Credit Transactions Digest Pool (2024-2025) PDF

CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL PAMANTASAN NG LUNGSOD NG MAYNILA COLLEGE OF LAW CREDIT TRANSACTIONS First Semester, SY 2024-2025 2JD Block 2 Submitted on: September 0...

CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL PAMANTASAN NG LUNGSOD NG MAYNILA COLLEGE OF LAW CREDIT TRANSACTIONS First Semester, SY 2024-2025 2JD Block 2 Submitted on: September 04, 2024 Week No. 2: September 06, 2024 1 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL FORMAT: 1. FONT a. Color - Black b. Style - Times New Roman c. Size: 11 2. To highlight or emphasize a word, phrase, or sentence, please mainly use italicization. 3. Be mindful if not, limit using boldface and underlining texts - this is to limit needless clutter in the page. 4. No highlighting of texts - let’s leave it to the discretion of students to put their own highlight. 5. Please maintain the page break in between each case. 6. FILE NAME: a. Case Digest: i. CD-18_Republic v. Ramos-RAMOS ii. If you share the same surname please use the following file name: 1. CD-18_Republic v. Ramos-RAMOS.Anna 2. CD-18_Republic v. Ramos-RAMOS.Mariele b. Full-text Case: i. OC-18_Republic v. Ramos-RAMOS ii. If you share the same surname please use the following file name: 1. OC-18_Republic v. Ramos-RAMOS.Anna 2. OC-18_Republic v. Ramos-RAMOS.Mariele RULES AND REGULATIONS FROM THE QUALITY CONTROL TEAM: Strict compliance with the deadlines. ○ DUE DATES (TO BE REVIEWED ) ONLY FOR THIS WEEK: TUESDAY 6AM - 1st Submission of Draft TUESDAY 11:59PM - Release of List for Revision WEDNESDAY 9AM- 2nd Submission of Draft WEDNESDAY 11AM - Restriction of All Access to Files WEDNESDAY 12PM (noon) - Final submission to Atty. Agustin Failure to revise your digest will result in losing access to the digests. Observe proper grammar, punctuation, and spelling. NO USAGE OF AI such as ChatGPT, Quilbot, etc. NO PLAGIARIZED DIGEST. Do not copy-paste an already made digest of another person. When in doubt, PARAPHRASE. Completeness of the agreed-upon format. We will implement a 2-strike rule - A warning shall be given to a student for failure to follow the agreed-upon rules, he/she can edit it only up until Wednesday 12:00 AM. If the student still fails to meet the criteria (i.e. fails to edit or make the necessary adjustments) upon second checking by the QC Team, he/she will be excluded from accessing the digest at the given meeting of the week. 2 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL 1. BPI Investment Corp. v CA, et.al. GR No. 133632, February 15, 2002 Made by: CLEMENTE, NICKA F. Case Citation: BPI Investment Corp. v CA, et.al. GR No. 133632, February 15, 2002 Petitioner: BPI Investment Corporation Respondent: Hon. Court of Appeals and ALS Management & Development Corporation, Syllabus Topic: Art. 1934 An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. Doctrine: A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the object of the contract. A perfected consensual contract falls under the first clause of Article 1934, Civil Code refers only to an accepted promise to deliver something by way of simple loan. Case Summary: Roa obtained a loan from AIDC with mortgage of house and lot which was later sold to respondents ALS and Litonjua with a remaining balance of P500,000. Respondents agreed to execute another need of mortgage on March 31, 1981with AIDC following its proposition that a loan of P500,000 shall be granted with monthly amortization to cover the remaining balance of Roa. After payment of the remaining balance with the loan granted, on September 13, 1982, BPIIC now released the P7,146.87, purporting to be what was left of their loan. However, BPIIC now instituted foreclosure proceedings on the ground that they failed to pay the mortgage indebtedness which ran from May 1, 1981 to June 30, 1984. The RTC and CA ruled in favor of private respondents and the SC affirmed the same saying that, the contract of loan is a real contract which perfection is only upon delivery of the object. Such perfection hence occurred only upon release of the full loan in September and the payment of amortization runs only a month or October after such perfection of contract. The moral and exemplary damages were not awarded while the foreclosure sale was dismissed. 3 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL The Facts of the Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Case: Investment and Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to secure the loan. Roa later sold the house and lot to private respondents ALS and Antonio Litonjua for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roa's indebtedness with AIDC. The latter, however, did not extend the old interest rate to them and proposed to grant them a new loan of P500,000 to be applied to Roa's debt and secured by the same property, at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding principal balance payable within ten years in equal monthly amortization of P9,996.58 and penalty interest at the rate of 21% per annum per day from the date the amortization became due and payable. Consequently, on March 31, 1981, private respondents executed a mortgage deed containing said stipulations with the provision that payment of the monthly amortization shall commence on May 1, 1981. On August 13, 1982, ALS and Litonjua updated Roa's arrearages by paying BPIIC the sum of P190,601.35 and BPIIC applied thereto the proceeds of private respondents' loan of P500,000. On September 13, 1982 BPIIC now released the P7,146.87, purporting to be what was left of their loan after full payment of Roa's loan. BPIIC instituted foreclosure proceedings against private respondents on the ground that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to P475,585.31. Hence, ALS and Litonjua filed Civil Case No. 52093 against BPIIC stating that they were not in arrears in their payment, but in fact made an overpayment. Further, out of the P500,000 loan, only the total amount of P464,351.77 was released to them and by effects of legal compensation, the balance of P35,648.23 should be applied to the initial monthly amortization for the loan. RTC Ruling: RTC rendered its judgment in favor of ALS Management and Development Corporation and Antonio K. Litonjua and against BPI Investment Corporation with damages and the foreclosure suit was dismissed. CA Ruling CA affirmed the decision holding that the contract of loan between BPIIC and ALS & Litonjua was perfected only on the date when BPIIC released the purported balance of the P500,000 loan after deducting therefrom the value of Roa's indebtedness. Thus, payment of the monthly amortization should commence only a month after the said date, as can be inferred from the stipulations in the contract. 4 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL Petitioner’s Petitioner claims that the contract of loan is consensual, perfected at the time Contention: the contract of mortgage is executed conformably with ruling in Bonnevie v. CA and it was on said date of March 31, 1981 where computation should run and that the loan was released only on March 31, 1982 upon cancellation of Roa’s loan by the Deed of Sale in favor of ALS and consequently, ALS’ execution of deed of mortgage. Issue: Whether the contract of loan is a consensual contract. Supreme Court No. A loan contract is not a consensual contract but a real contract. It is Ruling: perfected only upon the delivery of the object of the contract as in this case between BPI on one hand, and ALS and Litonjua on the other, it was perfected only on September 13, 1982, the date of the second release of the loan. Following the intentions of the parties on the commencement of the monthly amortization, the obligation to pay commenced only on October 13, 1982, a month after the perfection of the contract. Contract of loan also involves reciprocal obligation. Only when a party has performed his part of the contract can he demand that the other party also fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner could only demand for the payment of the monthly amortization after September 13, 1982 for it was only then when it complied with its obligation under the loan contract. As to the award of damages, the filing alone of the foreclosure application should not be a ground for an award of moral damages in the same way that a clearly unfounded civil action is not among the grounds for moral damages. Dispositive Portion: WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral and exemplary damages in favor of private respondents is DELETED, but the award to them of attorney's fees in the amount of P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private respondents P25,000 as nominal damages. Costs against petitioner. SO ORDERED. 