G.R. No. 113412 , April 17, 1996
Spouses Ponciano Almeda and Eufemia P. Almeda, Petitioners, vs. The Court of Appeals and Philippine National Bank, Respondents.

FACTS

Petitioners obtained a P18 million loan from respondent Philippine National Bank (PNB) in 1981, secured by a real estate mortgage. The credit agreement stipulated a 21% annual interest rate but contained a clause allowing PNB to unilaterally increase the rate “within the limits allowed by law.” From 1984 to 1986, PNB raised the interest rate from 21% to as high as 68%. Petitioners protested and filed a petition for declaratory relief in 1988, questioning the validity of the unilateral increases. The trial court issued a preliminary injunction restraining PNB from enforcing interest above 21%.
While the case was pending, petitioners defaulted. PNB initiated foreclosure proceedings under P.D. 385. Petitioners then tendered payment of the principal plus accrued interest computed at 21%, totaling over P40 million. PNB refused, demanding a higher amount based on the increased rates. Petitioners consigned the payment in court and obtained an injunction against the foreclosure sale. The Court of Appeals later set aside the injunctive orders, upholding PNB’s right to foreclose.

ISSUE

The principal issues were: (1) Whether PNB was authorized under the credit agreement to unilaterally raise interest rates from 21% to 68%; and (2) Whether PNB could mandatorily foreclose the mortgage under P.D. 385.

RULING

The Supreme Court reversed the Court of Appeals. On the first issue, the Court held the escalation clause was invalid. While Central Bank Circular No. 905 removed interest rate ceilings, it did not authorize unilateral increases without the borrower’s consent. The clause granted PNB unchecked power to determine rates, lacking a mutually agreed-upon standard or ceiling, making it a “blanket authority” that violated the principle of mutuality of contracts. The increases to 68% were unconscionable.
On the second issue, the Court ruled that P.D. 385’s mandatory foreclosure could not apply because the validity of the debt itself was in serious question. The determination of the exact amount due, which depended on the invalid interest increases, was a prejudicial issue that had to be resolved first. Foreclosure presupposes a valid and liquidated obligation. Since the principal obligation was subject to a pending judicial determination, the issuance of the injunctive writs by the trial court to maintain the status quo was proper. The case was remanded to the trial court for further proceedings.