G.R. No. 147758 ; June 26, 2002
SPOUSES ARSENIO R. REYES and NIEVES S. REYES, petitioners, vs. COURT OF APPEALS and PABLO V. REYES, respondents.

FACTS

Respondent Pablo V. Reyes filed a collection case against petitioner-spouses Arsenio and Nieves Reyes for a loan of P600,000.00 with 5% monthly interest, evidenced by an acknowledgment receipt dated July 15, 1990. Petitioners made interest payments via checks totalling P84,000.00 and later turned over a Nissan pickup truck valued at P400,000.00, executing a deed of absolute sale for it. Upon petitioners’ default despite demand, respondent sought payment of the outstanding balance.
Petitioners admitted the receipt of money but claimed novation, asserting the amount was respondent’s contribution to a partnership formed on March 23, 1990. They alleged the acknowledgment receipt was merely fabricated to show respondent’s family he had invested, and that the 5% interest reflected his profit share. They argued the subsequent payments and transfer of the vehicle were settlements under this partnership arrangement, not payments for a loan.

ISSUE

Whether the Court of Appeals erred in finding that the transaction between the parties was a loan agreement and not a partnership contribution, thereby holding petitioners liable for the loan amount with stipulated interest.

RULING

The Supreme Court denied the petition and affirmed the appellate court’s finding of a loan. The Court held that petitioners failed to prove novation by clear and convincing evidence. The acknowledgment receipt, which was notarized and contained detailed terms including the principal amount, interest rate, and payment schedule, constituted a clear and valid promissory note establishing a loan. The receipt’s execution months after the alleged partnership formation, and the consistent pattern of interest payments aligning with the stipulated 5% monthly rate on the loan principal, strongly corroborated its existence as a distinct contract.
The Court further ruled that the stipulated 5% monthly interest was not usurious, as the parties freely agreed to it in writing. However, it modified the computation of payments. Applying Article 1253 of the Civil Code, which mandates that if a debt produces interest, payments shall first be applied to interest before the principal, the Court held that the P400,000.00 value of the pickup truck and the P84,000.00 in check payments must first satisfy the accrued interest. The remaining balance, if any, would then be applied to the principal. Thus, the liability was recalculated accordingly, ordering petitioners to pay the P500,000.00 principal with 5% monthly interest from July 15, 1990, minus the P484,000.00 total from the vehicle and checks.