5 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL 2. China Banking Corp. v Lichauco, 46 Phil 460. Made by: ROXAS, JOSE EMANNUEL R. Case Citation China Banking Corp. v Lichauco, 46 Phil 460. G.R. No. L-22001 (Nov 04, 1924) Petitioner: China Banking Corporation Respondent: Faustino Lichauco, et al. Syllabus Topic: Article 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. Doctrine: The interest due at the time of the filing of the complaint for the recovery thereof, earns legal interest from said date, under article 1109 of the Civil Code, although the obligation is silent on this point, and the action of the trial court is in accordance with law, which includes in its judgment an order for the payment of legal interest upon the interest due on the amount claimed, at the time of the filing of the complaint. Case Summary: Lichauco & Co., Inc. owed a large debt to the plaintiff, and to help secure this debt, Faustino Lichauco and his wife mortgaged some of their property. Initially, the interest rate was set at 9%, but later they agreed to raise it to 12%, though they mistakenly set the start date for this new rate too early. The lower court found them responsible for paying the debt, interest, and legal fees. They appealed, questioning the interest rate and whether the mortgage was valid. The Supreme Court held that a mortgage can secure the obligation of a third person as long as the principal contract is valid. The Facts of the Lichauco & Co., Inc. owed the plaintiff a debt of P50,000, which was secured by a Case: mortgage executed by Faustino Lichauco and his wife on September 5, 1921. The mortgage had an interest rate of 9% per annum and included a clause that, in the event of non-payment, it would also cover legal costs and attorney's fees, fixed at 5% of the principal amount. On December 20, 1922, Lichauco & Co., Inc., along with Faustino and Luisa Lichauco, reaffirmed the mortgage, agreeing that the debt would accrue interest at 12% per annum, retroactively starting from October 20, 1920. RTC Ruling: The lower court decided in favor of the plaintiff, directing the defendants to pay P21,500, with 12% annual interest starting from September 13, 1922. Additionally, the defendants were ordered to pay P14,200 to cover the plaintiff's attorney fees, litigation expenses, and other related costs. The court also required the defendants to pay P50,000, with 12% annual interest from September 5, 1921, compounded monthly, along with 5% of the P50,000 and the accrued interest as costs and other expenses. CA Ruling: N/A Petitioner’s The contention of China Banking Corporation in this case was that the obligation Contention: secured by the mortgage executed by Faustino Lichauco and his wife lacked 6 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL consideration because the mortgage was meant to secure a debt incurred by Lichauco & Co., Inc., not by Faustino Lichauco and his wife personally. They argued that the mortgage should not be valid since it was securing a third-party debt, not a debt of the Lichaucos themselves. Issue: 1. Did the lower court correctly apply the interest rate on the amounts owed by Faustino Lichauco? 2. Was the mortgage valid, even though it secured a debt incurred by Lichauco & Co., Inc.? Supreme Court 1. No. The Supreme Court found that the lower court made a clerical error by Ruling: setting the start date for the 12% interest as October 20, 1920, before the mortgage was executed. The correct interest rate should be 9% from September 5, 1921, and 12% from December 20, 1922. 2. Yes. The Court affirmed the validity of the mortgage, determining that it had adequate consideration stemming from the main loan agreement between the plaintiff and Lichauco & Co., Inc., even though the mortgage was securing a debt of a third party. Since a mortgage is an accessory contract, its consideration is directly tied to the principal contract and it relies on this consideration to exist and cannot stand alone, even if it secures someone else's obligation. Dispositive For the foregoing, it being understood that the defendants must pay interest at 9 per Portion: cent from September 5, 1921, and 12 percent from December 20, 1922, the judgment appealed from is affirmed in all other respects, without special pronouncement as to costs. So ordered. 7 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL 3. Romago, Inc. and Francisco Gonzalez v. Associated Bank (now United Overseas Bank Phils.) and Metallor Trading Corporation, GR Mo. 223450, February 22, 2023 Made by: RAMIREZ, ARMELLA MARI R. Case Citation Romago, Inc. and Francisco Gonzalez v. Associated Bank (now United Overseas Bank Phils.) and Metallor Trading Corporation, GR Mo. 223450, February 22, 2023 Petitioner: Romago, Inc. and Francisco Gonzalez Respondent: Associated Bank (now United Overseas Bank Phils.) and Metallor Trading Corporation Syllabus Topic: Unconscionability Standard of Interest Rates Doctrine: Interest rates must be appreciated in light of the fundamental nature of interest as compensation to the creditor for money lent to another, which he or she could otherwise have used for his or her own purposes at the time it was lent. Interest need only be reasonable. It ought not be a supine mechanism for the creditor's unjust enrichment at the expense of another. The maximum interest rate that will not cross the line of conscionability is 'not more than twice the prevailing legal rate of interest.' If the stipulated interest rate exceeds the standard, the creditor must show that the rate is necessary under current market conditions and that the parties were on an equal footing when they stipulated the interest rate. When the stipulated interest rate is found unconscionable, only the unconscionable rate is nullified and deemed not written into the contract. The legal interest rate prevailing at the time the agreement was entered into is applied by the courts. Case Summary: Herein respondent filed a complaint for Sum of Money against the petitioner for loan obligations. The petitioner took out three (3) loans all were backed by Promissory Notes from the respondent bank. One of said promissory notes was not fully paid and was restructured into two promissory notes. These promissory notes have a stipulated conventional interest at the rate of 24% per annum, payable monthly and a stipulated compensatory interest rate of 1% per month in the form of liquidated damages from due date until fully paid. Petitioner has not made any further payments after it paid sometime in October 1983. Petitioner argued that Metallor assumed its outstanding loan evidenced by its letters, partial payment made which was accepted by the bank, and that the said bank's acceptance implies the consent to a change in debtor. The issues are about the novation of contracts and the conscionability of stipulated interest rates. As to the first issue, the Court upheld that Romago remained obligated as no explicit or unambiguous creditor consent to substitute Metallor as debtor was evidenced. Partial payments by Metallor and its proposals did not equate to the Bank’s unequivocal agreement to release Romago. On to the second issue, which discussed the topic's in the syllabus is the "unconscionability" standard of interest rates. The Court ruled that the stipulated interest rates were unconscionable and should be invalidated. The maximum interest rate that will not cross the line of conscionability is 'not more than twice the prevailing legal rate of interest.' In the case at hand, the stipulated rate effectively exceeds the general standard of "twice the prevailing legal rate," and that the records also show that if left to operate as stipulated, petitioners' liability for interest alone would become exponentially higher than the principal amounts that they originally promised to pay. 8 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL The Facts of the This case involves a petition for review on certiorari, assailing the Decision and Case: Resolution of the Court of Appeals which affirmed the Regional Trial Court's ruling that petitioner Romago, Inc. was liable to pay respondent Associated Bank (now United Overseas Bank Phils.). The case originated from a complaint for Sum of Money filed by Associated Bank against the petitioner for loan obligations it contracted. Romago took out three (3) loans all were backed by Promissory Notes, one of which was not fully paid. The bank restructured the unpaid loan into two promissory notes which Romago made no further payments after the payment was made sometime in October 1983. More so, the restructured notes impose a stipulated conventional interest at the rate of 24% per annum, payable monthly and a stipulated compensatory interest rate of 1% per month in the form of liquidated damages from due date until fully paid." The promissory notes also provide for the monthly compounding of all accruing interest. Petitioner Romago alleged that the restructured promissory notes was a "conduit loan" for respondent Metallor Trading Corporation, evidenced by letters from the latter containing its intent in assuming the outstanding loan, and denied making any payments on restructured notes. Metallor contended that Romago had no cause of action as a third-party complainant and its alleged liability on the loan had already been prescribed. Respondent bank, on the other hand, argued that: (1) Romago cannot offload its liability to Metallor since the latter was not even privy to the contract between Romago and the Bank; (2) letters cited by Romago were insufficient to establish Metallor's sole liability under the promissory notes; and (3) novation did not take place as the bank did not express unequivocal consent nor its acts amounted to "clear and unmistakable consent," in changing the debtor. RTC Ruling: The Regional Trial Court ruled in favor of the Bank, holding that Romago remained obligated to pay, since there was no indication that