Case Digest: Rey v. Anson, G.R. No. 211206, November 7, 2018

Commercial Law | Interest

Facts:

• Rosemarie Q. Rey, President of Southern Luzon Technological College Foundation Incorporated, needed a quick infusion of cash for the said school. She approached Ben Del Castillo, who introduced her to his acquaintance, Cesar Anson.
• On August 23, 2002, Rey borrowed P200,000.00 from Anson, payable in one year with 7.5% interest per month or P15,000.00 monthly interest, which would be paid bi-monthly by way of postdated checks.
• The loan was secured by a real estate mortgage.
• In the event of default, the Spouses Rey would pay a penalty charge of 10% of the total amount, plus 12% attorney’s fees.
• Rey issued 24 postdated checks for P7,500.00 each, as well as another postdated check for the principal amount of P200,000.00.
• Three days later, Rey borrowed P350,000.00 from Anson, payable in four months with 7% interest per month, secured by another real estate mortgage over a parcel of land registered in the name of Rosemarie Rey’s mother, Isabel B. Quinto.
• Rey paid interest on the first loan for twelve months but could not pay the principal on due date. She appealed to Anson not to foreclose the mortgage or to impose the stipulated penalty charges, but instead to extend the terms thereof.
• Anson agreed and Rey later signed a promissory note and executed a Deed of Real Estate Mortgage, stating that the principal obligation of P200,000.00 shall be payable in four (4) months from the execution of the Deed of Real Estate Mortgage, and it shall be subject to interest of 7.5% per month.
• Rey once again issued postdated checks to cover the interest payments on the amended first loan, but thereafter failed to pay the principal amount of P200,000.00.
• For the second loan, Rey also failed to meet monthly interest payments and was unable to pay the principal amount thereof when it became due. Rey appealed to Anson not to foreclose the mortgage or to impose the penalty charges, but instead to extend the terms thereof.
• Anson agreed, and the parties executed anew a Deed of Real Estate Mortgage acknowledging her indebtedness to Anson in the amount of P611,340.00, payable within four months from the execution of the Deed of Real Estate Mortgage, and subject to 7% interest per month.
• Rey again failed to fulfill her obligation on the second loan and was extended once more in a Deed of Real Estate Mortgage acknowledging her indebtedness in the amount of P761,450.00, payable within six months from the execution of the Deed of Real Estate Mortgage, and subject to the same 7% interest per month.
• Rey obtained two additional loans of P100,000.00 each, with verbal agreements for monthly interest rates of 3% and 4%, respectively.
• On February 25, 2005, Anson demanded full payment of all loans totaling P2,214,587.50.
• Instead of paying her loan obligations, Rey sent Anson a letter stating that the interest rates imposed on the four loans were irregular, if not contrary to law. 
• Rey filed a complaint against Anson for Recomputation of Loans and Recovery of Excess Payments and Cancellation of Real Estate Mortgages and Checks.
• They prayed for the recomputation of all four loans reflecting the reduction of the interest rates of the first and second loans to 12% per annum and the disallowance of interest on the third and fourth loans; and the return of overpayment amounting to P269,700.68; 

Answer of Anson:

• With the suspension of the Usury Law, parties can freely stipulate on the imposable rates of interest that shall accrue on a loan. 
• The Spouses Rey freely agreed with him and even proposed the rate of interest to be imposed on Loan 1 and Loan 2. 
• As the Spouses Rey have benefited from the proceeds of the loan, they cannot now be allowed to raise the alleged illegality of the interest rates imposed on the loans.

RTC-Legazpi: Granted the Spouses Rey’s complaint for recomputation of the loans. 

• In regard to the third and fourth loans, the RTC held that since the said loans were not in writing, they could not legally earn interest.
• The stipulated interest rates at 90% per annum and 84% per annum for the first and second loans, respectively, were void.

CA: Reversed and set aside the Decision of the RTC.

• When Rosemarie Rey entered into the two loan transactions with Cesar Anson, she was fully aware of the imposable interests thereon, as it was the latter who proposed the interest rates of 7.5% and 7% per month. 
• After years of benefiting from the proceeds of the loans, she cannot now be allowed to renege on her obligation to comply with what is incumbent upon her under the loan agreement.

