Silos vs PNB.docx

8/17/2019 Silos vs PNB.docx

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the 6ne 7, ())5 Order 7 of the Regional Trial CortRTC-, 8ranch 2 of 9alibo, +:lan in Civil Case No.31*3.

4actal +ntecedents

Sposes Edardo and ;!dia Silos petitioners- havebeen in bsiness for abot t#o decades of operatinga department store and b!ing and selling of read!to#ear apparel. Respondent Philippine National

8an: PN8- is a ban:ing corporation organi


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%1'1 Credit +greement contained a stiplation oninterest #hich provides as follo#s>

%.)5. Interest. a- The ;oan shall be sb?ect tointerest at the rate of %1.3@ per annm. Interestshall be pa!able in advance ever! one hndredt#ent! da!s at the rate prevailing at the time of therene#al.

b- The 8orro#er agrees that the 8an: ma! modif!

the interest rate in the ;oan depending on #hateverpolic! the 8an: ma! adopt in the ftre, inclding#ithot limitation, the shifting from the floatinginterest rate s!stem to the fi=ed interest rate s!stem,or vice versa. Ahere the 8an: has imposed on the;oan interest at a rate per annm, #hich is e&al tothe 8an:Bs spread over the crrent floating interest

rate, the 8orro#er hereb! agrees that the 8an: ma!,#ithot need of notice to the 8orro#er, increase ordecrease its spread over the floating interest rate atan! time depending on #hatever polic! it ma! adoptin the ftre.%) Emphases spplied-

The eight Promissor! Notes, on the other hand,

contained a stiplation granting PN8 the right toincrease or redce interest rates #ithin the limitsallo#ed b! la# or b! the $onetar! 8oard.%%

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The Real Estate $ortgage agreement provided thesame right to increase or redce interest rates atan! time depending on #hatever polic! PN8 ma!

adopt in the ftre.%(

Petitioners religiosl! paid interest on the notes atthe follo#ing rates>

%. %st Promissor! Note dated 6l! (7, %1'1 %1.3@"

(. (nd Promissor! Note dated November ((,%1'1 (5@"

5. 5rd Promissor! Note dated $arch (%, %11) ((@"

7. 7th Promissor! Note dated 6l! %1, %11)

(7@"

3. 3th Promissor! Note dated December %*,%11) ('@"

2. 2th Promissor! Note dated 4ebrar! %7, %11% 5(@"

*. *th Promissor! Note dated $arch %, %11% 5)@" and

'. 'th Promissor! Note dated 6l! %%, %11% (7@.%5



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In +gst %11%, an +mendment to Credit +greement%7 #as e=ected b! the parties, #ith thefollo#ing stiplation regarding interest>

%.)5. Interest on ;ine +vailments. a- The 8orro#ersagree to pa! interest on each +vailment from date of each +vailment p to bt not inclding the date of fllpa!ment thereof at the rate per annm #hich isdetermined b! the 8an: to be prime rate plsapplicable spread in effect as of the date of each

+vailment.%3 Emphases spplied-

nder this +mendment to Credit +greement,petitioners issed in favor of PN8 the follo#ing %'Promissor! Notes, #hich petitioners settled e=ceptthe last the note covering the principal- at thefollo#ing interest rates>

%. 1th Promissor! Note dated November ', %11% (2@"

(. %)th Promissor! Note dated $arch %1, %11( (3@"

5. %%th Promissor! Note dated 6l! %%, %11(

(5@"

7. %(th Promissor! Note dated November %),%11( (%@"



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3. %5th Promissor! Note dated $arch %3, %115 (%@"

2. %7th Promissor! Note dated 6l! %(, %115 %*.3@"

*. %3th Promissor! Note dated November %*,%115 (%@"

'. %2th Promissor! Note dated $arch (', %117 (%@"

1. %*th Promissor! Note dated 6l! %5, %117 (%@"

%). %'th Promissor! Note dated November %2,%117 %2@"

%%. %1th Promissor! Note dated +pril %), %113 (%@"

%(. ()th Promissor! Note dated 6l! %1, %113 %'.3@"

%5. (%st Promissor! Note dated December %',%113 %'.*3@"

%7. ((nd Promissor! Note dated +pril ((, %112 %'.3@"

%3. (5rd Promissor! Note dated 6l! ((, %112 %'.3@"


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%2. (7th Promissor! Note dated November (3,%112 %'@"

%*. (3th Promissor! Note dated $a! 5), %11* %*.3@" and

%'. (2th Promissor! Note PN 1*)*(5*- dated6l! 5), %11* (3@.%2

The 1th p to the %*th promissor! notes provide forthe pa!ment of interest at the rate the 8an: ma! at

an! time #ithot notice, raise #ithin the limitsallo#ed b! la# = = =.%*

On the other hand, the %'th p to the (2thpromissor! notes inclding PN 1*)*(5*, #hich isthe (2th promissor! note carried the follo#ingprovision>

= = = 4or this prpose, IFAe agree that the rate ofinterest herein stiplated ma! be increased ordecreased for the sbse&ent Interest Periods, #ithprior notice to the 8orro#er in the event of changesin interest rate prescribed b! la# or the $onetar!8oard of the Central 8an: of the Philippines, or in

the 8an:Bs overall cost of fnds. IFAe hereb! agreethat in the event IF#e are not agreeable to theinterest rate fi=ed for an! Interest Period, IF#e shallhave the option top repa! the loan or credit facilit!



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#ithot penalt! #ithin ten %)- calendar da!s fromthe Interest Setting Date.%' Emphasis spplied-

Respondent reglarl! rene#ed the line from %11) pto %11*, and petitioners made good on thepromissor! notes, religiosl! pa!ing the interests#ithot ob?ection or fail. 8t in %11*, petitionersfaltered #hen the interest rates soared de to the

+sian financial crisis. PetitionersB sole otstandingpromissor! note for P(.3 million PN 1*)*(5*

e=ected in 6l! %11* and de %() da!s later or onOctober (', %11* became past de, and despiterepeated demands, petitioners failed to ma:e goodon the note.

Incidentall!, PN 1*)*(5* provided for the penalt!e&ivalent to (7@ per annm in case of defalt, as

follo#s>

Aithot need for notice or demand, failre to pa!this note or an! installment thereon, #hen de, shallconstitte defalt and in sch cases or in case ofgarnishment, receivership or ban:rptc! or sit ofan! :ind filed against meFs b! the 8an:, the

otstanding principal of this note, at the option of the8an: and #ithot prior notice of demand, shallimmediatel! become de and pa!able and shall besb?ect to a penalt! charge of t#ent! for percent

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(7@- per annm based on the defalted principalamont. = = =%1 Emphasis spplied-

PN8 prepared a Statement of +ccont()

as ofOctober %(, %11', detailing the amont de anddemandable from petitioners in the total amontof P5,2(),37%.2), bro:en do#n as follo#s>

Principal P (,3)),))).))

Interest 35','*7.17

Penalties 3'%,222.22

Total P 5,2(),37%.2)

Despite demand, petitioners failed to pa! theforegoing amont. Ths, PN8 foreclosed on themortgage, and on 6anar! %7, %111, TCTs T%7(3)and T%2()' #ere sold to it at action for the amontof P7,5(7,%*(.12.(% The sheriffBs certificate of sale#as registered on $arch %%, %111.

$ore than a !ear later, or on $arch (7, ())),petitioners filed Civil Case No. 31*3, see:ingannlment of the foreclosre sale and an accontingof the PN8 credit. Petitioners theori


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PN8 #hich allegedl! left to the latter the sole #illto determine the interest rate became nll andvoid. Petitioners added that becase the interest

rates #ere fi=ed b! respondent #ithot their priorconsent or agreement, these rates are void, and asa reslt, petitioners shold onl! be made liable forinterest at the legal rate of %(@. The! claimedfrther that the! overpaid interests on the credit, andconclded that de to this overpa!ment of steepinterest charges, their debt shold no# be deemedpaid, and the foreclosre and sale of TCTs T%7(3)and T%2()' became nnecessar! and #rongfl. +sfor the imposed penalt! of P3'%,222.22, petitionersalleged that since the Real Estate $ortgage and theSpplement thereto did not inclde penalties as partof the secred amont, the same shold be

e=clded from the foreclosre amont or bid price,even if sch penalties are provided for in the finalPromissor! Note, or PN 1*)*(5*.((

In addition, petitioners soght to be reimbrsed analleged overpa!ment of P'7',('3.)) made dringthe period +gst (%, %11% to $arch 3,

%11',reslting from respondentBs imposition of thealleged illegal and steep interest rates. The! alsopra!ed to be a#arded P()),))).)) b! #a! ofattorne!Bs fees.(5



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In its +ns#er,(7 PN8 denied that it nilaterall!imposed or fi=ed interest rates" that petitionersagreed that #ithot prior notice, PN8 ma! modif!

interest rates depending on ftre polic! adopted b!it" and that the imposition of penalties #as agreedpon in the Credit +greement. It added that theimposition of penalties is spported b! the allinclsive clase in the Real Estate $ortgageagreement #hich provides that the mortgage shallstand as secrit! for an! and all other obligations of#hatever :ind and natre o#ing to respondent,#hich ths incldes penalties imposed pon defaltor nonpa!ment of the principal and interest on dedate.

