PrefinALS and Finals Cases Notes

THIRD DIVISION
NEW
SAMPAGUITA
BUILDERS
G.R. No. 148753
CONSTRUCTION, INC. (NSBCI)
and Spouses EDUARDO R. DEE
Present:
and
ARCELITA
M.
DEE,
Petitioners,
Panganiban, J,
Chairman,
Sandoval-Gutierrez,
Corona,*
and
Carpio Morales, JJ
versus
PHILIPPINE NATIONAL BANK,

Promulgated:
Respondent.
July 30, 2004
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- -- -- -- -- -- -- -- x
DECISION
PANGANIBAN, J.:
C
ourts have the authority to strike down
or to modify provisions in promissory
notes
that
grant
the
lenders
unrestrained power to increase interest
rates, penalties and other charges at
the
latters
sole discretion and
without giving prior notice to and
securing
the
consent
of
the
borrowers. This unilateral
__________________
*
On leave.
authority is anathema to the mutuality
of contracts and enable lenders to take
undue
advantage
of
borrowers.
Although the Usury Law has been
effectively repealed, courts may still
reduce iniquitous or unconscionable
rates charged for the use of money.
Furthermore,
excessive
interests,
penalties and other charges not revealed
in disclosure statements issued by banks,
even if stipulated in the promissory
notes, cannot be given effect under the
Truth in Lending Act.
The Case
Before us is a Petition for
Review[1] under Rule 45 of the Rules of
Court, seeking to nullify the June 20,
2001 Decision[2] of the Court of
Appeals[3] (CA) in CA-GR CV No.
55231. The decretal portion of the
assailed Decision reads as follows:

WHEREFORE, the decision of the
Regional Trial Court of Dagupan City,
Branch 40 dated December 28, 1995 is
REVERSED and SET ASIDE.
The
foreclosure proceedings of the mortgaged
properties of defendants-appellees[4] and
the February 26, 1992 auction sale are
declared legal and valid and said
defendants-appellees are ordered to pay
plaintiff-appellant
PNB,[5]
jointly
and
severally[,] the amount of deficiency that will
be computed by the trial court based on the
original penalty of 6% per annum as
explicitly stated in the loan documents and
to pay attorneys fees in an amount
equivalent to x x x 1% of the total amount
due and the costs of suit and expenses of
litigation.[6]
The Facts
The facts are narrated by the
CA as follows:
On February 11, 1989, Board
Resolution No. 05, Series of 1989 was
approved by [Petitioner] NSBCI [1)]
authorizing the company to x x x apply for or
secure a commercial loan with the PNB in

an aggregate amount of P8.0M, under such
terms agreed by the Bank and the NSBCI,
using or mortgaging the real estate
properties registered in the name of its
President and Chairman of the Board
[Petitioner] Eduardo R. Dee as collateral;
[and] 2) authorizing [petitioner-spouses] to
secure the loan and to sign any [and all]
documents which may be required by
[Respondent] PNB[,] and that [petitionerspouses] shall act as sureties or co-obligors
who shall be jointly and severally liable with
[Petitioner] NSBCI for the payment of any
[and all] obligations.
On August 15, 1989, Resolution No.
77 was approved by granting the request of
[Respondent] PNB thru its Board NSBCI for
an P8 Million loan broken down into a
revolving credit line of P7.7M and an
unadvised line of P0.3M for additional
operating and working capital[7] to mobilize
its various construction projects, namely:
1)
MWSS Watermain;
2)
NEA-Liberty farm;
3)
Olongapo City Pag-Asa
Public Market;
4)
Renovation of COA-NCR
Buildings 1, 2 and 9;
5)
Dupels, Inc., Extensive
prawn farm development
project;
6)
Banawe Hotel Phase II;
7)
Clark Air Base -Barracks and Buildings; and
8)
Others: EDSA Lighting,
Roxas Blvd. Painting NEA
Sapang Palay and Angeles
City.
The loan of [Petitioner] NSBCI was

secured by a first mortgage on the following:
a) three (3) parcels of residential land
located at Mangaldan, Pangasinan with total
land area of 1,214 square meters[,]
including improvements thereon and
registered under TCT Nos. 128449, 126071,
and 126072 of the Registry of Deeds of
Pangasinan; b) six (6) parcels of residential
land situated at San Fabian, Pangasinan
with total area of 1,767 square meters[,]
including improvements thereon and
covered by TCT Nos. 144006, 144005,
120458, 120890, 144161[,] and 121127 of
the Registry of Deeds of Pangasinan; and c)
a residential lot and improvements thereon
located at Mangaldan, Pangasinan with an
area of 4,437 square meters and covered by
TCT No. 140378 of the Registry of Deeds of
Pangasinan.
The loan was further secured by the
joint and several signatures of [Petitioners]
Eduardo Dee and Arcelita Marquez Dee,
who signed as accommodation-mortgagors

since all the collaterals were owned by them
and registered in their names.
Moreover
[Petitioner]
NSBCI
executed the following documents, viz: a)
promissory note dated June 29, 1989 in the
amount of P5,000,000.00 with due date on
October 27, 1989; [b)] promissory note
dated September 1, 1989 in the amount of
P2,700,000.00 with due date on December
30, 1989; and c) promissory note dated
September 6, 1989 in the amount of
P300,000.00 with maturity date on January
4, 1990.
In addition, [petitioner] corporation
also signed the Credit Agreement dated
August 31, 1989 relating to the revolving
credit line of P7.7 Million x x x and the
Credit Agreement dated September 5, 1989
to support the unadvised line of
P300,000.00.
On August 31, 1989, [petitionerspouses] executed a Joint and Solidary
Agreement (JSA) in favor of [Respondent]
PNB unconditionally and irrevocably binding
themselves to be jointly and severally liable
with the borrower for the payment of all
sums due and payable to the Bank under
the Credit Document.
Later on, [Petitioner] NSBCI failed to

comply with its obligations under the
promissory notes.
On June 18, 1991, [Petitioner]
Eduardo R. Dee on behalf of [Petitioner]
NSBCI sent a letter to the Branch Manager
of the PNB Dagupan Branch requesting for
a 90-day extension for the payment of
interests and restructuring of its loan for
another term.
Subsequently,
NSBCI
tendered
payment to [Respondent] PNB [of] three (3)
checks aggregating P1,000,000.00, namely
1) check no. 316004 dated August 8, 1991
in the amount of P200,000.00; 2) check no.
03499997 dated August 8, 1991 in the
amount of P650,000.00; and 3) check no.
03499998 dated August 15, 1991 in the
amount of P150,000.00.[8]
In a meeting held on August 12,
1991, [Respondent] PNBs representative[,]
Mr. Rolly Cruzabra, was informed by
[Petitioner] Eduardo Dee of his intention to
remit to [Respondent] PNB post-dated
checks covering interests, penalties and part
of the loan principals of his due account.
On August 22, 1991, [Respondent]
banks Crispin Carcamo wrote [Petitioner]
Eduardo Dee[,] informing him that
[Petitioner]
NSBCIs
proposal
[was]
acceptable[,] provided the total payment
should be P4,128,968.29 that [would] cover
the amount of P1,019,231.33 as principal,
P3,056,058.03 as interests and penalties[,]
and P53,678.93 for insurance[,] with the
issuance of post-dated checks to be dated
not later than November 29, 1991.
On September 6, 1991, [Petitioner]
Eduardo Dee wrote the PNB Branch
Manager reiterating his proposals for the
settlement of [Petitioner] NSBCIs past due
loan account amounting to P7,019,231.33.
[Petitioner] Eduardo Dee later
tendered four (4) post-dated Interbank
checks aggregating P1,111,306.67 in favor
of [Respondent] PNB, viz:
Check No.
Date
Amount
03500087
Sept. 29, 1991
03500088
Oct. 29, 1991
03500089
Nov. 29, 1991
03500090
Dec. 20, 1991
P277,826.70
P277,826.70
P277,826.70
P277,826.57
Upon presentment[,] however, x x x

check nos. 03500087 and 03500088 dated
September 29 and October 29, 1991 were

dishonored by the drawee bank and
returned due [to] a stop payment order from
[petitioners].
On November 12, 1991, PNBs Mr.
Carcamo wrote [Petitioner] Eduardo Dee
informing him that unless the dishonored
checks [were] made good, said PNB branch
shall recall its recommendation to the Head
Office for the restructuring of the loan
account and refer the matter to its legal
counsel for legal action.[] [Petitioners] did
not heed [respondents] warning and as a
result[,] the PNB Dagupan Branch sent
demand letters to [Petitioner] NSBCI at its
office address at 1611 ERDC Building, E.
Rodriguez Sr. Avenue, Quezon City[,] asking
it to settle its past due loan account.
[Petitioners] nevertheless failed to
pay their loan obligations within the
[timeframe] given them and as a result,
[Respondent] PNB
filed
with
the
Provincial Sheriff of Pangasinan at
Lingayen a Petition for Sale under Act 3135,
as amended[,] and Presidential Decree No.
385 dated January 30, 1992.
The notice of extra-judicial sale of the
mortgaged properties relating to said PNBs
[P]etition for [S]ale was published in the
February 8, 15 and 22, 1992 issues of the
Weekly Guardian, allegedly a newspaper of

general circulation in the Province of
Pangasinan, including the cities of Dagupan
and San Carlos. In addition[,] copies of the
notice were posted in three (3) public
places[,] and copies thereof furnished
[Petitioner] NSBCI at 1611 [ERDC Building,]
E. Rodriguez Sr. Avenue, Quezon City, [and
at] 555 Shaw Blvd., Mandaluyong[, Metro
Manila;] and [Petitioner] Sps. Eduardo and
Arcelita Dee at 213 Wilson St., San Juan,
Metro Manila.
On February 26, 1992, the Provincial
Deputy Sheriff Cresencio F. Ferrer of
Lingayen, Pangasinan foreclosed the real
estate mortgage and sold at public auction
the mortgaged properties of [petitionerspouses,] with [Respondent] PNB being
declared the highest bidder for the amount
of P10,334,000.00.
On March 2, 1992, copies of the
Sheriffs Certificate of Sale were sent by
registered mail to [petitioner] corporations
address at 1611 [ERDC Building,] E.
Rodriguez Sr. Avenue, Quezon City and
[petitioner-spouses] address at 213 Wilson
St., San Juan, Metro Manila.
On April 6, 1992, the PNB Dagupan
Branch Manager sent a letter to [petitioners]
at their address at 1611 [ERDC Building,] E.
Rodriguez Sr. Avenue, Quezon City[,]

informing them that the properties securing
their loan account [had] been sold at public
auction, that the Sheriffs Certificate of Sale
had been registered with the Registry of
Deeds of Pangasinan on March 13, 1992[,]
and that a period of one (1) year therefrom
[was] granted to them within which to
redeem their properties.
[Petitioners] failed to redeem their
properties within the one-year redemption
period[,] and so [Respondent] PNB executed
a [D]eed of [A]bsolute [S]ale consolidating
title to the properties in its name. TCT Nos.
189935 to 189944 were later issued to
[Petitioner] PNB by the Registry of Deeds of
Pangasinan.
On August 4, 1992, [Respondent]
PNB informed [Petitioner] NSBCI that the
proceeds of the sale conducted on February
26, 1992 were not sufficient to cover its total
claim amounting to P12,506,476.43[,] and
thus demanded from the latter the deficiency
of P2,172,476.43 plus interest and other
charges[,] until the amount [was] fully paid.
[Petitioners] refused to pay the above
deficiency
claim
which
compelled
[Respondent] PNB to institute the instant
[C]omplaint for the collection of its deficiency
claim.
Finding that the PNB debt relief

package
automatically
[granted]
to
[Petitioner] NSBCI the benefits under the
program, the court a quo ruled in favor of
[petitioners] in its Decision dated December
28, 1995, the fallo of which reads:
In view of the foregoing,
the Court believes and so holds
that the [respondent] has no
cause of action against the
[petitioners].
WHEREFORE, the case
is hereby DISMISSED, without
costs.[9]
On appeal, respondent assailed the

trial courts Decision dismissing its
deficiency claim on the mortgage debt.
It also challenged the ruling of the
lower court that Petitioner NSBCIs
loan account was bloated, and that the
inadequacy of the bid price was
sufficient to set aside the auction sale.
Ruling of the Court of Appeals
Reversing the trial court, the CA

held that Petitioner NSBCI did not avail
itself of respondents debt relief
package (DRP) or take steps to comply
with the conditions for qualifying under
the program. The appellate court also
ruled that entitlement to the program
was not a matter of right, because such
entitlement was still subject to the
approval of higher bank authorities,
based on their assessment of the
borrowers repayment capability and
satisfaction of other requirements.
As to the misapplication of loan
payments, the CA held that the
subsidiary ledgers of NSBCIs loan
accounts with respondent reflected all
the loan proceeds as well as the partial
payments that had been applied either
to the principal or to the interests,
penalties and other charges. Having
been made in the ordinary and usual
course of the banking business of
respondent, its entries were presumed
accurate, regular and fair under Section
5(q) of Rule 131 of the Rules of Court.

Petitioners
failed
to
rebut
this
presumption.
The increases in the interest rates
on NSBCIs loan were also held to be
authorized by law and the Monetary
Board and -- like the increases in
penalty rates -- voluntarily and freely
agreed upon by the parties in the Credit
Agreements they executed. Thus, these
increases
were
binding
upon
petitioners.
However, after considering that
two to three of Petitioner NSBCIs
projects covered by the loan were
affected by the economic slowdown in
the areas near the military bases in the
cities of Angeles and Olongapo, the
appellate court annulled and deleted
the adjustment in penalty from 6
percent to 36 percent per annum. Not
only did respondent fail to demonstrate
the existence of market forces and
economic conditions that would justify
such increases; it could also have

treated
petitioners
request
for
restructuring as a request for availment
of the DRP. Consequently, the original
penalty rate of 6 percent per annum
was used to compute the deficiency
claim.
The auction sale could not be set
aside on the basis of the inadequacy of
the auction price, because in sales
made at public auction, the owner is
given the right to redeem the
mortgaged properties; the lower the bid
price, the easier it is to effect
redemption or to sell such right. The
bid price of P10,334,000.00 vis--vis
respondents claim of P12,506,476.43
was found to be neither shocking nor
unconscionable.
The attorneys fees were also
reduced by the appellate court from 10
percent to 1 percent of the total
indebtedness. First, there was no
extreme difficulty in an extrajudicial
foreclosure of a real estate mortgage,

as
this
proceeding
was
merely
administrative in nature and did not
involve a court litigation contesting the
proceedings prior to the auction sale.
Second, the attorneys fees were
exclusive of all stipulated costs and
fees. Third, such fees were in the
nature of liquidated damages that did
not inure to respondents salaried
counsel.
Respondent was also declared to
have
the
unquestioned
right
to
foreclose the Real Estate Mortgage. It
was allowed to recover any deficiency
in the mortgage account not realized in
the foreclosure sale, since petitionerspouses had agreed to be solidarily
liable for all sums due and payable to
respondent.
Finally,
the
appellate
court
concluded
that
the
extrajudicial
foreclosure proceedings and auction
sale were valid for the following
reasons: (1) personal notice to the

mortgagors, although unnecessary, was
actually made; (2) the notice of
extrajudicial sale was duly published
and posted; (3) the extrajudicial sale
was conducted through the deputy
sheriff, under the direction of the clerk
of court who was concurrently the exoficio provincial sheriff and acting as
agent of respondent; (4) the sale was
conducted within the province where
the mortgaged properties were located;
and (5) such sale was not shown to have
been attended by fraud.
Hence this Petition.[10]
Issues
Petitioners submit the
issues for our consideration:
following
I
Whether or not the Honorable Court of
Appeals correctly ruled that petitioners did
not avail of PNBs debt relief package and
were not entitled thereto as a matter of right.

