Case Summary (G.R. No. 159912)
Key Dates and Relevant Transactions
- Credit line originally granted 16 April 1996; initial maximum P1.2M, extended and increased to P2.35M with term extended to 28 February 1998.
- Promissory notes executed on various dates in 1996–1998 covering amounts of P700,000; P500,000; P800,000; later consolidated and additional notes for P200,000 and P150,000.
- The spouses paid a total of P763,692.03 (1996–Feb 1998).
- UCPB’s demand for payment dated 2 September 1998.
- Foreclosure conducted 28 December 1998; by early 2001 certificates of title consolidated in UCPB’s name.
- Petition for annulment, accounting and damages filed by the spouses Beluso on 9 February 1999 with the RTC (Makati).
Procedural History
The spouses Beluso filed a petition in the RTC (Makati) challenging the interest provisions of the promissory notes, seeking annulment of foreclosure and damages. The RTC (23 March 2000) declared the interest rate provision void, annulled the foreclosure and ordered return of foreclosed properties, awarded attorney’s fees to the spouses, and ordered the spouses to pay P1,560,308.00 to UCPB. The RTC denied UCPB’s motion for reconsideration (8 May 2000). The Court of Appeals affirmed the RTC decision but modified to relieve UCPB of liability for attorney’s fees and denied reconsideration (21 Jan. 2003; 9 Sept. 2003). UCPB sought review by the Supreme Court by Rule 45 petition raising multiple issues.
Issues Presented by Petitioner
UCPB framed the principal issues as: (I) whether the CA and RTC erred in declaring void the interest-rate provision; (II) whether the courts erred in computing respondents’ indebtedness and limiting their payment obligation to P1,560,308.00; (III) whether the courts erred in annulling foreclosure based on alleged incorrect computation; (IV) whether the trial court correctly found UCPB liable under the Truth in Lending Act; and (V) whether the courts should have dismissed the petition due to alleged forum shopping.
Contractual Provision at Issue (Interest Clause)
The promissory notes provided interest “at the rate indicative of DBD retail rate or as determined by the Branch Head,” and the Credit Agreement allowed the Lender alone to review and increase or decrease the interest rate based on enumerated considerations (prevailing conditions, other banks’ rates, profitability). Promissory notes also provided for penalty charges (1% per month), attorney’s fees (25% of total due as stipulated), and compounding of unpaid interest into principal.
Legal Standard on Mutuality of Contracts
Article 1308 of the Civil Code requires reciprocal binding of contracting parties; a contract’s validity or compliance cannot be left to the will of one party alone. Authority cited by the Court includes prior jurisprudence holding that clauses which permit one party to fix contract terms at will violate mutuality and are void as contracts of adhesion or as vesting uncontrolled discretion in one party.
Supreme Court on Validity of Interest-Rate Provision
The Court held the interest clause void for lack of mutuality. The two alternative means of fixing the rate — “indicative of DBD retail rate” and “as determined by the Branch Head” — were both insufficiently definite: the Branch Head formula vested unfettered discretion; the DBD‑indicative formula lacked a fixed margin or mathematical method to translate the reference rate into a specific percentage, unlike precedents where a fixed margin over a prime rate was specified. The provision permitting unilateral review and adjustment by UCPB was likewise invalid because it vested the lender alone with authority to determine rate changes without objective limitation. The separability clause could not salvage these provisions because both available methods of fixing the rate were invalid for the same fundamental defect. Estoppel was rejected: estoppel cannot validate an illegal stipulation and estoppel cannot be predicated on an illegal act. The Court also emphasized public policy reflected in the Truth in Lending Act favoring full disclosure of the true cost of credit.
