G.R. No. 138677 ; February 12, 2002
Tolomeo Ligutan and Leonidas De La Llana, petitioners, vs. Hon. Court of Appeals & Security Bank and Trust Company, respondents.

FACTS

Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan from respondent Security Bank and Trust Company, executing a promissory note binding themselves jointly and severally. The note stipulated payment of the principal with interest, a 5% per month penalty charge on default, and 10% attorney’s fees. The obligation matured, and despite extensions and demands, petitioners defaulted. The bank filed a complaint for recovery. After the bank presented its evidence, petitioners repeatedly reset hearings and failed to appear, leading the trial court to declare a waiver of their right to present evidence and to decide the case. The trial court ruled in favor of the bank, ordering petitioners to pay the amount with stipulated interest, penalty, and attorney’s fees.
Petitioners appealed to the Court of Appeals, which affirmed the trial court’s judgment but deleted a 2% service charge. Both parties moved for reconsideration. Petitioners argued the 5% monthly penalty was unconscionable, while the bank argued interest and penalty should run from the date of default, not the filing of the complaint. The appellate court modified its decision, ruling that interest and penalty should indeed commence from the date of default as stipulated, and, invoking Article 1229 of the Civil Code, equitably reduced the penalty charge from 5% to 3% per month. Petitioners later filed an omnibus motion, alleging a subsequent real estate mortgage constituted novation and that the foreclosure proceeds were not credited, but this was denied.

ISSUE

The primary issues were: (1) whether the penalty charge of 5% per month was unconscionable and subject to reduction; (2) whether interest and penalty should be computed from the date of default or the filing of the complaint; and (3) whether the execution of a real estate mortgage constituted novation of the original loan obligation.

RULING

The Supreme Court denied the petition. On the first issue, the Court affirmed the appellate court’s reduction of the penalty from 5% to 3% per month. Citing Article 1229 of the Civil Code, the Court held that stipulated penalties, while binding, may be equitably reduced by the courts if found to be iniquitous or unconscionable. The partial payment by petitioners and the excessive nature of a 60% per annum penalty justified the reduction to a still-substantial 36% per annum.
On the second issue, the Court upheld the computation of interest and penalty from the date of default, May 20, 1982, as stipulated in the promissory note which expressly waived the need for demand. The contract clearly provided for liability from the date of default, not from judicial demand.
On the third issue, the Court ruled that the subsequent real estate mortgage did not novate the original promissory note. Novation requires a clear intent to extinguish the old obligation. The mortgage was merely an accessory contract to secure the pre-existing loan; it did not alter the principal terms of the debt concerning the amount, maturity, or the solidary liability of the petitioners. The original obligation remained enforceable. The Court also found no merit in the claim regarding the foreclosure proceeds, as it was a factual matter not proper for review and raised belatedly.