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United Coconut Planters Bank v. Sps Beluso (2007) Chico-Nazario, J.

Facts:

Apr 16, 1996: UCPB granted the Sps Beluso a Promissory Notes Line under a Credit Agreement whereby the Belusos could avail a credit up to a max amt of P1.2 mil for a term ending on Apr 30, 1997. The Belusos, in addition to the promissory notes, executed a real estate mortgage over some land in Roxas as additional security. o Later on, their Credit Agreement was amended to increase the amount of the Promissory Notes Line to P2.3 mil. The term was also amended: extended to Feb 23, 1998. The Belusos availed of 3 promissory notes amounting to P2mil, which were renewed several times. Apr 30, 1997, the payment of the principal + interest of the last 2 notes was debited form their account with UCPB (both added up to P1.3 mil). Later, a loan of P1.3mil was still released to them under a promissory note whose due date was Feb 28, 1998. (meaning their loan was still an even P2mil) o To completely avail of the P2.35 mil credit line, they executed 2 more promissory notes amounting to P350k. However, they allege that the notes were never released to them so they claim that their debt is still only P2mil. (Anyway) UCPB applied interest rates on the promissory notes ranging from 18% to 34%: o From 1996 to Feb 1998, the Belusos paid P763k. o From Feb 1998 to June 1998, UCPB charged them interests and penalties. The Belusos failed to make any payment on these. o Sept 1998, UCPB demanded pay P2.93 mil PLUS 25% atty fees. Belusos did not pay. o Dec 1998, UCPB foreclosed on the Belusos mortgaged properties. (by that time already ballonned to P3.7 mil) RTC: interest rate provided in the promissory notes are void. Imposed fine of P26k for violating the Truth in Lending Act. CA: affirmed because the rates were determined solely by the UCPB.

Issues/Held: Are the interest rates valid? NO Is UCPB liable for violation of the Truth in Lending Act? YES Ratio: RE: Validity of the int rates Arguments UCPB: o While the rate was not quantified in the face of the promissory notes, it was fixed at the time of execution as: at the rate indicative of the DBP retail rate. This must be read with another stipulation in the promissory note that states: the int rate may be increased or decreased by the lender considering, among others, the prevailing financial and monetary c onditions, OR the rate and charges which other banks or financial institutions offer to charge for similar conditions, AND/OR the resulting profitability to the LENDER after due consideration with the borrower. o These are valid reference rates akin to a prevailing rate or prime rate allowed in Polotan v. CA o The imposition of the int rates did not infringe on the mutuality of contracts bec the Belusos chose whether to renew their credit. Assuming there was any defect, it was cured by the subsequent act of availing of the credit line from Apr 1996-Feb 1998 without protest. Therefore, they are in estoppel. SC disagrees with the UCPB. (PNB v. CA: There must be mutuality.) The provision: interest shall be at the rate indicative of DBD retail rate OR as determined by the Branch Head means the int rates are solely on the will of UCPB. Under the provision, UCPB has 2 choices: 1. Rate indicative of the DBD rate 2. Rate as determined by the branch head Bec UCPB has the choice, the rate should be determinable in BOTH choices. If either gives UCPB to determine the rate at will, then the bank can just do that, thus making the entire int rate provision violative of the principle of mutuality. In this case, BOTH are dependent solely on the will of UCPB. In the case of the rate indicative of the DBD rate it is not akin to a prevailing/prime rate in Polotan. In Polotan, the interest rate was interest per annum at 3% interest plus the prime rate of Security Bank and Trust Company o ------>here, ther is a fixed margin over the reference rate: 3%. Parties can easily determine the rate by applying simple arithmetic o In UCPBs provision, there is no specification of any margin above or below the DBD retail rate. It can peg the interest at any percentage above or below the DBD retail rate (giving it unfettered didiscretion in determining the int rate Also, the stipulation that the interest rate is subjected to a review is given to UCPB alone as the lender. (int rate MAY be increased or decreased by the LENDER considering: prevailing financial and monetary conditions, rate of other banks or financial instituti ons, resulting profitability to the lender) RE: Error in computation UCPB argues: o While both RTC/CA voided the interest rates, they failed to include in the computation the legal interest rate of 12% per annum and that they are entitled to atty fees and penalties o RTC/CA also erred in negating the Compounded interest agreed upon by the parties unders Sec 2.02 of their Credit Agreement Belusos argue: o The demand made by UCPB was considerably bigger and so the demand should be considered void. No valid demand = no default o Since the foreclosure was improper = atty fees not warranted SC agrees with UCPB o Default commences on demand. The excess amt in such demand does not nullify the demand wrt the proper amt o Belusos are considered in default wrt the proper amt, therefore the interests and penalties bagen to run at that point o As there was no valid stipulation to interest, legal interest shall be charged (the Belusos even originally asked the RTC to impose the legal interest rate. This shows that they acknowledge their obligation to pay 12% legal interest) This is proper bec what was voided was the stipulated interest and not the stipulation that the loan shall earn interest o Also, uphold the compounding of interest o Penalty = iniquitous (bec this 30-36% is already over and above the compounded in rate o Atty fees: both were forced to litigate so both parties are compensated. Merely affirm deletion of atty fees. RE: Liability for violating the Truth in Lending Act UCPB contests this:

Barred by the 1 yr prescriptive period (latest of the promissory notes was executed on Jan 2, 1998, but orig petition was filed on Feb 9, 1999) o The original complain did not explicitly allege a violation of the Truth in Lending Act and no action to formally admit the amended petition was made o Being a criminal offense, it cannot be inferred nor implied from the allegations CA says (and the SC agrees): there was no explicit allegation but the infringement may be inferred from the allegations when the Belusos executed the promissory notes, the interest charged were left blank. Thus, UCPB failed to discharge its duty to disclose in full to th e Belusos the charges applicable on their loans. SC says: the allegations in the complaint are controlling. SC adds some other parts in the complaint from which some violations can also be inferred: unilaterally imposed an increased interest rate by relying on the provision in the promissory note that granted it the power to unilaterally fix the interest rate. Such interest rate was not determined in the promissory note but was left solely to the will of the branch head. o -----> this means the promisorry notes did not contain a clear statement in writing of the finance charge expressed in terms of pesos and centavos/the percentage that the finance charge bears to the amount to be financed expressed as a simple annual rate on t he outstanding unpaid balance of the obligation

RE: Prescriptive period SC disagrees. The penalty for violation of the act is P100 or an amt equal to twice the finance charge required by creditor in connection with such transaction, whichever is greater (will not exceed P2k). o ----> not that the penalty depends on the finance charged to the borrower. Hence, the borrowers cause of action would only accrue when the finance charge is required. o Here, the date of demand was Sept 2, 1998. Therefore, the filing of the case on Feb 1999 was within the prescriptive period. RE: Cannot be implied nor inferred Violation of the Act gives rise to both criminal and civil liabilities: o Sec 6 (c) considers a criminal offense the wilful violation of the Act. Penalty: Fine/imprisonment/both o Sec 6 (a) provides for a civil cause of action for failure to disclose any information of the required information to any person in violation of the Act. Penalty: P100 or amt equal to twice the finance charge required by the creditor in connection with suc h transaction, whichever is greater, not exceeding P2k In this case, the civil action to recover under Sec 6 (a) was jointly instituted with: o The action to declare the interests void; and o The action to declare the foreclosure void. Under the Rules of Court, the Joinder is allowed. RE: Due Process UCPB argues: due process mandates that a defendant should be sufficiently apprised of the matters he/she would be defending himself against SC says: any attempt of UCPB to feign ignorance as to prevent it from putting up a defense is plainly hogwash! o Actually, in the Pre Trial Brief, the claim for civil sanctions was expressly alleged (that since from the start, the bank vilated the Act in not informing them in writing before the execution of the promissory notes of the interest rates expressed as a percentage of the total loan o Also, in that brief they raised the issue: does the expression indicative rate of DBD comply with the Truth in Lending Act provision to express the interest rate as a simple annual percentage of the loan? Opening a credit line did not create a creadit transaction (mutuum). Credit line = preparatory contract to the mutuum. Credit transaction occurred not when the line was opened, but when it was availed of Violation of the Act occurred not when they executed the Credit Agreement (where no interest rate was mentioned) but when the parties executed the promissory notes (where the offending interest rate was stipulated) RE: Substantial compliance UCPB argues: the Belusos were given copies of the promissory notes after their execution. Then they were duly notified = substantial compliance with the Act SC disagrees. Sec 4 of the Truth in Lending Act provides that the disclosure statement must be made prior to the consummation of the transaction Rationale: to protect users of credit from lack of awareness of the true cost, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount The law seeks to protect debtors by permitting them to fully appreciate the cost of their loan, to enable them to give full consent to the contract and to properly evaluate their options in arriving at business decisions Upholding the claim of substantial compliance would defeat the purposes of the Act Also, the promissory notes are not sufficient notification. The interest rate provision does not sufficiently indicate with particularity the interest rate to be applied Dispositive: CA decision modified. Belusos liable for: o P2.35 mil o Penalty 12% per annum from date of demand o Compounded legal interest rate 12% per annum from date of demand Ffg amts to be deducted from Belusos liability: o Payments made: P763k. (payments to be applied to the date of actual payment of the ffg in order: Penalty charges Interest Principal Outstanding balance o Penalty of P26k under the Act (amt deducted from liability of Belusos on Feb 1999 in the ffg order: Penalty Interest Principal Outstanding balance Foreclosure of mortgage valid o Amts which the RTC/CA ordered the Belusos to pay is deducted from the proceeds of the foreclosure sale