II
Whether or not petitioners have adduced
sufficient and convincing evidence to
overthrow the presumption of regularity and
correctness of the PNB entries in the
subsidiary ledgers of the loan accounts of
petitioners.
III
Whether or not the Honorable Court of
Appeals seriously erred in not holding that
the Respondent PNB bloated the loan
account of petitioner corporation by
imposing interests, penalties and attorneys
fees without legal, valid and equitable
justification.
IV
Whether or not the auction price at which
the mortgaged properties was sold was
disproportionate to their actual fair mortgage
value.
V
Whether or not Respondent PNB is not
entitled to recover the deficiency in the
mortgage account not realized in the

foreclosure sale, considering that:
A.
Petitioners are merely

guarantors of the mortgage
debt of petitioner corporation
which
has
a
separate
personality
from
the
[petitioner-spouses].
B.
The joint and solidary

agreement
executed
by
[petitionerspouses]
are
contracts of adhesion not
binding on them;
C. The NSBCI Board Resolution

is not valid and binding on
[petitioner-spouses] because
they were compelled to
execute the said Resolution[;]
otherwise[,] Respondent PNB
would not grant petitioner
corporation the loan;
D.
The Respondent PNB had

already in its possession the
properties of the [petitionerspouses] which served as a
collateral
to
the
loan
obligation
of
petitioner
corporation[,] and to still allow
Respondent PNB to recover
the
deficiency
claim
amounting
to
a
very
substantial amount of P2.1

million would constitute unjust
enrichment on the part of
Respondent PNB.
VI
Whether or not the extrajudicial foreclosure
proceedings and auction sale, including all
subsequent proceedings[,] are null and void
for non-compliance with jurisdictional and
other mandatory requirements; whether or
not the petition for extrajudicial foreclosure
of mortgage was filed prematurely; and
whether or not the finding of fraud by the
trial court is amply supported by the
evidence on record.[11]
The foregoing may be summed up

into two main issues: first, whether the
loan accounts are bloated; and second,
whether the extrajudicial foreclosure
and subsequent claim for deficiency are
valid and proper.
The Courts Ruling
The Petition is partly meritorious.
First Main Issue:

Bloated Loan Accounts
At the outset, it must be stressed
that only questions of law[12] may be
raised in a petition for review on
certiorari under Rule 45 of the Rules of
Court. As a rule, questions of fact
cannot be the subject of this mode of
appeal,[13] for [t]he Supreme Court is
not a trier of facts.[14] As exceptions
to this rule, however, factual findings of
the CA may be reviewed on appeal[15]
when, inter alia, the factual inferences
are
manifestly
mistaken;[16]
the
judgment
is
based
on
a
misapprehension of facts;[17] or the CA
manifestly overlooked certain relevant
and undisputed facts that, if properly
considered, would justify a different
legal conclusion.[18] In the present
case, these exceptions exist in various
instances, thus prompting us to take
cognizance of factual issues and to
decide upon them in the interest of
justice and in the exercise of our sound
discretion.[19]
Indeed, Petitioner NSBCIs loan
accounts with respondent appear to be
bloated with some iniquitous imposition
of interests, penalties, other charges
and attorneys fees. To demonstrate
this point, the Court shall take up one
by one the promissory notes, the credit
agreements
and
the
disclosure
statements.
Increases in Interest Baseless
Promissory Notes.
In each
drawdown,
the
Promissory
Notes
specified the interest rate to be
charged: 19.5 percent in the first, and
21.5 percent in the second and again in
the third. However, a uniform clause
therein
permitted
respondent
to
increase the rate within the limits
allowed by law at any time depending
on whatever policy it may adopt in the
future x x x,[20] without even giving
prior notice to petitioners. The Court

holds that petitioners accessory duty to
pay interest[21] did not give respondent
unrestrained freedom to charge any
rate other than that which was agreed
upon. No interest shall be due, unless
expressly stipulated in writing.[22] It
would be the zenith of farcicality to
specify and agree upon rates that could
be subsequently upgraded at whim by
only one party to the agreement.
The unilateral determination and
imposition[23] of increased rates is
violative of the principle of mutuality
of contracts ordained in Article
1308[24] of the Civil Code.[25] Onesided impositions do not have the force
of law between the parties, because
such impositions are not based on the
parties essential equality.
Although escalation clauses[26] are
valid in maintaining fiscal stability and
retaining the value of money on longterm contracts,[27] giving respondent
an unbridled right to adjust the interest

independently and upwardly would
completely take away from petitioners
the right to assent to an important
modification in their agreement[28]
and would also negate the element of
mutuality in their contracts. The clause
cited earlier made the fulfillment of the
contracts dependent exclusively upon
the uncontrolled will[29] of respondent
and was therefore void. Besides, the
pro forma promissory notes have the
character of a contract dadhsion,[30]
where the parties do not bargain on
equal footing, the weaker partys [the
debtors] participation being reduced to
the alternative to take it or leave
it.[31]
While the Usury Law[32] ceiling
on interest rates was lifted by [Central
Bank] Circular No. 905,[33] nothing in
the said Circular 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.[34] In fact, we have

declared nearly ten years ago that
neither this Circular nor PD 1684,
which further amended the Usury Law,
authorized either party to unilaterally
raise the interest rate without the
others consent.[35]
Moreover, a similar case eight
years ago pointed out to the same
respondent (PNB) that borrowing
signified a capital transfusion from
lending institutions to businesses and
industries and was done for the purpose
of stimulating their growth; yet
respondents continued unilateral and
lopsided policy[36] of increasing
interest rates without the prior
assent[37] of the borrower not only
defeats this purpose, but also deviates
from this pronouncement. Although
such increases are not usurious, since
the Usury Law is now legally
inexistent[38] -- the interest ranging
from 26 percent to 35 percent in the
statements of account[39] -- must be
equitably reduced for being iniquitous,

unconscionable and exorbitant.[40]
Rates found to be iniquitous or
unconscionable are void, as if it there
were no express contract thereon.[41]
Above all, it is undoubtedly against
public policy to charge excessively for
the use of money.[42]
It cannot be argued that assent to
the increases can be implied either
from the June 18, 1991 request of
petitioners for loan restructuring or
from their lack of response to the
statements
of
account
sent
by
respondent. Such request does not
indicate any agreement to an interest
increase; there can be no implied
waiver of a right when there is no clear,
unequivocal and decisive act showing
such
purpose.[43]
Besides,
the
statements
were
not
letters
of
information sent to secure their
conformity; and even if we were to
presume these as an offer, there was no
acceptance.
No one receiving a
proposal to modify a loan contract,

especially interest -- a vital component
-is
obliged
to
answer
the
proposal.[44]
Furthermore, respondent did not
follow the stipulation in the Promissory
Notes providing for the automatic
conversion of the portion that remained
unpaid after 730 days -- or two years
from date of original release -- into a
medium-term loan, subject to the
applicable interest rate to be applied
from the dates of original release.[45]
In the first,[46] second[47] and
third[48] Promissory Notes, the amount
that remained unpaid as of October 27,
1989, December 1989 and January 4,
1990 -- their respective due dates -should
have
been
automatically
converted by respondent into mediumterm loans on June 30, 1991, September
2, 1991, and September 7, 1991,
respectively.
And on this unpaid
amount should have been imposed the
same
interest
rate
charged
by
respondent on other medium-term
loans; and the rate applied from June
29, 1989, September 1, 1989 and
September 6, 1989 -- their respective
original release -- until paid. But these
steps were not taken. Aside from
sending demand letters, respondent did
not at all exercise its option to enforce
collection as of these Notes due dates.
Neither did it renew or extend the
account.
In these three Promissory Notes,
evidently, no complaint for collection
was filed with the courts. It was not
until January 30, 1992 that a Petition
for Sale of the mortgaged properties
was filed -- with the provincial sheriff,
instead.[49] Moreover, respondent did
not supply the interest rate to be
charged on medium-term loans granted
by automatic conversion. Because of
this deficiency, we shall use the legal
rate of 12 percent per annum on loans
and forbearance of money, as provided
for by CB Circular 416.[50]

Credit Agreements.
Aside from
the promissory notes, another main
document involved in the principal
obligation
is
the
set
of
credit
agreements
executed
and
their
annexes.
The first Credit Agreement[51]
dated June 19, 1989 -- although offered
and admitted in evidence, and even
referred to in the first Promissory Note
-- cannot be given weight.
First, it was not signed by
respondent
through
its
branch
manager.[52]
Apparently
it
was
surreptitiously acknowledged before
respondents counsel, who unflinchingly
declared that it had been signed by the
parties on every page, although
respondents signature does not appear
thereon.[53]
Second, it was objected to by
petitioners,[54] contrary to the trial

courts findings.[55] However, it was
not the Agreement, but the revolving
credit line[56] of P5,000,000, that
expired one year from the Agreements
date of implementation.[57]
Third, there was no attached
annex that contained the General
Conditions.[58]
Even
the
Acknowledgment did not allude to its
existence.[59]
Thus, no terms or
conditions could be added to the
Agreement other than those already
stated therein.
Since the first Credit Agreement
cannot be given weight, the interest
rate on the first availment pegged at 3
percent over and above respondents
prime rate[60] on the date of such
availment[61] has no bearing at all on
the loan. After the first Notes due
date, the rate of 19 percent agreed
upon should continue to be applied on
the availment, until its automatic
conversion to a medium-term loan.

The second Credit Agreement[62]
dated August 31, 1989, provided for
interest -- respondents prime rate, plus
the applicable spread[63] in effect as of
the date of each availment,[64] on a
revolving credit line of P7,700,000[65]
-- but did not state any provision on its
increase
or
decrease.[66]
Consequently, petitioners could not be
made to bear interest more than such
prime rate plus spread. The Court
gives weight to this second Credit
Agreement for the following reasons.
First, this document submitted by
respondent was admitted by petitioners.
[67] Again, contrary to their assertion,
it was not the Agreement -- but the
credit line -- that expired one year from
the
Agreements
date
of
implementation.[68] Thus, the terms
and conditions continued to apply, even
if drawdowns could no longer be made.
Second, there was no 7-page

annex[69] offered in evidence that
contained the General Conditions,[70]
notwithstanding the Acknowledgment
of its existence by respondents
counsel. Thus, no terms or conditions
could be appended to the Agreement
other than those specified therein.
Third, the 12-page General
Conditions[71] offered and admitted in
evidence had no probative value. There
was no reference to it in the
Acknowledgment of the Agreement;
neither was respondents signature on
any of the pages thereof. Thus, the
General Conditions stipulations on
interest adjustment,[72] whether on a
fixed or a floating scheme, had no effect
whatsoever
on
the
Agreement.
Contrary to the trial courts findings,
[73] the General Condition were
correctly objected to by petitioners.[74]
The rate of 21.5 percent agreed upon in
the second Note thus continued to
apply to the second availment, until its
automatic conversion into a mediumterm loan.

The third Credit Agreement[75]
dated September 5, 1989, provided for
the same rate of interest as that in the
second Agreement. This rate was to be
applied to availments of an unadvised
line of P300,000. Since there was no
mention in the third Agreement, either,
of any stipulation on increases or
decreases[76] in interest, there would
be no basis for imposing amounts
higher than the prime rate plus spread.
Again, the 21.5 percent rate agreed
upon would continue to apply to the
third availment indicated in the third
Note,
until
such
amount
was
automatically converted into a mediumterm loan.
The Court also finds that, first,
although this document was admitted
by petitioners,[77] it was the credit line
that expired one year from the
implementation of the Agreement.[78]
The terms and conditions therein

continued to apply, even if availments
could no longer be drawn after expiry.
Second, there was again no 7page annex[79] offered that contained
the General Conditions,[80] regardless
of the Acknowledgment by the same
respondents counsel affirming its
existence.
Thus, the terms and
conditions in this Agreement relating to
interest cannot be expanded beyond
that which was already laid down by the
parties.
Disclosure Statements. In the
present
case,
the
Disclosure
Statements[81]
furnished
by
respondent set forth the same interest
rates as those respectively indicated in
the Promissory Notes. Although no
method of computation was provided
showing how such rates were arrived
at, we will nevertheless take up the
Statements seriatim in order to
determine the applicable rates clearly.
As to the first Disclosure

Statement
on
Loan/Credit
Transaction[82] dated June 13, 1989,
we hold that the 19.5 percent effective
interest rate per annum[83] would
indeed apply to the first availment or
drawdown evidenced by the first
Promissory Note. Not only was this
Statement
issued
prior
to
the
consummation of such availment or
drawdown, but the rate shown therein
can also be considered equivalent to 3
percent over and above respondents
prime
rate
in
effect.
Besides,
respondent mentioned no other rate
that it considered to be the prime rate
chargeable to petitioners. Even if we
disregarded
the
related
Credit
Agreement, we assume that this private
transaction between the parties was fair
and regular,[84] and that the ordinary
course of business was followed.[85]
As to the second Disclosure
Statement
on
Loan/Credit
Transaction[86] dated September 2,

1989, we hold that the 21.5 percent
effective interest rate per annum[87]
would definitely apply to the second
availment or drawdown evidenced by
the
second
Promissory
Note.
Incidentally, this Statement was issued
only after the consummation of its
related availment or drawdown, yet
such rate can be deemed equivalent to
the prime rate plus spread, as
stipulated in the corresponding Credit
Agreement. Again, we presume that
this private transaction was fair and
regular, and that the ordinary course of
business was followed. That the related
Promissory Note was pre-signed would
also bolster petitioners claim although,
under cross-examination Efren Pozon -Assistant Department Manager I[88] of
PNB, Dagupan Branch -- testified that
the Disclosure Statements were the
basis for preparing the Notes.[89]
As
Statement
to
the
on
third
Disclosure
Loan/Credit
Transaction[90] dated September 6,

1989, we hold that the same 21.5
percent effective interest rate per
annum[91] would apply to the third
availment or drawdown evidenced by
the third Promissory Note.
This
Statement was made available to
petitioner-spouses,
only
after
the
related Credit Agreement had been
executed, but simultaneously with the
consummation of the Statements
related
availment
or
drawdown.
Nonetheless, the rate herein should still
be regarded as equivalent to the prime
rate plus spread, under the similar
presumption
that
this
private
transaction was fair and regular and
that the ordinary course of business
was followed.
In sum, the three disclosure
statements, as well as the two credit
agreements considered by this Court,
did not provide for any increase in the
specified interest rates. Thus, none
would now be permitted. When cross-
examined, Julia Ang-Lopez, Finance

