G.R. No. 210831 , November 26, 2014
Spouses Tagumpay N. Albos and Aida C. Albos, Petitioners, vs. Spouses Nestor M. Embisan and Iluminada A. Embisan, Deputy Sheriff Marino V. Cachero, and the Register of Deeds of Quezon City, Respondents.

FACTS

Petitioners Spouses Albos entered into a “Loan with Real Estate Mortgage” with respondent Spouses Embisan on October 17, 1984, for ₱84,000.00 payable within 90 days with 5% monthly interest. The loan was secured by a parcel of land registered under the petitioners’ name. Petitioners failed to pay upon maturity and were granted extensions. After the second extension lapsed on May 17, 1986, petitioners requested a third extension. Respondents alleged that an additional eight-month extension was granted on the condition that the monthly 5% interest would be compounded from June 1986 onwards, but this stipulation was not reduced in writing. Petitioners made partial payments but failed to settle the indebtedness. Based on a Statement of Account prepared by respondents applying compounded interest, the obligation ballooned. Respondents extra-judicially foreclosed the mortgaged property on October 12, 1987, emerged as the highest bidders, and later consolidated ownership. Petitioners filed a complaint for annulment of the mortgage, foreclosure sale, and related documents, alleging the foreclosure was void because the compounded interest was imposed without their consent and was excessive. The Regional Trial Court dismissed the complaint. The Court of Appeals affirmed the trial court’s decision, upholding the validity of the foreclosure sale.

ISSUE

Whether the extra-judicial foreclosure proceedings should be nullified for being based on an erroneous computation of the loan’s interest, specifically the imposition of a 5% compounded monthly interest without a written agreement.

RULING

The Supreme Court granted the petition, reversed the Court of Appeals, and declared the foreclosure proceedings null and void. The Court ruled that the imposition of compounded interest was invalid. Article 1956 of the Civil Code requires that interest must be expressly stipulated in writing. While the original loan agreement stipulated a 5% monthly interest in writing, the subsequent agreement to compound that interest was not reduced to writing. Therefore, the compounding of interest lacked the requisite written stipulation and was void. Consequently, the computation of the total arrearages upon which the foreclosure was based was erroneous. The foreclosure of the mortgage, the Certificate of Sale, the Affidavit of Consolidation, the Deed of Final Sale, and the Contract of Lease were declared void. The case was remanded to the Regional Trial Court to compute the current arrearages of petitioners, taking into account the partial payments made and imposing the simple interest rate of 12% per annum.