On pretrial, the parties mtall! agreed to thefollo#ing material facts, among others>

a- That since %11% p to %11', petitioners hadpaid PN8 the total amontof P5,7'7,('*.))"(3 and

b- That PN8 sent, and petitioners received, a$arch %), ())) demand letter.(2

Dring trial, petitioner ;!dia Silos ;!dia- testifiedthat the Credit +greement, the +mendment to Credit

+greement, Real Estate $ortgage and theSpplement thereto #ere all prepared b! respondent

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PN8 and #ere presented to her and her hsbandEdardo onl! for signatre" that she #as told b!PN8 that the latter alone #old determine the

interest rate" that as to the +mendment to Credit +greement, she #as told that PN8 #old fill p theinterest rate portion thereof" that at the time theparties e=ected the said Credit +greement, she#as not informed abot the applicable spread thatPN8 #old impose on her accont" that the interestrate portion of all Promissor! Notes she andEdardo issed #ere al#a!s left in blan: #hen the!e=ected them, #ith respondentBs mere assrancethat it #old be the one to enter or indicate thereonthe prevailing interest rate at the time of availment"and that the! agreed to sch arrangement. Shefrther testified that the t#o Real Estate $ortgage

agreements she signed did not stiplate thepa!ment of penalties" that she and Edardoconslted #ith a la#!er, and #ere told that PN8Bsactions #ere improper, and so on $arch (), ())),the! #rote to the latter see:ing a recomptation oftheir otstanding obligation" and #hen PN8 did notoblige, the! institted Civil Case No. 31*3.(*

On crosse=amination, ;!dia testified that she hasbeen in bsiness for () !ears" that she alsoborro#ed from other individals and another ban:"that it #as onl! #ith ban:s that she #as as:ed to



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sign loan docments #ith no indicated interest rate"that she did not bother to read the terms of the loandocments #hich she signed" and that she received

several PN8 statements of accont detailing theirotstanding obligations, bt she did not complain"that she assmed instead that #hat #as #rittentherein is correct.('

4or his part, PN8 9alibo 8ranch $anager Diosdado +spa, 6r. +spa-, the sole #itness for respondent,

stated on crosse=amination that as a practice, thedetermination of the prime rates of interest #as theresponsibilit! solel! of PN8Bs Treasr! Department#hich is based in $anila" that these prime rates#ere simpl! commnicated to all PN8 branches forimplementation" that there are a mltitde ofconsiderations #hich determine the interest rate,sch as the cost of mone!, foreign crrenc! vales,PN8Bs spread, ban: administrative costs,profitabilit!, and the practice in the ban:ing indstr!"that in ever! repricing of each loan availment, theborro#er has the right to &estion the rates, bt thatthis #as not done b! the petitioners" and that

an!thing that is not fond in the Promissor! Notema! be spplemented b! the Credit +greement.(1

Rling of the Regional Trial Cort



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On 4ebrar! (', ())5, the trial cort rendered ?dgment dismissing Civil Case No. 31*3.5)

It rled that>%. Ahile the Credit +greement allo#s PN8 tonilaterall! increase its spread over the floatinginterest rate at an! time depending on #hateverpolic! it ma! adopt in the ftre, it li:e#iseallo#s for the decrease at an! time of the same.

Ths, sch stiplation athori


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+greement and the Real Estate $ortgageagreements"57

7. Roghl!, PN8Bs comptation of the totalamont of petitionersB obligation is correct"53

3. 8ecase the loan #as admittedl! de anddemandable, the foreclosre #as reglarl!made"52

2. 8! the admission of petitioners dring pre

trial, all pa!ments made to PN8 #ere properl!applied to the principal, interest and penalties.5*

The dispositive portion of the trial cortBs Decisionreads>

IN 0IEA O4 TGE 4ORE/OIN/, ?dgment is hereb!

rendered in favor of the respondent and against thepetitioners b! DIS$ISSIN/ the latterBs petition.

Costs against the petitioners.

SO ORDERED.5'

Petitioners moved for reconsideration. In an

Order 51 dated 6ne 7, ())5, the trial cort grantedonl! a modification in the a#ard of attorne!Bs fees,redcing the same from %)@ to %@. Ths, PN8 #asordered to refnd to petitioner the e=cess inattorne!Bs fees in the amont of P532,3'1.1), vi

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AGERE4ORE, ?dgment is hereb! renderedpholding the validit! of the interest rate charged b!the respondent as #ell as the e=tra?dicial

foreclosre proceedings and the Certificate of Sale.Go#ever, respondent is directed to refnd to thepetitioner the amont of P532,3'1.1) representingthe e=cess interest charged against the latter.

No prononcement as to costs.

SO ORDERED.7)

Rling of the Cort of +ppeals

Petitioners appealed to the C+, #hich issed the&estioned Decision #ith the follo#ing decretalportion>

AGERE4ORE, in vie# of the foregoing, the instantappeal is P+RT;H /R+NTED. The modifiedDecision of the Regional Trial Cort per Order dated6ne 7, ())5 is hereb! +44IR$ED #ith$ODI4IC+TIONS, to #it>

%. TJhat the interest rate to be applied after the

e=piration of the first 5)da! interest period forPN. No. 1*)*(5* shold be %(@ per annm"

(. TJhat the attorne!Bs fees of%)@ is valid andbinding" and



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5. TJhat PN8J is hereb! ordered to reimbrsepetitionersJ the e=cess in the bid priceof P5**,3)3.11 #hich is the difference bet#een

the total amont de PN8J and the amont ofits bid price.

SO ORDERED.7%

On the other hand, respondent did not appeal the6ne 7,())5 Order of the trial cort #hich redced

its a#ard of attorne!Bs fees. It simpl! raised the issein its appelleeBs brief in the C+, and inclded apra!er for the reversal of said Order.

In effect, the C+ limited petitionersB appeal to thefollo#ing isses>

%- Ahether = = = the interest rates on petitionersB

otstanding obligation #ere nilaterall! andarbitraril! imposed b! PN8"

(- Ahether = = = the penalt! charges #eresecred b! the real estate mortgage" and

5- Ahether = = = the e=tra?dicial foreclosre

and sale are valid.7(

The C+ noted that, based on receipts presented b!petitioners dring trial, the latter dtifll! paid a totalofP5,)(*,5(7.2) in interest for the period +gst *,



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%11% to +gst 2, %11*, over and above the P(.3million principal obligation. +nd this is e=clsive ofpa!ments for insrance premims, docmentar!

stamp ta=es, and penalt!. +ll the #hile, petitionersdid not complain nor ob?ect to the imposition ofinterest" the! in fact paid the same religiosl! and#ithot fail for seven !ears. The appellate cortrled that petitioners are ths estopped from&estioning the same.

The C+ nevertheless noted that for the period 6l!5), %11* to +gst %7, %11*, PN8 #rongl! appliedan interest rate of (3.*(@ instead of the agreed(3@" ths it overcharged petitioners, and the latterpaid, an e=cess ofP*52.32 in interest.

On the isse of penalties, the C+ rled that the

e=press tenor of the Real Estate $ortgageagreements contemplated the inclsion of the PN1*)*(5*stiplated (7@ penalt! in the amont to besecred b! the mortgaged propert!, ths

4or and in consideration of certain loans, overdraftsand other credit accommodations obtained from the

$ORT/+/EE and to secre the pa!ment of thesame and those others that the $ORT/+/EE ma!e=tend to the $ORT/+/OR, inclding interest ande=penses, and other obligations o#ing b! the$ORT/+/OR to the $ORT/+/EE, #hether direct


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or indirect, principal or secondar!, as appearing inthe acconts, boo:s and records of the$ORT/+/EE, the $ORT/+/OR does hereb!

transfer and conve! b! #a! of mortgage nto the$ORT/+/EE = = =75 Emphasis spplied-

The C+ believes that the (7@ penalt! is covered b!the phrase and other obligations o#ing b! themortgagor to the mortgagee and shold ths beadded to the amont secred b! the mortgages.77

The C+ then proceeded to declare valid theforeclosre and sale of properties covered b! TCTsT%7(3) and T%2()', #hich came as a necessar!reslt of petitionersB failre to pa! the otstandingobligation pon demand.73The C+ sa# fit to increasethe trial cortBs a#ard of %@ to %)@, finding the latter

rate to be reasonable and citing the Real Estate$ortgage agreement #hich athori


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Isses

The follo#ing isses are raised in this Petition>

I

+. TGE CORT O4 +PPE+;S +S AE;; +STGE ;OAER CORT ERRED IN NOTN;;I4HIN/ TGE INTEREST R+TEPRO0ISION IN TGE CREDIT +/REE$ENTD+TED 6;H (7, %1'1 K K K +ND IN TGE

+$END$ENT TO CREDIT +/REE$ENTD+TED+/ST (%, %11% K K K AGICG;E4T TO TGE SO;E NI;+TER+;DETER$IN+TION O4 TGE RESPONDENTPN8 TGE ORI/IN+; 4IKIN/ O4INTEREST R+TE +ND ITS INCRE+SE,

AGICG +/REE$ENT IS CONTR+RH TO;+A, +RT. %5)' O4 TGE NEA CI0I;CODEJ, +S ENNCI+TED IN PONCI+NO

+;$EID+ 0. CORT O4 +PPE+;S,/.R.NO.J %%57%(, +PRI; %*, %112, +NDCONTR+RH TO P8;IC PO;ICH +NDP8;IC INTEREST, +ND IN +PP;HIN/

TGE PRINCIP;E O4 ESTOPPE; +RISIN/4RO$ TGE +;;E/ED DE;+HEDCO$P;+INT O4 PETITIONERSJ, +NDTGEIRJ P+H$ENT O4 TGE INTERESTCG+R/ED.


