PN 9707237 should be 12% per annum, held attorney’s fees at 10%, and ordered reimbursement to petitioners of P377,505.99 as excess in the bid price. The present petition to the Supreme Court followed.

Issues presented to the Supreme Court

The petitions framed the principal issues as: (1) whether interest provisions that allowed PNB unilateral determination and modification of interest rates were void for violating Article 1308 and public policy; (2) whether penalties (specifically the 24% default charge in PN 9707237) were included in the secured amount subject to foreclosure when not expressly mentioned in the mortgage; and (3) whether the appellate court erred in increasing attorney’s fees to 10% when the trial court reduced them to 1%.

Petitioners’ claims

The Siloses contended that the contractual clauses permitting the bank to unilaterally fix or modify interest rates violated the mutuality requirement of Article 1308 and relevant jurisprudence (notably prior decisions invalidating similar PNB clauses). They argued the bank prepared the credit documents, required signing of promissory notes in blank, did not obtain express consent to subsequently imposed rates, breached Truth in Lending Act disclosure requirements, and therefore the excessive interest payments should be recharacterized or refunded (leading to extinguishment or reduction of indebtedness). They also maintained that penalties were not secured by the mortgage because the mortgage did not expressly include penalties among secured obligations, and that attorney’s fees awarded should remain at the trial court’s 1%.

Respondent’s defenses

PNB asserted that the contractual documents permitted adjustments (increases and decreases) within the limits of law and that the Siloses’ continued payments without timely objection constituted estoppel. The bank relied on clauses referencing permissible changes under law/Monetary Board limits, argued the promissory notes and credit agreements were regular and binding, and maintained that penalties were customary banking practice and covered by the mortgage’s “all obligations” language. PNB also contended the Siloses had failed to timely raise certain documentary defects below.

Supreme Court’s legal analysis and controlling precedent

The Supreme Court applied the settled principle that mutual assent is essential in contract modifications and that clauses granting one party unilateral, unfettered power to alter a vital contract term (interest) are void under Article 1308. The Court reviewed and relied on numerous prior decisions invalidating materially identical clauses in PNB’s credit documents, holding that an escalation clause that permits unilateral upward adjustment without genuine mutual assent converts the contract into an adhesion instrument and is therefore void. The Court found the facts here (promissory notes signed in blank, interest rates fixed by PNB’s central Treasury and communicated to branches, and the omission of meaningful standards protecting borrower consent) demonstrated lack of assent. The Court further found Truth in Lending Act disclosure obligations were violated because petitioners were not furnished with the required disclosure prior to consummation; the belated statements and accountings could not cure non-disclosure. The Court also reiterated that estoppel cannot be predicated on an illegal act; a borrower’s continued payment does not validate an otherwise unlawful unilateral rate-setting mechanism.

Holdings: interest rates, penalties, attorney’s fees, and remedies

  • The interest rates stated in the 2nd through the 26th promissory notes were declared null and void insofar as they reflect unilateral upward adjustments; those notes shall instead carry interest at 12% per annum up to June 30, 2013, and 6% per annum thereafter (consistent with Nacar v. Gallery Frames and subsequent Monetary Board circular). The 1st promissory note (19.5%) was deemed proper and paid.
  • The 24% penalty charge in PN 9707237 was excluded from the amounts secured by the real estate mortgages because the mortgages did not expressly include penalties; mortgages were construed strictly against the drafter (PNB) and, given the taint of adhesion and illegality in the principal credit documents, penalties cannot be presumed secured.
  • The trial court’s award of 1% attorney’s fees was reinstated; the Court of Appeals erred in increasing attorney’s fees to 10% because respondent did not properly appeal the trial court’s reduction and therefore could not obtain affirmative relief from the appellate tribunal on that ground.
  • The case was remanded to the RTC for detailed accounting and application of a prescribed computation procedure to determine whether petitioners still owed an outstanding balance or made overpayments.

Required remand computation procedure and practical consequences

The Supreme Court ordered a specific step-by-step accounting to be performed by the trial court:

  1. Treat the 1st promissory note (19.5%) as proper and paid.
  2. Recompute all subsequent notes (2nd–26th) applying 12% p.a. (or 6% p.a. after July 1, 2013, where applicable).
  3. Apply any interest payments made in excess of 12% directly to principal in chronological order (excess on a note reduces principal before computing the next note’s 12% interest), iterating this process through all notes.
  4. After reconstructing principal and interest, determine whe

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