Account Analyst II of PNB, Dagupan
Branch, even testified that the bases for
computing such rates were those sent
by the head office from time to time,
and not those indicated in the notes or
disclosure statements.[92]
In addition to the preceding
discussion, it is then useless to labor
the point that the increase in rates
violates the impairment[93] clause of
the Constitution,[94] because the sole
purpose of this provision is to safeguard
the integrity of valid contractual
agreements
against
unwarranted
interference by the State[95] in the
form of laws.
Private individuals
intrusions on interest rates is governed
by statutory enactments like the Civil
Code.
Penalty, or Increases
Thereof, Unjustified
No penalty charges or increases
thereof appear either in the Disclosure

Statements[96] or in any of the clauses
in the second and the third Credit
Agreements[97]
earlier
discussed.
While a standard penalty charge of 6
percent per annum has been imposed
on the amounts stated in all three
Promissory Notes still remaining unpaid
or unrenewed when they fell due,[98]
there is no stipulation therein that
would justify any increase in that
charges. The effect, therefore, when
the borrower is not clearly informed of
the Disclosure Statements -- prior to the
consummation of the availment or
drawdown -- is that the lender will have
no right to collect upon such charge[99]
or increases thereof, even if stipulated
in the Notes. The time is now ripe to
give teeth to the often ignored fortyone-year
old
Truth
in
Lending
Act[100] and thus transform it from a
snivelling paper tiger to a growling
financial
watchdog
of
hapless
borrowers.
Besides, we have earlier said that

the Notes are contracts of adhesion;
although not invalid per se, any
apparent
ambiguity
in
the
loan
contracts -- taken as a whole -- shall be
strictly construed against respondent
who caused it.[101] Worse, in the
statements of account, the penalty rate
has again been unilaterally increased by
respondent to 36 percent without
petitioners consent. As a result of its
move,
such
liquidated
damages
intended as a penalty shall be equitably
reduced by the Court to zilch[102] for
being iniquitous or unconscionable.
[103]
Although the first Disclosure
Statement was furnished Petitioner
NSBCI prior to the execution of the
transaction, it is not a contract that can
be modified by the related Promissory
Note, but a mere statement in writing
that reflects the true and effective cost
of loans from respondent. Novation can
never be presumed,[104] and the
animus novandi must appear by

express agreement of the parties, or by
their acts that are too clear and
unequivocal to be mistaken.[105] To
allow novation will surely flout the
policy of the State to protect its
citizens from a lack of awareness of the
true cost of credit.[106]
With greater reason should such
penalty charges be indicated in the
second
and
third
Disclosure
Statements, yet none can be found
therein. While the charges are issued
after the respective availment or
drawdown, the disclosure statements
are given simultaneously therewith.
Obviously, novation still does not apply.
Other Charges Unwarranted
In like manner, the other charges
imposed
by
respondent
are
not
warranted. No particular values or
rates of service charge are indicated in
the Promissory Notes or Credit
Agreements, and no total value or even

the breakdown figures of such nonfinance charge are specified in the
Disclosure Statements. Moreover, the
provision in the Mortgage that requires
the payment of insurance and other
charges is neither made part of nor
reflected in such Notes, Agreements, or
Statements.[107]
Attorneys Fees Equitably Reduced
We affirm the equitable reduction
in attorneys fees.[108] These are not
an integral part of the cost of
borrowing, but arise only when
collecting upon the Notes becomes
necessary. The purpose of these fees is
not to give respondent a larger
compensation for the loan than the law
already allows, but to protect it against
any future loss or damage by being
compelled to retain counsel in-house
or not -- to institute judicial proceedings
for the collection of its credit.[109]
Courts have has the power[110] to
determine their reasonableness[111]

based on quantum meruit[112] and to
reduce[113] the amount thereof if
excessive.[114]
In addition, the disqualification
argument in the Affidavit of Publication
raised by petitioners no longer holds
water, inasmuch as Act 496[115] has
repealed the Spanish Notarial Law.
[116]
In the same vein, their
engagement of their counsel in another
capacity concurrent with the practice of
law is not prohibited, so long as the
roles being assumed by such counsel is
made clear to the client.[117] The only
reason for this clarification requirement
is that certain ethical considerations
operative in one profession may not be
so in the other.[118]
Debt Relief Package
Not Availed Of
We also affirm the CAs
disquisition on the debt relief package
(DRP).
Respondents Circular is not an
outright
grant
of
assistance
or
extension of payment,[119] but a mere
offer subject to specific terms and
conditions.
Petitioner NSBCI failed to
establish satisfactorily that it had been
seriously and directly affected by the
economic slowdown in the peripheral
areas of the then US military bases. Its
allegations, devoid of any verification,
cannot
lead
to
a
supportable
conclusion. In fact, for short-term
loans, there is still a need to conduct a
thorough review of the borrowers
repayment possibilities.[120]
Neither has Petitioner NSBCI
shown enough margin of equity,[121]
based on the latest loan value of hard
collaterals,[122] to be eligible for the
package. Additional accommodations
on an unsecured basis may be granted
only
when
regular
payment
amortizations have been established, or

when the merits of the credit
application would so justify.[123]
The
branch
managers
recommendation to restructure or
extend a total outstanding loan not
exceeding P8,000,000 is not final, but
subject to the approval of respondents
Branches
Department
Credit
Committee, chaired by its executive
vice-president.[124] Aside from being
further conditioned on other pertinent
policies
of
respondent,[125]
such
approval nevertheless needs to be
reported to its Board of Directors for
confirmation.[126] In fact, under the
General Banking Law of 2000,[127]
banks shall grant loans and other credit
accommodations only in amounts and
for periods of time essential to the
effective completion of operations to be
financed, consistent with safe and
sound banking practices.[128] The
Monetary Board -- then and now -- still
prescribes, by regulation, the conditions
and limitations under which banks may

grant extensions or renewals of their
loans and other credit accommodations.
[129]
Entries in Subsidiary Ledgers
Regular and Correct
Contrary
to
petitioners
assertions, the subsidiary ledgers of
respondent
properly
reflected
all
entries pertaining to Petitioner NSBCIs
loan accounts. In accordance with the
Generally
Accepted
Accounting
Principles (GAAP) for the Banking
Industry,[130] all interests accrued or
earned on such loans, except those that
were restructured and non-accruing,
[131] have been periodically taken into
income.[132] Without a doubt, the
subsidiary
ledgers
in
a
manual
accounting system are mere private
documents[133] that support and are
controlled by the general ledger.[134]
Such ledgers are neither foolproof nor
standard in format, but are periodically

subject to audit. Besides, we go by the
presumption that the recording of
private transactions has been fair and
regular, and that the ordinary course of
business has been followed.
Second Main Issue:
Extrajudicial Foreclosure Valid, But
Deficiency Claims Excessive
Respondent aptly exercised its
option
to
foreclose
the
mortgage,[135] after petitioners had
failed to pay all the Notes in full when
they fell due.[136] The extrajudicial
sale and subsequent proceedings are
therefore
valid,
but
the
alleged
deficiency claim cannot be recovered.
Auction Price Adequate
In the accessory contract[137] of
real
mortgage,[138]
in
which
immovable property or real rights
thereto are used as security[139] for
the fulfillment of the principal loan

obligation,[140] the bid price may be
lower than the propertys fair market
value.[141] In fact, the loan value itself
is only 70 percent of the appraised
value.[142] As correctly emphasized by
the appellate court, a low bid price will
make it easier[143] for the owner to
effect redemption[144] by subsequently
reacquiring the property or by selling
the right to redeem and thus recover
alleged losses. Besides, the public
auction sale has been regularly and
fairly conducted,[145] there has been
ample authority to effect the sale,[146]
and the Certificates of Title can be
relied upon. No personal notice[147] is
even
required,[148]
because
an
extrajudicial foreclosure is an action in
rem,
requiring
only
notice
by
publication and posting, in order to bind
parties interested in the foreclosed
property.[149]
As no redemption[150] was
exercised within one year after the date
of registration of the Certificate of Sale

with the Registry of Deeds,[151]
respondent -- being the highest bidder -has the right to a writ of possession, the
final process that will consummate the
extrajudicial foreclosure. On the other
hand, petitioner-spouses, who are
mortgagors herein, shall lose all their
rights to the property.[152]
No Deficiency Claim Receivable
After the foreclosure and sale of
the mortgaged property, the Real Estate
Mortgage is extinguished. Although the
mortgagors, being third persons, are
not liable for any deficiency in the
absence of a contrary stipulation,[153]
the action for recovery of such amount
-- being clearly sureties to the principal
obligation -- may still be directed
against
them.[154]
However,
respondent may impose only the
stipulated interest rates of 19.5 percent
and 21.5 percent on the respective
availments -- subject to the 12 percent
legal rate revision upon automatic

conversion into medium-term loans -plus 1 percent attorneys fees, without
additional charges on penalty, insurance
or any increases thereof.
Accordingly, the excessive interest
rates in the Statements of Account sent
to petitioners are reduced to 19.5
percent and 21.5 percent, as stipulated
in the Promissory Notes; upon loan
conversion, these rates are further
reduced to the legal rate of 12 percent.
Payments made by petitioners are prorated, the charges on penalty and
insurance eliminated, and the resulting
total unpaid principal and interest of
P6,582,077.70 as of the date of public
auction is then subjected to 1 percent
attorneys fees. The total outstanding
obligation is compared to the bid price.
On the basis of these rates and the
comparison made, the deficiency claim
receivable amounting to P2,172,476.43
in fact vanishes. Instead, there is an
overpayment by more than P3 million,
as shown in the following Schedules:
SCHEDULE 1: PN (1) drawdown amount on 6/29/89

Less: Interest deducted in advance (per 6/13/89 Disclosure Statement)
Net proceeds
Principal
Add:
Interest at 19.5% p.a.
10/28/89-12/31/89 (5,000,000 x 19.5% x [65/365])
1/1/90-1/5/90 (5,000,000 x 19.5% x [5/365])
Amount due as of 1/5/90
Less: Payment on 1/5/90 (pro-rated upon interest)
Balance
Add:
1/6/90-3/30/90 ([5,000,000-356,821.30] x 19.5% x [84/365])
Balance
Add:
3/31/90-5/31/90 ([5,000,000-356,821.30] x 19.5% x [62/365])
Balance
Add:
6/1/90-6/29/90 ([5,000,000-(356,821.30+821.33)] x 19.5% x [29/365])
Balance
Add:
6/30/90-12/31/90 ([5,000,000-(356,821.30+821.33+767,087.92)] x 19.5% x [185
1/1/91-6/29/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 19.5% x [180/3

Interest at 12% p.a. upon automatic conversion
6/30/91-8/8/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [40/365]

Balance
Add:
Interest at 12% p.a.
8/9/91-8/15/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [7/365])
Balance
Add:
8/16/91-11/29/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [106/3

Balance
Add:
11/30/91-12/20/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [21/3

Balance
Add:
12/21/91-12/31/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [11/3
1/1/92-2/26/92 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [57/365]

Amount due on PN (1) as of 2/26/92

Net proceeds
Principal
Add:
12/31/89 (2,700,000 x 21.5% x [1/365])
1/1/90-1/5/90 (2,700,000 x 21.5% x [5/365])
Balance
Add:
1/6/90-3/30/90 ([2,700,000-18,209.65] x 21.5% x [84/365])
Balance
Add:
3/31/90-5/31/90 ([2,700,000-18,209.65] x 21.5% x [62/365])
Balance
Add:
6/1/90-6/29/90 ([2,700,000-(18,209.65+523.04)] x 21.5% x [29/365])
Balance
Add:
6/30/90-12/31/90 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x [185/
1/1/91-8/8/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x [220/365

Balance
Add:
8/9/91-8/15/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x [7/365])

Balance
Add:
8/16/91-9/1/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 21.5% x [17/365

9/2/91-11/29/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12% x [89/365]

Balance
Add:
11/30/91-12/20/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12% x [21/36

Balance
Add:
12/21/91-12/31/91 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12% x [11/36

1/1/92-2/26/92 ([2,700,000-(18,209.65+523.04+488,484.22)] x 12% x [57/365])

Net proceeds
Principal
Add:
1/5/90 (300,000 x 21.5% x [1/365])
Balance
Add:
1/6/90-3/30/90 ([300,000-337.22] x 21.5% x [84/365])
Balance
Add:
3/31/90-5/31/90 ([300,000-337.22] x 21.5% x [62/365])
Balance
Add:
6/1/90-6/29/90 ([300,000-(337.22+58.44)] x 21.5% x [29/365])

Balance
Add:
6/30/90-12/31/90 ([300,000-(337.22+58.44+54,583.14)] x 21.5% x [185/365])
1/1/91-8/8/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x [220/365])
Balance
Add:
8/9/91-8/15/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x [7/365])
Balance
Add:

8/16/91-9/6/91 ([300,000-(337.22+58.44+54,583.14)]] x 21.5% x [22/365])
9/7/91-11/29/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x [84/365])
Balance
Add:
11/30/91-12/20/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x [21/365])
Balance
Add:
12/21/91-12/31/91 ([300,000-(337.22+58.44+54,583.14)]] x 12% x [11/365])
1/1/92-2/26/92 ([300,000-(337.22+58.44+54,583.14)]] x 12% x [57/365])
SCHEDULE 4: Application of Payments Upon Interest
Date
Interest
Payable
1/5/90 PN (1)
186,986.30
Pro-rated
543,807.61
PN (2)
9,542.47
27,752.12
PN (3)
176.71
513.93
196,705.48
572,073.65
3/30/90 PN (1)
208,370.59
163,182.85
PN (2)
132,693.52
103,917.28
PN (3)
14,827.15
11,611.70
355,891.26
278,711.83
5/31/90 PN (1)
198,985.09
199,806.42
PN (2)
126,716.69
127,239.72
PN (3)
14,159.30
14,217.74
339,861.08
341,263.89
6/29/90 PN (1)
71,924.74
839,012.66
PN (2)
45,801.92
534,286.14
PN (3)
5,117.90
59,701.04
122,844.56
1,432,999.84
8/8/91 PN (1)
806,639.99
493,906.31
PN (2)
523,113.94
320,303.08
PN (3)
58,452.66
35,790.61
1,388,206.59
850,000.00
8/15/91 PN (1)
321,652.11
86,593.37
PN (2)
211,852.33
57,033.69
PN (3)
23,672.34
6,372.93
557,176.79
150,000.00
11/29/91 PN (1)
370,109.22
161,096.81
PN (2)
240,937.94
104,872.65
PN (3)
27,241.23
11,857.24
638,288.39
277,826.70
12/20/91 PN (1)
235,767.70
162,115.78
PN (2)
151,204.51
103,969.45
PN (3)
17,075.64
11,741.35
404,047.85
277,826.57
In the preparation of the abovementioned schedules, these basic legal

principles were followed:
First, the payments were applied to
debts that were already due.[155]
Thus, when the first payment was made
and applied on January 5, 1990, all
Promissory Notes were already due.
Second, payments of the principal
were not made until the interests had
been covered.[156] For instance, the
first payment on January 15, 1990 had
initially been applied to all interests due
on the notes, before deductions were

made from their respective principal
amounts. The resulting decrease in
interest balances served as the bases
for subsequent pro-ratings.
Third,
payments
were
proportionately applied to all interests
that were due and of the same nature
and burden.[157] This legal principle
was the rationale for the pro-rated
computations shown on Schedule 4.
Fourth,
since
there
was
no
stipulation
on
capitalization,
no
interests due and unpaid were added to
the principal; hence, such interests did
not earn any additional interest.[158]
The simple -- not compounded -- method
of interest calculation[159] was used on
all Notes until the date of public
auction.
In
fine,
under
solutio
indebiti[160] or payment by mistake,
[161] there is no deficiency receivable
in favor of PNB, but rather an excess

claim or surplus[162] payable by
respondent;
this
excess
should
immediately be returned to petitionerspouses or their assigns -- not to
mention
the
buildings
and
improvements[163] on and the fruits of
the property -- to the end that no one
may be unjustly enriched or benefited
at the expense of another.[164] Such
surplus
is
in
the
amount
of
P3,686,101.52, computed as follows:
Total unpaid principal and interest on the
promissory notes as of February 26, 1992:
Drawdown on June 29, 1989
(Schedule 1)
P
4,037,204.10
Drawdown
on
September
1,
1989
(Schedule
2)
2,289,040.38
Drawdown
on
September
6,
1989
(Schedule
3)
255,833.22
6,582,077.70
Add: 1% attorneys fees
65,820.78
Total
obligation
Less: Bid price
10,334,000.00
Excess
3,686,101.52
outstanding
6,647,898.48
P
Joint and Solidary Agreement.