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8. CONSELENT;H, TGE CORT O4 +PPE+;S +ND TGE ;OAER CORTERRED IN NOT DEC;+RIN/ TG+T PN8 IS

NOT +T +;; ENTIT;ED TO +NH INTERESTEKCEPT TGE ;E/+; R+TE 4RO$ D+TEO4 DE$+ND, +ND IN NOT +PP;HIN/ TGEEKCESS O0ER TGE ;E/+; R+TE O4 TGE

+D$ITTED P+H$ENTS $+DE 8HPETITIONERSJ 4RO$ %11%%11' IN TGE

+D$ITTED TOT+; +$ONTO4 P5,7'7,('*.)), TO P+H$ENT O4 TGEPRINCIP+; O4P(,3)),))).))J ;E+0IN/

+N O0ERP+H$ENT O4P1'7,('*.))RE4ND+8;E 8H RESPONDENT TOPETITIONERSJ AITG INTEREST O4 %(@PER +NN$.

II

TGE CORT O4 +PPE+;S +ND TGE ;OAERCORT ERRED IN GO;DIN/ TG+T PEN+;TIES

+RE INC;DEDIN TGE SECRED +$ONT,S86ECT TO 4OREC;OSRE, AGEN NOPEN+;TIES +RE $ENTIONED NORJ PRO0IDED

4OR IN TGE RE+; EST+TE $ORT/+/E +S +SECRED +$ONT +ND TGERE4ORE TGE

+$ONT O4 PEN+;TIES SGO;DG+0E 8EEN


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EKC;DED 4RO$ TGEJ 4OREC;OSRE +$ONT.

IIITGE CORT O4 +PPE+;S ERRED INRE0ERSIN/ TGE R;IN/ O4 TGE ;OAERCORT, AGICG REDCED TGE +TTORNEHBS4EES O4 %)@ O4 TGE TOT+; INDE8TEDNESSCG+R/ED IN TGE K K K EKTR+6DICI+;

4OREC;OSRE TOON;H %@, +ND +A+RDIN/J%)@ +TTORNEHBS 4EES.7'

PetitionersB +rgments

Petitioners insist that the interest rate provision inthe Credit +greement and the +mendment to Credit

+greement shold be declared nll and void, for

the! relegated to PN8 the sole po#er to fi= interestrates based on arbitrar! criteria or factors sch asban: polic!, profitabilit!, cost of mone!, foreigncrrenc! vales, and ban: administrative costs"spaces for interest rates in the t#o Credit

+greements and the promissor! notes #ere leftblan: for PN8 to nilaterall! fill, and their consent oragreement to the interest rates imposed thereafter#as not obtained" the interest rate, #hich consists of the prime rate pls the ban: spread, is determinednot b! agreement of the parties bt b! PN8Bs



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Treasr! Department in $anila. Petitioners concldethat b! this method of fi=ing the interest rates, theprinciple of mtalit! of contracts is violated, and

pblic polic! as #ell as Circlar 1)371 of the thenCentral 8an: had been breached.

Petitioners &estion the C+Bs application of theprinciple of estoppel, sa!ing that no estoppel canproceed from an illegal act. Thogh the! failed totimel! &estion the imposition of the alleged illegal

interest rates and contined to pa! the loan on thebasis of these rates, the! cannot be deemed to haveac&iesced, and hence cold recover #hat the!erroneosl! paid.3)

Petitioners arge that if the interest rates #erenllified, then their obligation to PN8 is deemed

e=tingished as of 6l! %11*" moreover, it #oldappear that the! even made an over pa!ment to theban: in the amont ofP1'7,('*.)).

Ne=t, petitioners sggest that since the Real Estate$ortgage agreements did not inclde nor specif!, aspart of the secred amont, the penalt! of (7@

athori


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Cort of +ppeals,3% petitioners insist that the phraseand other obligations o#ing b! the mortgagor to themortgagee3( in the mortgage agreements cannot

embrace theP3'%,222.22 penalt!, becase, as heldin the P8Com case, aJ penalt! charge does notbelong to the species of obligations enmerated inthe mortgage, hence, the said contract cannot benderstood to secre the penalt!"35#hile themortgages are the accessor! contracts, #hat itemsare secred ma! onl! be determined from theprovisions of the mortgage contracts, and not fromthe Credit +greement or the promissor! notes.

4inall!, petitioners sbmit that the trial cortBs a#ardof %@ attorne!Bs fees shold be maintained, giventhat in foreclosres, a la#!erBs #or: consists merel!in the preparation and filing of the petition, andinvolves minimal std!.37 To allo# the imposition of astaggering P512,(%%.)) for sch #or: #old becontrar! to e&it!. Petitioners state that the prposeof attorne!Bs fees in cases of this natre is not togive respondent a larger compensation for the loanthan the la# alread! allo#s, bt to protect it against

an! ftre loss or damage b! being compelled toretain consel = = = to institte ?dicial proceedingsfor the collection of its credit.33 +nd becase theinstant case involves a simple e=tra?dicial

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foreclosre, attorne!Bs fees ma! be e&itabl!tempered.

RespondentBs +rgments4or its part, respondent disptes petitionersB claimthat interest rates #ere nilaterall! fi=ed b! it, ta:ingrelief in the C+ prononcement that petitioners aredeemed estopped b! their failre to &estion theimposed rates and their contined pa!ment thereof

#ithot opposition. It adds that becase the Credit +greement and promissor! notes contained both anescalation clase and a deescalation clase, it ma!not be said that the ban: violated the principle ofmtalit!. 8esides, the increase or decrease ininterest rates have been mtall! agreed pon b!the parties, as sho#n b! petitionersB continos

pa!ment #ithot protest. Respondent adds that thealleged nilateral imposition of interest rates is not aproper sb?ect for revie# b! the Cort becase theisse #as never raised in the lo#er cort.

+s for petitionersB claim that interest rates imposedb! it are nll and void for the reasons that %- the

Credit +greements and the promissor! notes #eresigned in blan:" (- interest rates #ere at shortperiods" 5- no interest rates cold be charged #hereno agreement on interest rates #as made in #riting"7- PN8 fi=ed interest rates on the basis of arbitrar!


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policies and standards left to its choosing" and 3-interest rates based on prime rate pls applicablespread are indeterminate and arbitrar! PN8

conters>

a. That Credit +greements and promissor! notes#ere signed b! petitionersJ in blan: Respondent claims that this isse #as neverraised in the lo#er cort. 8esides, docmentar!evidence prevails over testimonial evidence"

;!dia SilosB testimon! in this regard is selfserving, nspported and ncorroborated, andfor being the lone evidence on this isse. Thefact remains that these docments are in properform, presmed reglar, and endre, againstarbitrar! claims b! Silos #ho is ane=perienced bsiness person that she signed&estionable loan docments #hose provisionsfor interest rates #ere left blan:, and !et shecontined to pa! the interests #ithot protest fora nmber of !ears.32

b. That interest rates #ere at short periods Respondent arges that the la# #hich governs

and prohibits changes in interest rates mademore than once ever! t#elve months has beenremoved3* #ith the issance of PresidentialDecree No. '3'.3'



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c. That no interest rates cold be charged #hereno agreement on interest rates #as made in#riting in violation of +rticle %132 of the Civil

Code, #hich provides that no interest shall bede nless it has been e=pressl! stiplated in#riting Respondent insists that the stiplated(3@ per annm as embodied in PN 1*)*(5*shold be imposed dring the interim, or theperiod after the loan became de and #hile itremains npaid, and not the legal interest of%(@ as claimed b! petitioners.31

d. That PN8 fi=ed interest rates on the basis ofarbitrar! policies and standards left to itschoosing +ccording to respondent, interestrates #ere fi=ed ta:ing into considerationincreases or decreases as provided b! la# or b!the $onetar! 8oard, the ban:Bs overall costs offnds, and pon agreement of the parties.2)

e. That interest rates based on prime rate plsapplicable spread are indeterminate andarbitrar! On this score, respondent sbmitsthere are varios factors that inflence interest

rates, from political events to economicdevelopments, etc." the cost of mone!,profitabilit! and foreign crrenc! transactionsma! not be disconted.2%



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On the isse of penalties, respondent reiterates thetrial cortBs finding that dring pretrial, petitionersadmitted that the Statement of +ccont as of

October %(, %11' #hich detailed and incldedpenalt! charges as part of the total otstandingobligation o#ing to the ban: #as correct.Respondent ?stifies the imposition and collection ofa penalt! as a normal ban:ing practice, and thestandard rate per annm for all commercial ban:s,at the time, #as (7@.

