1) MARGARITA QUINTOS

BECK, defendant-appellee.

and

ANGEL

A.

ANSALDO, plaintiffs-appellants, vs.

[G.R. No. L-46240 November 3, 1939]

IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain furniture which she
lent him for his use. She appealed from the judgment of the Court of First Instance of Manila
which ordered that the defendant return to her the three has heaters and the four electric lamps
found in the possession of the Sheriff of said city, that she call for the other furniture from the said
sheriff of Manila at her own expense, and that the fees which the Sheriff may charge for the
deposit of the furniture be paid pro rata by both parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del
Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the
plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture
described in the third paragraph of the stipulation of facts, subject to the condition that the
defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the
property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the
defendant of the conveyance, giving him sixty days to vacate the premises under one of the
clauses of the contract of lease. There after the plaintiff required the defendant to return all the
furniture transferred to him for them in the house where they were found. On November 5, 1936,
the defendant, through another person, wrote to the plaintiff reiterating that she may call for the
furniture in the ground floor of the house. On the 7th of the same month, the defendant wrote
another letter to the plaintiff informing her that he could not give up the three gas heaters and the
four electric lamps because he would use them until the 15th of the same month when the lease in
due to expire. The plaintiff refused to get the furniture in view of the fact that the defendant had
declined to make delivery of all of them. On November 15th, before vacating the house, the
defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on
deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law:
in holding that they violated the contract by not calling for all the furniture on November 5, 1936,
when the defendant placed them at their disposal; in not ordering the defendant to pay them the
value of the furniture in case they are not delivered; in holding that they should get all the furniture
from the Sheriff at their expenses; in ordering them to pay-half of the expenses claimed by the
Sheriff for the deposit of the furniture; in ruling that both parties should pay their respective legal
expenses or the costs; and in denying pay their respective legal expenses or the costs; and in
denying the motions for reconsideration and new trial. To dispose of the case, it is only necessary
to decide whether the defendant complied with his obligation to return the furniture upon the
plaintiff's demand; whether the latter is bound to bear the deposit fees thereof, and whether she is
entitled to the costs of litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership
thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon
the latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the
Civil Code). The obligation voluntarily assumed by the defendant to return the furniture upon the
plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence
or house. The defendant did not comply with this obligation when he merely placed them at the
disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps.
The provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely
applicable. The trial court, therefore, erred when it came to the legal conclusion that the plaintiff
failed to comply with her obligation to get the furniture when they were offered to her.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the
latter's demand, the Court could not legally compel her to bear the expenses occasioned by the
deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the
furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture,
because the defendant wanted to retain the three gas heaters and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment
thereof by the defendant in case of his inability to return some of the furniture because under
paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor admitted the
correctness of the said value. Should the defendant fail to deliver some of the furniture, the value
thereof should be latter determined by the trial Court through evidence which the parties may
desire to present.
The costs in both instances should be borne by the defendant because the plaintiff is the prevailing
party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the
contract of commodatum, and without any reason he refused to return and deliver all the furniture
upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which the plaintiff would not have otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to return and deliver to the
plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of the
latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The expenses
which may be occasioned by the delivery to and deposit of the furniture with the Sheriff shall be
for the account of the defendant. the defendant shall pay the costs in both instances. So ordered.

2) TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT

OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents.
[G.R. No. 138677. February 12, 2002]
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,
assailing the decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled
"Security Bank and Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the
amount of P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed
a promissory note binding themselves, jointly and severally, to pay the sum borrowed with an
interest of 15.189% per annum upon maturity and to pay a penalty of 5% every month on the
outstanding principal and interest in case of default. In addition, petitioners agreed to pay 10% of
the total amount due by way of attorneys fees if the matter were indorsed to a lawyer for
collection or if a suit were instituted to enforce payment. The obligation matured on 8 September
1981; the bank, however, granted an extension but only up until 29 December 1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as of 20
May 1982, amounted to P114,416.10. On 30 September 1982, the bank sent a final demand letter
to petitioners informing them that they had five days within which to make full payment. Since
petitioners still defaulted on their obligation, the bank filed on 3 November 1982, with the
Regional Trial Court of Makati, Branch 143, a complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence
and, on 27 March 1985, rested its case. Petitioners, instead of introducing their own evidence, had
the hearing of the case reset on two consecutive occasions. In view of the absence of petitioners
and their counsel on 28 August 1985, the third hearing date, the bank moved, and the trial court
resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the
order of the trial court declaring them as having waived their right to present evidence and prayed
that they be allowed to prove their case. The court a quo denied the motion in an order, dated 5
September 1988, and on 20 October 1989, it rendered its decision,[1] the dispositive portion of
which read:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
ordering the latter to pay, jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum, 2%
service charge and 5% per month penalty charge, commencing on 20 May
1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount of indebtedness for
and as attorneys fees; and
"3. To pay the costs of the suit.[2]
Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the
trial court of their motion to present evidence and assailing the imposition of the 2% service
charge, the 5% per month penalty charge and 10% attorney's fees. In its decision[3] of 7 March
1996, the appellate court affirmed the judgment of the trial court except on the matter of the 2%
service charge which was deleted pursuant to Central Bank Circular No. 783. Not fully satisfied
with the decision of the appellate court, both parties filed their respective motions for

