G.R. No. 185368 ; October 11, 2012
ARTHUR F. MENCHAVEZ, Petitioner, vs. MARLYN M. BERMUDEZ, Respondent.

FACTS

Petitioner Arthur Menchavez extended a PhP 500,000 loan to respondent Marlyn Bermudez on November 17, 1993, with interest fixed at 5% per month. Respondent issued a promissory note and a check, later replaced with five postdated checks. Four checks were encashed, and the fifth, though dishonored, was later replaced and paid. In total, respondent paid PhP 925,000, an excess of PhP 425,000 over the principal. Petitioner later alleged a verbal compromise agreement for delayed payment and accumulated interest, under which respondent issued eleven more postdated checks. Eight of these checks were dishonored.
Nine criminal cases for violation of Batas Pambansa Blg. 22 (Bouncing Checks Law) were filed. The Metropolitan Trial Court (MeTC) acquitted respondent, finding the obligation extinguished by payment. On appeal of the civil aspect, the Regional Trial Court (RTC) ordered respondent to pay a remaining balance of PhP 165,000, applying a 12% annual interest rate instead of the stipulated 5% monthly rate, citing the absence of a written agreement for the higher rate.

ISSUE

Whether the stipulated interest rate of 5% per month (60% per annum) on the loan is valid and enforceable, and whether petitioner is entitled to further recovery given the total payments made.

RULING

The Supreme Court denied the petition and affirmed the Court of Appeals. The legal logic centers on the principle of unconscionability and the police power of the state to regulate usury. While parties are free to stipulate loan terms under Article 1306 of the Civil Code, such stipulations must not be contrary to law, morals, good customs, public order, or public policy. The Court explicitly ruled that a 5% per month (60% per annum) interest rate is iniquitous, unconscionable, and revolting to the conscience. Mere voluntariness in agreeing to the rate does not validate it if it is inherently excessive.
Consequently, the stipulation on interest was declared void. It was deemed as if no express contract on that interest rate existed, allowing the courts to equitably reduce it. The Court found that respondent had already paid PhP 925,000, which sufficiently covered the PhP 500,000 principal and reasonable interest. Allowing petitioner to recover more based on the void stipulation would be unjust. Therefore, no further civil liability for the loan remained. The decision underscores the judiciary’s authority to annul stipulations that are contrary to morals and public policy, even in the absence of a specific usury law, to prevent oppression.