Respondent adds that the prpose of the penalt! ora penal clase for that matter is to ensre theperformance of the obligation and sbstitte fordamages and the pa!ment of interest in the event ofnoncompliance.2( +nd the promissor! note beingthe principal agreement as opposed to themortgage, #hich is a mere accessor! sholdprevail. This being the case, its inclsion as part ofthe secred amont in the mortgage agreements isvalid and necessar!.

Regarding the foreclosre of the mortgages,respondent accses petitioners of preempting

consolidation of its o#nership over TCTs T%7(3)and T%2()'" that petitioners filed Civil Case No.31*3 ostensibl! to &estion the foreclosre and saleof properties covered b! TCTs T%7(3) and T%2()'



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in a desperate move to retain o#nership over theseproperties, becase the! failed to timel! redeemthem.

Respondent directs the attention of the Cort to itspetition in /.R. No. %'%)72,25 #here the propriet! ofthe C+Bs rling on the follo#ing isses is s&arel!raised>

%. That the interest rate to be applied after the

e=piration of the first 5)da! interest period forPN 1*)*(5* shold be %(@ per annm" and

(. That PN8 shold reimbrse petitioners thee=cess in the bid price of P5**,3)3.11 #hich isthe difference bet#een the total amont de toPN8 and the amont of its bid price.

Or Rling

The Cort grants the Petition.

8efore an!thing else, it mst be said that it is not thefnction of the Cort to ree=amine or reevalateevidence addced b! the parties in the proceedings

belo#. The rle admits of certain #ellrecogni


30/87

manifestl! overloo:ed that, if properl! considered,#old ?stif! a different conclsion. This case falls#ithin sch e=ceptions.

The Cort notes that on $arch 3, ())', a Resoltion#as issed b! the CortBs 4irst Division den!ingrespondentBs petition in /.R. No. %'%)72, de to latefiling, failre to attach the re&ired affidavit of serviceof the petition on the trial cort and the petitioners,and sbmission of a defective verification and

certification of nonform shopping. On 6ne (3,())', the Cort issed another Resoltion den!ing#ith finalit! respondentBs motion for reconsiderationof the $arch 3, ())' Resoltion. +nd on +gst %3,())', entr! of ?dgment #as made. This ths settlesthe isses, as abovestated, covering a- the interestrate or %(@ per annm that applies pone=piration of the first 5) da!s interest periodprovided nder PN 1*)*(5*, and b-the C+Bs decreethat PN8 shold reimbrse petitioner the e=cess inthe bid price of P5**,3)3.)1.

It appears that respondentBs practice, more thanonce proscribed b! the Cort, has been carried over

once more to the petitioners. In a nmber of decidedcases, the Cort strc: do#n provisions in creditdocments issed b! PN8 to, or re&ired of, itsborro#ers #hich allo# the ban: to increase or


31/87

decrease interest rates #ithin the limits allo#ed b!la# at an! time depending on #hatever polic! it ma!adopt in the ftre. Ths, in Philippine National

8an: v. Cort of +ppeals,27 sch stiplation andsimilar ones #ere declared in violation of +rticle%5)'23 of the Civil Code. In a second case, PhilippineNational 8an: v. Cort of +ppeals,22 the ver! samestiplations fond in the credit agreement and thepromissor! notes prepared and issed b! therespondent #ere again invalidated. The Corttherein said>

The Credit +greement provided inter alia, that M

a- The 8+N9 reserves the right to increase theinterest rate #ithin the limits allo#ed b! la# at an!time depending on #hatever polic! it ma! adopt in

the ftre" Provided, that the interest rate on thisaccommodation shall be correspondingl! decreasedin the event that the applicable ma=imm interest isredced b! la# or b! the $onetar! 8oard. In eithercase, the ad?stment in the interest rate agreedpon shall ta:e effect on the effectivit! date of theincrease or decrease in the ma=imm interest rate.

The Promissor! Note, in trn, athori


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The Real Estate $ortgage contract li:e#iseprovided that M

:- INCRE+SE O4 INTEREST R+TE> The rate ofinterest charged on the obligation secred b! thismortgage as #ell as the interest on the amont#hich ma! have been advanced b! the$ORT/+/EE, in accordance #ith the provisionhereof, shall be sb?ect dring the life of this contractto sch an increase #ithin the rate allo#ed b! la#,

as the 8oard of Directors of the $ORT/+/EE ma!prescribe for its debtors.

= = = =

In ma:ing the nilateral increases in interest rates,petitioner ban: relied on the escalation clase

contained in their credit agreement #hich provides,as follo#s>

The 8an: reserves the right to increase the interestrate #ithin the limits allo#ed b! la# at an! timedepending on #hatever polic! it ma! adopt in theftre and provided, that, the interest rate on thisaccommodation shall be correspondingl! decreasedin the event that the applicable ma=imm interestrate is redced b! la# or b! the $onetar! 8oard. Ineither case, the ad?stment in the interest rateagreed pon shall ta:e effect on the effectivit! date


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of the increase or decrease in ma=imm interestrate.

This clase is athori


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ma=imm rates of interest for loans and certainforbearances. Prsant to sch athorit!, the$onetar! 8oard issed Central 8an: C.8.- Circlar

No. 1)3, series of %1'(, Section 3 of #hich provides>

Sec. 3. Section %5)5 of the $anal of Reglationsfor 8an:s and Other 4inancial Intermediaries- ishereb! amended to read as follo#s>

Sec. %5)5. Interest and Other Charges.

M The rate of interest, inclding commissions,premims, fees and other charges, on an! loan, orforbearance of an! mone!, goods or credits,regardless of matrit! and #hether secred ornsecred, shall not be sb?ect to an! ceilingprescribed nder or prsant to the sr! ;a#, as

amended.P.D. No. %2'7 and C.8. Circlar No. 1)3 no morethan allo# contracting parties to stiplate freel!regarding an! sbse&ent ad?stment in the interestrate that shall accre on a loan or forbearance ofmone!, goods or credits. In fine, the! can agree toad?st, p#ard or do#n#ard, the interest previosl!stiplated. Go#ever, contrar! to the stbborninsistence of petitioner ban:, the said la# andcirclar did not athori


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It is basic that there can be no contract in the tresense in the absence of the element of agreement,or of mtal assent of the parties. If this assent is

#anting on the part of the one #ho contracts, his acthas no more efficac! than if it had been done nderdress or b! a person of nsond mind.

Similarl!, contract changes mst be made #ith theconsent of the contracting parties. The minds of allthe parties mst meet as to the proposed

modification, especiall! #hen it affects an importantaspect of the agreement. In the case of loancontracts, it cannot be gainsaid that the rate ofinterest is al#a!s a vital component, for it can ma:eor brea: a capital ventre. Ths, an! change mstbe mtall! agreed pon, other#ise, it is bereft ofan! binding effect.

Ae cannot contenance petitioner ban:Bs postringthat the escalation clase at bench gives it nbridledright to nilaterall! p#ardl! ad?st the interest onprivate respondentsB loan. That #old completel!ta:e a#a! from private respondents the right toassent to an important modification in their

agreement, and #old negate the element ofmtalit! in contracts. In Philippine National 8an: v.Cort of +ppeals, et al., %12 SCR+ 352, 377373%11%- #e held M


36/87

= = = The nilateral action of the PN8 in increasingthe interest rate on the private respondentBs loanviolated the mtalit! of contracts ordained in +rticle

%5)' of the Civil Code>

+rt. %5)'. The contract mst bind both contractingparties" its validit! or compliance cannot be left tothe #ill of one of them.

In order that obligations arising from contracts ma!

have the force of la# bet#een the parties, theremst be mtalit! bet#een the parties based ontheir essential e&alit!. + contract containing acondition #hich ma:es its flfillment dependente=clsivel! pon the ncontrolled #ill of one of thecontracting parties, is void . . . . Gence, evenassming that the . . . loan agreement bet#een the

PN8 and the private respondent gave the PN8 alicense althogh in fact there #as none- to increasethe interest rate at #ill dring the term of the loan,that license #old have been nll and void for beingviolative of the principle of mtalit! essential incontracts. It #old have invested the loanagreement #ith the character of a contract of

adhesion, #here the parties do not bargain on e&alfooting, the #ea:er part!Bs the debtor- participationbeing redced to the alternative to ta:e it or leave it. . . . Sch a contract is a veritable trap for the


37/87

#ea:er part! #hom the corts of ?stice mst protectagainst abse and imposition.2* Emphases spplied-

Then again, in a third case, Sposes +lmeda v.Cort of +ppeals,2' the Cort invalidated the ver!same provisions in the respondentBs prepared Credit

+greement, declaring ths>

The binding effect of an! agreement bet#een partiesto a contract is premised on t#o settled principles>

%- that an! obligation arising from contract has theforce of la# bet#een the parties" and (- that theremst be mtalit! bet#een the parties based ontheir essential e&alit!. +n! contract #hich appearsto be heavil! #eighed in favor of one of the partiesso as to lead to an nconscionable reslt is void.

+n! stiplation regarding the validit! or compliance

of the contract #hich is left solel! to the #ill of one of the parties, is li:e#ise, invalid.

