G.R. No. 176344; August 22, 2008
LAND BANK OF THE PHILIPPINES, petitioner, vs. YOLANDA G. DAVID, respondent.

FACTS

Respondent Yolanda G. David obtained a loan from petitioner Land Bank of the Philippines (LBP) secured by a real estate mortgage. Due to business reverses, the parties executed a Restructuring Agreement stipulating a 17% per annum interest rate on the remaining principal and a 12% per annum penalty charge for default. The agreement provided that failure to pay two consecutive quarterly amortizations would be ground for foreclosure. Respondent defaulted, leading LBP to initiate foreclosure proceedings and eventually sell the mortgaged property at public auction.
Respondent filed a complaint seeking to annul the foreclosure sale, arguing that the interest was usurious and that Central Bank Circular No. 905 and PD No. 116 were unconstitutional. The Regional Trial Court dismissed her complaint. On appeal, the Court of Appeals modified the decision, finding the 17% interest and 12% penalty exorbitant. It reduced them to 12% and 5% per annum, respectively, and nullified the foreclosure sale, ordering respondent to pay a recomputed loan balance.

ISSUE

Whether the stipulated interest rate of 17% per annum and penalty charge of 12% per annum are exorbitant, unconscionable, and contrary to morals, thereby justifying the nullification of the foreclosure proceedings.

RULING

The Supreme Court denied LBP’s petition and affirmed the Court of Appeals. While the court reiterated that CB Circular No. 905 removed interest rate ceilings, thereby preventing a finding of usury, it emphasized that stipulated interest rates remain subject to judicial review for being excessive, iniquitous, unconscionable, and exorbitant under Article 1306 of the Civil Code in relation to the principle of equity. The legal logic is that freedom of contract is not absolute and must be tempered by the norms of justice and fairness.
The Court found the 17% interest and 12% penalty, when imposed on a loan that was part of a social assistance program for farmers, to be clearly excessive and unconscionable. Citing precedent, it held that such rates, under the circumstances, violated the principles of equity. Consequently, the foreclosure based on an obligation bloated by these excessive charges was correctly nullified by the appellate court. The reduction of the rates and the recomputation of the obligation were proper equitable remedies to prevent injustice. The ruling underscores that courts have the authority to invalidate contractual stipulations that are contrary to morals, even in the absence of a usury law ceiling.