G.R. No. 222448 , November 24, 2021
UNITED COCONUT PLANTERS BANK, PETITIONER, VS. EDITHA F. ANG AND VIOLETA M. FERNANDEZ, RESPONDENTS.

FACTS

On April 30, 1997, petitioner United Coconut Planters Bank (UCPB) granted respondents Editha F. Ang and Violeta M. Fernandez a term loan of P16,000,000.00, payable in five years through 20 quarterly amortizations. The loans, with a total principal obligation of P16,054,955.83, were secured by several real estate mortgages. Respondents defaulted on their amortizations after April 30, 1998. Due to their failure to pay, UCPB extrajudicially foreclosed the mortgaged properties. At the public auction on August 2, 1999, UCPB emerged as the highest bidder for P21,985,000.00. Respondents failed to redeem the properties, leading to the issuance of a Final Deed of Sale.
On July 10, 2000, respondents filed a Petition for Declaration of Nullity of Foreclosure, Auction Sale and Promissory Note & Fixing of True Account, alleging, among others, that the dollar-denominated promissory notes violated Republic Act (R.A.) No. 529, that the interest rate provisions were void for violating the principle of mutuality of contracts, and that UCPB violated the Truth in Lending Act ( R.A. No. 3765 ). The Regional Trial Court (RTC) initially declared the interest rate provisions and the promissory notes null and void, and nullified the auction sale. However, upon reconsideration, the RTC reversed itself, declared the auction sale valid, and ordered respondents liable for the principal amount of P16,000,000.00 plus 12% per annum legal interest and a 12% per annum penalty, deducting payments made and the auction proceeds. Both parties appealed to the Court of Appeals (CA).

ISSUE

The core issue is whether the Court of Appeals erred in affirming the RTC’s amended decision which upheld the validity of the extrajudicial foreclosure sale but ordered the recomputation of the loan obligation using a 12% per annum interest rate instead of the stipulated rates.

RULING

The Supreme Court DENIED the petition and AFFIRMED the Decision of the Court of Appeals with MODIFICATION regarding the applicable interest rates.
1. Validity of the Extrajudicial Foreclosure Sale: The Court upheld the validity of the foreclosure sale. Respondents’ failure to pay their loan obligations constituted a valid ground for foreclosure under the terms of the Real Estate Mortgage. The sale was conducted in accordance with Act No. 3135 , as amended.
2. Validity of the Stipulated Interest Rates: The Court declared the stipulated interest rates in the Credit Agreement and Promissory Notes VOID for violating the principle of mutuality of contracts under Article 1308 of the Civil Code. The clauses granting UCPB the unilateral authority to increase interest rates were invalid as they placed the determination of the rate solely at the bank’s will, without the consent of the borrowers.
3. Applicable Interest Rate: Since the stipulated interest rates were void, the Court applied the legal rate of interest. Following established jurisprudence and the guidelines in Nacar v. Gallery Frames, the obligation is subject to:
* 12% per annum legal interest from judicial or extrajudicial demand on April 14, 1999, until June 30, 2013.
* 6% per annum legal interest from July 1, 2013, until full satisfaction.
4. Penalty Charge: The Court found the stipulated penalty charge of 3% per month (36% per annum) to be iniquitous and unconscionable. It was reduced to 12% per annum to be computed from the date of demand, April 14, 1999, until full payment.
5. Violation of the Truth in Lending Act: The Court found that UCPB failed to comply with the disclosure requirements of the Truth in Lending Act. However, the prescribed penalty for such violation is an administrative fine payable to the government, not a cause for the nullification of the loan or the promissory notes themselves. The loan principal obligation remains valid and enforceable.
6. Application of Auction Proceeds and Payments: The Court ordered that the total indebtedness (principal, interest, and penalty) be recomputed in accordance with the above rulings. From this amount, the payments made by respondents (P2,349,514.95) and the net proceeds from the valid foreclosure sale (P21,985,000.00 less lawful expenses) must be deducted. Any excess from the application of the foreclosure proceeds constitutes a money judgment in favor of respondents against UCPB.