It is plainl! obvios, therefore, from the ndisptedfacts of the case that respondent ban: nilaterall!altered the terms of its contract #ith petitioners b!increasing the interest rates on the loan #ithot the

prior assent of the latter. In fact, the manner ofagreement is itself e=plicitl! stiplated b! the CivilCode #hen it provides, in +rticle %132 that Nointerest shall be de nless it has been e=pressl!stiplated in #riting. Ahat has been stiplated in



38/87

#riting from a persal of interest rate provision ofthe credit agreement signed bet#een the parties isthat petitioners #ere bond merel! to pa! (%@

interest, sb?ect to a possible escalation or deescalation, #hen %- the circmstances #arrant schescalation or deescalation" (- #ithin the limitsallo#ed b! la#" and 5- pon agreement.

Indeed, the interest rate #hich appears to have beenagreed pon b! the parties to the contract in this

case #as the (%@ rate stiplated in the interestprovision. +n! dobt abot this is in fact readil!resolved b! a carefl reading of the creditagreement becase the same plainl! ses thephrase interest rate agreed pon, in reference tothe original (%@ interest rate. = = =

= = = =

Petitioners never agreed in #riting to pa! theincreased interest rates demanded b! respondentban: in contravention to the tenor of their creditagreement. That an increase in interest rates from%'@ to as mch as 2'@ is e=cessive and

nconscionable is indisptable. 8et#een %1'% and%1'7, petitioners had paid an amont e&ivalent tovirtall! half of the entire principal P*,*53,))7.22-#hich #as applied to interest alone. 8! the time thesposes tendered the amont of P7),%7(,3%'.)) in


39/87

settlement of their obligations" respondent ban: #asdemanding P3',5**,7'*.)) over and above thoseamonts alread! previosl! paid b! the sposes.

Escalation clases are not basicall! #rong or legall!ob?ectionable so long as the! are not solel!potestative bt based on reasonable and validgronds. Gere, as clearl! demonstrated above, notonl! areJ the increases of the interest rates on thebasis of the escalation clase patentl! nreasonable

and nconscionable, bt also there are no valid andreasonable standards pon #hich the increases areanchored.

= = = =

In the face of the ne&ivocal interest rate

provisions in the credit agreement and in the la#re&iring the parties to agree to changes in theinterest rate in #riting, #e hold that the nilateraland progressive increases imposed b! respondentPN8 #ere nll and void. Their effect #as to increasethe total obligation on an eighteen million peso loanto an amont #a! over three times that #hich #as

originall! granted to the borro#ers. That theseincreases, occasioned b! craft! maniplations in theinterest rates is nconscionable and netrali


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Still, in a forth case, Philippine National 8an: v.Cort of +ppeals,*) the above doctrine #asreiterated>

The promissor! note contained the follo#ingstiplation>

4or vale received, IF#e, private respondentsJ ?ointl!and severall! promise to pa! to the ORDER of thePGI;IPPINE N+TION+; 8+N9, at its office in San

6ose Cit!, Philippines, the sm of 4I4TEENTGOS+ND ON;H P%3,))).))-, PhilippineCrrenc!, together #ith interest thereon at the rate of %(@ per annm ntil paid, #hich interest rate the8an: ma! at an! time #ithot notice, raise #ithin thelimits allo#ed b! la#, and IF#e also agree to pa!

?ointl! and severall! @ per annm penalt!

charge, b! #a! of li&idated damages shold thisnote be npaid or is not rene#ed on de dated.

Pa!ment of this note shall be as follo#s>

TGREE GNDRED SIKTH 4I0E D+HS +4TERD+TE

On the reverse side of the note the follo#ingcondition #as stamped>

+ll shortterm loans to be granted starting 6anar! %,%1*' shall be made sb?ect to the condition that an!



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andFor all e=tensions hereof that #ill leave an!portion of the amont still npaid after *5) da!sshall atomaticall! convert the otstanding balance

into a medim or longterm obligation as the casema! be and give the 8an: the right to charge theinterest rates prescribed nder its policies from thedate the accont #as originall! granted.

To secre pa!ment of the loan the parties e=ecteda real estate mortgage contract #hich provided>

:- INCRE+SE O4 INTEREST R+TE>

The rate of interest charged on the obligationsecred b! this mortgage as #ell as the interest onthe amont #hich ma! have been advanced b! the$ORT/+/EE, in accordance #ith the provision

hereof, shall be sb?ect dring the life of this contractto sch an increase #ithin the rate allo#ed b! la#,as the 8oard of Directors of the $ORT/+/EE ma!prescribe for its debtors.

= = = =

To begin #ith, PN8Bs argment rests on a

misapprehension of the import of the appellatecortBs rling. The Cort of +ppeals nllified theinterest rate increases not becase the promissor!note did not compl! #ith P.D. No. %2'7 b! providingfor a deescalation, bt becase the absence of


42/87

sch provision made the clase so onesided as toma:e it nreasonable.

That rling is correct. It is in line #ith or decision in8anco 4ilipino Savings $ortgage 8an: v. Navarrothat althogh P.D. No. %2'7 is not to be retroactivel!applied to loans granted before its effectivit!, theremst nevertheless be a deescalation clase tomitigate the onesidedness of the escalation clase.Indeed becase of concern for the ne&al stats of

borro#ers visQvis the ban:s, or cases after 8anco4ilipino have fashioned the rle that an! increase inthe rate of interest made prsant to an escalationclase mst be the reslt of agreement bet#een theparties.

Ths in Philippine National 8an: v. Cort of +ppeals,

t#o promissor! notes athori


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the amont #hich ma! have been advanced b! the$ORT/+/EE, in accordance #ith the provisionshereof, shall be sb?ect dring the life of this contract

to sch an increase #ithin the rate allo#ed b! la#,as the 8oard of Directors of the $ORT/+/EE ma!prescribe for its debtors.

Prsant to these clases, PN8 sccessivel!increased the interest from %'@ to 5(@, then to7%@ and then to 7'@. This Cort declared the

increases nilaterall! imposed b! PN8J to be inviolation of the principle of mtalit! as embodied in

+rt.%5)' of the Civil Code, #hich provides that tJhecontract mst bind both contracting parties" itsvalidit! or compliance cannot be left to the #ill of oneof them. +s the Cort e=plained>

In order that obligations arising from contracts ma!have the force of la# bet#een the parties, theremst be mtalit! bet#een the parties based ontheir essential e&alit!. + contract containing acondition #hich ma:es its flfillment dependente=clsivel! pon the ncontrolled #ill of one of thecontracting parties, is void /arcia vs. Rita ;egarda,

Inc., (% SCR+ 333-. Gence, even assming thatthe P%.' million loan agreement bet#een the PN8and the private respondent gave the PN8 a licensealthogh in fact there #as none- to increase the


44/87

interest rate at #ill dring the term of the loan, thatlicense #old have been nll and void for beingviolative of the principle of mtalit! essential in

contracts. It #old have invested the loanagreement #ith the character of a contract ofadhesion, #here the parties do not bargain on e&alfooting, the #ea:er part!Bs the debtor- participationbeing redced to the alternative to ta:e it or leave itLa vs. ;a# nion Roc: Insrance Co., 13 Phil.'3-. Sch a contract is a veritable trap for the#ea:er part! #hom the corts of ?stice mst protectagainst abse and imposition.

+ similar rling #as made in Philippine National8an: v. Cort of +ppeals. The credit agreement inthat case provided>

The 8+N9 reserves the right to increase the interestrate #ithin the limits allo#ed b! la# at an! timedepending on #hatever polic! it ma! adopt in theftre> Provided, that the interest rate on thisaccommodation shall be correspondingl! decreasedin the event that the applicable ma=imm interest isredced b! la# or b! the $onetar! 8oard. . . .

+s in the first case, PN8 sccessivel! increased thestiplated interest so that #hat #as originall! %(@per annm became, after onl! t#o !ears, 7(@. Indeclaring the increases invalid, #e held>


45/87

Ae cannot contenance petitioner ban:Bs postringthat the escalation clase at bench gives it nbridledright to nilaterall! p#ardl! ad?st the interest on

private respondentsB loan. That #old completel!ta:e a#a! from private respondents the right toassent to an important modification in theiragreement, and #old negate the element ofmtalit! in contracts.

Onl! recentl! #e invalidated another rond of

interest increases decreed b! PN8 prsant to asimilar agreement it had #ith other borro#ers>

AJhile the sr! ;a# ceiling on interest rates #aslifted b! C.8. Circlar 1)3, nothing in the saidcirclar cold possibl! be read as grantingrespondent ban: carte blanche athorit! to raise

interest rates to levels #hich #old either enslave itsborro#ers or lead to a hemorrhaging of their assets.

