G.R. No. 154129. July 8, 2005.
TERESITA DIO, Petitioner, vs. SPOUSES VIRGILIO and LUZ ROCES JAPOR and MARTA JAPOR, Respondents.

FACTS

Respondents Spouses Japor and Marta Japor obtained a loan from petitioner Teresita Dio, secured by a real estate mortgage over two parcels of land. The deed, executed in February 1989, stipulated a loan of ₱350,000 with 5% monthly interest payable within two months, plus a 5% monthly penalty for default. Respondents defaulted. Petitioner initiated extrajudicial foreclosure. Respondents filed an action to fix their contractual obligation, initially praying for the court to determine the allowable interest, and later amending to seek the mortgage’s nullity, which the trial court denied. The trial court upheld the mortgage’s validity. The Court of Appeals affirmed the validity but modified the interest and penalty rates, deeming the stipulated 5% monthly interest and 5% monthly penalty as unconscionable. It fixed the interest at 12% per annum and a 1% monthly penalty, recalculating the total obligation. It also ordered petitioner to give respondents the surplus from the foreclosure sale, amounting to ₱2,247,326, as the properties were auctioned for ₱3.5 million.

ISSUE

Did the Court of Appeals err in modifying the stipulated interest and penalty rates and in ordering the surrender of the foreclosure surplus to respondents?

RULING

No, the Supreme Court affirmed the modification of interest and penalty but reversed the order to surrender the surplus. On the first issue, the Court upheld the appellate court’s authority to modify unconscionable stipulations. While respondents did not originally assign the iniquity of the rates as an error on appeal, the Court can review and correct such stipulations as a matter of public policy, as excessively high interest and penalty charges are contrary to morals and public interest. The stipulated 5% monthly interest (60% per annum) and 5% monthly penalty were indeed exorbitant and iniquitous. The Court modified the rates to 5% for the first two months, 12% per annum thereafter, and a 1% monthly penalty, aligning with equitable principles under Article 2227 of the Civil Code. On the second issue, the Court ruled that no surplus existed for petitioner to return. The appellate court’s recalculation of the obligation using the reduced rates meant the true mortgage debt approximated the ₱3.5 million bid price. Therefore, the bid price reflected the actual debt, and ordering the surrender of the supposed surplus would constitute unjust enrichment for respondents. The mortgagor’s right to a surplus under Act No. 3135 only arises when the bid price exceeds the actual debt, which was not the case here after equitable adjustment.