G.R. No. 148325 ; September 3, 2007
Reynaldo P. Floirendo, Jr. vs. Metropolitan Bank and Trust Company

FACTS

Petitioner Reynaldo P. Floirendo, Jr. obtained a loan from respondent Metropolitan Bank and Trust Company, secured by a real estate mortgage. The promissory note stipulated an interest rate of 15.446% per annum for the first 30 days, “subject to upward/downward adjustment every 30 days thereafter,” and included a penalty charge. The note further authorized the bank to change interest rates without advance notice based on various economic indicators. Respondent bank subsequently imposed increased rates, which at one point reached 30.244%. Petitioner, unable to pay, negotiated for renewal upon settling interest arrears. Despite his payment, the bank initiated foreclosure proceedings.
Petitioner filed a complaint for reformation of the real estate mortgage and promissory note, alleging the documents were contracts of adhesion with scandalous, unconscionable, and unilaterally imposed interest rates. He sought to enjoin the foreclosure. The Regional Trial Court (RTC) dismissed the complaint, upheld the validity of the escalation clause, dissolved the preliminary injunction, and ordered the foreclosure to proceed. Petitioner elevated the case via a Petition for Review on Certiorari.

ISSUE

Whether the RTC erred in dismissing the complaint for reformation of instruments and in upholding the validity of the interest rate escalation clause in the promissory note.

RULING

The Supreme Court denied the petition and affirmed the RTC decision. The action for reformation of instrument requires that the written agreement does not express the true meeting of the minds due to mistake, fraud, inequitable conduct, or accident. The Court found no basis for reformation. The terms of the promissory note, particularly the escalation clause, were clear and unequivocal. Petitioner, as a corporate officer and businessman, was presumed to have understood and voluntarily agreed to these terms, which were not hidden or obscurely worded.
On the validity of the escalation clause, the Court reiterated established jurisprudence that such clauses are valid stipulations in commercial contracts to maintain fiscal stability. However, for an escalation clause to be valid, it must include a corresponding de-escalation clause and the adjustments must be based on prevailing market rates and not left solely to the bank’s discretion. The clause in question met these criteria. It provided for both upward and downward adjustments and tied the changes to specific, objective economic factors and the bank’s overall funding costs, not merely its whim. The increases imposed were therefore pursuant to a valid contractual provision agreed upon by the parties.