FROILAN S. DIAZ AND AGAPITA M. DIAZ, PLAINTIFFS-APPELLANTS, VS. EQUITABLE BANKING CORPORATION AND THE PROVINCIAL OR EX-OFFICIO SHERIFF OF THE REGIONAL TRIAL COURT OF MISAMIS ORI…
INTING, J.:
The facts[2] of the case are as follows:
George Diaz, the son of plaintiffs-appellants Froilan S. Diaz and Agapita M. Diaz, acquired several loans from defendant-appellee Equitable Banking Corporation (Equitable Bank):
|
Promissory
Note No. [3] |
Executed by:
|
Amount
|
Interest
Rate |
Approved on
|
Date Due
|
| a.) PN 1045 | George Diaz & Froilan Diaz |
P2M | 15% | January 16, 1995 | February 16, 1995 |
| b.) PN 1142 | George Diaz | P0.75M | 15% | August 24, 1995 | August 24, 1996 |
| c.) PN 1143 | George Diaz | P3M | 14.5% | August 28, 1995 | August 24, 1996 |
| d.) PN 1177 | George Diaz | P0.2M | 17% | December 18, 1995 | March 18, 1995 |
On September 20, 1995, George Diaz was appointed by his parents, plaintiffs-appellants, Froilan S. Diaz and Agapita M. Diaz (Spouses Diaz) as their attorney-in-fact for the purpose of securing the loan obligations with defendant-appellee, Equitable Banking Corporation (Equitable Bank) for not more than six million pesos (P6,000,000.00). The parcel of land located at Osmeña Extension, Cagayan de Oro City, identified as Lot No. 14539-B-1-B, with an area of 1,019 square meters, and covered by Transfer Certificate of Title (TCT) No. T-67774[4] was used as collateral. The Special Power of Attorney (SPA)[5] was recorded in the TCT, as follows:
“Entry No. 230871 – Special Power of Atty. executed by Sps. Froilan A. Diaz and Agapita M. Diaz do hereby name, constitute and appoint and authorize George M. Diaz to be their true and lawful atty. in fact and to do the following acts, to wit: to offer and use as collateral for a loan of not more than SIX MILLION PESOS (P6,000,000.00) a parcel of land embrace (sic) in this tct, to sign the deed of mortgage and any papers, documents, contracts relative to the above under the terms and conditions that are deemed proper to fit and to receive and/or encash checks due us relative to the above-mentioned mortgage.”[6]
Thereafter, on October 19, 1995, the plaintiffs-appellants executed a Real Estate Mortgage in favor of the defendant-appellee bank. The REM was executed to guarantee the payment of the four (4) promissory notes. The REM reads as follows:
“Entry No. 230872 – Real Estate Mortgage executed by George M. Diaz, atty. in fact, in favor of the Equitable Banking Corporation to guarantee a principal obligation of P6,000,000.00 pesos subject to all terms and conditions stipulated in said mortgage on file in this office.” [7]
Both documents were recorded in the TCT on the same day or on October 25, 1995.
The plaintiffs-appellants faithfully complied with their obligation to pay the interest rates when they fell due. However, during the 1997 financial crisis which plagued the Asian markets, Equitable Bank increased the interest rate of the plaintiffs-appellants’ loan to 31% per annum.[8] When plaintiffs-appellants failed to pay their loan obligation, Equitable Bank imposed the penalty charge of 12% until full payment.
Despite repeated demands from Equitable Bank, the plaintiffs-appellants failed to pay the aforementioned loans to the former. Thus, Equitable Bank was constrained to file an application for Extrajudicial Foreclosure of the Real Estate Mortgage on October 1, 1998. Pursuant to the Sheriff’s Notice of Sale, a public auction sale was scheduled on December 18, 1998 to satisfy the indebtedness in the amount of Nine Million One Hundred Sixty-Six Thousand Nine Hundred Forty-Eight (P9,166,948.33) 33/100.[9]
To impede the impending sale, the plaintiffs-appellants filed a Complaint[10] with the court a quo against Equitable Bank for Annulment of Real Estate Mortgage and Promissory Notes, Annulment of Extrajudicial Foreclosure of Real Estate Mortgage with Application for a Writ of Preliminary Injunction and Temporary Restraining Order.
