G.R. No. 78315 January 2, 1989
Commercial Credit Corporation Cagayan de Oro, petitioner, vs. The Court of Appeals and The Cagayan de Oro Coliseum, Inc., respondents.

FACTS

Private respondent Cagayan de Oro Coliseum, Inc. executed a promissory note and real estate mortgage in favor of petitioner. Upon default, petitioner initiated extrajudicial foreclosure. Minority stockholders of the private respondent filed an action questioning the corporation’s authority to mortgage. The parties subsequently entered into a Compromise Agreement, which was approved and rendered as a judgment by the trial court on March 11, 1980. The judgment stipulated the total obligation, a payment schedule of monthly installments, and specific penalties for default, including a 3% per month penalty charge and a 5% attorney’s fee on the outstanding balance.
Private respondent later defaulted on several installments. Petitioner moved for and was granted a writ of execution. Private respondent filed a special civil action in the Court of Appeals to annul the compromise judgment. The appellate court, in its decision, upheld the validity of the compromise agreement but modified its terms. It reduced the penalty charge from 3% per month to 1/2% per month and the attorney’s fees from 5% to 2% of the outstanding balance, effective from a specified past date.

ISSUE

Whether the Court of Appeals, after upholding the validity and lawfulness of a compromise judgment, has the authority to modify its stipulated terms regarding penalty charges and attorney’s fees.

RULING

The Supreme Court ruled that the Court of Appeals acted without authority. A compromise agreement, once approved by the court and rendered as a judgment, attains finality and has the force of res judicata. It constitutes the law between the parties. The appellate court correctly found the agreement to be lawful and not violative of the Usury Law, with penalties being sanctioned by Article 1226 of the Civil Code. However, its subsequent modification based on Article 1229 of the Civil Code, which allows courts to equitably reduce iniquitous penalties, was erroneous. This provision applies to obligations that are still subject to litigation, not to a final and executory judgment. The terms of the compromise were voluntarily entered into by the parties and judicially approved. Therefore, the appellate court could not unilaterally alter these binding terms. The Supreme Court set aside the appellate court’s decision and resolutions, and reinstated the compromise judgment of the trial court in its entirety.