GR 158622; (January, 2016) (Digest)

G.R. Nos. 158622, 169441, 172958, 173194, 196958, 197120 & 205463. January 27, 2016.
Case Parties: SPOUSES ROBERT ALAN L. and NANCY LEE LIMSO and DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION, Petitioners, vs. PHILIPPINE NATIONAL BANK and THE REGISTER OF DEEDS OF DAVAO CITY, Respondents. (Consolidated Cases)

FACTS

In 1993, Spouses Robert Alan L. Limso and Nancy Lee Limso (Spouses Limso) and Davao Sunrise Investment and Development Corporation (Davao Sunrise) obtained a loan of P700 million from Philippine National Bank (PNB), secured by real estate mortgages on four parcels of land. Due to payment difficulties, the parties executed a Conversion, Restructuring and Extension Agreement in 1999. The restructured loan totaled approximately P1.067 billion, divided into Loan I (P583.18 million) and Loan II (P483.78 million, which included capitalized interest). The agreement stipulated that the interest rate for both loans would be “at the rate per annum to be set by the Bank” and “shall be reset by the Bank every month.” Spouses Limso and Davao Sunrise executed corresponding promissory notes. They again failed to pay, leading PNB to initiate extrajudicial foreclosure proceedings. An auction sale was held on October 26, 2000, where PNB was declared the highest bidder. Before the issuance of the Provisional Certificate of Sale, Spouses Limso and Davao Sunrise filed a Complaint for Reformation or Annulment of Contract (Civil Case No. 28,170-2000), assailing the unilateral imposition of interest rates and seeking to nullify the foreclosure sale. The trial court (Branch 17) declared the foreclosure sale null and void, a decision affirmed by the Court of Appeals. Separately, PNB filed a Petition for Issuance of a Writ of Possession over the foreclosed properties (LRC Case No. 2001-01). The trial court (Branch 15) granted the writ. The Court of Appeals, in consolidated petitions, modified the rulings, declaring the interest rate stipulations void for lack of mutuality but upholding the validity of the foreclosure sale and the writ of possession. It also ordered the recomputation of the loan obligation using a 12% annual interest rate.

ISSUE

The primary issue is whether the stipulation in the loan agreement granting PNB the sole discretion to set and reset the interest rate is valid.

RULING

The Supreme Court DENIED the petitions and AFFIRMED the Court of Appeals’ decision with MODIFICATIONS. The Court ruled that the interest rate stipulations in the Conversion, Restructuring and Extension Agreement are NULL and VOID for lack of mutuality of contracts. A stipulation that grants one party the sole and exclusive discretion to determine the interest rate, with the other party having no opportunity to agree or disagree, is contrary to the principle of mutuality under Article 1308 of the Civil Code. However, the nullity of the interest rate stipulation does not invalidate the entire loan obligation. The principal loan remains valid and demandable. In the absence of a valid stipulation, the applicable interest rate shall be 12% per annum, pursuant to Central Bank Circular No. 905, from the date of the execution of the restructured agreement on January 5, 1999, until June 30, 2013. Following Bangko Sentral ng Pilipinas Monetary Board Circular No. 799, the legal interest rate for loans or forbearance of money shall be 6% per annum from July 1, 2013, until full payment. The Court upheld the validity of the extrajudicial foreclosure sale and the issuance of the writ of possession, as the borrowers were in default and the foreclosure proceedings complied with Act No. 3135. The obligation was ordered recomputed based on the stipulated principal amounts, deducting payments made, and applying the declared interest rates.