Contrary to the contention of the
petitioner-spouses, their Joint and
Solidary Agreement (JSA)[165] was
indubitably a surety, not a guaranty.
[166] They consented to be jointly and
severally liable with Petitioner NSBCI -the borrower -- not only for the payment
of all sums due and payable in favor of
respondent, but also for the faithful and
prompt performance of all the terms
and
conditions
thereof.[167]
Additionally, the corporate secretary of
Petitioner NSBCI certified as early as
February 23, 1989, that the spouses
should act as such surety.[168] But,
their solidary liability should be
carefully
assumed
instantly.
studied,
not
to cover all
sweepingly
availments
First, the JSA was executed on

August 31, 1989. As correctly adverted
to by petitioners,[169] it covered only
the Promissory Notes of P2,700,000 and
P300,000 made after that date. The
terms of a contract of suretyship
undeniably determine the suretys
liability[170] and cannot extend beyond
what is stipulated therein.[171] Yet, the
total amount petitioner-spouses agreed
to be held liable for was P7,700,000; by
the time the JSA was executed, the first
Promissory Note was still unpaid and
was thus brought within the JSAs
ambit.[172]
Second, while the JSA included
all costs, charges and expenses that
respondent might incur or sustain in
connection with the credit documents,
[173] only the interest was imposed
under
the
pertinent
Credit
Agreements. Moreover, the relevant
Promissory Notes had to be resorted to

for proper valuation of the interests
charged.
Third, although the JSA, as a
contract of adhesion, should be taken
contra proferentum against the party
who may have caused any ambiguity
therein, no such ambiguity was found.
Petitioner-spouses, who agreed to be
accommodation mortgagors,[174] can
no longer be held individually liable for
the entire onerous obligation[175]
because, as it turned out, it was
respondent that still owed them.
To summarize, to give full force to
the Truth in Lending Act, only the
interest rates of 19.5 percent and 21.5
percent stipulated in the Promissory
Notes may be imposed by respondent
on the respective availments. After 730
days, the portions remaining unpaid are
automatically converted into mediumterm loans at the legal rate of 12
percent. In all instances, the simple
method of interest computation is

followed.
Payments
made
by
petitioners are applied and pro-rated
according to basic legal principles.
Charges on penalty and insurance are
eliminated, and 1 percent attorneys
fees imposed upon the total unpaid
balance of the principal and interest as
of the date of public auction. The P2
million deficiency claim therefore
vanishes, and a refund of P3,686,101.52
arises.
WHEREFORE, this Petition is
hereby
PARTLY
GRANTED.
The
Decision of the Court of Appeals is
AFFIRMED, with the MODIFICATION
that PNB is ORDERED to refund the
sum of P3,686,101.52 representing the
overcollection computed above, plus
interest thereon at the legal rate of six
percent (6%) per annum from the filing
of the Complaint until the finality of this
Decision. After this Decision becomes
final and executory, the applicable rate
shall be twelve percent (12%) per
annum until its satisfaction. No costs.

SO ORDERED.
THIRD DIVISION
UNITED
COCONUT
PLANTERS BANK,
Petitioner,
- versus -
G.R. No. 159912

Present:
YNARES-SANTIAGO,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
SPOUSES
SAMUEL
and
Promulgated:
ODETTE BELUSO,
Respondents.
August 17, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under
Rule 45 of the Rules of Court, which seeks to annul the

Court of Appeals Decision[1] dated 21 January 2003
and its Resolution[2] dated 9 September 2003 in CAG.R. CV No. 67318. The assailed Court of Appeals
Decision and Resolution affirmed in turn the
Decision[3] dated 23 March 2000 and Order[4] dated 8
May 2000 of the Regional Trial Court (RTC), Branch 65
of Makati City, in Civil Case No. 99-314, declaring void
the interest rate provided in the promissory notes
executed by the respondents Spouses Samuel and Odette
Beluso (spouses Beluso) in favor of petitioner United
Coconut Planters Bank (UCPB).
The procedural and factual antecedents of this
case are as follows:
On 16 April 1996, UCPB granted the spouses
Beluso a Promissory Notes Line under a Credit
Agreement whereby the latter could avail from the
former credit of up to a maximum amount of P1.2
Million pesos for a term ending on 30 April 1997. The
spouses Beluso constituted, other than their promissory
notes, a real estate mortgage over parcels of land in
Roxas City, covered by Transfer Certificates of Title No.
T-31539 and T-27828, as additional security for the
obligation. The Credit Agreement was subsequently
amended to increase the amount of the Promissory
Notes Line to a maximum of P2.35 Million pesos and to
extend the term thereof to 28 February 1998.
The spouses Beluso availed themselves of the

credit line under the following Promissory Notes:
PN #
Date of PN
Maturity Date
8314-96-00083-3
29 April 1996
27 August 1996
P 700,000
8314-96-00085-0
2 May 1996
30 August 1996
P 500,000
20 March 1997
P 800,000
8314-96-000292-2 20 November 1996
Amount Secured
The three promissory notes were renewed several

times. On 30 April 1997, the payment of the principal
and interest of the latter two promissory notes were
debited from the spouses Belusos account with UCPB;
yet, a consolidated loan for P1.3 Million was again
released to the spouses Beluso under one promissory
note with a due date of 28 February 1998.
To completely avail themselves of the P2.35
Million credit line extended to them by UCPB, the
spouses Beluso executed two more promissory notes for
a total of P350,000.00:
PN #
Date of PN
Maturity Date
Amount Secured
97-00363-1
11 December 1997
28 February 1998
P 200,0
98-00002-4
2 January 1998
28 February 1998
P 150,0
However, the spouses Beluso alleged that the amounts

covered by these last two promissory notes were never
released or credited to their account and, thus, claimed
that the principal indebtedness was only P2 Million.
In any case, UCPB applied interest rates on the
different promissory notes ranging from 18% to 34%.
From 1996 to February 1998 the spouses Beluso were
able to pay the total sum of P763,692.03.
From 28 February 1998 to 10 June 1998, UCPB
continued to charge interest and penalty on the
obligations of the spouses Beluso, as follows:
PN #
Amount Secured
Interest
Penalty
Tot
97-00363-1
200,000
31%
36%
P 225,313.2
97-00366-6
700,000
30.17%
(7 days)
32.786%
(102 days)
P 795,294.7
97-00368-2
P 1,300,000
28%
(2 days)
30.41%
(102 days)
P 1,462,124.5
98-00002-4
P 150,000
33%
(102 days)
36%
The spouses Beluso, however, failed to make any

payment of the foregoing amounts.
On 2 September 1998, UCPB demanded that the
spouses Beluso pay their total obligation of
170,034.7
P2,932,543.00 plus 25% attorneys fees, but the spouses

Beluso failed to comply therewith. On 28 December
1998, UCPB foreclosed the properties mortgaged by the
spouses Beluso to secure their credit line, which, by that
time, already ballooned to P3,784,603.00.
On 9 February 1999, the spouses Beluso filed a
Petition for Annulment, Accounting and Damages
against UCPB with the RTC of Makati City.
On 23 March 2000, the RTC ruled in favor of the
spouses Beluso, disposing of the case as follows:
PREMISES CONSIDERED, judgment is
hereby rendered declaring the interest rate used by
[UCPB] void and the foreclosure and Sheriffs
Certificate of Sale void. [UCPB] is hereby ordered
to return to [the spouses Beluso] the properties
subject of the foreclosure; to pay [the spouses
Beluso] the amount of P50,000.00 by way of
attorneys fees; and to pay the costs of suit. [The
spouses Beluso] are hereby ordered to pay [UCPB]
the sum of P1,560,308.00.[5]
On 8 May 2000, the RTC denied UCPBs Motion

for Reconsideration,[6] prompting UCPB to appeal the
RTC Decision with the Court of Appeals. The Court of
Appeals affirmed the RTC Decision, to wit:
WHEREFORE, premises considered, the
decision dated March 23, 2000 of the Regional Trial
Court, Branch 65, Makati City in Civil Case No. 99314 is hereby AFFIRMED subject to the
modification that defendant-appellant UCPB is not
liable for attorneys fees or the costs of suit.[7]
On 9 September 2003, the Court of Appeals

denied UCPBs Motion for Reconsideration for lack of
merit. UCPB thus filed the present petition, submitting
the following issues for our resolution:
I
WHETHER OR NOT THE HONORABLE COURT
OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED
THE DECISION OF THE TRIAL COURT WHICH
DECLARED VOID THE PROVISION ON
INTEREST RATE AGREED UPON BETWEEN
PETITIONER AND RESPONDENTS
II
THE COMPUTATION BY THE TRIAL COURT OF
RESPONDENTS
INDEBTEDNESS
AND
ORDERED
RESPONDENTS
TO
PAY
PETITIONER THE AMOUNT OF ONLY ONE
MILLION FIVE HUNDRED SIXTY THOUSAND
THREE
HUNDRED
EIGHT
PESOS
(P1,560,308.00)
III
ANNULLED
THE
FORECLOSURE
BY
PETITIONER OF THE SUBJECT PROPERTIES
DUE TO AN ALLEGED INCORRECT
COMPUTATION
OF
RESPONDENTS
INDEBTEDNESS
IV
FOUND PETITIONER LIABLE FOR VIOLATION
OF THE TRUTH IN LENDING ACT
V
REVERSIBLE ERROR WHEN IT FAILED TO
ORDER THE DISMISSAL OF THE CASE
BECAUSE THE RESPONDENTS ARE GUILTY
OF FORUM SHOPPING[8]
Validity of the Interest Rates

The Court of Appeals held that the imposition of
interest in the following provision found in the

promissory notes of the spouses Beluso is void, as the
interest rates and the bases therefor were determined
solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on
or before due date, SPS. SAMUEL AND ODETTE
BELUSO (BORROWER), jointly and severally
promise to pay to UNITED COCONUT
PLANTERS BANK (LENDER) or order at UCPB
Bldg., Makati Avenue, Makati City, Philippines, the
sum of ______________ PESOS, (P_____),
Philippine Currency, with interest thereon at the rate
indicative of DBD retail rate or as determined by
the Branch Head.[9]
UCPB asserts that this is a reversible error, and

claims that while the interest rate was not numerically
quantified in the face of the promissory notes, it was
nonetheless categorically fixed, at the time of execution
thereof, at the rate indicative of the DBD retail rate.
UCPB contends that said provision must be read with
another stipulation in the promissory notes subjecting to
review the interest rate as fixed:
The interest rate 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 of interest and
charges which other banks or financial institutions
charge or offer to charge for similar
accommodations; and/or the resulting profitability

to the LENDER after due consideration of all
dealings with the BORROWER.[10]
In this regard, UCPB avers that these are valid

reference rates akin to a prevailing rate or prime
rate allowed by this Court in Polotan v. Court of
Appeals.[11] Furthermore, UCPB argues that even if
the proviso as determined by the branch head is
considered void, such a declaration would not ipso facto
render the connecting clause indicative of DBD retail
rate void in view of the separability clause of the Credit
Agreement, which reads:
Section 9.08 Separability Clause. If any
one or more of the provisions contained in this
AGREEMENT, or documents executed in
connection herewith shall be declared invalid,
illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining
provisions hereof shall not in any way be affected
or impaired.[12]
According to UCPB, the imposition of the

questioned interest rates did not infringe on the principle
of mutuality of contracts, because the spouses Beluso
had the liberty to choose whether or not to renew their
credit line at the new interest rates pegged by petitioner.
[13] UCPB also claims that assuming there was any
defect in the mutuality of the contract at the time of its
inception, such defect was cured by the subsequent
conduct of the spouses Beluso in availing themselves of

the credit line from April 1996 to February 1998 without
airing any protest with respect to the interest rates
imposed by UCPB. According to UCPB, therefore, the
spouses Beluso are in estoppel.[14]
We agree with the Court of Appeals, and find no
merit in the contentions of UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both
contracting parties; its validity or compliance
cannot be left to the will of one of them.
We applied this provision in Philippine National