Court’s Treatment of Truth in Lending Act Allegations
The Court agreed with the lower courts that the complaint and subsequent pre‑trial pleadings sufficiently alleged a violation of Republic Act No. 3765. The Truth in Lending Act requires clear written disclosure prior to consummation of the credit transaction of the finance charge (amount and annual percentage rate). The promissory notes failed to state the finance charge in terms of pesos and cents and the annual percentage, and the promissory notes were not provided before consummation in the required manner; mere tender of copies after execution did not constitute prior disclosure. The civil penalty under Section 6(a) of RA 3765 (P100 or twice the finance charge, subject to a P2,000 cap) was recoverable civilly, accrual of the cause of action occurs when the finance charge is required (here, with the demand of 2 September 1998), and the filing on 9 February 1999 was within the one‑year prescriptive period. The court also recognized that the Act provides for both civil and criminal liabilities and allowed joinder of the civil claim with other reliefs in one action under the Rules of Court.
Default, Demand, and Computation Principles
The Court reaffirmed that default generally commences upon judicial or extrajudicial demand (Article 1169). An excessive demand does not vitiate the demand insofar as the correct amount can be determined; a valid demand even if excessive renders the obligor in default on the proper amount. The Court therefore rejected the spouses’ contention that refusal to pay an excessive demand precluded default and foreclosing remedies.
Interest, Compounding, and Penalties — Rulings on Monetary Computations
- Legal interest: The Court found that, although the contractual rate was void, the obligation remains subject to interest; it therefore imposed the statutory legal rate of 12% per annum, compounded, from the date of demand. The RTC had earlier indicated the legal rate should apply but inadvertently omitted it in computation; the Supreme Court corrected this by affirming imposition of compounded legal interest at 12% p.a.
- Compounding: The Court upheld the parties’ contractual compounding provision (interest not paid when due becomes part of principal and bears interest), noting that parties may stipulate capitalization of unpaid interest and that such stipulation was not attacked or nullified.
- Penalty charges: While upholding the contractual allowance of penalty charges, the Court found the specific penalty rates applied by UCPB (cited in pleadings and computations as high as 30.41%–36%) to be iniquitous and unconscionable when combined with compounded interest. The Court reduced the applicable penalty to 12% per annum and applied it from the date of demand.
- Attorney’s fees: The Credit Agreement provided for attorney’s fees of at least 25% if counsel is required for enforcement. The RTC had awarded attorney’s fees in favor of the spouses; the CA had modified to relieve UCPB from attorney’s fees liability. The Supreme Court declined to award attorney’s fees to UCPB, observing that both parties litigated and both could be entitled to fees; on practical grounds the Court offset liabilities and affirmed deletion of the award in favor of the spouses while not awarding attorney’s fees to UCPB.
- Application of payments: The Court ordered that the spouses’ prior payments (P763,692.00) be deducted from liability and applied in the agreed contractual order of preference at the dates of actual payment: (1) penalty charges due and demandable at time of payment; (2) interest due and demandable at time of payment; (3) principal amortization/payment in arrears at time of payment; (4) outstanding balance.
Foreclosure and Annulment of Sheriff’s Sale
The RTC had annulled the foreclosure and sheriff’s certificate of sale on the ground of alleged incorrect computation. The Supreme Court found no grounds for annulment: none of the canonical bases for setting aside a foreclosure sale (fraud, collusion, accident, mutual mistake, misconduct by purchaser; irregular or unfair conduct of sale; grossly inadequate price shocking to conscience) were present. Because a valid demand existed and default therefore existed as to the proper amount, UCPB was entitled to foreclose the mortgage. The Court declared the foreclosure valid and ordered that the amounts determined to be due (as modified by the decision) be deducted from foreclosure proceeds.
Forum Shopping and Multiple Actions
UCPB argued that the spouses engaged in forum shopping by filing an injunctive action in Roxas City (Civil Case No. V‑7227) and subsequently filing annullment action in Makati (Case No. 99‑314). The Court reiterated the rules on dismissal and refiling: dismissal on certain grounds bars refiling only in specified instances (Ru
Case Syllabus (G.R. No. 159912)
Procedural Posture
- Petition for Review on Certiorari under Rule 45 seeking to annul the Court of Appeals Decision dated 21 January 2003 and its Resolution dated 9 September 2003 in CA-G.R. CV No. 67318.
