G.R. No. 34187; September 7, 1931
JOAQUIN A. ELEAZAR, plaintiff-appellee, vs. GONZALO ABAYA and SEGUNDA ABELLA, defendants-appellants.

FACTS

Defendants Gonzalo Abaya and Segunda Abella obtained several loans from plaintiff Joaquin A. Eleazar, secured initially by deeds of sale with pacto de retro and later by mortgage contracts. The transactions began in 1919 with a P4,000 loan under a pacto de retro agreement, followed by another P4,000 loan in 1920 under similar terms. In 1921, the parties executed a mortgage deed (Exhibit C) for P6,000 (consolidating prior debts) with interest, payable in monthly installments. In 1923, a new mortgage deed (Exhibit D) was executed for P10,220.15 (including a new P5,000 loan and the balance from Exhibit C), payable in monthly installments. Defendants defaulted, leading plaintiff to file an action for foreclosure to recover the unpaid balance of P8,113.77. Defendants contended the contracts were equitable mortgages and the loans were usurious.

ISSUE

Whether the loan contracts between the plaintiff and the defendants were usurious and therefore void.

RULING

No, the contracts were not usurious. The Court found that the initial pacto de retro agreements, even if construed as equitable mortgages with the monthly “rental” treated as interest, did not exceed the 12% annual interest rate allowed by law. For the subsequent mortgage contracts, while the stipulated payment schedule could theoretically result in usurious interest over time due to the decreasing principal, the defendants did not make full and punctual payments as agreed. Applying the average interest actually collected by the plaintiff over the payment period, as established in Lopez and Javelona vs. El Hogar Filipino, the effective interest rate never exceeded the legal limit. The trial court’s judgment ordering payment was affirmed with modification only as to the start date for computing interest.

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