Teresita Dio v. Sps.

Virgilio and Luz Roces Japor, and Marta Japor

Quisumbing, J. 8 July 2005
SV: The Japors mortgaged their property with Dio. The Deed of REM provided for 5% interest
per month with a penalty of 5% for every month of delay. The SC ruled that although usury is
now legally non-existent in this jurisdiction, a stipulated interest rate may nevertheless be
equitably reduced should the same be found to be iniquitous, unconscionable, and
exorbitant. The interest and penalty rates in this case were found to be such, and were
reduced to 12% per annum interest + 1% per month penalty. However, the 5% interest for
the first 2 months, there being a finding that the mortgagors were the ones who proposed
such rate, is upheld.
FACTS:
- Sps. Japor and Marta Japor (the Japors) obtained a loan of P90,000 from the Quezon
Development Bank, and as security therefore, they mortgaged their residential lots in
Lucena City. The loan was subsequently increased to P128,000.
- Before the bank could foreclose the mortgage, the Japors mortgaged their properties to
Teresita Dio. The Real Estate Mortgage provided for:
a) interest rate of 5% a month, within a period of 2 months
b) additional interest of 5% of the amount due for every month of delay
- The Japors failed to pay their obligation despite repeated demands. Dio thus applied for
extrajudicial foreclosure of the mortgage.
- The Japors filed an action for Fixing of Contractual Obligation with Prayer for Preliminary
Mandatory Injunction/Restraining Order with the RTC of Lucena City.
- Japors filed a Motion to Admit Amended Complaint, praying that the REM be declared null
and void, but reiterating the plea that the trail court fix the contractual obligations of the
Japors with Dio. RTC denied the motion.
a) Japors filed a pettion for certiorari with the CA, praying that the RTC be directed to
admit their Amended Complaint. The CA denied the petition.
- RTC rendered a decision dismissing the complaint. Japors filed their notice of appeal and
also filed a Petition for TRO/Mandatory Injunction with the CA. CA denied TRO.
- Dio, meanwhile, as the sole bidder in an auction, purchased the properties subject of the
REM for P3.5M.
- CA rendered a decision affirming RTC decision but modified the interest and penalty rates
for being unconscionable and exorbitant. Dio brought the case up to the SC.
ISSUES/REASONING:
1) Were the stipulations on interest and penalty in the Deed of Real Estate
Mortgage contrary to morals, if not illegal? YES.
PETITIONERS ARGUMENTS:
a) The Usury Law has been rendered ineffective by CB Circular No. 905 Series of 1982.
Interest rates may thus be pegged at such rates as the parties may agree upon.
b) She is not engaged in the business of money-lending and therefore has not violated
any law.
c) She has suffered inconveniences and incurred expenses for some 13 years as a result
of the Japorss failure to pay her.
d) The 5% interest rate was proposed by the Japors themselves.

RESPONDENTS ARGUMENTS:
a) The Japors admit that they owe petitioner P350,000 and do not question any lawful
interest on the loan.
b) REM is null and void since it did not state the true intent of the parties. The 5%
interest rate was only supposed to be limited for 2 months from the date of the loan
and there were no penalties provided in the event of default or delay.
SC said that while the ceiling for interest rates for both secured and unsecured loans have
been removed by CB Circular No. 905, there is nothing in said Circular that grants lenders
carte blanche authority to impose interest rates which would result in the enslavement of
borrowers or to the hemorrhaging of their assets.
While a stipulated rate of interest may not necessarily be usurious under CB Circular No.
905, said rate may be equitably reduced should it be found to be iniquitous, unconscionable,
and exorbitant, and hence contrary to morals. What is iniquitous, unconscionable and
exorbitant shall depend upon the factual circumstances of each case.
Previous rulings of the SC were referenced:
a) interest rate of 5.5% per month or 66% per annum was found void for being
iniquitous/unconscionable
b) interest rate of 6% per month or 72% per annum is outrageous and inordinate.
Conformably to these, a combined interest and penalty rate at 10% per annum should be
deemed iniquitous, unconscionable and inordinate.
The SC said that the following interest and penalty rates should apply:
a) Since the Japors were the ones who proposed the 5% interest rate per month for 2
months, they are estopped from disclaiming it.
b) For the succeeding period after the 2 months, interest rate should be 12% per
annum, and penalty rate should be 1% per month in accordance with Art. 2227 CC
(and as ruled by the CA).
2) Were the Japors entitled to any surplus on the auction sale price? NO.
There is no surplus to speak of in this case. In adjusting the interest and penalty rates to be
equitable to conscionable levels, what the Court did was merely to reflect the true price of
the land in the foreclosure sale.
The amount of the petitioners bid merely represented the true amount of the mortgage
debt. Thus, no surplus in purchase price was created to which the respondents as the
mortgagors might have a vested right.
DECISION AFFIRMED WITH MODIFICATION. Interest rate is fixed at 5% for 1 st 2
months following date of execution of REM, and 12% for the succeeding period.
Penalty rate at 1% per month. Dio declared free of any obligation to return to the
respondents any surplus in the foreclosure sale price, there being no surplus.