In this case no attempt #as made b! PN8 to secrethe conformit! of private respondents to thesccessive increases in the interest rate. PrivaterespondentsB assent to the increases can not be

implied from their lac: of response to the letters sentb! PN8, informing them of the increases. 4or asstated in one case, no one receiving a proposal tochange a contract is obliged to ans#er theproposal.*% Emphasis spplied-



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Ae made the same prononcement in a fifth case,Ne# Sampagita 8ilders Constrction, Inc. v.Philippine National 8an:,*( ths

Corts have the athorit! to stri:e do#n or to modif!provisions in promissor! notes that grant the lendersnrestrained po#er to increase interest rates,penalties and other charges at the latterBs solediscretion and #ithot giving prior notice to andsecring the consent of the borro#ers. This

nilateral athorit! is anathema to the mtalit! ofcontracts and enable lenders to ta:e ndeadvantage of borro#ers. +lthogh the sr! ;a#has been effectivel! repealed, corts ma! stillredce ini&itos or nconscionable rates chargedfor the se of mone!. 4rthermore, e=cessiveinterests, penalties and other charges not revealedin disclosre statements issed b! ban:s, even ifstiplated in the promissor! notes, cannot be giveneffect nder the Trth in ;ending +ct.*5 Emphasisspplied-

Het again, in a si=th disposition, Philippine National8an: v. Sposes Rocamora,*7 the above

prononcements #ere reiterated to debn: PN8Bsrepeated reliance on its invalidated contractstiplations>



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Ae repeated this rle in the %117 case of PN8 v. C+and 6a!me 4ernande< and the %112 case of PN8 v.C+ and Sposes 8asco. Ta:ing no heed of these

rlings, the escalation clase PN8 sed in thepresent case to ?stif! the increased interest rates isno different from the escalation clase assailed inthe %112 PN8 case" in both, the interest rates #ereincreased from the agreed %(@ per annm rate to7(@. = = =

= = = =

On the strength of this rling, PN8Bs argment thatthe sposes RocamoraBs failre to contest theincreased interest rates that #ere prportedl!reflected in the statements of accont and thedemand letters sent b! the ban: amonted to their

implied acceptance of the increase shold li:e#isefail.

Evidentl!, PN8Bs failre to secre the sposesRocamoraBs consent to the increased interest ratesprompted the lo#er corts to declare e=cessive andillegal the interest rates imposed. Togo arond this

lo#er cort finding, PN8 alleges thatthe P()2,(1*.7* deficienc! claim #as comptedsing onl! the original %(@ per annm interest rate.Ae find this nli:el!. Or e=amination of PN8Bs o#nledgers, inclded in the records of the case, clearl!


48/87

indicates that PN8 imposed interest rates higherthan the agreed %(@ per annm rate. Thisconfirmator! finding, albeit based solel! on ledgers

fond in the records, reinforces the application inthis case of the rle that findings of the RTC, #henaffirmed b! the C+, are binding pon thisCort.*3 Emphases spplied-

0eril!, all these cases, inclding the present one,involve identical or similar provisions fond in

respondentBs credit agreements and promissor!notes. Ths, the 6l! %1'1 Credit +greemente=ected b! petitioners and respondent containedthe follo#ing stiplation on interest>

%.)5. Interest. a- The ;oan shall be sb?ect tointerest at the rate of %1.3@ per annmJ. Interest

shall be pa!able in advance ever! one hndredt#ent! da!s at the rate prevailing at the time of therene#al.

b- The 8orro#er agrees that the 8an: ma! modif!the interest rate in the ;oan depending on #hateverpolic! the 8an: ma! adopt in the ftre, inclding

#ithot limitation, the shifting from the floatinginterest rate s!stem to the fi=ed interest rate s!stem,or vice versa. Ahere the 8an: has imposed on the;oan interest at a rate per annm #hich is e&al tothe 8an:Bs spread over the crrent floating interest



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rate, the 8orro#er hereb! agrees that the 8an: ma!,#ithot need of notice to the 8orro#er, increase ordecrease its spread over the floating interest rate at

an! time depending on #hatever polic! it ma! adoptin the ftre.*2 Emphases spplied-

#hile the eight promissor! notes issed prsantthereto granted PN8 the right to increase or redceinterest rates #ithin the limits allo#ed b! la# or the$onetar! 8oard** and the Real Estate $ortgage

agreement inclded the same right to increase orredce interest rates at an! time depending on#hatever polic! PN8 ma! adopt in the ftre.*'

On the basis of the Credit +greement, petitionersissed promissor! notes #hich the! signed in blan:,and respondent later on entered their corresponding

interest rates, as follo#s>

%st Promissor! Note dated 6l! (7, %1'1 %1.3@"

(nd Promissor! Note dated November ((, %1'1 (5@"

5rd Promissor! Note dated $arch (%, %11) ((@"

7th Promissor! Note dated 6l! %1, %11) (7@"



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3th Promissor! Note dated December %*, %11) ('@"

2th Promissor! Note dated 4ebrar! %7, %11% 5(@"

*th Promissor! Note dated $arch %, %11% 5)@" and

'th Promissor! Note dated 6l! %%, %11% (7@.*1

On the other hand, the +gst %11% +mendment toCredit +greement contains the follo#ing stiplationregarding interest>

%.)5. Interest on ;ine +vailments. a- The 8orro#ersagree to pa! interest on each +vailment from date of

each +vailment p to bt not inclding the date of fllpa!ment thereof at the rate per annm #hich isdetermined b! the 8an: to be prime rate plsapplicable spread in effect as of the date of each

+vailment.') Emphases spplied-

and nder this +mendment to Credit +greement,

petitioners again e=ected and signed the follo#ingpromissor! notes in blan:, for the respondent to later on enter the corresponding interest rates, #hich itdid, as follo#s>



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1th Promissor! Note dated November ', %11% (2@"

%)th Promissor! Note dated $arch %1, %11( (3@"

%%th Promissor! Note dated 6l! %%, %11( (5@"

%(th Promissor! Note dated November %), %11( (%@"

%5th Promissor! Note dated $arch %3, %115 (%@"

%7th Promissor! Note dated 6l! %(, %115 %*.3@"

%3th Promissor! Note dated November %*, %115 (%@"

%2th Promissor! Note dated $arch (', %117 (%@"

%*th Promissor! Note dated 6l! %5, %117 (%@"

%'th Promissor! Note dated November %2, %117 %2@"

%1th Promissor! Note dated +pril %), %113 (%@"


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()th Promissor! Note dated 6l! %1, %113 %'.3@"

(%st Promissor! Note dated December %', %113 %'.*3@"

((nd Promissor! Note dated +pril ((, %112 %'.3@"

(5rd Promissor! Note dated 6l! ((, %112 %'.3@"

(7th Promissor! Note dated November (3, %112 %'@"

(3th Promissor! Note dated $a! 5), %11* %*.3@" and

(2th Promissor! Note PN 1*)*(5*- dated 6l!5), %11* (3@.'%

The 1th p to the %*th promissor! notes provide forthe pa!ment of interest at the rate the 8an: ma! atan! time #ithot notice, raise #ithin the limitsallo#ed b! la# = = =.'( On the other hand, the %'thp to the (2th promissor! notes #hich incldes PN1*)*(5* carried the follo#ing provision>

= = = 4or this prpose, IFAe agree that the rate ofinterest herein stiplated ma! be increased ordecreased for the sbse&ent Interest Periods, #ith



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prior notice to the 8orro#er in the event of changesin interest rate prescribed b! la# or the $onetar!8oard of the Central 8an: of the Philippines, or in

the 8an:Bs overall cost of fnds. IFAe hereb! agreethat in the event IF#e are not agreeable to theinterest rate fi=ed for an! Interest Period, IF#e shallhave the option to prepa! the loan or credit facilit!#ithot penalt! #ithin ten %)- calendar da!s fromthe Interest Setting Date.'5 Emphasis spplied-

These stiplations mst be once more invalidated,as #as done in previos cases. The commondenominator in these cases is the lac: of agreementof the parties to the imposed interest rates. 4or thiscase, this lac: of consent b! the petitioners hasbeen made obvios b! the fact that the! signed thepromissor! notes in blan: for the respondent to fill.Ae find credible the testimon! of ;!dia in thisrespect. Respondent failed to discredit her" in fact,its #itness PN8 9alibo 8ranch $anager +spaadmitted that interest rates #ere fi=ed solel! b! itsTreasr! Department in $anila, #hich #ere thensimpl! commnicated to all PN8 branches for

implementation. If this #ere the case, then this#old e=plain #h! petitioners had to sign thepromissor! notes in blan:, since the imposableinterest rates have !et to be determined and fi=ed b!respondentBs Treasr! Department in $anila.



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$oreover, in +spaBs enmeration of the factors thatdetermine the interest rates PN8 fi=es sch ascost of mone!, foreign crrenc! vales, ban:

administrative costs, profitabilit!, and considerations#hich affect the ban:ing indstr! it can be seenthat considerations #hich affect PN8Bs borro#ersare ignored. + borro#erBs crrent financial state, hisfeedbac: or opinions, the natre and prpose of hisborro#ings, the effect of foreign crrenc! vales orflctations on his bsiness or borro#ing, etc. these are not factors #hich inflence the fi=ing ofinterest rates to be imposed on him. Clearl!,respondentBs method of fi=ing interest rates basedon onesided, indeterminate, and sb?ective criteriasch as profitabilit!, cost of mone!, ban: costs, etc.is arbitrar! for there is no fi=ed standard or margin

above or belo# these considerations.The stiplation in the promissor! notes sb?ectingthe interest rate to revie# does not render theimposition b! CP8 of interest rates on theobligations of the sposes 8elso valid. +ccording tosaid stiplation>

The interest rate shall be sb?ect to revie# and ma!be increased or decreased b! the ;ENDERconsidering among others the prevailing financialand monetar! conditions" or the rate of interest and


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charges #hich other ban:s or financial instittionscharge or offer to charge for similaraccommodations" andFor the reslting profitabilit! to

the ;ENDER after de consideration of all dealings#ith the 8ORROAER.