Issue: 

• Whether the interest rates on the first and second loans are unconscionable and contrary to morals. YES
• Whether the computation of payment of interest and the principal amount is correct in Loan 1 and Loan 2. NO
• Whether interest is imposable on the excess payments. NO
• Whether or not petitioner is entitled to the award of attorney's fees. NO

Held:

I. Petitioner contends that the Decision of the Court of Appeals insofar as it declared that the stipulated 7.5% and 7% monthly interest rates imposed on Loan 1 and Loan 2, respectively, are valid must be reversed and set aside, as it is contrary to the jurisprudential pronouncements of this Court that stipulated interest rates of 3% per month or higher are unconscionable and contrary to morals.

The Court agrees with petitioner.

The freedom of contract is not absolute. Article 1306 of the Civil Code provides that "[t]he contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy."

In Sps. Albos v. Sps. Embisan, et al. the Court held:

As case law instructs, the imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals.

Summarizing the jurisprudential trend towards this direction is the recent case of Castro v. Tan in which We held:

While we agree with petitioners that parties to a loan agreement have wide latitude to stipulate on any interest rate in view of the Central Bank Circular No. 905 s. 1982 which suspended the Usury Law ceiling on interest effective January 1, 1983, it is also worth stressing that interest rates whenever unconscionable may still be declared illegal. There is certainly nothing in said circular which grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.

In several cases, we have ruled that stipulations authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law. In Medel v. Court of Appeals, we annulled a stipulated 5.5% per month or 66% per annum interest on a P500,000.00 loan and a 6% per month or 72% per annum interest on a P60,000.00 loan, respectively, for being excessive, iniquitous, unconscionable and exorbitant. In Ruiz v. Court of Appeals, we declared a 3% monthly interest imposed on four separate loans to be excessive. In both cases, the interest rates were reduced to 12% per annum.

In this case, the 5% monthly interest rate, or 60% per annum, compounded monthly, stipulated in the Kasulatan is even higher than the 3% monthly interest rate imposed in the Ruiz case. Thus, we similarly hold the 5% monthly interest to be excessive, iniquitous, unconscionable and exorbitant, contrary to morals, and the law. It is therefore void ab initio for being violative of Article 1306 of the Civil Code. With this, and in accord with the Medel and Ruiz cases, we hold that the Court of Appeals correctly imposed the legal interest of 12% per annum in place of the excessive interest stipulated in the Kasulatan. 

In the case before us, even if Rosemarie Rey initially suggested the interest rate on the first loan, voluntariness does not make the stipulation on an interest, which is iniquitous, valid. As Rosemarie Rey later realized through the counsel of her lawyer that the interest rates of the first and second loans were excessive and no interest should be imposed on the third and fourth loans, she came to court for recomputation of the loans and recovery of excess payments.

In this case, the first loan had a 7.5% monthly interest rate or 90% interest per annum, while the second loan had a 7% monthly interest rate or 84% interest per annum, which rates are very much higher than the 3% monthly interest rate imposed in Ruiz v. Court of Appeals and the 5% monthly interest rate imposed in Sps. Albos v. Sps. Embisan, et  al.

Based on the ruling of the Spouses Albos case, the Court holds that the interest rates of 7.5% and 7% are excessive, unconscionable, iniquitous, and contrary to law and morals; and, therefore, void ab initio. Hence, the Court of Appeals erred in sustaining the imposition of the said interest rates, while the RTC correctly imposed the legal interest of 12% per annum in place of the said interest rates.

Anent the third and fourth loans both in the amount of P100,000.00, the Court of Appeals correctly held that as the agreement of 3% monthly interest on the third loan and 4% monthly interest on the fourth loan was merely verbal and not put in writing. no interest was due on the third and fourth loans. This is in accordance with Article 1956 of the Civil Code which provides that "[n]o interest shall be due unless it has been stipulated in writing." 

Hence, the payments made as of March 18, 2005 in the third loan amounting to P141,360.0035 resulted in the overpayment of P41,360.00. Moreover, the payments made as of February 2, 2005 in the fourth loan amounting to P117,960.0036 resulted in an overpayment of P17,960.00. Consequently, as found by the Court of Appeals, there was a total overpayment of P59,320.00 for the third and fourth loans.

II. The Court agrees with petitioner that Articles 1253 and 2154 of the Civil Code apply to this case, and Cesar Anson is obliged to return to petitioner excess payments received by him.