Metallor expressly bound itself together with Romago, or that it assumed Romago's entire obligation under the promissory notes. According to the trial court, "novation cannot be inferred unless it is so declared in unequivocal terms, or that the old and the new obligations are incompatible on every point with each other." The Bank's acceptance of Metallor's partial payments did not release Romago from its obligation under the promissory notes. Moreover, it also awarded the Bank attorney's fees equal to 20% of the total outstanding obligation, as agreed between Romago and the Bank under the promissory notes. CA Ruling: The Court of Appeals affirmed the RTC's Decision finding Romago liable to pay the loan covered by the restructured notes. It held that while Metallor "had knowledge of Romago's outstanding loan and offered to pay the latter's indebtedness," this did not amount to Metallor being solely liable for the loan obligation taken out by Metallor. The Bank did not express unequivocal consent to Metallor's propositions even after accepting the partial payment on the restructured notes because a creditor's acceptance of payment from a third person does not imply acceptance of a change in debtor. The restructuring of the loan did not clear Romago of liability either. According to the Court of Appeals,"novation is never presumed, and without such release, there is no novation. The court upheld the award of 20% of the outstanding obligation, consistent with the stipulations in the promissory note. 9 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL Petitioner’s The Bank's acceptance of Metallor's partial payments implied the creditor's Contention: consent to a change in debtor. Metallor, as the true beneficiary of the loan, should be the one liable for the costs of the suit. The Bank's failure to object amounted to "clear and unmistakable expression of consent to the substitution of the debtor." The lower courts failed to consider "the totality of the facts and circumstances" which indicated respondent Bank's acquiescence to its substitution as debtor. Its payment of the obligation covered by the restructured notes would amount to unjust enrichment on respondent Metallor's behalf. Issue: Whether petitioner Romago is liable under the loan obligation, which requires a finding on whether novation took place. Whether the stipulated interest rates of restructured loan is conscionable. Supreme Court Yes. The Court upheld Romago's liability for the loan and the award of Ruling: attorney's fees. The Court upheld that partial payments by Metallor and its proposals did not equate to the Bank’s unequivocal agreement to release Romago. While petitioners attempted to prove a substitution in debtors, the creditor's acceptance of such a substitution cannot be implied from the creditor's silence or inaction. Petitioners also failed to prove that the partial payments made on the promissory notes came from respondent Metallor. While respondent Bank admitted to receiving partial payments on the promissory notes, petitioners' insistence that respondent Metallor made these payments were not sufficiently established by their evidence. Likewise, payment by a third person does not necessarily result in the third person's substitution of the original debtor. No. The Court invalidated the stipulated interest rates as unconscionable. The Court had explained that the two kinds of interest rates are conventional and compensatory. The former is a "rigorously lucrative,a and the result of the express will of the parties in a contract," while the latter is the indemnity for damages arising from delay on the part of the debtor in an obligation consisting in the payment of a sum of money: both are subject to the "unconscionability" standard. In determining whether the rate of interest is unconscionable, the parties' contexts must be considered. Interest rates must be appreciated in light of the fundamental nature of interest as compensation to the creditor for money lent to another, which he or she could otherwise have used for his or her own purposes at the time it was lent. Interest need only be reasonable. It ought not be a supine mechanism for the creditor's unjust enrichment at the expense of another. The guiding parameter is that in cases where stipulated interest is more than twice the prevailing legal rate of interest, it is for the creditor to prove that this rate is required by prevailing market conditions and that the parties were on an equal footing when they stipulated the interest rate. In the case at hand, the stipulated monetary interest rate of 24% per annum and the penalty interest rate of 1% per month, taken together with the 10 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL stipulation for the monthly compounding of all interest, are unconscionable and should be invalidated. Not only does the stipulated rate effectively exceed the general standard of "twice the prevailing legal rate," but the records also show that if left to operate as stipulated, petitioners' liability for interest alone would become exponentially higher than the principal amounts that they originally promised to pay. The Court also considered the predatory nature of the stipulated rates, as the lender would earn a return nearly equaling the amount of the principal in a short span of time. Hence, it was held that the stipulated interest rates were unconscionable and should be invalidated. Dispositive ACCORDINGLY, the Petition for Review on Certiorari is DENIED, there being no Portion: reversible error on the part of the Court of Appeals. The Court of Appeals' October 26, 2015 Decision and its February 29, 2016 Resolution affirming the Regional Trial Court's Decision dated October 20, 2006, are AFFIRMED with MODIFICATION. The parties' stipulated conventional interest rate of 24% per annum, and their stipulated compensatory interest rate of 1% per month as liquidated damages, as contained in Promissory Notes Nos. 9660 and 9661, are DELETED for being unconscionable. Petitioner Romago, Incorporated is hereby ORDERED to pay the following amounts to respondent Associated Bank, now United Overseas Bank: (a) SIX HUNDRED THIRTY-FIVE THOUSAND THREE HUNDRED FORTY-SEVEN PESOS and 83/100 (PHP 635,347.83) as the remaining balance of the amount due under Promissory Note No. 9660, plus interest thereon at the rate of 12% per annum from August 30, 1983 until June 30, 2013. From July 1, 2013 until full payment, the outstanding obligation on Promissory Note No. 9660 shall earn interest at the rate of 6% per annum, until fully paid; (b) FIVE HUNDRED TWENTY-FIVE THOUSAND NINE HUNDRED THIRTY NINE and 91/100 (PHP 525,939.91) as the remaining balance of the amount due under Promissory Note No. 9661, plus interest thereon at the rate of 12% per annum from August 30, 1983 until June 30, 2013. From July 1, 2013 until full payment, the outstanding obligation on Promissory Note No. 9661 shall earn interest at the rate of 6% per annum, until fully paid; (c) Legal interest at the rate of 12% per annum applied to any unpaid interest from the time of respondent Associated Bank's judicial demand until June 30, 2013. From July 1, 2013 until full payment, any unpaid interest shall earn legal interest at the rate of 6% per annum; and (d) The sum equivalent to 20% of the total outstanding obligation as attorney's fees and costs of the suit. SO ORDERED. 11 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL 4. Pabalan vs. Sabnani Made by: TAPANG, MARY NIÑA GERARD V. Case Citation Estrella Pabalan vs. Vasudave Sabnani, G.R. No. 211363 (February 21, 2023) Petitioner: Estrella Pabalani Respondent: Vasudave Sabnani Syllabus Topic: Additional Case: “On what constitutes a valid interest rate, the leading jurisprudence on the issue now.” Doctrine: Central Bank Circular No. 905 s. 1982 which suspended the Usury Law has granted contracting parties wide latitude to stipulate interest rates. However, the freedom to contract is still not absolute. Article 1306 of the New Civil Code governing the right to contract provides that agreements cannot be contrary to law, morals, good customs, public order, or public policy. The determination of whether or not interest rates are unconscionable or illegal depends on the circumstances of each case. It was explained in Vitug v. Abuda that stipulated interest rates are not inherently conscionable or unconscionable. These interest rates may be deemed unconscionable only "in light of the context in which they were imposed or applied." Prisma Construction & Development Corporation v. Menchavez that stipulated interest rates and charges shall be reduced only if these terms are open-ended and applied for an indefinite period. Lara's Gifts and Decors, Inc. v. Midtown Industrial Sales, Inc. wherein it established the new and prevailing guidelines on conventional and compensatory interest rates. It was recognized in that the standard used in determining the conscionability of a conventional interest rate is twice the legal rate of interest. If the stipulated interest rate is higher than this standard, the creditor has the burden to prove that this was necessary under market conditions, or show that the parties stood on equal footing when they agreed on it. It was pertinently pronounced: Conformable to the foregoing pronouncements, "[t]he maximum interest rate that will not cross the