reconsideration.[4] Petitioners prayed for the reduction of the 5% stipulated penalty for being
unconscionable. The bank, on the other hand, asked that the payment of interest and penalty be
commenced not from the date of filing of complaint but from the time of default as so stipulated in
the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with interest
thereon must commence not on the date of filing of the complaint as we have previously held in
our decision but on the date when the obligation became due.
Default generally begins from the moment the creditor demands the performance of the
obligation. However, demand is not necessary to render the obligor in default when the obligation
or the law so provides.
In the case at bar, defendants-appellants executed a promissory note where they undertook to pay
the obligation on its maturity date 'without necessity of demand.' They also agreed to pay the
interest in case of non-payment from the date of default.
x x x

xxx
xxx

While we maintain that defendants-appellants must be bound by the contract which they
acknowledged and signed, we take cognizance of their plea for the application of the provisions of
Article 1229 x x x.
Considering that defendants-appellants partially complied with their obligation under the
promissory note by the reduction of the original amount of P120,000.00 to P114,416.00 and in
order that they will finally settle their obligation, it is our view and we so hold that in the interest
of justice and public policy, a penalty of 3% per month or 36% per annum would suffice.
x x x

xxx
xxx

WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendantsappellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiffappellee Security Bank and Trust Company the following:
1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum
and 3% per month penalty charge commencing May 20, 1982 until fully paid;
2. The sum equivalent to 10% of the total amount of the indebtedness as and for
attorneys fees.[5]
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit
newly discovered evidence,[6] alleging that while the case was pending before the trial court,
petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage
on 18 January 1984 to secure the existing indebtedness of petitioners Ligutan and dela Llana with
the bank. Petitioners contended that the execution of the real estate mortgage had the effect
of novating the contract between them and the bank. Petitioners further averred that the mortgage
was extrajudicially foreclosed on 26 August 1986, that they were not informed about it, and the
bank did not credit them with the proceeds of the sale. The appellate court denied the omnibus
motion for reconsideration and to admit newly discovered evidence, ratiocinating that such a
second motion for reconsideration cannot be entertained under Section 2, Rule 52, of the 1997
Rules of Civil Procedure. Furthermore, the appellate court said, the newly-discovered evidence

being invoked by petitioners had actually been known to them when the case was brought on
appeal and when the first motion for reconsideration was filed. [7]
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their
case to this Court on 9 July 1999 via a petition for review oncertiorari under Rule 45 of the Rules
of Court, submitting thusly I.

The respondent Court of Appeals seriously erred in not holding that the
15.189% interest and the penalty of three (3%) percent per month or thirtysix (36%) percent per annum imposed by private respondent bank on
petitioners loan obligation are still manifestly exorbitant, iniquitous and
unconscionable.

II.

The respondent Court of Appeals gravely erred in not reducing to a

reasonable level the ten (10%) percent award of attorneys fees which is
highly and grossly excessive, unreasonable and unconscionable.

III.

The respondent Court of Appeals gravely erred in not admitting petitioners

newly discovered evidence which could not have been timely produced
during the trial of this case.

IV.

The respondent Court of Appeals seriously erred in not holding that there
was a novation of the cause of action of private respondents complaint in
the instant case due to the subsequent execution of the real estate mortgage
during the pendency of this case and the subsequent foreclosure of the
mortgage.[8]

Respondent bank, which did not take an appeal, would, however, have it that the penalty
sought to be deleted by petitioners was even insufficient to fully cover and compensate for the cost
of money brought about by the radical devaluation and decrease in the purchasing power of the
peso, particularly vis-a-vis the U.S. dollar, taking into account the time frame of its
occurrence. The Bank would stress that only the amount of P5,584.00 had been remitted out of
the entire loan of P120,000.00.[9]
A penalty clause, expressly recognized by law,[10] is an accessory undertaking to assume
greater liability on the part of an obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligation[11] and to provide, in effect, for what could be the
liquidated damages resulting from such a breach. The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof on the existence and on the measure of
damages caused by the breach.[12] Although a court may not at liberty ignore the freedom of the
parties to agree on such terms and conditions as they see fit that contravene neither law nor
morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be
equitably reduced by the courts if it is iniquitous or unconscionable or if the principal obligation
has been partly or irregularly complied with.[13]
The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective. Its resolution would depend on such factors as, but not necessarily confined to,
the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the sound discretion of the
court. In Rizal Commercial Banking Corp. vs. Court of Appeals,[14] just an example, the Court has
tempered the penalty charges after taking into account the debtors pitiful situation and its offer to
settle the entire obligation with the creditor bank. The stipulated penalty might likewise be
reduced when a partial or irregular performance is made by the debtor. [15] The stipulated penalty
might even be deleted such as when there has been substantial performance in good faith by the
obligor,[16] when the penalty clause itself suffers from fatal infirmity, or when exceptional
circumstances so exist as to warrant it.[17]