In their complaint, plaintiffs-appellants contend that Equitable Bank violated the mutuality of contract when it unilaterally increased the interest rates without their consent. They also argue that the terms and conditions of the Promissory Notes and Real Estate Mortgage weighed heavily in favor of Equitable Bank.
They further allege that since the Extrajudicial Foreclosure was based on Promissory Notes and a Real Estate Mortgage that were void, the foreclosure should necessarily be void.
On December 17, 1998, the court a quo issued a Temporary Restraining Order (TRO) in favor of the plaintiff-appellees. The pertinent portion of the Order states, to wit:
“After careful review of the allegations contained in the verified complaint, there is showing that great and irreparable damage would result to the applicants before the matter could be heard on notice.
x x x
In view thereof and pursuant to the above provisions of the law, the application for the issuance of a temporary restraining order is hereby granted. The Provincial Sheriff or Ex-Officio Sheriff of Misamis Oriental and Deputy Sheriff Manrico Dael and other deputies are hereby enjoined to proceed with the conduct of the auction sale of plaintiffs’ mortgage real properties set on December 18, 1998 at 9:00AM until 4:30PM. x x x”[11]
For its part, the defendant-appellee Equitable Bank avers in its answer[12] that the payment of interest rates was sanctioned by the escalation and de-escalation clauses of the promissory notes. Moreover, the plaintiffs-appellants’ receipt of the statement of account indicating the rate applied was not only an acknowledgement and ratification of the clauses but was also an unequivocal manifestation of their acquiescence to such rates. Moreover, Equitable Bank opines that the 12% penalty applied to the plaintiffs-appellants was well within the 1/10 of 1% penalty stipulated in the promissory notes and was even advantageous and beneficial to them considering the number of days their loan has been past due.
On August 16, 2006, the court a quo issued a pre-trial order with the following issues propounded:
- Whether or not there was violation of the mutuality of contract;
- Whether or not there was violation of PD No. 116;
- Whether or not the Promissory Notes 1045, 1142, 1143 and 1177 are null and void because of the violation of the mutuality of contract and PD No. 116;
- Whether or not the Real Estate Mortgage and the Foreclosure of Mortgage is null and void because of (sic) violation of mutuality of contract and PD 116;
- Whether or not plaintiffs are entitled to the relief prayed for in the complaint;
- Whether or not plaintiffs are in estoppel; and
- Whether or not defendants are entitled to their counterclaim.[13]
Thereafter, on December 29, 2009, the court a quo issued the assailed Decision. The dispositive portion of which reads:
“WHEREFORE, the Complaint for Annulment of Real Estate Mortgage and Promissory Notes, Annulment of Extra-Judicial Foreclosure of Real Estate Mortgage with Application for Writ of Preliminary Injunction and Temporary Restraining Order is hereby DISMISSED.
The plaintiff’s spouses are bound to pay and as hereby decreed the sum of Six Million Two Hundred Thousand pesos (P6,200,000.00) including interest charges and penalties heretofore decreed.
The Preliminary Injunction earlier granted by the Court is hereby lifted and the extrajudicial foreclosure may proceed subject to the limitation set forth regarding the amount of indebtedness and interest rates, etc.
Defendant bank’s counterclaim is also hereby DISMISSED.”[14]
Undeterred, plaintiffs-appellants elevated the case on appeal before this Court with the following assignment of errors:
I
THE COURT A QUO ERRED IN NOT DECLARING APPELLEE EQUITABLE BANK CORPORATION VIOLATED THE MUTUALITY OF CONTRACTS;II
THE COURT A QUO ERRED IN NOT DECLARING THE PROMISSORY NOTES, ANNEXES “C”, “C-1”, “C-2” AND “C-3”, AND THE REAL ESTATE MORTGAGE, ANNEX “B”, NULL AND VOID AB INITIO; ANDIII
THE COURT A QUO ERRED IN NOT DECLARING THE EXTRAJUDICIAL FORECLOSURE OF REAL ESTATE MORTGAGE NULL AND VOID AB INITIO.[15]
Our Ruling
The appeal is bereft of merit.