It shold be pointed ot that the athorit! to revie#the interest rate #as given toJ CP8 alone as thelender. $oreover, CP8 ma! appl! theconsiderations enmerated in this provision as it

#ishes. +s #orded in the above provision, CP8ma! give as mch #eight as it desires to each of thefollo#ing considerations> %- the prevailing financialand monetar! condition"(- the rate of interest andcharges #hich other ban:s or financial instittionscharge or offer to charge for similaraccommodations" andFor5- the reslting profitabilit!to the ;ENDER CP8- after de consideration ofall dealings #ith the 8ORROAER the sposes8elso-. +gain, as in the case of the interest rateprovision, there is no fi=ed margin above or belo#these considerations.

In vie# of the foregoing, the Separabilit! Clase

cannot save either of the t#o options of CP8 as tothe interest to be imposed, as both options violatethe principle of mtalit! of contracts.'7 Emphasesspplied-



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To repeat #hat has been said in the abovecitedcases, an! modification in the contract, sch as theinterest rates, mst be made #ith the consent of the

contracting parties.1âwphi1 The minds of all the partiesmst meet as to the proposed modification,especiall! #hen it affects an important aspect of theagreement. In the case of loan agreements, the rateof interest is a principal condition, if not the mostimportant component. Ths, an! modification thereof mst be mtall! agreed pon" other#ise, it has nobinding effect.

Ahat is even more glaring in the present case isthat, the stiplations in &estion no longer providethat the parties shall agree pon the interest rate tobe fi=ed" instead, the! are #orded in sch a #a!that the borro#er shall agree to #hatever interestrate respondent fi=es. In credit agreements coveredb! the abovecited cases, it is provided that>

The 8an: reserves the right to increase the interestrate #ithin the limits allo#ed b! la# at an! timedepending on #hatever polic! it ma! adopt in theftre> Provided, that, the interest rate on this

accommodation shall be correspondingl! decreasedin the event that the applicable ma=imm interestrate is redced b! la# or b! the $onetar! 8oard. Ineither case, the ad?stment in the interest rate


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agreed pon shall ta:e effect on the effectivit! dateof the increase or decrease in ma=imm interestrate.'3 Emphasis spplied-

Ahereas, in the present credit agreements nderscrtin!, it is stated that>

IN TGE 6;H %1'1 CREDIT +/REE$ENT

b- The 8orro#er agrees that the 8an: ma! modif!the interest rate on the ;oan depending on #hatever

polic! the 8an: ma! adopt in the ftre, inclding#ithot limitation, the shifting from the floatinginterest rate s!stem to the fi=ed interest rate s!stem,or vice versa. Ahere the 8an: has imposed on the;oan interest at a rate per annm, #hich is e&al tothe 8an:Bs spread over the crrent floating interest

rate, the 8orro#er hereb! agrees that the 8an: ma!,#ithot need of notice to the 8orro#er, increase ordecrease its spread over the floating interest rate atan! time depending on #hatever polic! it ma! adoptin the ftre.'2 Emphases spplied-

IN TGE +/ST %11% +$END$ENT TO CREDIT +/REE$ENT

%.)5. Interest on ;ine +vailments. a- The 8orro#ersagree to pa! interest on each +vailment from date of each +vailment p to bt not inclding the date of fllpa!ment thereof at the rate per annm #hich is



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determined b! the 8an: to be prime rate plsapplicable spread in effect as of the date of each

+vailment.'* Emphasis spplied-

Plainl!, #ith the present credit agreement, theelement of consent or agreement b! the borro#er isno# completel! lac:ing, #hich ma:es respondentBsnla#fl act all the more reprehensible.

+ccordingl!, petitioners are correct in arging that

estoppel shold not appl! to them, for eJstoppelcannot be predicated on an illegal act. +s bet#eenthe parties to a contract, validit! cannot be given to itb! estoppel if it is prohibited b! la# or is againstpblic polic!.''

It appears that b! its acts, respondent violated the

Trth in ;ending +ct, or Repblic +ct No. 5*23,#hich #as enacted to protect = = = citi


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SEC. 7. +n! creditor shall frnish to each person to#hom credit is e=tended, prior to the consmmationof the transaction, a clear statement in #riting setting

forth, to the e=tent applicable and in accordance #ithrles and reglations prescribed b! the 8oard, thefollo#ing information>

%- the cash price or delivered price of thepropert! or service to be ac&ired"

(- the amonts, if an!, to be credited as do#npa!ment andFor tradein"

5- the difference bet#een the amonts set forthnder clases %- and (-"

7- the charges, individall! itemi


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nder Section 72-, finance charge represents theamont to be paid b! the debtor incident to thee=tension of credit sch as interest or disconts,

collection fees, credit investigation fees, attorne!Bsfees, and other service charges. The total financecharge represents the difference bet#een %- theaggregate consideration do#n pa!ment plsinstallments- on the part of the debtor, and (- thesm of the cash price and nonfinance charges.1%

8! re&iring the petitioners to sign the creditdocments and the promissor! notes in blan:, andthen nilaterall! filling them p later on, respondentviolated the Trth in ;ending +ct, and #as remiss inits disclosre obligations. In one case, #hich theCort finds applicable here, it #as held>

CP8 frther arges that since the sposes 8elso#ere dl! given copies of the sb?ect promissor!notes after their e=ection, then the! #ere dl!notified of the terms thereof, in sbstantialcompliance #ith the Trth in ;ending +ct.

Once more, #e disagree. Section 7 of the Trth in

;ending +ct clearl! provides that the disclosrestatement mst be frnished prior to theconsmmation of the transaction>



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SEC. 7. +n! creditor shall frnish to each person to#hom credit is e=tended, prior to the consmmationof the transaction, a clear statement in #riting setting

forth, to the e=tent applicable and in accordance #ithrles and reglations prescribed b! the 8oard, thefollo#ing information>

%- the cash price or delivered price of thepropert! or service to be ac&ired"

(- the amonts, if an!, to be credited as do#npa!ment andFor tradein"

5- the difference bet#een the amonts set forthnder clases %- and (-"

7- the charges, individall! itemi


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The rationale of this provision is to protect sers ofcredit from a lac: of a#areness of the tre costthereof, proceeding from the e=perience that ban:s

are able to conceal sch tre cost b! hiddencharges, ncertaint! of interest rates, dedction ofinterests from the loaned amont, and the li:e. Thela# thereb! see:s to protect debtors b! permittingthem to fll! appreciate the tre cost of their loan, toenable them to give fll consent to the contract, andto properl! evalate their options in arriving atbsiness decisions. pholding CP8Bs claim ofsbstantial compliance #old defeat these prposesof the Trth in ;ending +ct. The belated discover! ofthe tre cost of credit #ill too often not be able toreverse the ill effects of an alread! consmmatedbsiness decision.

In addition, the promissor! notes, the copies of#hich #ere presented to the sposes 8elso aftere=ection, are not sfficient notification from CP8.

+s earlier discssed, the interest rate provisiontherein does not sfficientl! indicate #ith particlarit!the interest rate to be applied to the loan covered b!

said promissor! notes.1(

Emphases spplied-Go#ever, the one!ear period #ithin #hich an actionfor violation of the Trth in ;ending +ct ma! be filedevidentl! prescribed long ago, or sometime in ())%,



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one !ear after petitioners received the $arch ()))demand letter #hich contained the illegal charges.

The fact that petitioners later received severalstatements of accont detailing its otstandingobligations does not cre respondentBs breach. Torepeat, the belated discover! of the tre cost ofcredit does not reverse the ill effects of an alread!consmmated bsiness decision.15

Neither ma! the statements be consideredproposals sent to secre the petitionersB conformit!"the! #ere sent after the imposition and application of the interest rate, and not before. +nd even if it #ereto be presmed that these are proposals or offers,there #as no acceptance b! petitioners. No onereceiving a proposal to modif! a loan contract,

especiall! regarding interest, is obliged to ans#erthe proposal.17

;oan and credit arrangements ma! be madeenticing b!, or s#eetened #ith, offers of lo# initialinterest rates, bt actall! accompanied b!provisions #ritten in fine print that allo# lenders to

later on increase or decrease interest ratesnilaterall!, #ithot the consent of the borro#er, anddepending on comple= and sb?ective factors.8ecase the! have been lred into these contractsb! initiall! lo# interest rates, borro#ers get caght



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and stc: in the #eb of sbse&ent steep rates andpenalties, srcharges and the li:e. 8eing ordinar!individals or entities, the! natrall! dread legal

complications and cannot afford cort litigation" the!sccmb to #hatever charges the lenders impose.

+t the ver! least, borro#ers shold be chargedrightl!" bt then again this is not possible in a onesided credit s!stem #here the temptation to abse isstrong and the #illingness to rectif! is made #ea: b!the eternal desire for profit.