The Court of Appeals, exercising its good judgment in the instant case, has reduced the
penalty interest from 5% a month to 3% a month which petitioner still disputes. Given the
circumstances, not to mention the repeated acts of breach by petitioners of their contractual
obligation, the Court sees no cogent ground to modify the ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question
its reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that
has not been raised and ventilated before the courts below. In any event, the interest stipulation,
on its face, does not appear as being that excessive. The essence or rationale for the payment of
interest, quite often referred to as cost of money, is not exactly the same as that of a surcharge or a
penalty. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to
that effect, the two being distinct concepts which may separately be demanded. [18] What may
justify a court in not allowing the creditor to impose full surcharges and penalties, despite an
express stipulation therefor in a valid agreement, may not equally justify the non-payment or
reduction of interest. Indeed, the interest prescribed in loan financing arrangements is a
fundamental part of the banking business and the core of a bank's existence. [19]
Petitioners next assail the award of 10% of the total amount of indebtedness by way of
attorney's fees for being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent
and the extent of services rendered by counsel for the bank and the nature of the case. Bearing in
mind that the rate of attorneys fees has been agreed to by the parties and intended to answer not
only for litigation expenses but also for collection efforts as well, the Court, like the appellate
court, deems the award of 10% attorneys fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new
trial or to admit newly discovered evidence. As the appellate court so held in its resolution of 14
May 1999 Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for
reconsideration of a judgment or final resolution by the same party shall be
entertained. Considering that the instant motion is already a second motion for reconsideration,
the same must therefore be denied.
Furthermore, it would appear from the records available to this court that the newly-discovered
evidence being invoked by defendants-appellants have actually been existent when the case was
brought on appeal to this court as well as when the first motion for reconsideration was
filed. Hence, it is quite surprising why defendants-appellants raised the alleged newly-discovered
evidence only at this stage when they could have done so in the earlier pleadings filed before this
court.
The propriety or acceptability of such a second motion for reconsideration is not contingent upon
the averment of 'new' grounds to assail the judgment, i.e., grounds other than those theretofore
presented and rejected. Otherwise, attainment of finality of a judgment might be stayed off
indefinitely, depending on the partys ingenuousness or cleverness in conceiving and formulating
'additional flaws' or 'newly discovered errors' therein, or thinking up some injury or prejudice to
the rights of the movant for reconsideration.[20]
At any rate, the subsequent execution of the real estate mortgage as security for the existing loan
would not have resulted in the extinguishment of the original contract of loan because
of novation. Petitioners acknowledge that the real estate mortgage contract does not contain any
express stipulation by the parties intending it to supersede the existing loan agreement between the
petitioners and the bank.[21] Respondent bank has correctly postulated that the mortgage is but an
accessory contract to secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all
the parties to the new contract; third, the extinguishment of the obligation; and fourth, the validity

of the new one.[22] In order that an obligation may be extinguished by another which substitutes
the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new
obligation be on every point incompatible with each other. [23] An obligation to pay a sum of
money is not extinctively novated by a new instrument which merely changes the terms of
payment or adding compatible covenants or where the old contract is merely supplemented by the
new one.[24] When not expressed, incompatibility is required so as to ensure that the parties have
indeed intended such novation despite their failure to express it in categorical terms. The
incompatibility, to be sure, should take place in any of the essential elements of the obligation, i.e.,
(1) the juridical relation or tie, such as from a mere commodatum to lease of things, or
from negotiorum gestio to agency, or from a mortgage to antichresis,[25] or from a sale to one of
loan;[26] (2) the object or principal conditions, such as a change of the nature of the prestation; or
(3) the subjects, such as the substitution of a debtor [27] or the subrogation of the
creditor. Extinctive novation does not necessarily imply that the new agreement should be
complete by itself; certain terms and conditions may be carried, expressly or by implication, over
to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.

3) UNITED
BANK,

COCONUT

PLANTERS

Petitioner,

Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

- versus -

SPOUSES
BELUSO,

G.R. No. 159912

SAMUEL

and

ODETTE

Promulgated:

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] dated21 January 2003 and its Resolution[2] dated 9
September 2003 in CA-G.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

Amount Secured

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

8314-96-000292-2

20 November 1996

20 March 1997

P 800,000

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 200,000

98-00002-4

2 January 1998

28 February 1998

P 150,000

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

Total

97-00363-1
97-00366-6

P
P

P 1,300,000

98-00002-4

36%
32.786%
(102 days)
30.41% (102
days)
36%

P
P

97-00368-2

31%
30.17%
(7 days)
28%
(2 days)
33%
(102 days)

200,000
700,000

150,000

225,313.24
795,294.72

P 1,462,124.54
P

170,034.71

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 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 ofP1,560,308.00.[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
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED
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
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED
THE DECISION OF THE TRIAL COURT WHICH ANNULLED THE
FORECLOSURE BY PETITIONER OF THE SUBJECT PROPERTIES DUE
TO AN ALLEGED INCORRECT COMPUTATION OF RESPONDENTS
INDEBTEDNESS
IV
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED
THE DECISION OF THE TRIAL COURT WHICH FOUND PETITIONER
LIABLE FOR VIOLATION OF THE TRUTH IN LENDING ACT
V
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND 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.
6.
7.
8.

Accounts receivable and other out-of-pocket expenses

Front-end Fee, Origination Fee, Attorneys Fee and other
expenses of collection;
Penalty charges;
Past due interest;
Principal amortization/Payment in arrears;
Advance interest;
Outstanding balance; and
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 noninclusion, 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 isthe 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 pretrial 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 tradein;

(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. V-7227, 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:

2.

3.

a. Penalty of 12% per annum on the amount due [46] from the date of demand;
and
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;
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.

4) SPOUSES DAVID B. CARPO

and RECHILDA S. CARPO,
Petitioners,

G.R. Nos. 150773 &

153599
Present:

- versus -

ELEANOR CHUA and

ELMA DY NG,
Respondents.

PUNO, J.,
Chairman,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.