Bank v. Court of Appeals,[15] where we held:
In order that obligations arising from
contracts may have the force of law between the
parties, there must be mutuality between the parties
based on their essential equality. A contract
containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of
one of the contracting parties, is void (Garcia vs.
Rita Legarda, Inc., 21 SCRA 555). Hence, even
assuming that the P1.8 million loan agreement
between the PNB and the private respondent gave
the PNB a license (although in fact there was none)
to increase the interest rate at will during the term of
the loan, that license would have been null and void
for being violative of the principle of mutuality
essential in contracts. It would have invested the

loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal
footing, the weaker party's (the debtor) participation
being reduced to the alternative "to take it or leave
it" (Qua vs. Law Union & Rock Insurance Co., 95
Phil. 85). Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect
against abuse and imposition.
The provision stating that the interest shall be at

the rate indicative of DBD retail rate or as determined
by the Branch Head is indeed dependent solely on the
will of petitioner UCPB. Under such provision,
petitioner UCPB has two choices on what the interest
rate shall be: (1) a rate indicative of the DBD retail rate;
or (2) a rate as determined by the Branch Head. As
UCPB is given this choice, the rate should be
categorically determinable in both choices. If either of
these two choices presents an opportunity for UCPB to
fix the rate at will, the bank can easily choose such an
option, thus making the entire interest rate provision
violative of the principle of mutuality of contracts.
Not just one, but rather both, of these choices are
dependent solely on the will of UCPB. Clearly, a rate
as determined by the Branch Head gives the latter
unfettered discretion on what the rate may be. The
Branch Head may choose any rate he or she desires. As
regards the rate indicative of the DBD retail rate, the
same cannot be considered as valid for being akin to a

prevailing rate or prime rate allowed by this Court
in Polotan. The interest rate in Polotan reads:
The Cardholder agrees to pay interest per annum at
3% plus the prime rate of Security Bank and Trust
Company. x x x.[16]
In this provision in Polotan, there is a fixed margin over

the reference rate: 3%. Thus, the parties can easily
determine the interest rate by applying simple
arithmetic. On the other hand, the provision in the case
at bar does not specify any margin above or below the
DBD retail rate. UCPB can peg the interest at any
percentage above or below the DBD retail rate, again
giving it unfettered discretion in determining the interest
rate.
The stipulation in the promissory notes subjecting
the interest rate to review does not render the imposition
by UCPB of interest rates on the obligations of the
spouses Beluso valid. According to said stipulation:
The interest rate 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 of interest and
charges which other banks or financial institutions
charge or offer to charge for similar
accommodations; and/or the resulting profitability
to the LENDER after due consideration of all
dealings with the BORROWER.[17]
It should be pointed out that the authority to review the

interest rate was given UCPB alone as the lender.
Moreover, UCPB may apply the considerations
enumerated in this provision as it wishes. As worded in
the above provision, UCPB may give as much weight as
it desires to each of the following considerations: (1) the
prevailing financial and monetary condition; (2) the rate
of interest and charges which other banks or financial
institutions charge or offer to charge for similar
accommodations; and/or (3) the resulting profitability to
the LENDER (UCPB) after due consideration of all
dealings with the BORROWER (the spouses Beluso).
Again, as in the case of the interest rate provision, there
is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause
cannot save either of the two options of UCPB as to the
interest to be imposed, as both options violate the
principle of mutuality of contracts.
UCPB likewise failed to convince us that the
spouses Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act.
As between the parties to a contract, validity cannot be
given to it by estoppel if it is prohibited by law or is
against public policy.[18]
The interest rate provisions in the case at bar are

illegal not only because of the provisions of the Civil
Code on mutuality of contracts, but also, as shall be
discussed later, because they violate the Truth in
Lending Act. Not disclosing the true finance charges in
connection with the extensions of credit is, furthermore,
a form of deception which we cannot countenance. It is
against the policy of the State as stated in the Truth in
Lending Act:
Sec. 2. Declaration of Policy. It is hereby
declared to be the policy of the State to protect its
citizens from a lack of awareness of the true cost of
credit to the user by assuring a full disclosure of
such cost with a view of preventing the uninformed
use of credit to the detriment of the national
economy.[19]
Moreover, while the spouses Beluso indeed

agreed to renew the credit line, the offending provisions
are found in the promissory notes themselves, not in the
credit line. In fixing the interest rates in the promissory
notes to cover the renewed credit line, UCPB still
reserved to itself the same two options (1) a rate
indicative of the DBD retail rate; or (2) a rate as
determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the

Court of Appeals voided the interest rates imposed by
UCPB, both failed to include in their computation of the
outstanding obligation of the spouses Beluso the legal
rate of interest of 12% per annum. Furthermore, the
penalty charges were also deleted in the decisions of the
RTC and the Court of Appeals. Section 2.04, Article II
on Interest and other Bank Charges of the subject
Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to
the interest provided for in Section 2.01 of this
ARTICLE, any principal obligation of the CLIENT
hereunder which is not paid when due shall be
subject to a penalty charge of one percent (1%) of
the amount of such obligation per month computed
from due date until the obligation is paid in full. If
the bank accelerates teh (sic) payment of availments
hereunder pursuant to ARTICLE VIII hereof, the
penalty charge shall be used on the total principal
amount outstanding and unpaid computed from the
date of acceleration until the obligation is paid in
full.[20]
Paragraph 4 of the promissory notes also states:

In case of non-payment of this Promissory
Note (Note) at maturity, I/We, jointly and severally,
agree to pay an additional sum equivalent to twentyfive percent (25%) of the total due on the Note as
attorneys fee, aside from the expenses and costs of
collection whether actually incurred or not, and a
penalty charge of one percent (1%) per month on

the total amount due and unpaid from date of
default until fully paid.[21]
Petitioner further claims that it is likewise entitled

to attorneys fees, pursuant to Section 9.06 of the Credit
Agreement, thus:
If the BANK shall require the services of
counsel for the enforcement of its rights under this
AGREEMENT, the Note(s), the collaterals and
other related documents, the BANK shall be entitled
to recover attorneys fees equivalent to not less than
twenty-five percent (25%) of the total amounts due
and outstanding exclusive of costs and other
expenses.[22]
Another alleged computational error pointed out

by UCPB is the negation of the Compounding Interest
agreed upon by the parties under Section 2.02 of the
Credit Agreement:
Section 2.02 Compounding Interest. Interest not
paid when due shall form part of the principal and
shall be subject to the same interest rate as herein
stipulated.[23]
and paragraph 3 of the subject promissory notes:

Interest not paid when due shall be added to, and
become part of the principal and shall likewise bear
interest at the same rate.[24]
UCPB lastly avers that the application of the

spouses Belusos payments in the disputed computation
does not reflect the parties agreement. The RTC
deducted the payment made by the spouses Beluso
amounting to P763,693.00 from the principal of
P2,350,000.00. This was allegedly inconsistent with the
Credit Agreement, as well as with the agreement of the
parties as to the facts of the case. In paragraph 7 of the
spouses Belusos Manifestation and Motion on Proposed
Stipulation of Facts and Issues vis--vis UCPBs
Manifestation, the parties agreed that the amount of
P763,693.00 was applied to the interest and not to the
principal, in accord with Section 3.03, Article II of the
Credit Agreement on Order of the Application of
Payments, which provides:
Section 3.03 Application of Payment.
Payments made by the CLIENT shall be applied in
accordance with the following order of preference:
1.
2.
3.
4.
5.
Accounts receivable and other out-ofpocket expenses

Front-end Fee, Origination Fee,
Attorneys Fee and other expenses of
collection;
Penalty charges;
Past due interest;
Principal amortization/Payment in
arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the
BANK, if any.[25]
Thus, according to UCPB, the interest charges,

penalty charges, and attorneys fees had been
erroneously excluded by the RTC and the Court of
Appeals from the computation of the total amount due
and demandable from spouses Beluso.
The spouses Belusos defense as to all these
issues is that the demand made by UCPB is for a
considerably bigger amount and, therefore, the demand
should be considered void. There being no valid
demand, according to the spouses Beluso, there would
be no default, and therefore the interests and penalties
would not commence to run. As it was likewise
improper to foreclose the mortgaged properties or file a
case against the spouses Beluso, attorneys fees were not
warranted.
We agree with UCPB on this score. Default
commences upon judicial or extrajudicial demand.[26]
The excess amount in such a demand does not nullify
the demand itself, which is valid with respect to the
proper amount. A contrary ruling would put commercial
transactions in disarray, as validity of demands would be
dependent on the exactness of the computations thereof,
which are too often contested.

There being a valid demand on the part of UCPB,
albeit excessive, the spouses Beluso are considered in
default with respect to the proper amount and, therefore,
the interests and the penalties began to run at that point.
As regards the award of 12% legal interest in
favor of petitioner, the RTC actually recognized that
said legal interest should be imposed, thus: There being
no valid stipulation as to interest, the legal rate of
interest shall be charged.[27] It seems that the RTC
inadvertently overlooked its non-inclusion in its
computation.
The spouses Beluso had even originally asked for
the RTC to impose this legal rate of interest in both the
body and the prayer of its petition with the RTC:
12. Since the provision on the fixing of the
rate of interest by the sole will of the respondent
Bank is null and void, only the legal rate of interest
which is 12% per annum can be legally charged and
imposed by the bank, which would amount to only
about P599,000.00 since 1996 up to August 31,
1998.
xxxx
WHEREFORE, in view of the foregoing,
petiitoners pray for judgment or order:
xxxx
2. By way of example for the public good
against the Banks taking unfair advantage of the
weaker party to their contract, declaring the legal
rate of 12% per annum, as the imposable rate of
interest up to February 28, 1999 on the loan of
2.350 million.[28]
All these show that the spouses Beluso had

acknowledged before the RTC their obligation to pay a
12% legal interest on their loans. When the RTC failed
to include the 12% legal interest in its computation,
however, the spouses Beluso merely defended in the
appellate courts this non-inclusion, as the same was
beneficial to them. We see, however, sufficient basis to
impose a 12% legal interest in favor of petitioner in the
case at bar, as what we have voided is merely the
stipulated rate of interest and not the stipulation that the
loan shall earn interest.
We must likewise uphold the contract stipulation
providing the compounding of interest. The provisions
in the Credit Agreement and in the promissory notes
providing for the compounding of interest were neither
nullified by the RTC or the Court of Appeals, nor
assailed by the spouses Beluso in their petition with the
RTC. The compounding of interests has furthermore
been declared by this Court to be legal. We have held in
Tan v. Court of Appeals,[29] that:

Without prejudice to the provisions of
Article 2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by
stipulation capitalize the interest due and
unpaid, which as added principal, shall earn new
interest.
As regards the imposition of penalties, however,

although we are likewise upholding the imposition
thereof in the contract, we find the rate iniquitous. Like
in the case of grossly excessive interests, the penalty
stipulated in the contract may also be reduced by the
courts if it is iniquitous or unconscionable.[30]
We find the penalty imposed by UCPB, ranging
from 30.41% to 36%, to be iniquitous considering the
fact that this penalty is already over and above the
compounded interest likewise imposed in the contract.
If a 36% interest in itself has been declared
unconscionable by this Court,[31] what more a 30.41%
to 36% penalty, over and above the payment of
compounded interest? UCPB itself must have realized
this, as it gave us a sample computation of the spouses
Belusos obligation if both the interest and the penalty
charge are reduced to 12%.
As regards the attorneys fees, the spouses Beluso
can actually be liable therefor even if there had been no

demand. Filing a case in court is the judicial demand
referred to in Article 1169[32] of the Civil Code, which
would put the obligor in delay.
The RTC, however, also held UCPB liable for
attorneys fees in this case, as the spouses Beluso were
forced to litigate the issue on the illegality of the interest
rate provision of the promissory notes. The award of
attorneys fees, it must be recalled, falls under the sound
discretion of the court.[33] Since both parties were
forced to litigate to protect their respective rights, and
both are entitled to the award of attorneys fees from the
other, practical reasons dictate that we set off or
compensate both parties liabilities for attorneys fees.
Therefore, instead of awarding attorneys fees in favor
of petitioner, we shall merely affirm the deletion of the
award of attorneys fees to the spouses Beluso.
In sum, we hold that spouses Beluso should still
be held liable for a compounded legal interest of 12%
per annum and a penalty charge of 12% per annum. We
also hold that, instead of awarding attorneys fees in
favor of petitioner, we shall merely affirm the deletion
of the award of attorneys fees to the spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed,
titles to which had already been consolidated on 19

February 2001 and 20 March 2001 in the name of
UCPB, as the spouses Beluso failed to exercise their
right of redemption which expired on 25 March 2000.
The RTC, however, annulled the foreclosure of
mortgage based on an alleged incorrect computation of
the spouses Belusos indebtedness.
UCPB alleges that none of the grounds for the
annulment of a foreclosure sale are present in the case at
bar. Furthermore, the annulment of the foreclosure
proceedings and the certificates of sale were mooted by
the subsequent issuance of new certificates of title in the
name of said bank. UCPB claims that the spouses
Belusos action for annulment of foreclosure constitutes
a collateral attack on its certificates of title, an act
proscribed by Section 48 of Presidential Decree No.
1529, otherwise known as the Property Registration
Decree, which provides:
Section 48. Certificate not subject to
collateral attack. A certificate of title shall not be
subject to collateral attack. It cannot be altered,
modified or cancelled except in a direct proceeding
in accordance with law.
The spouses Beluso retort that since they had the

right to refuse payment of an excessive demand on their
account, they cannot be said to be in default for refusing
to pay the same. Consequently, according to the spouses

Beluso, the enforcement of such illegal and
overcharged demand through foreclosure of mortgage
should be voided.
We agree with UCPB and affirm the validity of
the foreclosure proceedings. Since we already found
that a valid demand was made by UCPB upon the
spouses Beluso, despite being excessive, the spouses
Beluso are considered in default with respect to the
proper amount of their obligation to UCPB and, thus,
the property they mortgaged to secure such amounts
may be foreclosed. Consequently, proceeds of the
foreclosure sale should be applied to the extent of the
amounts to which UCPB is rightfully entitled.
As argued by UCPB, none of the grounds for the
annulment of a foreclosure sale are present in this case.
The grounds for the proper annulment of the foreclosure
sale are the following: (1) that there was fraud,
collusion, accident, mutual mistake, breach of trust or
misconduct by the purchaser; (2) that the sale had not
been fairly and regularly conducted; or (3) that the price
was inadequate and the inadequacy was so great as to
shock the conscience of the court.[34]
Liability for Violation of Truth in Lending Act
The RTC, affirmed by the Court of Appeals,

imposed a fine of P26,000.00 for UCPBs alleged
violation of Republic Act No. 3765, otherwise known as
the Truth in Lending Act.
UCPB challenges this imposition, on the
argument that Section 6(a) of the Truth in Lending Act
which mandates the filing of an action to recover such
penalty must be made under the following
circumstances:
Section 6. (a) Any creditor who in
connection with any credit transaction fails to
disclose to any person any information in violation
of this Act or any regulation issued thereunder shall
be liable to such person in the amount of P100 or in
an amount equal to twice the finance charge
required by such creditor in connection with such
transaction, whichever is greater, except that such
liability shall not exceed P2,000 on any credit
transaction. Action to recover such penalty may
be brought by such person within one year from
the date of the occurrence of the violation, in any
court of competent jurisdiction. x x x (Emphasis
ours.)
According to UCPB, the Court of Appeals even

stated that [a]dmittedly the original complaint did not
explicitly allege a violation of the Truth in Lending
Act and no action to formally admit the amended
petition [which expressly alleges violation of the Truth

in Lending Act] was made either by [respondents]
spouses Beluso and the lower court. x x x.[35]
UCPB further claims that the action to recover the
penalty for the violation of the Truth in Lending Act had
been barred by the one-year prescriptive period
provided for in the Act. UCPB asserts that per the
records of the case, the latest of the subject promissory
notes had been executed on 2 January 1998, but the
original petition of the spouses Beluso was filed before
the RTC on 9 February 1999, which was after the
expiration of the period to file the same on 2 January
1999.
On the matter of allegation of the violation of the
Truth in Lending Act, the Court of Appeals ruled:
Admittedly the original complaint did not
explicitly allege a violation of the Truth in Lending
Act and no action to formally admit the amended
petition was made either by [respondents] spouses
Beluso and the lower court. In such transactions,
the debtor and the lending institutions do not deal
on an equal footing and this law was intended to
protect the public from hidden or undisclosed
charges on their loan obligations, requiring a full
disclosure thereof by the lender. We find that its
infringement may be inferred or implied from
allegations that when [respondents] spouses Beluso
executed the promissory notes, the interest rate
chargeable thereon were left blank. Thus,

[petitioner] UCPB failed to discharge its duty to
disclose in full to [respondents] Spouses Beluso the
charges applicable on their loans.[36]
We agree with the Court of Appeals. The

allegations in the complaint, much more than the title
thereof, are controlling. Other than that stated by the
Court of Appeals, we find that the allegation of violation
of the Truth in Lending Act can also be inferred from
the same allegation in the complaint we discussed
earlier:
b.) In unilaterally imposing an increased
interest rates (sic) respondent bank has relied on the
provision of their promissory note granting
respondent bank the power to unilaterally fix the
interest rates, which rate was not determined in the
promissory note but was left solely to the will of the
Branch Head of the respondent Bank, x x x.[37]
The allegation that the promissory notes grant