line of conscionability is 'not more than twice the prevailing legal rate of interest.' If the stipulated interest exceeds this standard, the creditor must show that the rate is necessary under current market conditions." The creditor must also show that the parties were on an equal footing when they stipulated on the interest rate. Case Summary: Respondent obtained a short term loan from the petitioner. As securities for the loan, respondent executed two (2) promissory notes and a Deed of Real Estate Mortgage. Respondent failed to pay the 12 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL installment rendering the obligation immediately due and demandable. Still, the respondent failed to pay. This resulted in the petitioner proceeding with the foreclosure of the mortgaged property. Foreclosure sale proceeded as scheduled despite the respondent’s efforts to annul the same. Respondent then filed an amended complaint still seeking the annulment of the promissory notes, deed of real estate mortgage and foreclosure sale. The Regional Trial Court ruled in favor of the petitioner herein. Respondent then appealed to the Court of Appeals affirmed the RTC ruling but with modification. The Court of Appeals modified the interest rates. Hence, this petition for review before the Supreme Court. The Facts of the On April 30, 1999, Vasudave Sabnani (Sabnani), a British national, obtained a Case: short-term loan from Estrella Pabalan (Pabalan) in the total amount of ₱7,450,000.00. As securities for the loan, he executed two promissory notes (PNs) and a Deed of Real Estate Mortgage (REM) over his condominium unit at the Skyland Plaza Condominium, Makati City. 1st PN – indicated a principal loan amount of ₱1,450,000.00 with an interest rate of 8% per month. This was payable with a period of three (3) months. With ₱116,000.00 representing interest payable due each month (April 30, 1999; May 31, 1999; and June 30, 1999) and with ₱1,450,000.00 representing principal payable on July 30, 1999. 2nd PN – indicated a principal loan amount of ₱6,000,000.00 with an interest rate of 5% per month. This was also payable in three (3) months. With ₱300,000.00 representing interest payable due each month (April 30, 1999; May 31, 1999; and June 30, 1999) and with ₱6,000,000.00 representing principal payable on July 30, 1999. Both PNs had common provisions on the consequences of default: 1. If the stipulated interest was not paid when due, Sabnani would be required to pay a higher interest rate of 20% per month on the outstanding principal loan. 2. If the case is referred to an attorney for collection of legal action, Sabnani agreed to pay Pabalan: 2.1. Additional Interest Penalty equivalent to 20% of the total unpaid principal, accrued interest, and penalty; 2.2. Liquidated Damages equivalent to 50% of the total unpaid principal, accrued interest, and penalty; and 2.3. Attorney’s Fees equivalent to 25% of the total unpaid principal, accrued interest, and penalty; and 2.4. Other costs and expenses of litigation. The REM reiterated the payment terms in the PNs and provided Pabalan with the right to foreclose the property in case of default. It also contained an acceleration clause that should there be failure to pay any amounts due under the PNs would render the obligation immediately due and demandable. Sabnani failed to pay the installment due on May 31, 1999 which resulted in Pabalan sending him a Demand Letter asking him to pay the total amount of ₱8,940,000.00 by June 21, 1999. 13 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL ₱8,940,000.00 consisted: 1. Principal amount of ₱7,450,000.00; and 2. Interest and penalty charges of ₱1,490,000.00. Still, Sabnani did not pay despite demand which resulted in Pabalan filing for extrajudicial foreclosure of the mortgaged property with the RTC of Makati City. To prevent the foreclosure sale, Sabnani filed a Complaint for Annulment of REM, PNs and Notice of Sheriffs Sale with prayer for the issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction (WPI) and damages. Answering this, Pabalan asserted that her right to foreclose was supported by the Deed of REM. In the hearing for the application of Sabnani’s TRO and WPI, RTC denied the same on the ground that there was insufficient basis to prevent the foreclosure sale. Foreclosure sale proceeded as scheduled and Pabalan won as the sole and highest bidder amounting to ₱17,400,000.00. The bid price exceeded the amount indicated in the Notice of Sheriffs Sale because Pabalan used as basis an updated Statement of Account which reflected the additional interests, penalties, liquidated damages and attorney’s fees that accrued pursuant to the PNs. Sabnani then filed an Amended Complaint still seeking to annul the foreclosure sale, demand the payment of damages, and obtain a WPI. He added that Pabalan made unauthorized deductions from the loan which would prevent him from being in default and make the foreclosure action premature. Although the principal loan was P7,450,000.00, Pabalan allegedly released to him only P6,447,700.00 after unilaterally deducting advance interest, service fees, real property tax clearance, tax declaration, BIR fees, and Registry of Deed fees amounting to ₱1,002,300.00. Sabnani claimed that not all of these deductions were agreed upon by them and authorized under the PNs. He admitted that the advance interest pertained to the period – from April 30 to May 30, 1999. However, the service fees had no contractual basis and should instead be applied as payment for the interest for the period – from May 31 to June 30, 1999, and as partial payment for the interest due from June 30 to July 30, 1999. He further alleged that the REM and PNs he executed in favor of Pabalan should be annulled for lack of consideration. Lastly, he argued that the rates of interest, penalty charges, and other fees imposed in the REM and PNs were "illegal, excessive, exorbitant, and unconscionable" and should be voided. RTC Ruling: Ruled in favor of Pabalan in upholding the validity of the REM, PNs, and foreclosure sale. Instant complaint of Sabnani is dismissed for lack of merit. Pabalan’s counterclaim was also dismissed. RTC held the following: 14 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL Insufficient basis to nullify Sabnani’s rem and PNs and the terms of the agreements reduced into writing must necessarily be given effect. Contention regarding the service fees deducted were negated by his own signature on the receipt acknowledging such. Interest rates and penalty charges imposed were not illegal, excessive and exorbitant as the usury law was no longer in force and that the parties can freely impose the interest rates as they may agree upon. CA Ruling: Affirmed with modification. CA held the following: · Upheld the validity of the PNs and Deed of REM but with modification insofar as: the interest rate and penalty is reduced to 1% per month or 12% per annum; liquidated damages and attorney’s fees is reduced to 10% of the amount due. · Upheld the validity of extrajudicial foreclosure sale of the REM. · Pabalan is likewise ordered to pay Sabnani the excess of the bid price with legal interest from August 3, 1999 until it is paid. Hence, the instant petition. Petitioner’s Contention: Pabalan argues: 1. That Sabnani is estopped from claiming that the interest rate imposed is unconscionable when he voluntarily agreed to it, especially since he was a businessman himself. 2. That Sabnani came to court with unclean hands. Initially, he deliberately refused to honor his obligation. Secondly, admitted the loan from Pabalan to re-lend the P6,000,000.00 to Claparols. 3. That the stipulated contractual interest rate was not unconscionable since it was only for a short-term period. 4. That there was unjust enrichment at Pabalan’s expense when the CA ordered payment for excess bid with a 12% per annum interest. Respondent’s That the Court has the power to reduce unconscionable interest rates when Contention warranted and that there was no proof that he re-lent the money. Issue: Whether the CA erred: 1. In reducing the stipulated rates of interest, penalty charges, liquidated damages, and attorney’s fees; and 2. In ordering Pabalan to return the surplus of her winning bid price to Sabnani. 