Promulgated:
September 30, 2005

x-------------------------------------------------------------------x

DECISION

TINGA, J.:
Before this Court are two consolidated petitions for review. The first, docketed as G.R.
No. 150773, assails theDecision[1] of the Regional Trial Court (RTC), Branch 26 of Naga City
dated 26 October 2001 in Civil Case No. 99-4376. RTC Judge Filemon B. Montenegro dismissed
the complaint[2] for annulment of real estate mortgage and consequent foreclosure proceedings
filed by the spouses David B. Carpo and Rechilda S. Carpo (petitioners).
The second, docketed as G.R. No. 153599, seeks to annul the Court of
Appeals Decision[3] dated 30 April 2002 in CA-G.R. SP No. 57297. The Court of Appeals Third
Division annulled and set aside the orders of Judge Corazon A. Tordilla to suspend the sheriffs
enforcement of the writ of possession.
The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they borrowed
from Eleanor Chua and Elma Dy Ng (respondents) the amount of One Hundred Seventy-Five
Thousand Pesos (P175,000.00), payable within six (6) months with an interest rate of six percent
(6%) per month. To secure the payment of the loan, petitioners mortgaged their residential house
and lot situated at San Francisco, Magarao, Camarines Sur, which lot is covered by Transfer
Certificate of Title (TCT) No. 23180. Petitioners failed to pay the loan upon
demand. Consequently, the real estate mortgage was extrajudicially foreclosed and the mortgaged
property sold at a public auction on 8 July 1996. The house and lot was awarded to respondents,
who were the only bidders, for the amount of Three Hundred Sixty-Seven Thousand Four
Hundred Fifty-Seven Pesos and Eighty Centavos (P367,457.80).
Upon failure of petitioners to exercise their right of redemption, a certificate of sale was
issued on 5 September 1997 by Sheriff Rolando A. Borja. TCT No. 23180 was cancelled and in
its stead, TCT No. 29338 was issued in the name of respondents.
Despite the issuance of the TCT, petitioners continued to occupy the said house and lot,
prompting respondents to file a petition for writ of possession with the RTC docketed as Special
Proceedings (SP) No. 98-1665. On 23 March 1999, RTC Judge Ernesto A. Miguel issued
an Order[4] for the issuance of a writ of possession.

On 23 July 1999, petitioners filed a complaint for annulment of real estate mortgage and
the consequent foreclosure proceedings, docketed as Civil Case No. 99-4376 of the
RTC. Petitioners consigned the amount of Two Hundred Fifty-Seven Thousand One Hundred
Ninety-Seven Pesos and Twenty-Six Centavos (P257,197.26) with the RTC.
Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon motion
on 3 August 1999, enjoining the enforcement of the writ of possession. In an Order[5] dated 6
January 2000, the RTC suspended the enforcement of the writ of possession pending the final
disposition of Civil Case No. 99-4376. Against this Order, respondents filed a petition for
certiorari and mandamus before the Court of Appeals, docketed as CA-G.R. SP No. 57297.
During the pendency of the case before the Court of Appeals, RTC Judge Filemon B.
Montenegro dismissed the complaint in Civil Case No. 99-4376 on the ground that it was filed
out of time and barred by laches. The RTC proceeded from the premise that the complaint was
one for annulment of a voidable contract and thus barred by the four-year prescriptive period.
Hence, the first petition for review now under consideration was filed with this Court, assailing the
dismissal of the complaint.
The second petition for review was filed with the Court after the Court of Appeals on 30
April 2002 annulled and set aside the RTC orders in SP No. 98-1665 on the ground that it was the
ministerial duty of the lower court to issue the writ of possession when title over the mortgaged
property had been consolidated in the mortgagee.
This Court ordered the consolidation of the two cases, on motion of petitioners.
In G.R. No. 150773, petitioners claim that following the Courts ruling in Medel v. Court of
Appeals[6] the rate of interest stipulated in the principal loan agreement is clearly null and void.
Consequently, they also argue that the nullity of the agreed interest rate affects the validity of the
real estate mortgage. Notably, while petitioners were silent in their petition on the issues of
prescription and laches on which the RTC grounded the dismissal of the complaint, they belatedly
raised the matters in their Memorandum. Nonetheless, these points warrant brief comment.
On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not commit any
grave abuse of discretion when it issued the orders dated 3 August 1999 and 6 January 2000, and
that these orders could not have been the proper subjects of a petition for certiorari and
mandamus. More accurately, the justiciable issues before us are whether the Court of Appeals
could properly entertain the petition for certiorari from the timeliness aspect, and whether the
appellate court correctly concluded that the writ of possession could no longer be stayed.

We first resolve the petition in G.R. No. 150773.

Petitioners contend that the agreed rate of interest of 6% per month or 72% per annum is
so excessive, iniquitous, unconscionable and exorbitant that it should have been declared null and
void. Instead of dismissing their complaint, they aver that the lower court should have declared
them liable to respondents for the original amount of the loan plus 12% interest per annum and 1%
monthly penalty charge as liquidated damages,[7] in view of the ruling in Medel v. Court of
Appeals.[8]
In Medel, the Court found that the interest stipulated at 5.5% per month or 66% per
annum was so iniquitous or unconscionable as to render the stipulation void.
Nevertheless, we find the interest at 5.5% per month, or 66% per
annum, stipulated upon by the parties in the promissory note iniquitous or
unconscionable, and, hence, contrary to morals (contra bonos mores), if not