UCPB the power to unilaterally fix the interest rates
certainly also means that the promissory notes do not
contain a clear statement in writing of (6) the finance
charge expressed in terms of pesos and centavos; and (7)
the percentage that the finance charge bears to the
amount to be financed expressed as a simple annual rate
on the outstanding unpaid balance of the
obligation.[38] Furthermore, the spouses Belusos

prayer for such other reliefs just and equitable in the
premises should be deemed to include the civil penalty
provided for in Section 6(a) of the Truth in Lending Act.
UCPBs contention that this action to recover the
penalty for the violation of the Truth in Lending Act has
already prescribed is likewise without merit. The
penalty for the violation of the act is P100 or an amount
equal to twice the finance charge required by such
creditor in connection with such transaction, whichever
is greater, except that such liability shall not exceed
P2,000.00 on any credit transaction.[39] As this penalty
depends on the finance charge required of the borrower,
the borrowers cause of action would only accrue when
such finance charge is required. In the case at bar, the
date of the demand for payment of the finance charge is
2 September 1998, while the foreclosure was made on
28 December 1998. The filing of the case on 9 February
1999 is therefore within the one-year prescriptive
period.
UCPB argues that a violation of the Truth in
Lending Act, being a criminal offense, cannot be
inferred nor implied from the allegations made in the
complaint.[40] Pertinent provisions of the Act read:
Sec. 6. (a) Any creditor who in connection
with any credit transaction fails to disclose to any
person any information in violation of this Act or
any regulation issued thereunder shall be liable to

such person in the amount of P100 or in an amount
equal to twice the finance charge required by such
creditor in connection with such transaction,
whichever is the greater, except that such liability
shall not exceed P2,000 on any credit transaction.
Action to recover such penalty may be brought by
such person within one year from the date of the
occurrence of the violation, in any court of
competent jurisdiction. In any action under this
subsection in which any person is entitled to a
recovery, the creditor shall be liable for reasonable
attorneys fees and court costs as determined by the
court.
xxxx
(c)
Any person who willfully violates
any provision of this Act or any regulation issued
thereunder shall be fined by not less than P1,000 or
more than P5,000 or imprisonment for not less than
6 months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth

in Lending Act, the violation of the said Act gives rise to
both criminal and civil liabilities. Section 6(c) considers
a criminal offense the willful violation of the Act,
imposing the penalty therefor of fine, imprisonment or
both. Section 6(a), on the other hand, clearly 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. The penalty therefor is an amount
of P100 or in an amount equal to twice the finance

charge required by the creditor in connection with such
transaction, whichever is greater, except that the liability
shall not exceed P2,000.00 on any credit transaction.
The action to recover such penalty may be instituted by
the aggrieved private person separately and
independently from the criminal case for the same
offense.
In the case at bar, therefore, the civil action to
recover the penalty under Section 6(a) of the Truth in
Lending Act had been jointly instituted with (1) the
action to declare the interests in the promissory notes
void, and (2) the action to declare the foreclosure void.
This joinder is allowed under Rule 2, Section 5 of the
Rules of Court, which provides:
SEC. 5. Joinder of causes of action.A
party may in one pleading assert, in the alternative
or otherwise, as many causes of action as he may
have against an opposing party, subject to the
following conditions:
(a)
The party joining the causes of action
shall comply with the rules on joinder of parties;
(b)
The joinder shall not include special
civil actions or actions governed by special rules;
(c)
Where the causes of action are
between the same parties but pertain to different
venues or jurisdictions, the joinder may be allowed
in the Regional Trial Court provided one of the
causes of action falls within the jurisdiction of said

court and the venue lies therein; and
(d)
Where the claims in all the causes of
action are principally for recovery of money, the
aggregate amount claimed shall be the test of
jurisdiction.
In attacking the RTCs disposition on the

violation of the Truth in Lending Act since the same was
not alleged in the complaint, UCPB is actually asserting
a violation of due process. Indeed, due process
mandates that a defendant should be sufficiently
apprised of the matters he or she would be defending
himself or herself against. However, in the 1 July 1999
pre-trial brief filed by the spouses Beluso before the
RTC, the claim for civil sanctions for violation of the
Truth in Lending Act was expressly alleged, thus:
Moreover, since from the start, respondent bank
violated the Truth in Lending Act in not informing
the borrower in writing before the execution of the
Promissory Notes of the interest rate expressed as a
percentage of the total loan, the respondent bank
instead is liable to pay petitioners double the
amount the bank is charging petitioners by way of
sanction for its violation.[41]
In the same pre-trial brief, the spouses Beluso

also expressly raised the following issue:
b.) Does the expression indicative rate of

DBD retail (sic) comply with the Truth in Lending
Act provision to express the interest rate as a simple
annual percentage of the loan?[42]
These assertions are so clear and unequivocal that

any attempt of UCPB to feign ignorance of the assertion
of this issue in this case as to prevent it from putting up
a defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan
Trial Court which has jurisdiction to try and adjudicate
the alleged violation of the Truth in Lending Act,
considering that the present action allegedly involved a
single credit transaction as there was only one
Promissory Note Line.
We disagree. We have already ruled that the
action to recover the penalty under Section 6(a) of the
Truth in Lending Act had been jointly instituted with (1)
the action to declare the interests in the promissory
notes void, and (2) the action to declare the foreclosure
void. There had been no question that the above actions
belong to the jurisdiction of the RTC. Subsection (c) of
the above-quoted Section 5 of the Rules of Court on
Joinder of Causes of Action provides:
(c) Where the causes of action are between
the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the
Regional Trial Court provided one of the causes of

action falls within the jurisdiction of said court and
the venue lies therein.
Furthermore, opening a credit line does not create

a credit transaction of loan or mutuum, since the former
is merely a preparatory contract to the contract of loan
or mutuum. Under such credit line, the bank is merely
obliged, for the considerations specified therefor, to lend
to the other party amounts not exceeding the limit
provided. The credit transaction thus occurred not when
the credit line was opened, but rather when the credit
line was availed of. In the case at bar, the violation of
the Truth in Lending Act allegedly occurred not when
the parties executed the Credit Agreement, where no
interest rate was mentioned, but when the parties
executed the promissory notes, where the allegedly
offending interest rate was stipulated.
UCPB further argues that since the spouses
Beluso were duly given copies of the subject promissory
notes after their execution, then they were duly notified
of the terms thereof, in substantial compliance with the
Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth
in Lending Act clearly provides that the disclosure
statement must be furnished prior to the consummation
of the transaction:
SEC. 4. Any creditor shall furnish to each

person to whom credit is extended, prior to the
consummation of the transaction, a clear
statement in writing setting forth, to the extent
applicable and in accordance with rules and
regulations prescribed by the Board, the following
information:
(1) the cash price or delivered price of the
property or service to be acquired;
(2) the amounts, if any, to be credited as
down payment and/or trade-in;
(3) the difference between the amounts set
forth under clauses (1) and (2)
(4)
the charges, individually itemized,

which are paid or to be paid by such
person in connection with the transaction
but which are not incident to the
extension of credit;
(5) the total amount to be financed;

(6) the finance charge expressed in terms of
pesos and centavos; and
(7) the percentage that the finance bears to
the total amount to be financed expressed
as a simple annual rate on the
outstanding unpaid balance of the
obligation.
The rationale of this provision is to protect users

of credit from a lack of awareness of the true cost
thereof, 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, and the like. The law thereby seeks
to protect debtors by permitting them to fully appreciate
the true 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
UCPBs claim of substantial compliance would defeat
these purposes of the Truth in Lending Act. The belated
discovery of the true cost of credit will too often not be
able to reverse the ill effects of an already consummated
business decision.
In addition, the promissory notes, the copies of
which were presented to the spouses Beluso after
execution, are not sufficient notification from UCPB.
As earlier discussed, the interest rate provision therein
does not sufficiently indicate with particularity the
interest rate to be applied to the loan covered by said
promissory notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition
(originally Case No. 99-314 in RTC, Makati City) on

the ground that the spouses Beluso instituted another
case (Civil Case No. V-7227) before the RTC of Roxas
City, involving the same parties and issues. UCPB
claims that while Civil Case No. V-7227 initially
appears to be a different action, as it prayed for the
issuance of a temporary restraining order and/or
injunction to stop foreclosure of spouses Belusos
properties, it poses issues which are similar to those of
the present case.[43] To prove its point, UCPB cited the
spouses Belusos Amended Petition in Civil Case No. V7227, which contains similar allegations as those in the
present case. The RTC of Makati denied UCPBs
Motion to Dismiss Case No. 99-314 for lack of merit.
Petitioner UCPB raised the same issue with the Court of
Appeals, and is raising the same issue with us now.
The spouses Beluso claim that the issue in Civil
Case No. V-7227 before the RTC of Roxas City, a
Petition for Injunction Against Foreclosure, is the
propriety of the foreclosure before the true account of
spouses Beluso is determined. On the other hand, the
issue in Case No. 99-314 before the RTC of Makati City
is the validity of the interest rate provision. The spouses
Beluso claim that Civil Case No. V-7227 has become
moot because, before the RTC of Roxas City could act
on the restraining order, UCPB proceeded with the
foreclosure and auction sale. As the act sought to be
restrained by Civil Case No. V-7227 has already been
accomplished, the spouses Beluso had to file a different

action, that of Annulment of the Foreclosure Sale, Case
No. 99-314 with the RTC, Makati City.
Even if we assume for the sake of argument,
however, that only one cause of action is involved in the
two civil actions, namely, the violation of the right of
the spouses Beluso not to have their property foreclosed
for an amount they do not owe, the Rules of Court
nevertheless allows the filing of the second action. Civil
Case No. V-7227 was dismissed by the RTC of Roxas
City before the filing of Case No. 99-314 with the RTC
of Makati City, since the venue of litigation as provided
for in the Credit Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action
previously dismissed only in the following instances:
SEC. 5. Effect of dismissal.Subject to the
right of appeal, an order granting a motion to
dismiss based on paragraphs (f), (h) and (i) of
section 1 hereof shall bar the refiling of the same
action or claim. (n)
Improper venue as a ground for the dismissal of

an action is found in paragraph (c) of Section 1, not in
paragraphs (f), (h) and (i):
SECTION 1. Grounds.Within the time for
but before filing the answer to the complaint or
pleading asserting a claim, a motion to dismiss may

be made on any of the following grounds:
(a) That the court has no jurisdiction over
the person of the defending party;
(b) That the court has no jurisdiction over
the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to
sue;
(e) That there is another action pending
between the same parties for the same cause;
(f) That the cause of action is barred by a
prior judgment or by the statute of limitations;
(g) That the pleading asserting the claim
states no cause of action;
(h) That the claim or demand set forth in
the plaintiffs pleading has been paid, waived,
abandoned, or otherwise extinguished;
(i) That the claim on which the action is
founded is unenforceable under the provisions of
the statute of frauds; and
(j) That a condition precedent for filing the
claim has not been complied with.[44] (Emphases
supplied.)
When an action is dismissed on the motion of the

other party, it is only when the ground for the dismissal
of an action is found in paragraphs (f), (h) and (i) that
the action cannot be refiled. As regards all the other
grounds, the complainant is allowed to file same action,
but should take care that, this time, it is filed with the
proper court or after the accomplishment of the
erstwhile absent condition precedent, as the case may
be.
UCPB, however, brings to the attention of this
Court a Motion for Reconsideration filed by the spouses
Beluso on 15 January 1999 with the RTC of Roxas City,
which Motion had not yet been ruled upon when the
spouses Beluso filed Civil Case No. 99-314 with the
RTC of Makati. Hence, there were allegedly two
pending actions between the same parties on the same
issue at the time of the filing of Civil Case No. 99-314
on 9 February 1999 with the RTC of Makati. This will
still not change our findings. It is indeed the general
rule that in cases where there are two pending actions
between the same parties on the same issue, it should be
the later case that should be dismissed. However, this
rule is not absolute. According to this Court in Allied
Banking Corporation v. Court of Appeals[45]:
In these cases, it is evident that the first
action was filed in anticipation of the filing of the
later action and the purpose is to preempt the later

suit or provide a basis for seeking the dismissal of
the second action.
Even if this is not the purpose for the
filing of the first action, it may nevertheless be
dismissed if the later action is the more
appropriate vehicle for the ventilation of the
issues between the parties. Thus, in Ramos v.
Peralta, it was held:
[T]he rule on litis pendentia
does not require that the later case
should yield to the earlier case. What
is required merely is that there be
another pending action, not a prior
pending action. Considering the
broader scope of inquiry involved in
Civil Case No. 4102 and the location
of the property involved, no error
was committed by the lower court in
deferring to the Bataan court's
jurisdiction.
Given, therefore, the pendency of two
actions, the following are the relevant
considerations in determining which action should
be dismissed: (1) the date of filing, with preference
generally given to the first action filed to be
retained; (2) whether the action sought to be
dismissed was filed merely to preempt the later
action or to anticipate its filing and lay the basis for
its dismissal; and (3) whether the action is the
appropriate vehicle for litigating the issues between
the parties.
In the case at bar, Civil Case No. V-7227 before

the RTC of Roxas City was an action for injunction
against a foreclosure sale that has already been held,
while Civil Case No. 99-314 before the RTC of Makati
City includes an action for the annulment of said
foreclosure, an action certainly more proper in view of
the execution of the foreclosure sale. The former case
was improperly filed in Roxas City, while the latter was
filed in Makati City, the proper venue of the action as
mandated by the Credit Agreement. It is evident,
therefore, that Civil Case No. 99-314 is the more
appropriate vehicle for litigating the issues between the
parties, as compared to Civil Case No. V-7227. Thus,
we rule that the RTC of Makati City was not in error in
not dismissing Civil Case No. 99-314.
WHEREFORE, the Decision of the Court of
Appeals is hereby AFFIRMED with the following
MODIFICATIONS:
1.
In addition to the sum of P2,350,000.00 as

determined by the courts a quo, respondent
spouses Samuel and Odette Beluso are also
liable for the following amounts:
a. Penalty of 12% per annum on the
amount due[46] from the date of
demand; and
2.
b. Compounded legal interest of 12% per

annum on the amount due[47] from date
of demand;
The following amounts shall be deducted
from the liability of the spouses Samuel and
Odette Beluso:
a. Payments made by the spouses in the
amount
of
P763,692.00.
These
payments shall be applied to the date of
actual payment of the following in the
order that they are listed, to wit:
i. penalty charges due and
demandable as of the time of
payment;
ii. interest due and demandable as
of the time of payment;
iii.
principal
amortization/payment in arrears
as of the time of payment;
iv. outstanding balance.
b. Penalty under Republic Act No. 3765 in
the amount of P26,000.00. This amount
shall be deducted from the liability of
the spouses Samuel and Odette Beluso
on 9 February 1999 to the following in
the order that they are listed, to wit:
i. penalty charges due and
demandable as of time of
payment;
3.
ii. interest due and demandable as

of the time of payment;
iii.
principal
amortization/payment in arrears
as of the time of payment;
iv. outstanding balance.
The foreclosure of mortgage is hereby
declared VALID.
Consequently, the
amounts which the Regional Trial Court
and the Court of Appeals ordered
respondents to pay, as modified in this
Decision, shall be deducted from the
proceeds of the foreclosure sale.
SO ORDERED.
THIRD DIVISION
HEIRS OF ZOILO ESPIRITU

