G.R. No. 130994 , September 18, 2002
Spouses Felimon and Maria Barrera, Petitioners, vs. Spouses Emiliano and Maria Concepcion Lorenzo, Respondents.

FACTS

Petitioners Spouses Barrera borrowed P230,000.00 from Spouses Lazaro, secured by a real estate mortgage over their lot. Subsequently, the Lazaro spouses transferred the loan to respondent Spouses Lorenzo. On May 14, 1991, petitioners executed a new real estate mortgage in favor of respondents to secure a loan of P325,000.00. The mortgage contract stipulated that the loan was payable within three months (until August 14, 1991) and would earn interest at 5% per month, and that failure to pay within said period would result in foreclosure. Petitioners failed to pay in full by August 14, 1991, and were allowed to pay on installment until December 23, 1993, by which time they had paid a total of P687,000.00. Respondents later demanded payment of P325,000.00 plus interest and initiated extrajudicial foreclosure. Petitioners filed a complaint for return of title, sum of money, and damages, claiming overpayment. The Regional Trial Court (RTC) ruled in favor of petitioners, ordering respondents to return P215,750.00 as overpayment and the title, and making the preliminary injunction against foreclosure permanent. The RTC held that the 5% monthly interest applied only from May 14, 1991, to August 14, 1991, and thereafter the interest should be 12% per annum. The Court of Appeals reversed the RTC, holding that the 5% monthly interest subsisted until full payment of the loan, applying partial payments first to interest.

ISSUE

Whether the stipulated 5% monthly interest on the loan was applicable only for the three-month period from May 14, 1991, to August 14, 1991, or until the loan was fully paid.

RULING

The Supreme Court reversed the Court of Appeals and reinstated the RTC Decision. The Court held that the 5% monthly interest applied only for the three-month period stipulated in the written contract, from May 14, 1991, to August 14, 1991. The mortgage contract clearly stated the loan was for three months with 5% monthly interest and would have no force once fully paid within that period; otherwise, the mortgage could be foreclosed. There was no written agreement extending the 5% monthly interest beyond August 14, 1991. Applying Article 1956 of the Civil Code, which requires interest to be expressly stipulated in writing, and the doctrine in Eastern Shipping Lines, Inc. v. Court of Appeals, the Court ruled that in the absence of a written stipulation for interest after the agreed period, the rate should be 12% per annum from default. Thus, petitioners made an overpayment, and respondents were ordered to return the overpaid amount and the title.