against the law. The stipulation is void. The Court shall reduce equitably
liquidated damages, whether intended as an indemnity or a penalty if they are
iniquitous or unconscionable.[9]
In a long line of cases, this Court has invalidated similar stipulations on interest rates for
being excessive, iniquitous, unconscionable and exorbitant. In Solangon v. Salazar,[10] we
annulled the stipulation of 6% per month or 72% per annum interest on a P60,000.00
loan. In Imperial v. Jaucian,[11] we reduced the interest rate from 16% to 1.167% per month or
14% per annum. In Ruiz v. Court of Appeals,[12] we equitably reduced the agreed 3% per month or
36% per annum interest to 1% per month or 12% per annum interest. The 10% and 8% interest
rates per month on aP1,000,000.00 loan were reduced to 12% per annum in Cuaton v.
Salud.[13] Recently, this Court, in Arrofo v. Quino,[14]reduced the 7% interest per month on
a P15,000.00 loan amounting to 84% interest per annum to 18% per annum.
There is no need to unsettle the principle affirmed in Medel and like cases. From that
perspective, it is apparent that the stipulated interest in the subject loan is excessive, iniquitous,
unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in Article
1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy. In the ordinary course, the codal provision may be
invoked to annul the excessive stipulated interest.
In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the
standards set in the above-cited cases, this stipulation is similarly invalid. However, the RTC
refused to apply the principle cited and employed in Medel on the ground that Medel did not
pertain to the annulment of a real estate mortgage, [15] as it was a case for annulment of the loan
contract itself. The question thus sensibly arises whether the invalidity of the stipulation on
interest carries with it the invalidity of the principal obligation.
The question is crucial to the present petition even if the subject thereof is not the
annulment of the loan contract but that of the mortgage contract. The consideration of the
mortgage contract is the same as that of the principal contract from which it receives life, and
without which it cannot exist as an independent contract. Being a mere accessory contract, the
validity of the mortgage contract would depend on the validity of the loan secured by it. [16]
Notably in Medel, the Court did not invalidate the entire loan obligation despite the
inequitability of the stipulated interest, but instead reduced the rate of interest to the more
reasonable rate of 12% per annum. The same remedial approach to the wrongful interest rates
involved was employed or affirmed by the Court in Solangon, Imperial, Ruiz,Cuaton, and Arrofo.
The Courts ultimate affirmation in the cases cited of the validity of the principal loan
obligation side by side with the invalidation of the interest rates thereupon is congruent with the
rule that a usurious loan transaction is not a complete nullity but defective only with respect to the
agreed interest.
We are aware that the Court of Appeals, on certain occasions, had ruled that a usurious loan
is wholly null and void both as to the loan and as to the usurious interest. [17] However, this Court
adopted the contrary rule, as comprehensively discussed in Briones v. Cammayo:[18]
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise
declared that, in any event, the debtor in a usurious contract of loan should pay the
creditor the amount which he justly owes him, citing in support of this ruling its
previous decisions in Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and
Delgado vs. Duque Valgona, 44 Phil. 739.
....

Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also
held that the standing jurisprudence of this Court on the question under consideration
was clearly to the effect that the Usury Law, by its letter and spirit, did not deprive
the lender of his right to recover from the borrower the money actually loaned to and
enjoyed by the latter. This Court went further to say that the Usury Law did not
provide for the forfeiture of the capital in favor of the debtor in usurious contracts,
and that while the forfeiture might appear to be convenient as a drastic measure to
eradicate the evil of usury, the legal question involved should not be resolved on the
basis of convenience.
Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919
and Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the
latter We expressly held that when a contract is found to be tainted with usury "the
only right of the respondent (creditor) . . . was merely to collect the amount of the
loan, plus interest due thereon."
The view has been expressed, however, that the ruling thus consistently
adhered to should now be abandoned because Article 1957 of the new Civil Code
a subsequent law provides that contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against usury, shall be void, and
that in such cases "the borrower may recover in accordance with the laws on usury."
From this the conclusion is drawn that the whole contract is void and that, therefore,
the creditor has no right to recover not even his capital.
The meaning and scope of our ruling in the cases mentioned heretofore is
clearly stated, and the view referred to in the preceding paragraph is adequately
answered, in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24,
1968). On the question of whether a creditor in a usurious contract may or may not
recover the principal of the loan, and, in the affirmative, whether or not he may also
recover interest thereon at the legal rate, We said the following:
. . . .
Appealing directly to Us, defendants raise two questions of law:
(1) In a loan with usurious interest, may the creditor recover the principal
of the loan? (2) Should attorney's fees be awarded in plaintiff's favor?"
Great reliance is made by appellants on Art. 1411 of the New
Civil Code . . . .
Since, according to the appellants, a usurious loan is void due to illegality
of cause or object, the rule of pari delicto expressed in Article 1411, supra,
applies, so that neither party can bring action against each other. Said rule,
however, appellants add, is modified as to the borrower, by express
provision of the law (Art. 1413, New Civil Code), allowing the borrower to
recover interest paid in excess of the interest allowed by the Usury Law.
As to the lender, no exception is made to the rule; hence, he cannot recover
on the contract. So they continue the New Civil Code provisions
must be upheld as against the Usury Law, under which a loan with
usurious interest is not totally void, because of Article 1961 of the New
Civil Code, that: "Usurious contracts shall be governed by the Usury Law
and other special laws, so far as they are not inconsistent with this Code."
We do not agree with such reasoning. Article 1411 of the New
Civil Code is not new; it is the same as Article 1305 of the Old Civil Code.
Therefore, said provision is no warrant for departing from previous
interpretation that, as provided in the Usury Law (Act No. 2655, as