A contract of loan is defined by Article 1933 of the Civil Code of the Philippines, as follows:
“Article 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower.”
In the case at bar, the loan obligation of the plaintiffs-appellants was secured by a real estate mortgage. Their loan obligation was also evidenced by the promissory notes duly signed by them. Plaintiffs-appellants now challenge the validity of these documents due to respondent-appellee’s alleged unilateral increase of the interest rate of the loan obligations.
The promissory note states:
“x x x Provided that the said rate of interest shall be increased to the maximum rate of interest allowed by law or by the Monetary Board in the event the maximum rate applicable on the date hereof is increased by law by or by Monetary Board; Provided also that said rate of interest herein agreed upon shall be reduced by law or by the Monetary Board; Provided further that such adjustment in the rate shall take effect automatically on or after the effectivity of the increase or decrease in the maximum rates of interest. x x x”[16]
It is now well-settled that an escalation clause is void where the creditor unilaterally determines and imposes an increase in the stipulated rate of interest without the express conformity of the debtor. Such unbridled right given to creditors to adjust the interest independently and upwardly would completely take away from the debtors the right to assent to an important modification in their agreement and would also negate the element of mutuality in their contracts. While a ceiling on interest rates under the Usury Law was already lifted under Central Bank Circular No. 905, nothing therein “grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.”[17]
Be that as it may, the nullification of the unilaterally imposed increased interest rate of the loan obligation by the defendant-appellee does not result in the obliteration of the loan obligation itself. Nor does it prevent the Court from applying the proper interest rate therein.
The case of Asian Cathay Finance v. Spouses Gravador illuminates, viz:
“Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived. The nullity of the stipulation on the usurious interest does not, however, affect the lender’s right to recover the principal of the loan. Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly imposed. The nullification by the CA of the interest rate and the penalty charge and the consequent imposition of an interest rate of 12% and penalty charge of 1% per month cannot, therefore, be considered a reversible error.”[18]
Thus, the court a quo committed no reversible error in applying the legal interest of 12% per annum and the penalty charge of 10% per annum computed from the time the loan obligations became due and demandable.
We therefore adopt the findings of the court a quo, as follows:
“In summary, spouses Agapita and Froilan S. Diaz, plaintiffs are liable to pay only P6 Million covered by the Real Estate Mortgage, Exh. ‘26’ and P200,000.00 covered by Promissory Note of December 18, 1995 (Exh. ‘8’) or the total sum of P6,200,000.00 plus the legal interest of 12% per annum and penalty charge of 10% per annum, which the Court finds just and reasonable under the circumstances, computed from the time the obligations became due and demandable as shown by the promissory notes and other supporting documents.” [19]
WHEREFORE, the appeal is DENIED. The Decision dated December 29, 2009 of the Regional Trial Court of Cagayan de Oro City, Branch 23, rendered in Civil Case No. 98-733 is AFFIRMED.
SO ORDERED.
Camello, (Chairperson), and Perez, JJ., concur.
[1] Penned by Hon. Ma. Anita M. Esguerra-Lucagbo; Rollo, pp. 61-71; Records, pp.347-357.
[2] As culled from the records.
[3] Records; pp. 16-19, 48, 281-305.
[4] Supra, pp. 10-11.
[5] Supra; pp. 309-310.
[6] Supra, p. 11.
[7] Supra, pp. 12-15, 307-308.
[8] Supra; pp. 20-24.
[9]Supra, p. 47.
[10] Supra, pp. 2-50.
[11] Supra, p. 56.
[12] Supra, pp. 76-80.
[13] Supra, pp. 234-241.
[14] See footnote 1.
[15] Rollo, p. 14.
[16] See footnote 3.
[17] Spouses Juico v. China Bank; G.R. No. 187678; April 10, 2013.
[18] G.R. No. 186550; July 5, 2010.
[19] Rollo, p. 70.