/iven the above spposition, the Cort cannotsbscribe to respondentBs argment that in ever!repricing of petitionersB loan availment, the! aregiven the right to &estion the interest ratesimposed. The import of respondentBs line ofreasoning cannot be other than that if one ot ofever! hndred borro#ers &estions respondentBspractice of nilaterall! fi=ing interest rates, then onl!the loan arrangement #ith that lone complainingborro#er #ill en?o! the benefit of revie# or renegotiation" as to the 11 others, the &estionablepractice #ill contine nchec:ed, and respondent

#ill contine to reap the profits from schnscrplos practice. The Cort can no morecondone a vie# so perverse. This is e=actl! #hat theCort meant in the immediatel! preceding cited case#hen it said that the belated discover! of the tre


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cost of credit does not reverse the ill effects of analread! consmmated bsiness decision"13 as to the11 borro#ers #ho did not or cold not complain, the

illegal act shall have become a fait accompli to their detriment, the! have alread! sffered the oppressiverates.

8esides, that petitioners are given the right to&estion the interest rates imposed is, nder thecircmstances, irrelevant" #e have a sitation #here

the petitioners do not stand on e&al footing #ith therespondent. It is dobtfl that an! borro#er #hofinds himself in petitionersB position #old dare&estion respondentBs po#er to arbitraril! modif!interest rates at an! time. In the second place, on#hat basis cold an! borro#er &estion sch po#er,#hen the criteria or standards #hich are reall!onesided, arbitrar! and sb?ective for the e=erciseof sch po#er are precisel! lost on him

4or the same reasons, the Cort cannot validl!consider that, as stiplated in the %'th p to the (2thpromissor! notes, petitioners are granted the optionto prepa! the loan or credit facilit! #ithot penalt!

#ithin %) calendar da!s from the Interest SettingDate if the! are not agreeable to the interest ratefi=ed. It has been sho#n that the promissor! notesare e=ected and signed in blan:, meaning that b!



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the time petitioners learn of the interest rate, the!are alread! bond to pa! it becase the! havealread! presigned the note #here the rate is

sbse&entl! entered.

8esides, premim ma! not be placed pon astiplation in a contract #hich grants one part! theright to choose #hether to contine #ith or #ithdra#from the agreement if it discovers that #hat the other part! has been doing all along is improper or illegal.

Ths said, respondentBs argments relative to thecredit docments that docmentar! evidenceprevails over testimonial evidence" that the creditdocments are in proper form, presmed reglar,and endre, against arbitrar! claims b! petitioners,e=perienced bsiness persons that the! are, the!

signed &estionable loan docments #hoseprovisions for interest rates #ere left blan:, and !etthe! contined to pa! the interests #ithot protestfor a nmber of !ears deserve no consideration.

Aith regard to interest, the Cort finds that since theescalation clase is annlled, the principal amont

of the loan is sb?ect to the original or stiplated rateof interest, and pon matrit!, the amont de shallbe sb?ect to legal interest at the rate of %(@ perannm. This is the niform rling adopted inprevios cases, inclding those cited here.12 The



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interests paid b! petitioners shold be applied first tothe pa!ment of the stiplated or legal and npaidinterest, as the case ma! be, and later, to the capital

or principal.1* Respondent shold then refnd thee=cess amont of interest that it has illegall!imposed pon petitioners" tJhe amont to berefnded refers to that paid b! petitioners #hen the!had no obligation to do so.1' Ths, the partiesBoriginal agreement stiplated the pa!ment of %1.3@interest" ho#ever, this rate #as intended to appl!onl! to the first promissor! note #hich e=pired onNovember (%, %1'1 and #as paid b! petitioners" it#as not intended to appl! to the #hole dration ofthe loan. Sbse&ent higher interest rates havebeen declared illegal" bt becase onl! the rates arefond to be improper, the obligation to pa! interest

sbsists, the same to be fi=ed at the legal rate of%(@ per annm. Go#ever, the %(@ interest shallappl! onl! ntil 6ne 5), ()%5. Starting 6l!%, ()%5,the prevailing rate of interest shall be 2@ per annmprsant to or rling in Nacar v. /aller!4rames11 and 8ang:o Sentral ng Pilipinas$onetar!8oard Circlar No. *11.

No# to the isse of penalt!. PN 1*)*(5* providesthat failre to pa! it or an! installment thereon, #hende, shall constitte defalt, and a penalt! charge of (7@ per annm based on the defalted principal



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amont shall be imposed. Petitioners claim that thispenalt! shold be e=clded from the foreclosreamont or bid price becase the Real Estate

$ortgage and the Spplement thereto did notspecificall! inclde it as part of the secred amont.Respondent ?stifies its inclsion in the secredamont, sa!ing that the prpose of the penalt! or apenal clase is to ensre the performance of theobligation and sbstitte for damages and thepa!ment of interest in the event of noncompliance.%)) Respondent adds that the impositionand collection of a penalt! is a normal ban:ingpractice, and the standard rate per annm for allcommercial ban:s, at the time, #as (7@. Itsinclsion as part of the secred amont in themortgage agreements is ths valid and necessar!.

The Cort sstains petitionersB vie# that the penalt!ma! not be inclded as part of the secred amont.Gaving fond the credit agreements and promissor!notes to be tainted, #e mst accord the sametreatment to the mortgages. +fter all, aJ mortgageand a note secred b! it are deemed parts of one

transaction and are constred together.%)%

8eing sotainted and having the attribtes of a contract ofadhesion as the principal credit docments, #e mstconstre the mortgage contracts strictl!, and againstthe part! #ho drafted it. +n e=amination of the



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mortgage agreements reveals that no#here is itstated that penalties are to be inclded in thesecred amont. Constring this silence strictl!

against the respondent, the Cort can onl! concldethat the parties did not intend to inclde the penalt!allo#ed nder PN 1*)*(5* as part of the secredamont. /iven its resorces, respondent cold have

if it trl! #anted to convenientl! prepared ande=ected an amended mortgage agreement #ith thepetitioners, thereb! inclding penalties in the amontto be secred b! the encmbered properties. Het itdid not.

Aith regard to attorne!Bs fees, it #as plain error forthe C+ to have passed pon the isse since it #asnot raised b! the petitioners in their appeal" it #asthe respondent that improperl! broght it p in itsappelleeBs brief, #hen it shold have interposed anappeal, since the trial cortBs Decision on this isseis adverse to it. It is an elementar! principle in thesb?ect of appeals that an appellee #ho does nothimself appeal cannot obtain from the appellatecort an! affirmative relief other than those granted

in the decision of the cort belo#.= = = +Jn appellee, #ho is at the same time not anappellant, ma! on appeal be permitted to ma:econter assignments of error in ordinar! actions,


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#hen the prpose is merel! to defend himselfagainst an appeal in #hich errors are alleged tohave been committed b! the trial cort both in the

appreciation of facts and in the interpretation of thela#, in order to sstain the ?dgment in his favor btnot #hen his prpose is to see: modification orreversal of the ?dgment, in #hich case it isnecessar! for him to have e=cepted to and appealedfrom the ?dgment.%)(

Since petitioners did not raise the isse of redctionof attorne!Bs fees, the C+ possessed no athorit! topass pon it at the instance of respondent. Therling of the trial cort in this respect shold remainndistrbed.

4or the fi=ing of the proper amonts de and o#ing

to the parties to the respondent as creditor and tothe petitioners #ho are entitled to a refnd as aconse&ence of overpa!ment considering that the!paid more b! #a! of interest charges than the %(@per annm%)5 herein allo#ed the case shold beremanded to the lo#er cort for proper accontingand comptation, appl!ing the follo#ing procedre>

%. The %st Promissor! Note #ith the %1.3@interest rate is deemed proper and paid"



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(. +ll sbse&ent promissor! notes from the(nd to the (2th promissor! notes- shall carr! aninterest rate of onl! %(@ per annm.%)7 Ths,

interest pa!ment made in e=cess of %(@ on the(nd promissor! note shall immediatel! beapplied to the principal, and the principal shallbe accordingl! redced. The redced principalshall then be sb?ected to the %(@%)3 interest onthe 5rd promissor! note, and the e=cess over%(@ interest pa!ment on the 5rd promissor!note shall again be applied to the principal,#hich shall again be redced accordingl!. Theredced principal shall then be sb?ected to the%(@ interest on the 7th promissor! note, and thee=cess over%(@ interest pa!ment on the 7thpromissor! note shall again be applied to the

principal, #hich shall again be redcedaccordingl!. +nd so on and so forth"

5. +fter the above procedre is carried ot, thetrial cort shall be able to conclde if petitionersa- still have an OTST+NDIN/8+;+NCEFO8;I/+TION or b- $+DE

P+H$ENTS O0ER +ND +8O0E TGEIR TOT+;O8;I/+TION principal and interest-"

7. Sch otstanding balanceFobligation, if therebe an!, shall then be sb?ected to a %(@ per



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annm interest from October (', %11* ntil6anar! %7, %111, #hich is the date of theaction sale"

3. Sch otstanding balanceFobligation shallalso be charged a (7@ per annm penalt! from

+gst %7, %11* ntil 6anar! %7, %111. 8tfrom this total penalt!, the petitionersB previospa!ment of penalties in the amontof P()(,))).))made on 6anar! (*,

%11'%)2 shall be DEDCTED"

2. To this otstanding balance 5.-, the interest7.-, penalties 3.-, and the final and e=ector!

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