15 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL Supreme Court Ruling: 1. Yes. The determination of whether or not interest rates are unconscionable or illegal depends on the circumstances of each case. It was explained in Vitug that stipulated interest rates are not inherently conscionable or unconscionable. These interest rates may be deemed unconscionable only "in light of the context in which they were imposed or applied." The Court in Vitug elucidated that parties' freedom to stipulate is granted under the assumption that there is a competitive market for loans where the parties are on equal footing. It is only when there are imperfections in the loan market resulting in the parties' unequal bargaining positions that the court can step in to ensure that the agreement is not iniquitous or unconscionable. Hence, although the Court has, in some cases, reduced stipulated interest rates, there have also been instances when no intervention was made in view of the peculiar factual circumstances. For instance, the Court in Development Bank of the Philippines v. Family Foods Manufacturing Co., Ltd. upheld the stipulated interest rates of twenty-two percent (22%) and eighteen percent (18%), and additional penalty charge of eight percent (8%) per annum. It appreciated the fact that these rates were voluntarily agreed upon by the parties, and that neither of them was defrauded or positioned at a disadvantage to warrant protection. Similarly, the interest rate of six to seven percent (6-7%) per month, or seventy-two to eighty-four percent (72- 84%) per annum, imposed in Toledo v. Hyden was held not to be excessive under the circumstances. It was observed that unlike in other cases when intervention was necessary, the debtor in this case was not compelled to enter into the loan transaction and actually had good business reasons to voluntarily agree on the stipulated interest rates. As proven, the debtor was found to be making a business on the amount loaned. She thus could no longer deny the validity of the terms of the loan after enjoying its benefits: In this case, there was no urgency of the need for money on the part of Jocelyn, the debtor, which compelled her to enter into said loan transactions. She used the money from the loans to make advance payments for prospective clients of educational plans offered by her employer. In this way, her sales production would increase, thereby entitling her to 50 % rebate on her sales. This is the reason why she did not mind the 6% to 7% monthly interest. It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same carried with it an interest rate of 6% to 7% per month, yet she did not complain. As aptly found by the RTC and the CA, Jocelyn was making a business out of the loaned amounts. She was actually using the money to make advance payments for her prospective clients so that her sales production would increase. Clearly, by her own acts, Jocelyn is estopped from impugning the validity of the "Acknowledgement of Debt." "[A] party to a contract cannot deny the validity thereof after enjoying its benefits without outrage to one's sense of justice and fairness." 16 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL Lara's Gifts and Decors, Inc. v. Midtown Industrial Sales, Inc. wherein it established the new and prevailing guidelines on conventional and compensatory interest rates. It was recognized in that the standard used in determining the conscionability of a conventional interest rate is twice the legal rate of interest. If the stipulated interest rate is higher than this standard, the creditor has the burden to prove that this was necessary under market conditions, or show that the parties stood on equal footing when they agreed on it. It was pertinently pronounced: Conformable to the foregoing pronouncements, "[t]he maximum interest rate that will not cross the line of conscionability is 'not more than twice the prevailing legal rate of interest.' If the stipulated interest exceeds this standard, the creditor must show that the rate is necessary under current market conditions." The creditor must also show that the parties were on an equal footing when they stipulated on the interest rate. Applying the foregoing, we hold that the parties’ stipulated rates of interest, penalty charges, liquidated damages, and attorney’s fees were not iniquitous, unconscionable, or illegal. CA erred in modifying the RTC decision and decreasing these rates. Firstly, it is clear from both parties’ personal circumstances that neither of them was positioned at a disadvantage and required protection from the court. They were both competent and fully capable of understanding all the terms and conditions under REM and PNS. Pabalan is a businesswoman based in Manila while Sabnani was a British businessman who frequented the Philippines to look for investment opportunities. He also owned a prime condominium unit in Makati worth over ₱16M. Being an experienced businessman, Sabnani’s claim that he was not fully aware of the terms of the REM and PNs are highly doubtful. Secondly, factual context and background of the parties transaction showed that neither Sabnani nor Pabalan was compelled to enter into it. No proof was provided that Sabnani was under external pressure to obtain the loan from Pabalan in order to execute a REM and PNs in her favor. In fact, it was actually him and Claparols who first approached Pabalan asking for the loan. No one forced him to do so. Thirdly, Sabnani voluntarily agreed to the terms of the loan since he had legitimate business reasons and benefited from it. In reality, he made business on the amount loaned. The loan was part of a bigger series of transactions which he considered in total beneficial for him to expand his business. He repeatedly alleged that he obtained the loan to accommodate Claparols who would then utilize the proceeds to invest in one of his projects. He did Claparols a favor by agreeing to the loan and mortgage so that he could get the investment money sooner while waiting for the latter's money to be released from New York. Fourthly, Sabnani’s contemporaneous actions during the execution of the loan proved that he had full knowledge of all its terms and conditions when 17 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL he gave his consent to be bound. He was an experienced businessman who took deliberate measures to address his liability exposure after he knew and undertook the consequences of the rates of interest and penalties imposed. He agreed to the loan because he had already determined the risks and believed that he had sufficient measures to shield him from liability evinced in the BPI checks he demanded Claparols to issue in his favor amounting to ₱8,282,000.00 and ₱21,718,000.00. Fifthly, Sabnani benefited from the loan and can no longer be permitted to assail its validity. It is a general principle that a party who has validly executed a contract and availed of its benefits cannot escape their contractual obligations by seeking to invalidate it. Finally, it is significant that the loan in this case was only a short-term undertaking as it was only intended to be an accommodation for Claparols while the latter waited for the release of his money from New York. The nature of the loan in this case being a short term and not open-ended or applied for an indefinite period of time should have been considered in evaluating the validity and conscionability of the stipulated interest and penalty rates. Absent any compelling reasons in the interest of equity or justice, this Court will not interfere with the parties’ freedom to contract. Sabnani is bound by all terms and conditions of the loan, REM, and PNs. 2. Yes. Considering that the stipulated rates were legal, Pabalan’s winning bid at the foreclosure sale was proper. Dispositive WHEREFORE, the instant Petition for Review on Certiorari is GRANTED. The Portion: Decision dated November 28, 2012 and the Resolution dated February 12, 2014 of the Court of Appeals in CA-G.R. CV No. 91169 are REVERSED and SET ASIDE. The ruling of the Court of Appeals decreasing the interest and penalty rates, and other damages stipulated between the parties, as well as its order for petitioner Estrella Pabalan to pay Vasudave Sabnani the excess of the bid price, with legal interest, and costs of the sale, are DELETED. The Decision dated March 28, 2005 of the Regional Trial Court of Makati City, Branch 59, in Civil Case No. 99-1361, is REINSTATED. SO ORDERED. 18 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL 5. Batalla v. Prudential Bank, 898 SCRA 193 Made by: BELOSTRINO, JOANNE CAMILLE R. Case Citation: Batalla v. Prudential Bank, 898 SCRA 183 Petitioner: Spouses Luis G. Batalla and Salvacion Batalla, Respondent: Prudential Bank, Nagatome Auto Parts, Alicia Rantael and Honda Cars San Pablo, Inc. Syllabus Topic: Article 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. Doctrine: Simple Loan Case Summary: Petitioner purchased a Honda Civic from respondent Honda. To finance the purchase, they applied for a car loan with Prudential. Spouses Batalla received the car but the car door broke down. They sent a letter to Prudential informing them of the defect and asked for replacement saying that the car was not brand new. However, they were only offered by Honda to repair the car. They filed for a Complaint of Rescission of Contracts before the RTC but it was denied, and the CA affirmed. The petitioners are contending that there was no valid object for the contract of sale, car loan agreement, as well as the promissory note because the object of the same was a brand new vehicle. The Facts of the In March 1998, petitioner Spouses Luis and Salvacion Batalla purchased a brand Case: new Honda Civic from respondent Honda. Respondent Rantael, (acting manager of Pilipinas bank), merged with respondent Prudential Bank, brokered the deal. To finance the purchase of the said motor vehicle, Spouses Batalla applied for a car loan with Prudential. On March 23, 1998, they executed a promissory note for the sum of ₱292,200.00 payable within 36 months. The Car Loan Agreement was approved and Prudential issued a Manager's Check in the said amount payable to Honda. Spouses Batalla paid ₱214,000.00 corresponding to the remaining portion of the purchase price for the Honda Civic and additional costs of ₱11,000.000.00 and ₱28,333.56 for delivery costs and installation of a remote control door mechanism, and insurance, respectively. On