G.R. No. 148163 ; December 6, 2004
Banco Filipino Savings and Mortgage Bank, petitioner, vs. Juanita B. Ybañez, et al., respondents.

FACTS

Respondents obtained a loan from petitioner bank, secured by a real estate mortgage, which was later restructured to P1,225,000 with 21% annual interest and a 3% monthly penalty for default. From 1983 to 1988, respondents made substantial payments totaling P1,455,385.07. They ceased payments from 1989 onward, contending that the bank had ceased operations after being placed under liquidation by the Central Bank in 1985. The bank reopened in 1994 and subsequently sought to foreclose the mortgage, claiming an outstanding obligation of over P6 million inclusive of accrued interest and charges. Respondents filed a suit for injunction and accounting, arguing the loan was fully paid and the foreclosure had no basis.

ISSUE

The core issues were: (1) the effect of the bank’s closure from 1985 to 1994 on the loan obligations; (2) the legality of the 21% per annum interest rate; and (3) the validity of the 3% monthly surcharge.

RULING

The Supreme Court affirmed the lower courts’ decisions. On the first issue, the Court ruled that the bank’s temporary closure did not extinguish the loan obligation. The designated liquidator retained the authority to administer the bank’s affairs, including collecting receivables. However, the bank could not unilaterally impose interest during the period it was not operational and transacting business, as it could not be considered in delay for not accepting payments. Thus, no interest could accrue from January 1, 1985, to July 1, 1994.
On the second issue, the 21% interest rate was declared valid. The Court noted that Central Bank Circular No. 705, effective December 1, 1979, set the maximum interest rate for loans with maturities over 730 days at 21% per annum. The promissory note was executed in December 1982, and the stipulated rate was within the legally prescribed ceiling at that time. Subsequent deregulation via Central Bank Circular No. 905 did not render the agreed rate usurious, as it merely removed interest rate ceilings but did not prohibit parties from stipulating a rate.
On the third issue, the 3% monthly surcharge (or 36% per annum) was declared a penalty clause. The Court found it iniquitous and unconscionable, constituting a disguised interest charge that would circumvent the usury law. Applying Article 1229 of the Civil Code, the Court reduced the penalty to a reasonable rate, as the lower courts had done, given that respondents had made substantial payments and the bank’s closure contributed to the default scenario. The case was remanded for a proper accounting consistent with these principles.