AND PRIMITIVA ESPIRITU,
Petitioners,
G.R. No. 169617

Present:
- versus -
YNARES-SANTIAGO,
Chairperson,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
CHICO-NAZARIO, and
NACHURA, JJ.
SPOUSES MAXIMO LANDRITO

AND
PAZ
LANDRITO,
Represented
by
ZOILO
LANDRITO, as their Attorney-inPromulgated:
Fact,
Respondents.
April 4, 2007
x-------------------------------------------------x
DECISION
CHICO-NAZARIO, J.:
This is a petition for Review on Certiorari under
Rule 45 of the Rules of Court assailing the Decision of
the Court of Appeals,[1] dated 31 August 2005,
reversing the Decision rendered by the trial court on 13
December 1995. The Court of Appeals, in its assailed
Decision, fixed the interest rate of the loan between the
parties at 12% per annum, and ordered the Spouses
Zoilo and Primitiva Espiritu (Spouses Espiritu) to
reconvey the subject property to the Spouses Landrito
conditioned upon the payment of the loan.
Petitioners DULCE, BENLINDA, EDWIN,
CYNTHIA, AND MIRIAM ANDREA, all surnamed
ESPIRITU, are the only children and legal heirs of the
Spouses Zoilo and Primitiva Espiritu, who both died
during the pendency of the case before the Honorable
Court of Appeals.[2]
Respondents Spouses Maximo and Paz Landrito
(Spouses Landrito) are herein represented by their son
and attorney-in-fact, Zoilo Landrito.[3]
On 5 September 1986, Spouses Landrito loaned
from the Spouses Espiritu the amount of P350,000.00
payable in three months. To secure the loan, the

Spouses Landrito executed a real estate mortgage over a
five hundred forty (540) square meter lot located in
Alabang, Muntinlupa, covered by Transfer Certificate of
Title No. S-48948, in favor of the Spouses Espiritu.
From the P350,000.00 that the Landritos were supposed
to receive, P17,500.00 was deducted as interest for the
first month which was equivalent to five percent of the
principal debt, and P7,500.00 was further deducted as
service fee. Thus, they actually received a net amount
of P325,000.00. The agreement, however, provided that
the principal indebtedness earns interest at the legal
rate.[4]
After three months, when the debt became due
and demandable, the Spouses Landrito were unable to
pay the principal, and had not been able to make any
interest payments other than the amount initially
deducted from the proceeds of the loan. On 29
December 1986, the loan agreement was extended to 4
January 1987 through an Amendment of Real Estate
Mortgage. The loan was restructured in such a way that
the unpaid interest became part of the principal, thus
increasing the principal to P385,000. The new loan
agreement adopted all other terms and conditions
contained in first agreement.[5]
Due to the continued inability of the Spouses
Landritos to settle their obligations with the Spouses
Espiritu, the loan agreement was renewed three more

times. In all these subsequent renewals, the same terms
and conditions found in the first agreement were
retained. On 29 July 1987, the principal was increased
to P507,000.00 inclusive of running interest. On 11
March 1988, it was increased to P647,000.00. And on
21 October 1988, the principal was increased to
P874,125.00.[6] At the hearing before the trial court,
Zoilo Espiritu testified that the increase in the principal
in each amendment of the loan agreement did not
correspond to the amount delivered to the Spouses
Landrito. Rather, the increase in the principal had been
due to unpaid interest and other charges.[7]
The debt remained unpaid. As a consequence, the
Spouses Espiritu foreclosed the mortgaged property on
31 October 1990. During the auction sale, the property
was sold to the Spouses Espiritu as the lone bidder. On
9 January 1991, the Sheriffs Certificate of Sale was
annotated on the title of the mortgaged property, giving
the Spouses Landrito until 8 January 1992 to redeem the
property. [8]
The Spouses Landrito failed to redeem the subject
property although they alleged that they negotiated for
the redemption of the property as early as 30 October
1991. While the negotiated price for the land started at
P1,595,392.79, it was allegedly increased by the
Spouses Espiritu from time to time. Spouses Landrito
allegedly tendered two managers checks and some

cash, totaling P1,800,000.00 to the Spouses Espiritu on
13 January 1992, but the latter refused to accept the
same. They also alleged that the Spouses Espiritu
increased the amount demanded to P2.5 Million and
gave them until July 1992 to pay the said amount.
However, upon inquiry, they found out that on 24 June
1992, the Spouses Espiritu had already executed an
Affidavit of Consolidation of Ownership and registered
the mortgaged property in their name, and that the
Register of Deeds of Makati had already issued Transfer
Certificate of Title No. 179802 in the name of the
Spouses Espiritu. On 9 October 1992, the Spouses
Landrito, represented by their son Zoilo Landrito, filed
an action for annulment or reconveyance of title, with
damages against the Spouses Espiritu before Branch 146
of the Regional Trial Court of Makati.[9] Among the
allegations in their Complaint, they stated that the
Spouses Espiritu, as creditors and mortgagees, imposed
interest rates that are shocking to ones moral
senses.[10]
The trial court dismissed the complaint and
upheld the validity of the foreclosure sale. The trial
court ordered in its Decision, dated 13 December 1995:
[11]
WHEREFORE, all the foregoing premises
considered, the herein complaint is hereby
dismissed forthwith.
Without pronouncements to costs.
The Spouses Landrito appealed to the Court of

Appeals pursuant to Rule 41 of the 1997 Rules of
Court. In its Decision dated 31 August 2005, the Court
of Appeals reversed the trial courts decision, decreeing
that the five percent (5%) interest imposed by the
Spouses Espiritu on the first month and the varying
interest rates imposed for the succeeding months
contravened the provisions of the Real Estate Mortgage
contract which provided that interest at the legal rate,
i.e., 12% per annum, would be imposed. It also ruled
that although the Usury Law had been rendered
ineffective by Central Bank Circular No. 905, which, in
effect, removed the ceiling rates prescribed for interests,
thus, allowing parties to freely stipulate thereon, the
courts may render void any stipulation of interest rates
which are found iniquitous or unconscionable. As a
result, the Court of Appeals set the interest rate of the
loan at the legal rate, or 12% per annum.[12]
Furthermore, the Court of Appeals held that the
action for reconveyance, filed by the Spouses Landrito,
is still a proper remedy. Even if the Spouses Landrito
failed to redeem the property within the one-year
redemption period provided by law, the action for
reconveyance remained as a remedy available to a
landowner whose property was wrongfully registered in
anothers name since the subject property has not yet

passed to an innocent purchaser for value.[13]
In the decretal portion of its Decision, the Court
of Appeals ruled[14]:
WHEREFORE, the instant appeal is hereby
GRANTED.
The assailed Decision dated
December 13, 1995 of the Regional Trial Court of
Makati, Branch 146 in Civil Case No. 92-2920 is
hereby REVERSED and SET ASIDE, and a new
one is hereby entered as follows: (1) The legal rate
of 12% per annum is hereby FIXED to be applied as
the interest of the loan; and (2) Conditioned upon
the payment of the loan, defendants-appellees
spouses Zoilo and Primitiva Espiritu are hereby
ordered to reconvey Transfer Certificate of Title No.
S-48948 to appellant spouses Maximo and Paz
Landrito.
The case is REMANDED to the Trial Court
for the above determination.
Hence, the present petition. The following issues

were raised:[15]
I
THE HONORABLE COURT OF APPEALS
ERRED IN REVERSING AND SETTING ASIDE
THE DECISION OF THE TRIAL COURT AND
ORDERING
HEREIN
PETITIONERS
TO
RECONVEY TRANSFER CERTIFICATE OF
TITLE NO. 18918 TO HEREIN RESPONDENTS,

WITHOUT ANY FACTUAL OR LEGAL BASIS
THEREFOR.
II
ERRED
IN
FINDING
THAT
HEREIN
PETITIONERS UNILATERALLY IMPOSED ON
HEREIN RESPONDENTS THE ALLEGEDLY
UNREASONABLE INTERESTS ON THE
MORTGAGE LOANS.
III
ERRED IN NOT CONSIDERING THAT HEREIN
RESPONDENTS ATTORNEY-IN-FACT IS NOT
ARMED WITH AUTHORITY TO FILE AND
PROSECUTE THIS CASE.
The petition is without merit.

The Real Estate Mortgage executed between the
parties specified that the principal indebtedness shall
earn interest at the legal rate. The agreement contained
no other provision on interest or any fees or charges
incident to the debt. In at least three contracts, all
designated as Amendment of Real Estate Mortgage, the
interest rate imposed was, likewise, unspecified. During
his testimony, Zoilo Espiritu admitted that the increase
in the principal in each of the Amendments of the Real
Estate Mortgage consists of interest and charges. The
Spouses Espiritu alleged that the parties had agreed on

the interest and charges imposed in connection with the
loan, hereunder enumerated:
1. P17,500.00 was the interest charged for
the first month and P7,500.00 was imposed as
service fee.
2. P35,000.00 interest and charges, or the
difference between the P350,000.00 principal in the
Real Estate Mortgage dated 5 September 1986 and
the P385,000.00 principal in the Amendment of the
Real Estate Mortgage dated 29 December 1986.
Amendment of the Real Estate Mortgage dated 29
December 1986 and the P507,000.00 principal in
the Amendment of the Real Estate Mortgage dated
29 July 1987.
July 1987 and the P647,000.00 principal in the
March 1988.
March 1988 and the P874,125 principal in the
October 1988.
The total interest and charges amounting to

P559,125.00 on the original principal of P350,000 was
accumulated over only two years and one month. These
charges are not found in any written agreement between
the parties. The records fail to show any computation
on how much interest was charged and what other fees
were imposed. Not only did lack of transparency
characterize the aforementioned agreements, the interest
rates and the service charge imposed, at an average of
6.39% per month, are excessive.
In enacting Republic Act No. 3765, known as the
Truth in Lending Act, the State seeks to protect its
citizens from a lack of awareness of the true cost of
credit by assuring the full disclosure of such costs.
Section 4, in connection with Section 3(3)[16] of the
said law, gives a detailed enumeration of the specific
information required to be disclosed, among which are
the interest and other charges incident to the extension
of credit. Section 6[17] of the same law imposes on
anyone who willfully violates these provisions,
sanctions which include civil liability, and a fine and/or
imprisonment.
Although any action seeking to impose either civil
or criminal liability had already prescribed, this Court
frowns upon the underhanded manner in which the
Spouses Espiritu imposed interest and charges, in
connection with the loan. This is aggravated by the fact
that one of the creditors, Zoilo Espiritu, a lawyer, is

hardly in a position to plead ignorance of the
requirements of the law in connection with the
transparency of credit transactions. In addition, the
Civil Code clearly provides that:
Article 1956. No interest shall be due unless it has
been stipulated in writing.
The omission of the Spouses Espiritu in

specifying in the contract the interest rate which was
actually imposed, in contravention of the law,
manifested bad faith.
In several cases, this Court has been known to
declare null and void stipulations on interest and charges
that were found excessive, iniquitous, and
unconscionable. In the case of Medel v. Court of
Appeals,[18] the Court declared an interest rate of 5.5%
per month on a P500,000.00 loan to be excessive,
iniquitous, unconscionable and exorbitant. Even if the
parties themselves agreed on the interest rate and
stipulated the same in a written agreement, it
nevertheless declared such stipulation as void and
ordered the imposition of a 12% yearly interest rate. In
Spouses Solangon v. Salazar,[19] 6% monthly interest
on a P60,000.00 loan was likewise equitably reduced to
a 1% monthly interest or 12% per annum. In Ruiz v.
Court of Appeals,[20] the Court found a 3% monthly
interest imposed on four separate loans with a total of
P1,050,000.00 to be excessive and reduced the interest

to a 1% monthly interest or 12% per annum.
In declaring void the stipulations authorizing
excessive interest and charges, the Court declared that
although the Usury Law was suspended by Central Bank
Circular No. 905, s. 1982, effective on 1 January 1983,
and consequently parties are given a wide latitude to
agree on any interest rate, nothing in the said Circular
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.[21]
Stipulation
authorizing
iniquitous
or
unconscionable interests are contrary to morals, if not
against the law. Under Article 1409 of the Civil Code,
these contracts are inexistent and void from the
beginning. They cannot be ratified nor the right to set up
their illegality as a defense be waived.[22] The nullity
of the stipulation on the usurious interest does not,
however, affect the lenders right to recover the
principal of the loan.[23] Nor would it affect the terms
of the real estate mortgage. The right to foreclose the
mortgage remains with the creditors, and said right can
be exercised upon the failure of the debtors to pay the
debt due. The debt due is to be considered without the
stipulation of the excessive interest. A legal interest of
12% per annum will be added in place of the excessive
interest formerly imposed.
While the terms of the Real Estate Mortgage

remain effective, the foreclosure proceedings held on 31
Ocotber 1990 cannot be given effect. In the Notice of
Sheriffs Sale[24] dated 5 October 1990, and in the
Certificate of Sale[25] dated 31 October 1990, the
amount designated as mortgage indebtedness amounted
to P874,125.00. Likewise, in the demand letter[26]
dated 12 December 1989, Zoilo Espiritu demanded from
the Spouses Landrito the amount of P874,125.00 for the
unpaid loan. Since the debt due is limited to the
principal of P350,000.00 with 12% per annum as legal
interest, the previous demand for payment of the amount
of P874,125.00 cannot be considered as a valid demand
for payment. For an obligation to become due, there
must be a valid demand.[27] Nor can the foreclosure
proceedings be considered valid since the total amount
of the indebtedness during the foreclosure proceedings
was pegged at P874,125.00 which included interest and
which this Court now nullifies for being excessive,
iniquitous and exorbitant. If the foreclosure proceedings
were considered valid, this would result in an
inequitable situation wherein the Spouses Landrito will
have their land foreclosed for failure to pay an overinflated loan only a small part of which they were
obligated to pay.
Moreover, it is evident from the facts of the case
that despite considerable effort on their part, the Spouses
Landrito failed to redeem the mortgaged property

because they were unable to raise the total amount,
which was grossly inflated by the excessive interest
imposed. Their attempt to redeem the mortgaged
property at the inflated amount of P1,595,392.79, as
early as 30 October 1991, is reflected in a letter, which
creditor-mortgagee Zoilo Landrito acknowledged to
have received by affixing his signature herein.[28] They
also attached in their Complaint copies of two checks in
the amounts of P770,000.00 and P995,087.00, both
dated 13 January 1992, which were allegedly refused by
the Spouses Espiritu.[29] Lastly, the Spouses Espiritu
even attached in their exhibits a copy of a handwritten
letter, dated 27 January 1994, written by Paz Landrito,
addressed to the Spouses Espiritu, wherein the former
offered to pay the latter the sum of P2,000,000.00.[30]
In all these instances, the Spouses Landrito had tried,
but failed, to pay an amount way over the indebtedness
they were supposed to pay i.e., P350,000.00 and 12%
interest per annum. Thus, it is only proper that the
Spouses Landrito be given the opportunity to repay the
real amount of their indebtedness.
Since the Spouses Landrito, the debtors in this
case, were not given an opportunity to settle their debt,
at the correct amount and without the iniquitous interest
imposed, no foreclosure proceedings may be instituted.
A judgment ordering a foreclosure sale is conditioned
upon a finding on the correct amount of the unpaid
obligation and the failure of the debtor to pay the said