April 21, 1998, Spouses Batalla received the car after Rantael informed them that it was parked near Prudential. However, after three days, the rear right door of the car broke down. The Spouses Batalla consulted a certain Jojo Sanchez (Sanchez), who claimed that the power lock of the rear right door was defective and that the car was no longer brand new because the paint of the roof was merely retouched. Spouses Batalla sent a letter to the manager of Prudential notifying it of the defects and demanded for the immediate replacement of the motor vehicle. They 19 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL likewise took the car to the Auto Body Shop and it was confirmed that the car was no longer brand new. The manager of Prudential, together with two individuals from Honda, met Spouses Batalla and offered to repair the vehicle. Spouses Batalla rejected it because they wanted the car to be replaced with a brand new one without hidden defects. Unable to secure a brand new car in replacement of the alleged defective vehicle, Spouses Batalla filed a Complaint for Rescission of Contracts and Damages against Prudential and Honda. RTC Ruling: Dismissed the petition of the Spouses as they failed to prove that the defects in the car door were due to the fault of Honda and that it was only repainted to make it appear brand new. Spouses Batalla must pay the loan amount to Prudential as they admitted that they have not paid the same. CA Ruling Affirmed with modification RTC's decision. The appellate court ruled that Spouses Batalla cannot rescind the promissory note and car loan agreement on account of the car's alleged defects because they are distinct from the contract of sale entered into with Honda. Honda proved that the motor vehicle was brand new with no signs of alteration and tampering. Petitioner’s Argued that the car loan it obtained from Prudential was for the purchase of a Contention: brand new motor vehicle. Spouses Batalla assailed that because of the breach of the implied warranty against hidden defects, they were entitled to rescind the contract of sale, together with the car loan and the promissory note. Spouses Batalla surmised that the object of these documents was the delivery of a brand new car without hidden defects, and because of the alleged defects of the vehicle, there was no valid object for the contract. Issue: 1. Whether the motor vehicle delivered by honda had hidden defects; and 2. Whether spouses batalla may rescind the Contract of Sale, Car Loan Agreement and Promissory Note due to the defects of the motor vehicle sold. Supreme Court 1. No. The courts a quo have consistently found that the motor vehicle delivered Ruling: to Spouses Batalla was brand new. In addition, they ruled that if there were defects, it could not be attributed to Honda, as they were minor defects that could have been easily repaired. Spouses Batalla anchored their complaint for rescission of contract against Prudential and Honda on the allegation that the car delivered to them was not brand new and that it contained hidden defects. The witness they presented does not have special knowledge with regards to car painting and its examination of the car was merely visual examination. 20 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL Their basis, Article 1561 of the Civil Code which provides for an implied warranty implied warranty against hidden defects in that the vendor shall be responsible for any hidden defects which render the thing sold unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price, is not applicable because the defect is not important or serious, and that the defect did not exist at the time of the sale. 2. No. Contract of loan is distinct and separate from a contract of sale. In a loan, the object certain is the money or consumable thing borrowed by the obligor, while in a sale the object is a determinate thing to be sold to the vendee for a consideration. In addition, a loan agreement is perfected only upon the delivery of the object i.e., money or another consumable thing, while a contract of sale is perfected by mere consent of the parties. A contract of loan is one where one of the parties delivers money or other consumable thing upon the condition that the same amount of the same kind and quality shall be paid. It is perfected upon delivery of the object of the contract. On the other hand, a contract of sale is a special contract whereby the seller obligates himself to deliver a determinate thing and to transfer its ownership to the buyer. The same is perfected by mere consent of the parties. The transactions of Spouses Batalla with Prudential and Honda are distinct and separate from each other. From the time Spouses Batalla accepted the loan proceeds from Prudential, the loan agreement had been perfected. As such, they were bound to comply with their obligations under the loan agreement regardless of the outcome of the contract of sale with Honda. Even assuming that the car that Spouses Batalla received was not brand new or had hidden defects, they could not renege on their obligation of paying Prudential the loan amount. Dispositive Portion: WHEREFORE, the petition is DENIED. The October 10, 2011 Decision and February 1, 2012 Resolution of the Court of Appeals in CA-G.R. CV No. 92097 are AFFIRMED. 21 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL 6. Vasquez v. PNB, 916 SCRA 194 Made by: GARBO, RENA Case Citation: Vasquez vs. PNB, 916 SCRA 194 Petitioner: Engr. Ricardo Vasquez Respondent: PNB and Notary Public Jose Latorre Jr. Syllabus Topic: Chapter 2 : Simple Loan or Mutuum Doctrine: Article 1956. No interest shall be due unless it has been expressly stipulated in writing. Case Summary: Vasquez entered into 2 loans with PNB which was secured by a Real Eastate Mortgage on 4 parcels of land. Vasquez defaulted on their loans because PNB imposed interest rates that were only up to their discretion. Now, Vasquez is alleging that the rates were purely potestative, hence, null and void. The Facts of the In Nov 1996, Vasquez was granted a loan by PNB for Php 600,000.00 Case: under the Pangkabuhayan ng Bayan Program evidenced by a promissory note Later on, Vasquez obtained another loan under the Revolving Credit Line (RCL) for Php 800,000.00, again, evidence by a promissory note The 2 loans were secured by 4 parcels of land located in Trece Martirez, Cavite by way of Real Estate Mortgage (REM) In June 1999, Vasquez filed a Complaint against PNB and the Notary Public who was assigned as the public auction sale officer before the RTC of Imus, Cavite. It prayed for annulment of foreclosure proceedings and payment of damages. Vasquez alleged that in their agreement, the rate of interest for the loan agreement is only 17% (and up to 18% for 3 years). He was able to make payments of up to Php 221,991.36 but suspended any further payments because PNB unilaterally escalated the interest rate from 17% to 33% to 24% to 34% to 29% to 21.7% and lastly 20.186% without prior knowledge or consent of the borrower (Vasquez) As evidence, Vasquez presented a Statement of Account depicting the overcharging and excessive interest imposed including imposition of 23% penalties that the REM did not provide The interest ballooned to a total of Php 2,071,189.64 (as of 1998) and Php 2,363,315.4 (per notice of Auction Sale). This led Vasquez to send letter-requests for recomputation of his account and to delete the excess interest that they did not agree to in the first place. He pleaded that due to the unilateral escalation, he could no longer settle his obligations. 22 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL InPNB’s Answer, they averred that Vasquez has no cause of action because the purported increases in the interest rate were freely, voluntarily and mutually agreed upon by the parties. This also applies to the penalty charges they imposed. RTC elucidated the following facts : ○ (1) the subject properties of the REM have already been foreclosed and Vasquez failed to intervene in the proceedings, and, ○ (2) Vasquez also failed to secure a writ of prelim injunction as he filed only 3 days AFTER the foreclosure proceedings During cross-examination, Vasquez agreed that he willingly signed the loan agreement, however, he insisted that no notice was given by PNB before it actually increased the interest rate. He even tried to tender his payment but the same was declined by the bank RTC Ruling: In the end, the RTC dismissed Vasquez’ complaint stating that the Credit Agreement and the Promissory Notes were executed by the parties willfully and voluntarily CA Ruling CA modified the RTC’s Decision and held that the unilateral imposition of increased interest rates is violative of the principle of mutuality of contracts and declared the same void. The CA then imposed the applicable legal rate of 12% per annum. The penalty interest of 36% was also declared unconscionable and was reduced to 12% per annum. Petitioner’s The CA was correct in holding that the interest rates were void, Contention: however, argues that the imposed 12% per annum should be 6% per annum instead based on applicable jurisprudence He also alleged that he had already made partial payments on the subject loan obligations of Php 983,343.38 CA erred in not ordering the nullity of the foreclosure on the subject properties Issue: Whether the interest rate scheme imposed by PNB under the Credit Agreement and other loan documents is valid and if it were not, what are the implications of such holding on the foreclosure of the mortgaged properties and the principal loan obligation of Vasquez Supreme Court The escalation of interest rates in the instant case is solely potestative on Ruling: the part of the creditor and not anchored on valid and reasonable standards. In effect, the foreclosure proceedings are also invalid. However, the Court still declared that “only the interest rate imposed is nullified; hence, it is deemed not written in the contract. The agreement on payment of interest on the principal loan obligation remains.” The Court shall apply the applicable legal rate of interest, which refers to the “prevailing rate at the time when the agreement was entered into.” This is 6% per annum. 