- The Court of Appeals had affirmed the RTC, Branch 65, Makati City, Decision dated 23 March 2000 and Order dated 8 May 2000 in Civil Case No. 99-314 declaring void the interest rate provision in the promissory notes and annulling the foreclosure sale.
- RTC initially rendered judgment on 23 March 2000; it denied UCPB’s Motion for Reconsideration on 8 May 2000.
- CA denied UCPB’s Motion for Reconsideration on 9 September 2003.
- The present appeal raises multiple issues assigned by petitioner UCPB for resolution by the Supreme Court.
Parties and Court Composition
- Petitioner: United Coconut Planters Bank (UCPB).
- Respondents: Spouses Samuel and Odette Beluso.
- Decision of the Supreme Court penned by Justice Chico‑Nazario; Ynares‑Santiago (Chairperson), Austria‑Martinez, and Nachura, JJ., concur. Reyes, J., took no part.
Factual Background — Credit Facilities and Security
- On 16 April 1996 UCPB granted spouses Beluso a Promissory Notes Line under a Credit Agreement: credit up to P1.2 million, term ending 30 April 1997.
- Spouses Beluso executed a real estate mortgage over parcels of land in Roxas City (TCT Nos. T-31539 and T-27828) as additional security.
- Credit Agreement subsequently amended: credit limit increased to P2.35 million; term extended to 28 February 1998.
- Promissory notes executed and availed under the line included:
- PN 8314-96-00083-3: dated 29 April 1996, due 27 August 1996, amount P700,000.
- PN 8314-96-00085-0: dated 2 May 1996, due 30 August 1996, amount P500,000.
- PN 8314-96-000292-2: dated 20 November 1996, due 20 March 1997, amount P800,000.
- The three promissory notes were renewed several times.
- On 30 April 1997 payments for principal and interest on two promissory notes were debited from spouses’ UCPB account; subsequently a consolidated loan of P1.3 million released under one note due 28 February 1998.
- To fully avail P2.35 million, two additional promissory notes were executed:
- PN 97-00363-1: dated 11 December 1997, due 28 February 1998, amount P200,000.
- PN 98-00002-4: dated 2 January 1998, due 28 February 1998, amount P150,000.
- Spouses Beluso alleged the last two amounts were never released/credited; they claimed principal indebtedness was only P2 million.
- UCPB applied interest rates on the different promissory notes ranging from 18% to 34%.
Payments, Demands, Foreclosure and Suit
- From 1996 to February 1998 spouses Beluso paid P763,692.03 (as stated in the record).
- From 28 February 1998 to 10 June 1998 UCPB continued to charge interest and penalty on obligations; sample computations included:
- PN 97-00363-1 (P200,000): interest 31% and penalty 36% — total P225,313.24.
- PN 97-00366-6 (P700,000): interest 30.17% (7 days) and 32.786% (102 days) — total P795,294.72.
- PN 97-00368-2 (P1,300,000): interest 28% (2 days) and 30.41% (102 days) — total P1,462,124.54.
- PN 98-00002-4 (P150,000): interest 33% (102 days) and penalty 36% — total P170,034.71.
- Spouses Beluso failed to pay the foregoing amounts.
- On 2 September 1998 UCPB demanded payment of P2,932,543.00 plus 25% attorney’s fees; spouses Beluso did not comply.
- On 28 December 1998 UCPB foreclosed the mortgaged properties; indebtedness claimed had “ballooned” to P3,784,603.00 by then.
- On 9 February 1999 spouses Beluso filed a Petition for Annulment, Accounting and Damages with the RTC, Makati City.
