Case Digest: Sps. Mallari v. Prudential Bank, G.R. No. 197861, June 5, 2013

Commercial Law | Interest

Facts:

• On December 11, 1984, Florentino T. Mallari obtained a loan of ₱300,000.00 from Prudential Bank-Tarlac Branch, evidenced by Promissory Note.
• Under the promissory note, the loan was subject to:
• interest rate of 21% per annum,
• attorney’s fees equivalent to 15% of the total amount due but not less than P200.00 
• in case of default, a penalty and collection charges of 12% p.a. of the total amount due.
• The loan had a maturity date of January 10, 1985, but was renewed up to  February 17, 1985. 
• Mallari executed a Deed of Assignment, authorizing the bank to pay his loan with his time deposit of ₱300,000.00.
• On December 22, 1989, Florentino and Aurea Mallari obtained another loan of ₱1.7 million from the same bank, evidenced by a Promissory Note and with a maturity date of March 22, 1990.
• They stipulated that the loan will bear:
• 23% interest p.a.
• attorney’s fees equivalent to 15% p.a. of the total amount due, but not less than P200.00
• penalty and collection charges of 12% p.a.
• Petitioners executed a Deed of Real Estate Mortgage in favor of respondent bank for the loan.
• Petitioners failed to settle their loan obligations.
• The bank sent demand letters when Sps. Mallari failed to settle their obligations, which when computed up to January 31, 1992, amounted to P571,218.54 and P2,991,294.82.
• The bank filed a petition for the extrajudicial foreclosure of petitioners’ mortgaged property for the satisfaction of the latter’s obligation of P1,700,000.00 secured by such mortgage.
• Sps. Mallari by  filed a complaint for annulment of mortgage, deeds, injunction, preliminary injunction, temporary restraining order and damages claiming that: 
1. the ₱300,000.00 loan obligation should have been considered paid, because the time deposit with the same amount had already been assigned to respondent bank; 
2. respondent bank still added the ₱300,000.00 loan to the ₱1.7 million loan obligation for purposes of applying the proceeds of the auction sale; and
3. they realized that there were onerous terms and conditions imposed by respondent bank when it tried to unilaterally increase the charges and interest over and above those stipulated. Petitioners asked the court to restrain respondent bank from proceeding with the scheduled foreclosure sale.
• RTC allowed the extrajudicial foreclosure and a Certificate of Sale was issued to respondent bank being the highest bidder in the amount of ₱3,500,000.00.

RTC-Tarlac: Dismissed the case, finding no evidence of bad faith.

• As to the ₱300,000.00 loan, petitioners had assigned petitioner Florentino's time deposit in the amount of ₱300,000.00 in favor of respondent bank, which maturity coincided with petitioners' loan maturity. Thus, if the loan was unpaid, which was later extended to February 17, 1985, respondent bank should had just applied the time deposit to the loan. However, respondent bank did not, and allowed the loan interest to accumulate reaching the amount of ₱594,043.54 as of April 10, 1992, hence, the amount of ₱292,600.00 as penalty charges was unjust and without basis.
• As to the ₱1.7 million loan which petitioners obtained from respondent bank after the ₱300,000.00 loan, it had reached the amount of ₱3,171,836.18 per Statement of Account dated April 27, 1993, which was computed based on the 23% interest rate and 12% penalty charge agreed upon by the parties; and that contrary to petitioners' claim, respondent bank did not add the ₱300,000.00 loan to the ₱1.7 million loan obligation for purposes of applying the proceeds of the auction sale.
• The RTC found no legal basis for petitioners' claim that since the total obligation was ₱1.7 million and respondent bank's bid price was ₱3.5 million, the latter should return to petitioners the difference of ₱1.8 million. It found that since petitioners' obligation had reached ₱2,991,294.82 as of January 31, 1992, but the certificate of sale was executed by the sheriff only on July 7, 1993, after the restraining order was lifted, the stipulated interest and penalty charges from January 31, 1992 to July 7, 1993 added to the loan already amounted to ₱3.5 million as of the auction sale.
• The RTC found that the 23% interest rate p.a., which was then the prevailing loan rate of interest could not be considered unconscionable, since banks are not hospitable or equitable institutions but are entities formed primarily for profit. It also found that Article 1229 of the Civil Code invoked by petitioners for the reduction of the interest was not applicable, since petitioners had not paid any single centavo of the ₱1.7 million loan which showed they had not complied with any part of the obligation.

CA: Affirmed the decision of RTC.

• The time deposit of ₱300,000.00 was equivalent only to the principal amount of the loan of ₱300,000.00 and would not be sufficient to cover the interest, penalty, collection charges and attorney's fees agreed upon, thus, in the Statement of Account dated April 10, 1992, the outstanding balance of petitioners' loan was ₱594,043.54. 
• It also found not persuasive petitioners' claim that the ₱300,000.00 loan was added to the ₱1.7 million loan. T
• The interest rates and penalty charges imposed were not unconscionable.