23 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL After close examination of the evidence, the ACTUAL interest rate to be imposed in the Pangkabuhayan Loan was not fixed but rather “Prime Rate plus Spread interest rate” The loan documents on record did not elaborate as to how the “Prime Rate plus Spread” is determined. There is no reference rate on which it is based. Whereas the specific interest rate on the RCL obligation was left blank In both loans, it stated that the principal obligations shall be paid together with the interest “applicable”. In the case of Sps. Silos v. PNB, PNB also implemented an identical interest scheme where the interest was based on the “prime rate plus applicable spread in effect” which was determined to be based on a “one-sided, indeterminate, and subjective criteria such as profitability, cost of money, bank costs, that is arbitrary for there is no fixed standard or margin above or below these considerations. In the case, the Court held that it was valid because it cannot be said to be dependent solely on the will of the bank as it is also dependent on the prevailing market rates. The fluctuation in the market rates is beyond the control of the banks. However, when banks impose “prevailing lending rates”, such imposition is considered one-sided, arbitrary and ptestative as the bank is still the one who determines its own prevailing lending rate. Even assuming that the parties indeed came into an agreement in both the loans, the Court finds that the monetary interest rates may still not be considered as fixed. The rates were still subject to the unilateral modification by PNB The loans’ General Conditions included “the Bank reserves the right to increase or decrease the interest rate should the Bank’s cost of money to fund or maintain such Loans/Availmanets/Advances/Trust Receipt/s while outstanding increase or decrease, respectively.” Even the REM stated that the interest to be charged on the obligation secured by such mortgage will be prescribed by the Board of Directors of the MORTGAGEE (PNB) The SC finds that PNB clearly failed to sufficiently explain exactly how they arrived at such increased rates. Hence, it is clear that PNB decided on its own. FLOATING INTEREST RATE SYSTEM —> an interest scheme which does not specifically indicate a particular interest rate OR the variable interest rates stated on a market-based reference rate agreed upon by the parties (this can still be validly imposed). The BSP requires that the interest cannot be solely dependent on the will of one party. The reference rate must be stated in writing, and must be agreed upon by the parties. Even PNB admits that the interest rates are made dependent on “whatever policy it may adopt in the future” 24 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL EFFECT : No foreclosure proceedings may be instituted. The registration of such foreclosure sale has been held to be invalid and cannot vest title over the mortgaged property. Dispositive Portion: WHEREFORE, in view of the foregoing, the Petition in G.R. No. 228355 is PARTIALLY GRANTED, while the Petition in G.R. No. 228397 is DENIED. The Decision dated April 29, 2016 and Resolution dated November 8, 2016 of the Court of Appeals in CA-G.R. CV No. 102669 is REVERSED and SET ASIDE. Petitioner Vasquez is ORDERED TO PAY respondent PNB the outstanding principal loan obligation of P1,375,733.32. Monetary or conventional interest on the aforesaid principal obligation shall be imposed at the rate of 12% per annum computed from the date of availment of the subject loans as borne by the loan documents, i.e., November 8, 1996, up to June 30, 2013, and at the rate of 6% per annum from July 1, 2013 until full payment. The foreclosure sale of the subject properties is hereby declared NULL AND VOID. Ownership and possession over the subject properties are REVERTED to petitioner Ricardo O. Vasquez. The certificates of title covering the subject properties issued and registered as a consequence of the foreclosure sale are hereby ordered CANCELLED. Transfer Certificates of Title Nos. 295114, 295115, 322380 and 322381 are hereby ordered RECONSTITUTED in the name of petitioner Ricardo O. Vasquez. Let a copy of this Decision be furnished to the Register of Deeds of Trece Martirez, Province of Cavite. SO ORDERED. 25 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL 7. PNB v. Giron-Roque, 920 SCRA 384 Made by: YAYEN, KHALILLA GRACE R. Case Citation: PNB v. Giron-Roque, 920 SCRA 384, G.R. No. 240311 (September 18, 2019) Petitioner: Philippine National Bank, petitioner Respondent: Feline Giron-Roque, Dr. Gloria M. Apostol and husband, Dr. Edward Apostol, respondents Syllabus Topic: Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. Doctrine: Please note: This article is not directly quoted in the case. The case implies that when Felina received the loan, she acquired ownership of the funds and was obligated to repay the same amount to PNB. The obligation of the borrower is to repay the lender an equal amount of the same kind and quality. Case Summary: Felina Giron-Roque, while residing in the USA, obtained 2 loans secured on a credit line from PNB and later discovered unauthorized transactions on her account by Gloria Apostol. PNB initiated foreclosure on Felina's property due to unpaid loans, but Felina claimed the second loan was forged and unauthorized. The RTC ruled in favor of Felina, declaring the foreclosure void and that PNB's actions were remiss diligence. This was upheld by the CA with modifications. The Supreme Court affirmed the lower courts' rulings by finding no merit in PNB's appeal and the forgery and lack of authorization for the second loan and ordered Felina to settle the remaining balance of the first loan within 60 days. The Facts of the Felina, a Filipino residing in the USA, secured a P230,000 credit line from PNB Case: with a real estate mortgage. She initially took out a first loan for P50,000 under this credit line, as shown by a promissory note. While in the US, Feline purportedly filed a stand-by application through Gloria Apostol for an additional P120,000 for a second loan. Feline later found out that Apostol had withdrawn a check for the second loan from her PNB account for P119,820. PNB asked for payment for both loans, but instead of paying, Felina asked for an in-depth investigation for the second loan. Felina wrote to PNB and included a cashier’s check for P16,000 as settlement of the first loan but the check was returned with a letter stating that it was not enough to cover the total amount including interest and penalties for both loans. With this, PNB initiated an extrajudicial foreclosure of Felina’s real property. Felina claimed that her signature on the check was forged and that Apostol was not authorized to withdraw from her account. She then filed a complaint with RTC for the annulment of the foreclosure sale and for the reinstatement of the unused credit line with damages against PNB and the Spouses Apostol. 26 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL Spouses Apostol maintained that Gloria Apostol was authorized by Felina to make the withdrawal from her credit line. Meanwhile, PNB contended that it had exercised the necessary due diligence before approving the withdrawal. It also argued that Felina's tender of payment for the first loan was invalid since it was made one day before the foreclosure date and did not fully cover the interest and penalties. PNB, in a cross-claim, argued that if Felina's claim was upheld, the Spouses Apostol should be required to repay the P119,820.00 that they received. RTC Ruling: The RTC ruled in Felina's favor, and accordingly: (a) declared the extrajudicial foreclosure null and void; (b) directed PNB to reinstate the unused credit accommodation of Felina; and (c) ordered PNB and Spouses Apostol to pay Felina attorney's fees in the amount of P100,000.00, plus costs of suit. RTC found that the subject check was forged since Felina could not have executed it as she was in the USA and the signatures compared with the promissory note were not from the same person. Furthermore, RTC also concluded that PNB was remiss of the diligence required of banking institutions in allowing the withdrawal and encashment of the forged check in favor of Gloria, who was not proven to be duly authorized by Felina. Notably, however, the RTC made no pronouncement as to the validity of Felina's tender of payment in relation to the first loan. PNB moved for reconsideration