G.R. No. 235020 , December 10, 2019
ATTY. LEONARD FLORENT O. BULATAO, PETITIONER, VS. ZENAIDA C. ESTONACTOC, RESPONDENT.

FACTS

On June 3, 2008, respondent Zenaida C. Estonactoc executed a Deed of Mortgage of Real Property (DMRP) in favor of petitioner Atty. Leonard Florent O. Bulatao over a parcel of land in La Union to secure a loan of P200,000.00. The DMRP stipulated a 5% per month interest, payable within one year. Zenaida defaulted. Atty. Bulatao initiated extrajudicial foreclosure, and the property was sold at public auction on October 10, 2011. Zenaida filed a Complaint for Injunction, Annulment of Deed of Real Estate Mortgage and Damages. She alleged the 5% monthly interest was excessive, unconscionable, and contrary to public policy, rendering the contract null and void. She also claimed she received only P80,000.00, not P200,000.00, and raised issues regarding the property’s ownership (being co-owned with her late husband and son) and the DMRP’s notarization. The Regional Trial Court (RTC) dismissed her complaint, upheld the mortgage and foreclosure, and awarded damages to Atty. Bulatao. The Court of Appeals (CA) partly granted Zenaida’s appeal. The CA ruled the mortgage was valid only to the extent of Zenaida’s share as a co-owner. It declared the 5% monthly interest excessive and unconscionable, reducing it to 1% per month (12% per annum). Consequently, it nullified the foreclosure sale, finding the demand for payment (based on the inflated interest) invalid, thus the obligation was not yet due. The CA also deleted the award of damages against Zenaida. Atty. Bulatao appealed to the Supreme Court.

ISSUE

The core issue is whether the stipulated 5% per month interest rate in the Deed of Mortgage of Real Property is excessive, unconscionable, and void, warranting its reduction and the nullification of the foreclosure proceedings based on an invalid demand.

RULING

The Supreme Court DENIED the petition and AFFIRMED the CA Decision with MODIFICATIONS. The Court held the 5% per month (60% per annum) interest rate was excessive, iniquitous, unconscionable, and exorbitant, rendering the stipulation void. Citing precedent, the Court reduced the interest to 6% per annum from June 3, 2008, until full payment. It further ruled that the nullity of the interest stipulation did not invalidate the principal loan obligation or the real estate mortgage contract itself. However, the foreclosure sale was correctly nullified by the CA because the demand for payment was based on an over-inflated amount (P540,000.00) due to the void interest, which constituted an invalid demand. Since there was no valid demand, Zenaida was not in default, making the foreclosure premature. The Court also upheld the CA’s deletion of the damages awarded against Zenaida. The mortgage was declared valid only as to Zenaida’s share in the co-owned property. The dispositive portion ordered Zenaida to pay Atty. Bulatao the principal loan of P200,000.00, with interest at 6% per annum from June 3, 2008, until full payment, and awarded Atty. Bulatao attorney’s fees.