G.R. No. 222448 - United Coconut Planters Bank vs. Ang

Case Summary (G.R. No. 222448)

Factual Background

On April 30, 1997, UCPB granted a term loan with aggregate principal equivalence of approximately PHP 16,054,955.83 to Ang and Fernandez for renovation and working capital for Queen’s Beach Resort and foreign exchange business. The loan was payable in twenty quarterly amortizations of PHP 800,000.00 from July 1, 1997 to April 30, 2002. The indebtedness was evidenced by several promissory notes, some denominated in US dollars, and secured by multiple real estate mortgages that consolidated to secure approximately PHP 17,000,000.00. The borrowers paid a portion of the obligation—US$55,882.90 and PHP 198,023.30, equivalent to PHP 2,349,514.95—and ceased amortization payments after April 30, 1998.

Extrajudicial Foreclosure and Auction Sale

After demand and continued default, UCPB initiated extrajudicial foreclosure under Act No. 3135 through Notary Public Immanuel L. Sodusta. A Notice of Sale dated June 17, 1999 scheduled an auction for July 15, 1999, and on August 2, 1999 the mortgaged properties were sold at public auction to UCPB as highest bidder for PHP 21,985,000.00. A Final Deed of Sale dated December 28, 2000 was subsequently issued and tax declarations were transferred in the bank’s name.

Petition for Nullity and Trial Court Proceedings

On July 10, 2000, Ang and Fernandez filed a Petition for Declaration of Nullity of Foreclosure, Auction Sale and Promissory Note & Fixing of True Account of Petitioners. They sought, inter alia, annulment of the auction sale, declaration that the dollar-denominated promissory notes and conversion at later exchange rates were contrary to law, annulment of interest provisions and unilateral rate adjustments, damages, and attorney’s fees.

Regional Trial Court Decision and Reconsideration

The Regional Trial Court initially rendered judgment declaring the interest provisions in the Credit Agreement, mortgage and promissory notes void for violating Articles 1308 and 1309 and R.A. No. 3765, declared the five promissory notes null and void for alleged violations of Sections 5, 6 and 7 of R.A. No. 3765, and annulled the public auction of August 2, 1999, directing recomputation of indebtedness. After motions for reconsideration, the RTC reversed some findings and, by Order dated December 5, 2011, declared the auction sale valid, held the borrowers liable for principal of PHP 16,000,000.00 plus compounded legal interest of 12% per annum and penalty of 12% per annum from date of demand, ordered deduction of payments made, and applied proceeds of auction to the indebtedness.

Court of Appeals Decision

The Court of Appeals rendered a Decision dated May 11, 2015 that partially granted the appeal. The CA declared the five promissory notes valid, held the provisions fixing and imposing interest rates null and void for violating Article 1308 of the New Civil Code, and declared the sale at public auction on August 2, 1999 null and void. The CA remanded the case to the trial court to determine the total indebtedness, directing computation by deducting payments and applying legal interest of 12% per annum from extrajudicial demand until June 30, 2013 and 6% per annum from July 1, 2013 (following BSP Circular No. 799) until paid. The CA found no violation of the Truth in Lending Act because respondents failed to specifically deny under oath the genuineness of the bank’s financial statements.

Issues Presented to the Supreme Court

The Supreme Court framed the issues as: whether the petition should be dismissed for raising questions of fact in violation of Rule 45, Rules of Court; whether the stipulations on payment of interest in the Credit Agreement, promissory notes, and disclosure statements were valid; and whether the extrajudicial foreclosure of the mortgage remained valid despite nullity of provisions imposing interest which resulted in alleged erroneous computation of indebtedness.

Reviewability of Factual Findings under Rule 45

The Court acknowledged the general Rule 45 limitation against reexamination of factual findings, but cited exceptions from Microsoft Corp. v. Farajallah permitting review when the Court of Appeals’ inferences are manifestly mistaken, premised on misapprehension of facts, or where relevant facts were overlooked. The Court concluded the exceptions applied and proceeded to reexamine the record, principally to assess the CA’s application of Spouses Andal v. Philippine National Bank in invalidating the auction sale.

Validity of Interest Stipulations

The Supreme Court held that the interest stipulations in the Credit Agreement and promissory notes were void. The Credit Agreement permitted interest to be based on the Manila Reference Rate, Treasury Bill Rate, or other market-based references, subject to quarterly review and resetting “at the option of the bank.” The Court found that the bank’s unilateral discretion to select or reset the reference rate effectively left determination of future interest to the bank’s sole will. That mechanism was indeterminate and vulnerable to unconscionable upward adjustment. Applying prior authority, including United Coconut Planters Bank v. Spouses Beluso, the Court concluded that an arrangement which grants the bank untrammeled power to choose or reset a reference rate without the borrower’s consent violated the principle of mutuality under Article 1308 and rendered the interest provisions void.

Application of the Truth in Lending Act

The Court found no proven violation of R.A. No. 3765 on the record because Ang and Fernandez did not, under oath, specifically deny the genuineness and due execution of the financial statements and disclosure documents the bank produced. Consistent with Section 8, Rule 8, those documents were thus deemed admitted and the CA correctly concluded the Truth in Lending Act was not shown to have been violated in the particulars alleged.