which was denied. Aggrieved, both PNB and Spouses Apostol appealed to the CA. CA Ruling CA affirmed the RTC ruling with modification, further ordering Spouses Apostol to pay PNB the amount of P119,820.00, and deleting the award of attorney's fees in favor of Felina. It held that the foreclosure sale had no basis since the loan in the amount of P120,000.00 was void, considering that the subject check was forged and Gloria was not duly authorized to withdraw from PNB. It emphasized that, for being in an industry imbued with public interest, PNB should have exercised extraordinary diligence in handling the transaction. However, similar with the RTC, the CA also made no pronouncement as to the validity of Felina's tender of payment in relation to the first loan Dissatisfied, PNB and Felina separately moved for reconsideration but both were denied in a Resolution, hence, this petition by PNB. Petitioner’s Petitioner contends the ruling of CA. Contention: 27 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL Issue: Whether the CA correctly affirmed the nullification of the extrajudicial foreclosure proceedings covering Felina’s real property subject of the real estate mortgage. Supreme Court Yes, the Court upheld the ruling of the lower courts. The petition is without Ruling: merit. It must be pointed out that PNB initiated extrajudicial foreclosure proceedings on Felina's property due to her non-payment of the first and second loans, including interest and penalties, totaling P163,173.91. However, and as unanimously found by the courts a quo:(a) Felina did not avail of the second loan, as her signature in the subject check was forged; (b) Gloria was not duly authorized to obtain the second loan from PNB; and (c) PNB was remiss of the diligence required of a banking institution in allowing the withdrawal and encashment of the subject check representing the second loan. Absent any cogent reason to overturn the aforesaid findings, the Court is inclined to uphold the same Due to the nullity of the second loan, Felina's outstanding balance to PNB is now reduced to the amount of the first loan, including interest and penalties, totaling P14,565.58. Felina attempted to settle this balance by tendering a cashier's check for P16,000.00, which PNB refused, arguing that it was insufficient to cover the total loan obligations, as the second loan had not yet been nullified by the court. Considering this, the Court finds it appropriate to give Felina a reasonable opportunity to fully settle her remaining obligation to PNB, amounting to P14,565.58 plus interest and penalties from September 15, 1998, until December 21, 1998, when PNB received the check. The Court upholds the annulment of the extrajudicial proceedings but allows PNB to seek other remedies if Felina fails to settle her loan obligation within this period. Dispositive Portion: WHEREFORE, the petition is DENIED. The Decision dated October 27, 2017 and the Resolution dated June 13, 2018 of the Court of Appeals in CA-G.R. CV No. 100017 are hereby AFFIRMED with MODIFICATION, in that: (a) respondent Felina Giron-Roque is given a period of sixty (60) days to settle the remaining balance of her outstanding loan obligation to petitioner Philippine National Bank (PNB) amounting to P14,565.58 plus interests and penalties from September 15, 1998 to December 21, 1998; and (b) the annulment of the extrajudicial foreclosure of the real property registered under Transfer Certificate of Title No. T-45548 shall be without prejudice to PNB's availment of the proper remedies, should the loan obligation remain unsettled after the lapse of the aforementioned period. The rest of the Decision STANDS. 28 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL 8. Hun Hyung Park v. Eung Won Choi, 899 SCRA 90 Made by: ANGUSTIA, GIO LEVI Case Citation: Hun Hyung Park v. Eung Won Choi; G.R. No. 220826, March 27, 2019 Petitioner: Hun Hyung Park Respondent: Eung Won Choi Syllabus Topic: Article 1956 of the Civil Code, which states that "[n]o interest shall be due unless it has been expressly stipulated in writing. Doctrine: There are two types of interest - monetary interest and compensatory interest. Interest as a compensation fixed by the parties for the use or forbearance of money is referred to as monetary interest, while interest that may be imposed by law or by courts as penalty for damages is referred to as compensatory interest. Right to interest therefore arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is demanded. Case Summary: A legal battle ensues between Hun Hyung Park and Eung Won Choi over a dishonored check, resulting in Choi being held liable to pay Park the full amount of the loan, along with compensatory interest. The Facts of the The case of "Hun Hyung Park v. Eung Won Choi" revolves around a dishonored Case: check issued by Eung Won Choi (respondent) to Hun Hyung Park (petitioner) as payment for a loan amounting to PHP 1,875,000.00. On June 28, 1999, Park, a moneylender, extended the loan to Choi, who issued PNB Check No. 0077133 dated August 28, 1999, in favor of Park. When Park attempted to deposit the check on October 5, 1999, it was dishonored due to a closed account. Despite receiving a demand letter on May 19, 2000, Choi failed to settle the debt. Consequently, Park filed a complaint for estafa and violation of Batas Pambansa Blg. 22 (BP 22). The Office of the City Prosecutor of Makati charged Choi with one count of BP 22 violation, and the case was docketed as Criminal Case No. 294690 in the Metropolitan Trial Court (MeTC) of Makati City-Branch 65. Choi pleaded not guilty but filed a demurrer to evidence, arguing that the prosecution failed to prove receipt of the notice of dishonor. The MeTC granted the demurrer, dismissing the criminal complaint, but Park appealed to the Regional Trial Court (RTC) of Makati City-Branch 60, which ordered Choi to pay the face value of the check with legal interest. Choi's motion for reconsideration led to the case being remanded to the MeTC for reception of evidence on the civil aspect. The MeTC eventually declared Choi's right to present evidence waived due to repeated postponements and ruled in favor of Park, ordering Choi to pay the loan 29 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL amount plus interest and fees. This decision was affirmed by RTC-Branch 142 but reversed by the Court of Appeals (CA), which remanded the case again to the MeTC. Park then petitioned the Supreme Court for review. RTC Ruling: MeTC: Park filed a complaint against Choi for estafa and violation of Batas Pambansa Blg. 22 (B.P. 22), also known as the Bouncing Checks Law. The Office of the City Prosecutor charged Choi with violation of B.P. 22, and the case was docketed as Criminal Case No. 294690 before the Metropolitan Trial Court (MeTC). During the trial, Choi filed a Motion for Leave of Court to File Demurrer to Evidence, arguing that the prosecution failed to prove that he received the notice of dishonor, which is an element for conviction under B.P. 22. The MeTC granted Choi's motion and dismissed the criminal complaint. RTC: Park appealed to the Regional Trial Court (RTC), which initially granted the appeal and held that Choi was civilly liable to pay Park the amount of the dishonored check. However, upon reconsideration, the RTC remanded the case to the MeTC for the reception of evidence on the civil aspect of the case. CA Ruling Park appealed the remand order to the Court of Appeals (CA), but the CA dismissed the petition on procedural grounds. Petitioner’s Park filed a petition for review with the Supreme Court, arguing that the CA Contention: erred in reversing the RTC's decision. Issue: Can Eung Won Choi be held liable for the alleged violation of B.P. 22 and liable for the payment of legal interest? Supreme Court The Supreme Court granted Park's petition, reversing and setting aside the CA's Ruling: decision and resolution. The Court reinstated the RTC-Branch 142's decision, which affirmed the MeTC's ruling that Choi is civilly liable to pay Park PHP 1,875,000.00 plus legal interest. The Supreme Court found that Choi was not deprived of due process. The MeTC had been liberal in granting Choi's numerous motions for postponement, each time reminding him to come prepared to present his evidence. Despite several opportunities spanning almost three years, Choi repeatedly failed to present his evidence. The Court emphasized that the grant or denial of postponements is within the sound discretion of the court, aimed at serving the ends of justice and fairness. The MeTC's decision to declare Choi's right to present evidence as waived was justified given the circumstances. Furthermore, the RTC's denial of Choi's motion for reconsideration before the expiration of the period to file a reply did not constitute a violation of due process, as the reply would have only addressed issues already raised. On the substantive issue, the Court held that 30 WEEK NO. 2 | SEPTEMBER O6, 2024  CREDIT TRANSACTIONS First Semester, SY 2024-2025 DIGEST POOL Choi is liable for the full amount of PHP 1,875,000.00 based on his judicial admission and the absence of evidence proving partial payment. The Court also clarified the application of legal interest, awarding 12% per annum from the date of extrajudicial demand until June 30, 2013, and 6% per annum thereafter until full payment. Disp