amended), a loan with usurious interest is not totally void only as to the
interest.
. . . [a]ppellants fail to consider that a contract of loan with
usurious interest consists of principal and accessory stipulations; the
principal one is to pay the debt; the accessory stipulation is to pay
interest thereon.
And said two stipulations are divisible in the sense that the
former can still stand without the latter. Article 1273, Civil Code,
attests to this: "The renunciation of the principal debt shall extinguish
the accessory obligations; but the waiver of the latter shall leave the
former in force."
The question therefore to resolve is whether the illegal terms
as to payment of interest likewise renders a nullity the legal terms as to
payments of the principal debt. Article 1420 of the New Civil Code
provides in this regard: "In case of a divisible contract, if the illegal
terms can be separated from the legal ones, the latter may be
enforced."
In simple loan with stipulation of usurious interest, the
prestation of the debtor to pay the principal debt, which is the cause of
the contract (Article 1350, Civil Code), is not illegal. The illegality lies
only as to the prestation to pay the stipulated interest; hence, being
separable, the latter only should be deemed void, since it is the only
one that is illegal.
....
The principal debt remaining without stipulation for payment of
interest can thus be recovered by judicial action. And in case of such
demand, and the debtor incurs in delay, the debt earns interest from the
date of the demand (in this case from the filing of the complaint). Such
interest is not due to stipulation, for there was none, the same being void.
Rather, it is due to the general provision of law that in obligations to pay
money, where the debtor incurs in delay, he has to pay interest by way of
damages (Art. 2209, Civil Code). The court a quo therefore, did not err in
ordering defendants to pay the principal debt with interest thereon at the
legal rate, from the date of filing of the complaint."[19]

The Courts wholehearted affirmation of the rule that the principal obligation subsists despite
the nullity of the stipulated interest is evinced by its subsequent rulings, cited above, in all of
which the main obligation was upheld and the offending interest rate merely corrected. Hence, it is
clear and settled that the principal loan obligation still stands and remains valid. By the same
token, since the mortgage contract derives its vitality from the validity of the principal obligation,
the invalid stipulation on interest rate is similarly insufficient to render void the ancillary mortgage
contract.
It should be noted that had the Court declared the loan and mortgage agreements void for
being contrary to public policy, no prescriptive period could have run. [20] Such benefit is obviously
not available to petitioners.
Yet the RTC pronounced that the complaint was barred by the four-year prescriptive
period provided in Article 1391 of the Civil Code, which governs voidable contracts. This
conclusion was derived from the allegation in the complaint that the consent of petitioners was
vitiated through undue influence. While the RTC correctly acknowledged the rule of prescription
for voidable contracts, it erred in applying the rule in this case. We are hard put to conclude in this
case that there was any undue influence in the first place.

There is ultimately no showing that petitioners consent to the loan and mortgage
agreements was vitiated by undue influence. The financial condition of petitioners may have
motivated them to contract with respondents, but undue influence cannot be attributed to
respondents simply because they had lent money. Article 1391, in relation to Article 1390 of the
Civil Code, grants the aggrieved party the right to obtain the annulment of contract on account of
factors which vitiate consent. Article 1337 defines the concept of undue influence, as follows:
There is undue influence when a person takes improper advantage of his power
over the will of another, depriving the latter of a reasonable freedom of choice. The
following circumstances shall be considered: the confidential, family, spiritual and other
relations between the parties or the fact that the person alleged to have been unduly
influenced was suffering from mental weakness, or was ignorant or in financial distress.

While petitioners were allegedly financially distressed, it must be proven that there is
deprivation of their free agency. In other words, for undue influence to be present, the influence
exerted must have so overpowered or subjugated the mind of a contracting party as to destroy his
free agency, making him express the will of another rather than his own. [21] The alleged lingering
financial woes of petitioners per se cannot be equated with the presence of undue influence.
The RTC had likewise concluded that petitioners were barred by laches from assailing
the validity of the real estate mortgage. We wholeheartedly agree. If indeed petitioners unwillingly
gave their consent to the agreement, they should have raised this issue as early as in the
foreclosure proceedings. It was only when the writ of possession was issued did petitioners
challenge the stipulations in the loan contract in their action for annulment of
mortgage. Evidently, petitioners slept on their rights. The Court of Appeals succinctly made the
following observations:
In all these proceedings starting from the foreclosure, followed by the issuance
of a provisional certificate of sale; then the definite certificate of sale; then the issuance of
TCT No. 29338 in favor of the defendants and finally the petition for the issuance of the
writ of possession in favor of the defendants, there is no showing that plaintiffs questioned
the validity of these proceedings. It was only after the issuance of the writ of possession in
favor of the defendants, that plaintiffs allegedly tendered to the defendants the amount
of P260,000.00 which the defendants refused. In all these proceedings, why did plaintiffs
sleep on their rights?[22]

Clearly then, with the absence of undue influence, petitioners have no cause of action. Even
assuming undue influence vitiated their consent to the loan contract, their action would already be
barred by prescription when they filed it. Moreover, petitioners had clearly slept on their rights as
they failed to timely assail the validity of the mortgage agreement. The denial of the petition in
G.R. No. 150773 is warranted.
We now resolve the petition in G.R. No. 153599.
Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January 2000 could
no longer be questioned in a special civil action for certiorari and mandamus as the reglementary
period for such action had already elapsed.
It must be noted that the Order dated 3 August 1999 suspending the enforcement of the writ
of possession had a period of effectivity of only twenty (20) days from 3 August 1999, or until 23
August 1999. Thus, upon the expiration of the twenty (20)-day period, the
said Order became functus officio. Thus, there is really no sense in assailing the validity of
this Order, mooted as it was. For the same reason, the validity of the order need not have been
assailed by respondents in their special civil action before the Court of Appeals.