amount.[31] In this case, it has not yet been shown that
the Spouses Landrito had already failed to pay the
correct amount of the debt and, therefore, a foreclosure
sale cannot be conducted in order to answer for the
unpaid debt. The foreclosure sale conducted upon their
failure to pay P874,125 in 1990 should be nullified since
the amount demanded as the outstanding loan was
overstated; consequently it has not been shown that the
mortgagors the Spouses Landrito, have failed to pay
their outstanding obligation. Moreover, if the proceeds
of the sale together with its reasonable rates of interest
were applied to the obligation, only a small part of its
original loans would actually remain outstanding, but
because of the unconscionable interest rates, the larger
part corresponded to said excessive and iniquitous
interest.
As a result, the subsequent registration of the
foreclosure sale cannot transfer any rights over the
mortgaged property to the Spouses Espiritu. The
registration of the foreclosure sale, herein declared
invalid, cannot vest title over the mortgaged property.
The Torrens system does not create or vest title where
one does not have a rightful claim over a real property.
It only confirms and records title already existing and
vested. It does not permit one to enrich oneself at the
expense of another.[32] Thus, the decree of registration,
even after the lapse of one (1) year, cannot attain the
status of indefeasibility.
Significantly, the records show that the property
mortgaged was purchased by the Spouses Espiritu and
had not been transferred to an innocent purchaser for
value. This means that an action for reconveyance may
still be availed of in this case.[33]
Registration of property by one person in his or
her name, whether by mistake or fraud, the real owner
being another person, impresses upon the title so
acquired the character of a constructive trust for the real
owner, which would justify an action for reconveyance.
[34] This is based on Article 1465 of the Civil Code
which states that:
Art. 1465. If property acquired through mistakes or
fraud, the person obtaining it is, by force of law,
considered a trustee of an implied trust for benefit
of the person from whom the property comes.
The action for reconveyance does not prescribe

until after a period of ten years from the date of the
registration of the certificate of sale since the action
would be based on implied trust.[35] Thus, the action
for reconveyance filed on 31 October 1992, more than
one year after the Sheriffs Certificate of Sale was
registered on 9 January 1991, was filed within the
prescription period.
It should, however, be reiterated that the

provisions of the Real Estate Mortgage are not annulled
and the principal obligation stands. In addition, the
interest is not completely removed; rather, it is set by
this Court at 12% per annum. Should the Spouses
Landrito fail to pay the principal, with its recomputed
interest which runs from the time the loan agreement
was entered into on 5 September 1986 until the present,
there is nothing in this Decision which prevents the
Spouses Espiritu from foreclosing the mortgaged
property.
The last issue raised by the petitioners is whether
or not Zoilo Landrito was authorized to file the action
for reconveyance filed before the trial court or even to
file the appeal from the judgment of the trial court, by
virtue of the Special Power of Attorney dated 30
September 1992. They further noted that the trial court
and the Court of Appeals failed to rule on this issue.[36]
The Special Power of Attorney[37] dated 30
September 1992 was executed by Maximo Landrito, Jr.,
with the conformity of Paz Landrito, in connection with
the mortgaged property. It authorized Zoilo Landrito:
2. To make, sign, execute and deliver
corresponding pertinent contracts, documents,
agreements and other writings of whatever nature or
kind and to sue or file legal action in any court of
the Philippines, to collect, ask demands, encash
checks, and recover any and all sum of monies,

proceeds, interest and other due accruing, owning,
payable or belonging to me as such owner of the
afore-mentioned property. (Emphasis provided.)
Zoilo Landritos authority to file the case is

clearly set forth in the Special Power of Attorney.
Furthermore, the records of the case unequivocally show
that Zoilo Landrito filed the reconveyance case with the
full authority of his mother, Paz Landrito, who attended
the hearings of the case, filed in her behalf, without
making any protest.[38] She even testified in the same
case on 30 August 1995. From the acts of Paz Landrito,
there is no doubt that she had authorized her son to file
the action for reconveyance, in her behalf, before the
trial court.
IN VIEW OF THE FOREGOING, the instant
Petition is DENIED. This Court AFFIRMS the
assailed Decision of the Court of Appeals, promulgated
on 31 August 2005, fixing the interest rate of the loan
between the parties at 12% per annum, and ordering the
Spouses Espiritu to reconvey the subject property to the
Spouses Landrito conditioned upon the payment of the
loan together with herein fixed rate of interest. Costs
against the petitioners.
SO ORDERED.
TUMALADV.VICENCIO41
SCRA143
FACTS:
VicencioandSimeonexecutedachattelmortgageinfavorof
plaintiffsTumaladovertheirhouse,whichwasbeingrentedby
Madrigalandcompany.Thiswasexecutedtoguaranteealoan,
payableinoneyearwitha12%perannuminterest.Themortgagewas
extrajudiciallyforecloseduponfailuretopaytheloan.Thehousewassold
atapublicauctionandtheplaintiffswerethehighestbidder.A
correspondingcertificateofsalewasissued.Thereafter,theplaintiffs
filedanactionforejectmentagainstthedefendants,prayingthatthelatter
vacatethehouseastheyweretheproperowners.
HELD:
Certaindeviationshavebeenallowedfromthegeneraldoctrinethat
buildingsareimmovablepropertysuchaswhenthroughstipulation,parties
mayagreetotreataspersonalpropertythosebytheirnaturewould
berealproperty.Thisispartlybasedontheprincipleofestoppelwherein
theprincipleispredicatedonstatementsbytheownerdeclaringhishouseas
chattel,aconductthatmayconceivablystophimfromsubsequently
claimingotherwise.Inthecaseatbar,thoughtherebenospecificstatement
referringtothesubjecthouseaspersonalproperty,yetbyceding,sellingor
transferringapropertythroughchattelmortgagecouldonlyhavemeant
thatdefendantconveysthehouseaschattel,oratleast,intendedto
treatthesameassuch,sothattheyshouldnotnowbeallowedto
makeaninconsistentstandbyclaimingotherwise.
TSAIV.COURTOFAPPEALS
336SCRA324
FACTS:
EVERTEXsecuredaloanfromPBC,guaranteedbyarealestateandchattel
mortgageoveraparceloflandwherethefactorystands,andthechattels
locatedtherein,asincludedinascheduleattachedtothemortgage
contract.Anotherloanwasobtainedsecuredbyachattelmortgage
overpropertieswithsimilardescriptionslistedinthefirstschedule.During
thedateofexecutionofthesecondmortgage,EVERTEX
purchasedmachineriesandequipment.Duetobusinessreverses,
EVERTEXfiledforinsolvencyproceedings.Itfailedtopayits
obligationandthus,PBCinitiatedextrajudicialforeclosureofthe
mortgages.PBCwasthehighestbidderinthepublicauctions,
makingittheowneroftheproperties.Itthenleasedthefactorypremisesto
Tsai.Afterwards,EVERTEXsoughttheannulmentofthesaleand
conveyanceofthepropertiestoPBCasitwasallegedlyaviolationofthe
INSOLVENCYLAW.TheRTCheldthattheleaseandsalewere
irregularasitinvolvedpropertiesnotincludedinthescheduleofthe
mortgagecontract.
HELD:
Whileitistruethatthecontrovertedpropertiesappeartobeimmobile,a
perusalofthecontractofREMandCMexecutedbytheparties
givesacontraryindication.Inthecaseatbar,boththetrialandappellate
courtsshowthattheintentionwastotreatthemachineriesas
movablesorpersonalproperty.Assumingthatthepropertieswere
consideredimmovables,nothingdetractsthepartiesfromtreatingitas
chattelstosecureanobligationundertheprincipleofestoppel.
FILINVESTCREDITvs.PHILIPPINEACETYLENEG.R.No.L50449January
30,1982
Facts:
PhilippineAcetyleneCo.purchasedfromAlexanderLimamotorvehicle
describedasChevorlet1969modelforP55Ktobepaidininstalments.Assecurity
forthepaymentofsaidpromissorynote,theappellantexecutedachattelmortgage
overthesamemotorvehicleinfavorofsaidAlexanderLim.Then,Limassigned
totheFilinvestallhisrights,title,andinterestsinthepromissorynoteandchattel
mortgagebyvirtueofaDeedofAssignment.
PhilAcetylenedefaultedinthepaymentofninesuccessiveinstallments.Filinvest
sentademandletter.Replyingthereto,PhilAcetylenewrotebackofitsdesireto
returnthemortgagedproperty,whichreturnshallbeinfullsatisfactionofits
indebtedness.SothevehiclewasreturnedtotheFilinvesttogetherwiththe
documentVoluntarySurrenderwithSpecialPowerofAttorneyToSell.
Filinvestfailedtosellthemotorvehicleastherewereunpaidtaxesonthesaid
vehicle.Filinvestrequestedtheappellanttoupdateitsaccountbypayingthe
installmentsinarrearsandaccruinginterest.Filinvestofferedtodeliverbackthe
motorvehicletotheappellantbutthelatterrefusedtoacceptit,soappellee
institutedanactionforcollectionofasumofmoneywithdamages.
PhilAcetylenesdefense:ThedeliveryofthemotorvehicletoFilinvest
extinguisheditsmoneyobligationasitamountedtoadationinpayment.
Assumingarguendothatthereturndidnotextinguish,itwasjustifiedinrefusing
paymentsincetheappelleeisnotentitledtorecoverthesameduetothebreachof
warrantycommittedbytheoriginalvendorassignorAlexanderLim.
Issue:
WONtherewasdationinpaymentthatextinguishedPhilAcetylenesobligation?
NO.
Held:
Themerereturnofthemortgagedmotorvehiclebythemortgagordoesnot
constitutedationinpaymentintheabsence,expressorimpliedofthetrue
intentionoftheparties.Dacionenpagoisthetransmissionoftheownershipofa
thingbythedebtortothecreditorasanacceptedequivalentoftheperformanceof
obligation.Indacion,thedebtoroffersanotherthingtothecreditorwhoacceptsit
asequivalentofpaymentofanoutstandingdebt.Theundertakingreallypartakes
inonesenseofthenatureofsale,thatis,thecreditorisreallybuyingthethingor
propertyofthedebtor,paymentforwhichistobechargedagainstthedebtors
debt.Assuch,theessentialelementsofacontractofsale,namely,consent,object
certain,andcauseorconsiderationmustbepresent.Initsmodernconcept,what
actuallytakesplaceindacionenpagoisanobjectivenovationoftheobligation
wherethethingofferedasanacceptedequivalentoftheperformanceofan
obligationisconsideredastheobjectofthecontractofsale,whilethedebtis
consideredasthepurchaseprice.Inanycase,commonconsentisanessential
prerequisite,beitsaleorinnovationtohavetheeffectoftotallyextinguishingthe
debtorobligation.
TheevidenceontherecordfailstoshowthattheFilinvestconsented,oratleast
intended,thatthemeredeliveryto,andacceptancebyhim,ofthemortgaged
motorvehiclebeconstruedasactualpayment,morespecificallydationinpayment
ordacionenpago.Thefactthatthemortgagedmotorvehiclewasdeliveredtohim
doesnotnecessarilymeanthatownershipthereof,asjuridicallycontemplatedby
dacionenpago,wastransferredfromappellanttoappellee.Intheabsenceofclear
consentofappelleetotheproferredspecialmodeofpayment,therecanbeno
transferofownershipofthemortgagedmotorvehiclefromappellanttoappellee.
Ifatall,onlytransferofpossessionofthemortgagedmotorvehicletookplace,for
itisquitepossiblethatappellee,asmortgagee,merelywantedtosecurepossession
toforestalltheloss,destruction,fraudulenttransferofthevehicletothirdpersons,
oritsbeingrenderedvaluelessifleftinthehandsoftheappellant.
AstothestrengthoftheVoluntarySurrenderwithSpecialPowerofAttorneyTo
Sell,itonlyauthorizedFilinvesttolookforabuyerandsellthevehicleinbehalf
oftheappellantwhoretainsownershipthereof,andtoapplytheproceedsofthe
saletothemortgageindebtedness,withtheundertakingoftheappellanttopaythe
difference,ifany,betweenthesellingpriceandthemortgageobligation.Filinvest
inessencewasconstitutedasamereagenttosellthemotorvehiclewhichwas
deliverednotasitsproperty.Ifitwere,hewouldhavefullpowerofdispositionof
theproperty,notonlytosellit.

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THIRD DIVISION

PHILIPPINE NATIONAL BANK,

assailed Decision reads as follows:

secure a commercial loan with the PNB in

The loan of [Petitioner] NSBCI was

who signed as accommodation-mortgagors

Later on, [Petitioner] NSBCI failed to

Sept. 29, 1991

Oct. 29, 1991

Nov. 29, 1991

Dec. 20, 1991

Upon presentment[,] however, x x x

September 29 and October 29, 1991 were

Weekly Guardian, allegedly a newspaper of

Rodriguez Sr. Avenue, Quezon City[,]

Finding that the PNB debt relief

On appeal, respondent assailed the

Reversing the trial court, the CA

5(q) of Rule 131 of the Rules of Court.

such increases; it could also have

foreclosure of a real estate mortgage,

reasons: (1) personal notice to the

were not entitled thereto as a matter of right.

mortgage account not realized in the

Petitioners are merely

The joint and solidary

C. The NSBCI Board Resolution

The Respondent PNB had

substantial amount of P2.1

The foregoing may be summed up

First Main Issue:

prior notice to petitioners. The Court

an unbridled right to adjust the interest

their assets.[34] In fact, we have

equitably reduced for being iniquitous,

proposal to modify a loan contract,

for by CB Circular 416.[50]

petitioners,[54] contrary to the trial

conversion to a medium-term loan.

Second, there was no 7-page

automatic conversion into a mediumterm loan.

The terms and conditions therein

As to the first Disclosure

Transaction[86] dated September 2,

Transaction[90] dated September 6,

examined, Julia Ang-Lopez, Finance

thereof appear either in the Disclosure

Besides, we have earlier said that

animus novandi must appear by

Agreements, and no total value or even

determine their reasonableness[111]

amortizations have been established, or

and limitations under which banks may

standard in format, but are periodically

the fulfillment of the principal loan

of registration of the Certificate of Sale

legal rate revision upon automatic

as shown in the following Schedules:

SCHEDULE 1: PN (1) drawdown amount on 6/29/89

6/30/90-12/31/90 ([5,000,000-(356,821.30+821.33+767,087.92)] x 19.5% x [185

1/1/91-6/29/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 19.5% x [180/3

6/30/91-8/8/91 ([5,000,000-(356,821.30+821.33+767,087.92)] x 12% x [40/365]

Amount due as of 8/8/91