Validity of Foreclosure and Auction Sale Despite Void Interest Stipulations

Notwithstanding the nullity of the interest stipulations, the Supreme Court ruled that the bank retained the right to recover the principal and to foreclose the mortgage. The Court relied on precedents such as Advocates for Truth in Lending, Inc. v. Bangko Sentral Monetary Board, Eastern Shipping Lines, Inc. v. Court of Appeals, and Spouses Beluso to articulate that nullification of usurious or unconscionable interest does not extinguish the principal obligation nor the creditor’s right to foreclose upon debtor default. The Court determined that a valid demand had been made and that Ang and Fernandez defaulted with respect to the proper principal amount. The Court also emphasized the bank’s statutory role and obligations under the General Banking Law of 2000 Section 52 to dispose of acquired properties, and warned against an indiscriminate application of Spouses Andal that would undermine public confidence in banking and disposition of foreclosed assets.

Computation of Indebtedness and Conduct of Borrowers

The Court noted that the borrowers had paid o

Case Syllabus (G.R. No. 222448)

Parties and Procedural Posture

United Coconut Planters Bank (UCPB) filed a Petition for Review on Certiorari under Rule 45, Rules of Court, assailing the Court of Appeals Decision dated May 11, 2015 and Resolution dated December 4, 2015.
Editha F. Ang and Violeta M. Fernandez instituted a Petition for Declaration of Nullity of Foreclosure, Auction Sale and Promissory Note & Fixing of True Account of Petitioners in the Regional Trial Court.
The RTC rendered an initial decision declaring interest stipulations and promissory notes void and annulling the auction sale, then reconsidered and validated the auction sale while directing recomputation of indebtedness.
The Court of Appeals partially granted the appeal and declared the promissory notes valid, the interest stipulations void, and the auction sale null and void while remanding for recomputation.
The Supreme Court granted UCPB’s Rule 45 petition on reconsideration of its earlier denial and finally rendered the dispositive judgment now under review.

Key Factual Allegations

UCPB granted Ang and Fernandez a term loan of P16,000,000.00 on April 30, 1997 payable in twenty quarterly amortizations of P800,000.00 from July 1, 1997 to April 30, 2002.
The total principal obligation as reflected in the records was Php 16,054,955.83, consisting of several dollar and peso promissory notes executed in April–June 1997.
Ang and Fernandez paid US$55,882.90 and P198,023.30, equivalent to P2,349,514.95, and ceased amortization payments after April 30, 1998.
A demand letter was sent on April 14, 1999, and UCPB initiated extrajudicial foreclosure under Act No. 3135 with Notice of Sale issued June 17, 1999 and a public auction culminating in a sale to UCPB on August 2, 1999 for P21,985,000.00.
A Final Deed of Sale was issued December 28, 2000 and subsequent tax declarations were registered in UCPB’s name and later transferred to an innocent purchaser, Eddie Po, who acquired the property on August 1, 2013.

Security and Foreclosure

The loans were secured by multiple real estate mortgages consolidated over time securing up to Php 17,000,000.00 in obligations.
UCPB proceeded with extrajudicial foreclosure and sold the mortgaged properties as the highest bidder at public auction on August 2, 1999.
The foreclosure and subsequent issuance of tax declarations and a Final Deed of Sale were undisputed in the chain of events until challenged in the trial court.

Statutory Framework

The Court analyzed contractual and statutory claims under Article 1308 and Article 1309 of the New Civil Code in relation to the principle of mutuality of contracts.
The Truth in Lending Act (R.A. No. 3765) and its implementing requirements, including Sections 5 and 6, guided the assessment of disclosure and liability for nondisclosure.
The Court considered procedural rules including Rule 45, Rules of Court, and evidentiary prescription under Section 8, Rule 8 of the Rules of Court for contesting written instruments.
The power of banks to acquire and dispose of real estate in satisfaction of debts was assessed against Section 52, General Banking Law of 2000 and the BSP regulatory framework referenced in prior jurisprudence.

Trial Court Ruling

The RTC initially held the provisions fixing and imposing interest rates in the Credit Agreement, Real Estate Mortgage, and Promissory Notes void for violating Articles 1308 and 1309 and R.A. No. 3765, and it declared the five promissory notes null and void.
The RTC initially nullified the auction sale of August 2, 1999 and ordered UCPB to recompute the indebtedness based on the interest rate known and agreed upon at contract consummation.
On motion for reconsideration the RTC reversed as to the auction sale and declared the sale valid, ordered the borrowers liable for the principal of P16 million plus compounded legal interest of 12% per annum and penalty of 12% per annum, and directed application of auction proceeds against indebtedness.

Court of Appeals Ruling

The Court of Appeals held that the five promissory notes were valid and that the borrowers failed to prove unsigned or blank-note allegations, but declared the provisions fixing interest rates null and void for violating Article 1308, New Civil Code.
The CA declared the auction sale of August 2, 1999 null and void on the ground that UCPB failed to account for the actual indebtedness and remanded the case for recomputation of the total indebtedness applying legal interest of 12% per annum from extrajudici