On the other hand, the Order dated 6 January 2000 is in the nature of a writ of injunction
whose period of efficacy is indefinite. It may be properly assailed by way of the special civil
action for certiorari, as it is interlocutory in nature.
As a rule, the special civil action for certiorari under Rule 65 must be filed not later than sixty
(60) days from notice of the judgment or order. [23] Petitioners argue that the 3 August
1999 Order could no longer be assailed by respondents in a special civil action for certiorari
before the Court of Appeals, as the petition was filed beyond sixty (60) days following
respondents receipt of the Order. Considering that the 3 August 1999 Order had become functus
officio in the first place, this argument deserves scant consideration.
Petitioners further claim that the 6 January 2000 Order could not have likewise been the
subject of a special civil action for certiorari, as it is according to them a final order, as opposed to
an interlocutory order. That the 6 January 2000 Order is interlocutory in nature should be beyond
doubt. An order is interlocutory if its effects would only be provisional in character and would still
leave substantial proceedings to be further had by the issuing court in order to put the controversy
to rest.[24] The injunctive relief granted by the order is definitely final, but merely provisional, its
effectivity hinging on the ultimate outcome of the then pending action for annulment of real estate
mortgage. Indeed, an interlocutory order hardly puts to a close, or disposes of, a case or a disputed
issue leaving nothing else to be done by the court in respect thereto, as is characteristic of a final
order.
Since the 6 January 2000 Order is not a final order, but rather interlocutory in nature, we
cannot agree with petitioners who insist that it may be assailed only through an appeal perfected
within fifteen (15) days from receipt thereof by respondents. It is axiomatic that an
interlocutory order cannot be challenged by an appeal, but is susceptible to review only through
the special civil action of certiorari.[25] The sixty (60)-day reglementary period for special civil
actions under Rule 65 applies, and respondents petition was filed with the Court of Appeals well
within the period.
Accordingly, no error can be attributed to the Court of Appeals in granting the petition for
certiorari and mandamus. As pointed out by respondents, the remedy of mandamus lies to compel
the performance of a ministerial duty. The issuance of a writ of possession to a purchaser in an
extrajudicial foreclosure is merely a ministerial function. [26]
Thus, we also affirm the Court of Appeals ruling to set aside the RTC orders enjoining
the enforcement of the writ of possession.[27] The purchaser in a foreclosure sale is entitled as a
matter of right to a writ of possession, regardless of whether or not there is a pending suit for
annulment of the mortgage or the foreclosure proceedings. An injunction to prohibit the issuance
or enforcement of the writ is entirely out of place. [28]
One final note. The issue on the validity of the stipulated interest rates, regrettably for
petitioners, was not raised at the earliest possible opportunity. It should be pointed out though that
since an excessive stipulated interest rate may be void for being contrary to public policy, an
action to annul said interest rate does not prescribe. Such indeed is the remedy; it is not the action
for annulment of the ancillary real estate mortgage. Despite the nullity of the stipulated interest
rate, the principal loan obligation subsists, and along with it the mortgage that serves as collateral
security for it.
WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against
petitioners.
SO ORDERED.

5) LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners,

vs. COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G.
GONZALES, JR., doing lending business under the trade name and style "GONZALES
CREDIT ENTERPRISES", respondents.
[G.R. No. 131622. November 27, 1998]
DECISION
PARDO, J.:
The case before the Court is a petition for review on certiorari, under Rule 45 of the
Revised Rules of Court, seeking to set aside the decision of the Court of Appeals, [1] and its
resolution denying reconsideration,[2] the dispositive portion of which decision reads as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED such that
defendants are hereby ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5%
per month interest and 2% service charge per annum effective July 23, 1986, plus 1%
per month of the total amount due and demandable as penalty charges effective August
23, 1986, until the entire amount is fully paid.
"The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And
so is the imposition of costs against the defendants.
SO ORDERED."[3]
The Court required the respondents to comment on the petition, [4] which was filed on April 3,
1998,[5] and the petitioners to reply thereto, which was filed on May 29, 1998. [6] We now resolve
to give due course to the petition and decide the case.
The facts of the case, as found by the Court of Appeals in its decision, which are considered
binding and conclusive on the parties herein, as the appeal is limited to questions of law, are as
follows:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00,
payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one month at 6% per month. Servado and Leticia
executed a promissory note forP50,000.00, to evidence the loan, payable on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the
amount of P90,000.00, payable in two months, at 6% interest per month. They executed a
promissory note to evidence the loan, maturing on January 19, 1986. They received
only P84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the
amount of P300,000.00, maturing in one month, secured by a real estate mortgage over a property
belonging to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of
Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed a
promissory note in favor of Veronica to pay the sum of P300,000.00, after a month, or on July 11,
1986. However, only the sum of P275,000.00, was given to them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans totaling P440,000.00, and sought from Veronica
another loan in the amount of P60,000.00, bringing their indebtedness to a total of P500,000.00,
payable on August 23, 1986. The executed a promissory note, reading as follows:

"Baliwag, Bulacan July 23, 1986

"Maturity Date August 23, 1986
"P500,000.00
"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of
VERONICA R. GONZALES doing business in the business style of GONZALES
CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of
Baliwag Bulacan, the sum of PESOS ........ FIVE HUNDRED THOUSAND .....
(P500,000.00)
Philippine
Currency with interest thereon at the rate of 5.5 PER CENT per month plus 2% service
charge per annumfrom date hereof until fully paid according to the amortization
schedule contained herein. (Underscoring supplied)
"Payment will be made in full at the maturity date.
"Should I/WE fail to pay any amortization or portion hereof when due, all the other
installments together with all interest accrued shall immediately be due and payable and
I/WE
hereby
agree
to
pay
an additional amount equivalent to one per cent (1%) per month of the amount due and
demandable as penalty charges in theform of liquidated damages until fully paid; and
the
further sum of TWENTY FIVE PER CENT (25%) thereon in full,
without
deductions as Attorney's Feewhether actually incurred or not, of the total amount due
and demandable, exclusive of costs and judicial or extra judicial
expenses. (Underscoring supplied)
"I, WE further agree that in the event the present rate of interest on loan is increased by
law or the Central Bank of the Philippines, the holder shall have the option to apply and
collect the increased interest charges without notice although the original interest have
already been collected wholly or partially unless the contrary is required by law.
"It is also a special condition of this contract that the parties herein agree that the
amount of peso-obligation under this agreement is based on the present value of peso,
and if there be any change in the value thereof, due to extraordinary inflation or
deflation, or any other cause or reason, then the peso-obligation herein contracted shall
be adjusted in accordance with the value of the peso then prevailing at the time of the
complete fulfillment of obligation.
"Demand and notice of dishonor waived. Holder may accept partial payments and
grant renewals of this note or extension of payments, reserving rights against each and
all indorsers and all parties to this note.
"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors
waive all his/their rights under the provisions of Section 12, Rule 39, of the Revised
Rules of Court."
On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus
interests and penalties, evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales,
filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for
collection of the full amount of the loan including interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando
alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr.
Rafael Medel who borrowed from the plaintiffs the sum of P500,000.00, and actually received the
amount and benefited therefrom; that the loan was secured by a real estate mortgage executed in
favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness.

In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged
that the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the
plaintiffs over a parcel of real estate situated in San Juan, Batangas; that the interest rate is
excessive at 5.5% per month with additional service charge of 2% per annum, and penalty charge
of 1% per month; that the stipulation for attorney's fees of 25% ofthe amount due is
unconscionable, illegal and excessive, and that substantial payments made were applied to
interest, penalties and other charges.
After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been repealed,
the interest charged by the plaintiffs on the loans was unconscionable and "revolting to the
conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the "legal
rate of interest for loan or forbearance of money, goods or credit is 12% per annum." [7]
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion
of which reads as follows:
"WHEREFORE, premises considered, judgment is hereby rendered, as follows:
"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay
plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and 1%
per month as penalty, until the entire amount is paid in full.
"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and
severally the amount of P84,000.00 with 12% interest per annum and 1% per cent per month as
penalty from November 19,1985 until the whole amount is fully paid;
"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of P285,000.00
plus 12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole
amount is fully paid;
"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as
attorney's fees;
"5. All counterclaims are hereby dismissed.
"With costs against the defendants."[8]
In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all
the unpaid loans of the defendants, is the law that governs the parties. They further argued that
Circular No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of
money, goods or credit at 12% per annum, applies only in the absence of a stipulation on interest
rate, but not when the parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury
Law having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of
Circular No. 905, the lender and borrower could agree on any interest that may be charged on the
loan".[9] The Court of Appeals further held that "the imposition of 'an additional amount equivalent
to 1% per month of the amount due and demandable as penalty charges in the form of liquidated
damages until fully paid' was allowed by law".[10]
Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that
of the Regional Trial Court, disposing as follows:

"WHEREFORE, the appealed judgment is hereby MODIFIED such

that defendants are hereby ordered to pay the plaintiffs the sum
of P500,000.00, plus 5.5% per month interest and 2% service charge per
annum effective July 23, 1986, plus 1% per month of the total amount due and
demandable as penalty charges effective August 24, 1986, until the entire
amount is fully paid.
"The award to the plaintiffs of P50,000.00 as attorney's fees is
affirmed. And so is the imposition of costs against the defendants.
"SO OREDERED."[11]
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said
decision. By resolution dated November 25, 1997, the Court of Appeals denied the motion. [12]
Hence, defendants interposed the present recourse via petition for review on certiorari.[13]
We find the petition meritorious.
Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the
question presented is whether or not the stipulated rate of interest at 5.5% per month on the loan in
the sum of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words, is
the Usury Law still effective, or has it been repealed by Central Bank Circular No. 905, adopted
on December 22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684?
We agree with petitioners that the stipulated rate of interest at 5.5% per month on
the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. 13However, we can
not consider the rate "usurious" because this Court has consistently held that Circulr No. 905 of
the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings
prescribed by the Usury Law[14] and that the Usury Law is now "legally inexistent".[15]
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61[16] the
Court held that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but
simply suspended the latter's effectivity." Indeed, we have held that "a Central Bank Circular can
not repeal a law. Only a law can repeal another law." [17] In the recent case of Florendo vs. Court
of Appeals[18], the Court reiterated the ruling that "by virtue of CB Circular 905, the Usury Law
has been rendered ineffective". "Usury has been legally non-existent in our jurisdiction. Interest
can now be charged as lender and borrower may agree upon." [19]
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by
the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals
("contra bonos mores"), if not against the law.[20] The stipulation is void.[21] The courts shall
reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are
iniquitous or unconscionable.[22]
Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather,
we agree with the trial court that, under the circumstances, interest at 12% per annum, and an
additional 1% a month penalty charge as liquidated damages may be more reasonable.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court
of Appeals promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead,
we render judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the
Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90,
involving the same parties.
No pronouncement as to costs in this instance
SO ORDERED.