GR 131622; (November, 1998) (Digest)
G.R. No. 131622 November 27, 1998
LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners, vs. COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR. doing lending business under the trade name and style “GONZALES CREDIT ENTERPRISES”, respondents.
FACTS
Petitioners Leticia Medel and Servando Franco obtained several loans from respondent Veronica R. Gonzales, doing business as Gonzales Credit Enterprises. On November 7, 1985, they borrowed P50,000.00 but received only P47,000.00 as P3,000.00 was retained as advance interest at 6% per month. On November 19, 1985, they borrowed P90,000.00 but received only P84,000.00 at the same interest rate. On June 11, 1986, they borrowed P300,000.00, secured by a real estate mortgage, but received only P275,000.00. All loans were unpaid. On July 23, 1986, they, along with Dr. Rafael Medel, consolidated the unpaid loans totaling P440,000.00 and obtained an additional P60,000.00, executing a promissory note for P500,000.00 payable on August 23, 1986, with interest at 5.5% per month plus a 2% service charge per annum, and a penalty charge of 1% per month of the amount due if they failed to pay. The borrowers failed to pay the consolidated loan. Respondents filed a complaint for collection. The Regional Trial Court found the interest rate unconscionable and applied the legal rate of 12% per annum. The Court of Appeals reversed, upholding the stipulated interest rate, citing Central Bank Circular No. 905 which suspended the Usury Law. Petitioners sought review, arguing the stipulated rate was excessive.
ISSUE
Whether the stipulated interest rate of 5.5% per month (66% per annum) on the loan is valid.
RULING
No. The Supreme Court reversed the Court of Appeals and reinstated the decision of the Regional Trial Court. While Central Bank Circular No. 905 suspended the effectivity of the Usury Law, making the stipulated rate not usurious, the Court found the 5.5% per month interest to be excessive, iniquitous, unconscionable, and exorbitant, hence contrary to morals and void. The Court, invoking its equity jurisdiction and Article 2227 of the Civil Code, reduced the interest to a reasonable rate. It affirmed the trial court’s imposition of interest at 12% per annum and an additional 1% per month penalty charge as liquidated damages.