Issue: 

• Whether the 23% p.a. interest rate and the 12% p.a. penalty charge on petitioners' ₱1,700,000.00 loan to which they agreed upon is excessive or unconscionable under the circumstances. NO

Held:

Parties are free to enter into agreements and stipulate as to the terms and conditions of their contract, but such freedom is not absolute. As Article 1306 of the Civil Code provides, "The 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." 

Hence, if the stipulations in the contract are valid, the parties thereto are bound to comply with them, since such contract is the law between the parties. In this case, petitioners and respondent bank agreed upon on a 23% p.a. interest rate on the ₱1.7 million loan. However, petitioners now contend that the interest rate of 23% p.a. imposed by respondent bank is excessive or unconscionable, invoking our ruling in Medel v. Court of Appeals, Toring v. Spouses Ganzon-Olan, and Chua v. Timan.

We are not persuaded.

In Medel v. Court of Appeals, we found the stipulated interest rate of 66% p.a. or a 5.5% per month on a ₱500,000.00 loan excessive, unconscionable and exorbitant, hence, contrary to morals if not against the law and declared such stipulation void.

In Toring v. Spouses Ganzon-Olan, the stipulated interest rates involved were 3% and 3.81% per month on a ₱10 million loan, which we find under the circumstances excessive and reduced the same to 1% per month. 

While in Chua v. Timan, where the stipulated interest rates were 7% and 5% a month, which are equivalent to 84% and 60% p.a., respectively, we had reduced the same to 1% per month or 12% p.a. 

We said that we need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, unconscionable and exorbitant, hence, the stipulation was void for being contrary to morals.

In this case, the interest rate agreed upon by the parties was only 23% p.a., or less than 2% per month, which are much lower than those interest rates agreed upon by the parties in the above-mentioned cases. Thus, there is no similarity of factual milieu for the application of those cases.

We do not consider the interest rate of 23% p.a. agreed upon by petitioners and respondent bank to be unconscionable.

In Villanueva v. Court of Appeals, where the issue raised was whether the 24% p.a. stipulated interest rate is unreasonable under the circumstances, we answered in the negative and held:

In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and Mortgage Bank, Dagupan City Branch, this Court held that the interest rate of 24% per annum on a loan of ₱244,000.00, agreed upon by the parties, may not be considered as unconscionable and excessive. As such, the Court ruled that the borrowers cannot renege on their obligation to comply with what is incumbent upon them under the contract of loan as the said contract is the law between the parties and they are bound by its stipulations.

Also, in Garcia v. Court of Appeals, this Court sustained the agreement of the parties to a 24% per annum interest on an ₱8,649,250.00 loan finding the same to be reasonable and clearly evidenced by the amended credit line agreement entered into by the parties as well as two promissory notes executed by the borrower in favor of the lender.

Based on the above jurisprudence, the Court finds that the 24% per annum interest rate, provided for in the subject mortgage contracts for a loan of ₱225,000.00, may not be considered unconscionable. Moreover, considering that the mortgage agreement was freely entered into by both parties, the same is the law between them and they are bound to comply with the provisions contained therein.

Clearly, jurisprudence establish that the 24% p.a. stipulated interest rate was not considered unconscionable, thus, the 23% p.a. interest rate imposed on petitioners' loan in this case can by no means be considered excessive or unconscionable.

We also do not find the stipulated 12% p.a. penalty charge excessive or unconscionable.

In Ruiz v. CA, we held:

The 1% surcharge on the principal loan for every month of default is valid. This surcharge or penalty stipulated in a loan agreement in case of default partakes of the nature of liquidated damages under Art. 2227 of the New Civil Code, and is separate and distinct from interest payment. Also referred to as a penalty clause, it is expressly recognized by law. It is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. The obligor would then be bound to pay the stipulated amount of indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach. x x x

And in Development Bank of the Philippines v. Family Foods Manufacturing Co., Ltd., we held that:

x x x The enforcement of the penalty can be demanded by the creditor only when the non-performance is due to the fault or fraud of the debtor. The non-performance gives rise to the presumption of fault; in order to avoid the payment of the penalty, the debtor has the burden of proving an excuse - the failure of the performance was due to either force majeure or the acts of the creditor himself.

Here, petitioners defaulted in the payment of their loan obligation with respondent bank and their contract provided for the payment of 12% p.a. penalty charge, and since there was no showing that petitioners' failure to perform their obligation was due to force majeure or to respondent bank's acts, petitioners cannot now back out on their obligation to pay the penalty charge. A contract is the law between the parties and they are bound by the stipulations therein.

WHEREFORE, the petition for review is DENIED. The Decision dated June 17, 2010 and the Resolution dated July 20, 2011 of the Court of Appeals are hereby AFFIRMED.