Issues Presented by Petitioner (UCPB) in the Petition for Review
- Whether the CA committed reversible error by affirming the RTC’s declaration that the interest-rate provision agreed between UCPB and spouses Beluso is void.
- Whether CA committed reversible error in affirming RTC’s computation of respondents’ indebtedness and ordering respondents to pay only P1,560,308.00.
- Whether CA committed reversible error in affirming the RTC’s annulment of the foreclosure due to alleged “incorrect computation” of respondents’ indebtedness.
- Whether CA committed reversible error in finding UCPB liable for violation of the Truth in Lending Act.
- Whether CA committed reversible error by not dismissing the case for forum shopping.
RTC Disposition (23 March 2000)
- Declared interest rate used by UCPB void.
- Declared the foreclosure and Sheriff’s Certificate of Sale void; ordered UCPB to return properties foreclosed.
- Ordered UCPB to pay spouses Beluso P50,000.00 as attorney’s fees and to pay costs of suit.
- Ordered spouses Beluso to pay UCPB P1,560,308.00.
- RTC denied UCPB’s Motion for Reconsideration on 8 May 2000.
Court of Appeals Ruling (21 January 2003)
- Affirmed the RTC Decision dated 23 March 2000 with modification: UCPB is not liable for attorney’s fees or costs of suit.
- Denied UCPB’s Motion for Reconsideration on 9 September 2003.
Supreme Court: Key Legal Standards and Authorities Quoted
- Article 1308, Civil Code: contract must bind both contracting parties; validity or compliance cannot be left to the will of one party.
- Philippine National Bank v. Court of Appeals (G.R. No. 88880, 30 April 1991) — discusses mutuality, contracts of adhesion, and void license to increase interest at will.
- Polotan v. Court of Appeals (357 Phil. 250 (1998)) — permits reference rates with a fixed margin (example: “3% plus prime rate”).
- Article 1169, Civil Code — default/delay commences upon judicial or extrajudicial demand.
- Tan v. Court of Appeals (419 Phil. 857 (2001)) — contract stipulation permitting capitalization (compounding) of interest is valid.
- Equitable Banking Corp. v. Liwanag (143 Phil. 102 (1970)) and Article 1229 Civil Code — penalty may be reduced if iniquitous or unconscionable.
- Ruiz v. Court of Appeals (449 Phil. 419 (2003)) — referenced in context of unconscionable interest.
- Truth in Lending Act (Republic Act No. 3765) — Sec. 2 declaration of policy; Sec. 4 disclosure requirements; Sec. 6(a) civil penalty and one-year prescriptive period; Sec. 6(c) criminal sanctions.
- Rules of Court Rule 2 Sec. 5 on joinder of causes of action; Rule 16 on motion to dismiss and refiling.
Court’s Analysis — Validity of Interest-Rate Provision
- Promissory note’s language: “with interest thereon at the rate indicative of DBD retail rate or as determined by the Branch Head.”
- The Court held the provision void for lack of mutuality: the interest provision left determination solely to UCPB by giving the bank two choices, each conferring unfettered discretion.
- “As determined by the Branch Head” gives unfettered discretion to fix the rate at will.
- “Indicative of DBD retail rate” lacks a fixed margin (unlike Polotan which had a fixed 3% margin), permitting UCPB to peg interest at any percentage above or below the reference rate — thus leaving determination to bank’s will.
- The separate stipulation that interest “shall be subject to review and may be increased or decreased by the LENDER considering among others the prevailing financial and monetary conditions; or the rate ... which other banks ... charge ...; and/or the resulting profitability to the LENDER” likewise vests unilateral discretion in UCPB.
- Separability clause (Section 9.08) cannot save the offending options because both options independently violate mutuality.
- Estoppel argument rejected: estoppel cannot validate an illegal act or a provision contrary to law or public policy.
- The interest provisions also violate the Truth in Lending Act by failing to disclose the “true finance charges” — non-disclosure is a form of deception contrary to the policy in Sec. 2 RA 3765.