Article 1253 of the Civil Code states that "[i]f the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered." The Court reviewed the computation above made by petitioner for Loan 1 and Loan 2, and found the computation to be correct.

The Court finds that in Loan 1, petitioner already paid in full the principal amount of P200,000.00 and monthly interest thereon on November 8, 2003, leaving an excess payment of P1,759.64. 

Further payments made by petitioner from November 23, 2003 to August 23, 2004 resulted in overpayment amounting to P144,259.64. 

The excess payment of P9,259.64 as of November 23, 2003 plus excess payments made from December 23, 2003 to April 23, 2004 amounting to P84,259.64 in Loan 1 may be applied to Loan 2, leaving a final excess payment of P60,000.00 for Loan 1.

As regards Loan 2, petitioner fully paid the principal amount of P350,000.00 and monthly interest thereon on May 26, 2004, leaving an excess payment of P31,856.68. 

Payments made thereafter, from June 26, 2004 to September 26, 2004, resulted in excess payments amounting to P150,380.68 for Loan 2. 

Petitioner also made excess payments of P41,360.00 in Loan 3, and P17,960.00 in Loan 4. 

Hence, the total excess payments made by petitioner in the four loans amounted to P269,700.68.

Since Cesar Anson received a total overpayment of P269,700.68 from petitioner, he is obliged to return the amount in accordance with the principle of solutio indebiti under Article 2154 of the Civil Code, to wit:

Article 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.  

However, in regard to payment of interest on the overpayment made by petitioner, the Court notes its ruling in Sps. Abella v. Sps. Abella, thus:

As respondents made an overpayment, the principle of solutio indebiti as provided by Article 2154 of the Civil Code applies. xxx

x x x x

In Moreno-Lentfer v. Wolff, this court explained the application of solutio indebiti:

The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the expense of another. It applies where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment, and (2) the payment is made through mistake, and not through liberality or some other cause.

As respondents had already fully paid the principal and all conventional interest that had accrued, they were no longer obliged to make further payments. Any further payment they made was only because of a mistaken impression that they were still due. Accordingly, petitioners are now bound by a quasi-contractual obligation to return any and all excess payments delivered by respondents.

Nacar provides that "[w]hen an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum." This applies to obligations arising from quasi-contracts such as solutio indebiti.

Further, Article 2159 of the Civil Code provides:

Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is involved, or shall be liable for fruits received or which should have been received if the thing produces fruits.

He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for damages to the person who delivered the thing, until it is recovered.

Consistent however, with our finding that the excess payment made by respondents were borne out of a mere mistake that it was due, we find it in the better interest of equity to no longer hold petitioners liable for interest arising from their quasi-contractual obligation.

In this case, the excess payments made by petitioner were also borne out of a mistake that they were due; hence, following the ruling in Sps. Abella v. Sps. Abella, the Court deems it in the better interest of equity not to hold Cesar Anson liable for interest on the excess payments.

Nevertheless, an interest at the rate of 6% per annum is imposable on the total judgment award pursuant to Nacar v. Gallery Frames, et al., which held that "[w]hen the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest x x x shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit."

III. 

Petitioner contends that the Court of Appeals and the RTC erred in not awarding attorney's fees and litigation expenses in her favor.

Petitioner's contention is without merit.

It is a settled rule that attorney's fees and litigation expenses cannot be automatically recovered as part of damages in light of the policy that the right to litigate should bear no premium. Attorney's fees are awarded only in those cases enumerated in Article 2208  of the Civil Code. Considering the absence of facts that justify the award of attorney's fees to herein petitioner, the Court of Appeals was correct in not awarding attorney's fees and litigation expenses to petitioner.

WHEREFORE, the Decision of the Court of Appeals dated September 6, 2013 and its Resolution dated January 10, 2014 in CA-G.R. CV No. 95012 are REVERSED AND SET ASIDE, and the Decision of the Regional Trial Court of Legazpi City, Branch 5 in Civil Case No. 10489 is REINSTATED with the following MODIFICATION: respondent Cesar G. Anson is ordered to pay petitioner Rosemary Q. Rey the amount of Two Hundred Sixty-Nine Thousand Seven Hundred Pesos and Sixty-Eight Centavos (P269,700.68), with legal interest at the rate of 6% per annum reckoned from the finality of this Decision until full payment.