G.R. No. L-17165; July 31, 1962
Emma R. Geniza, Aurelio Geniza, Lorenzo Rivera, Catalina Carreon Rivera and Zacarias Rivera, plaintiffs-appellants, vs. Henry Sy and Asia Mercantile Corporation, defendants-appellees.

FACTS

On July 8, 1959, two mortgage contracts were executed in favor of defendant Asia Mercantile Corporation. The first was by spouses Catalina Carreon and Zacarias Rivera over a lot for a P50,000 loan payable in 30 days with 12% annual interest. The second, with identical terms, was by Emma R. Geniza, Aurelio Geniza, and Lorenzo Rivera over two parcels of land for another P50,000 loan. Both contracts contained a stipulation that upon default, the mortgagee could foreclose and the mortgagor would pay an amount equivalent to 30% of the unpaid sum as attorney’s fees and liquidated damages.
The Rivera spouses defaulted, prompting the extrajudicial foreclosure of their mortgage. The property was sold for P68,567.57. The mortgagee applied the proceeds to the principal (P50,000), interest (P2,000), and, applying a reduced rate of 5%, attorney’s fees and liquidated damages (P2,500), leaving an excess of P13,567.57 for the mortgagors. The Geniza mortgage had not been foreclosed at the time of suit.

ISSUE

Whether the stipulated 30% attorney’s fees and liquidated damages are excessive and subject to reduction by the court.

RULING

Yes, the stipulated amount is excessive and subject to judicial reduction. The Court affirmed the trial court’s reduction of the stipulated 30% to 5% of the obligation. The legal logic is grounded on the Civil Code provisions granting courts the authority to equitably reduce liquidated damages if they are iniquitous or unconscionable (Articles 1227 and 1229). The Court found the 30% stipulation for a short-term, 30-day loan to be precisely that—iniquitous—and upheld the trial judge’s discretion to modify it to a fair and reasonable level.
The Court rejected the appellants’ argument that the stipulation constituted a cloak for usury. There was no factual allegation or evidence presented to demonstrate that the mortgagee’s intent was to exact usurious interest, nor that the contract was contra bonos mores. In the absence of such proof, the stipulation was treated strictly as a potentially oppressive penalty clause, subject to reduction but not nullification on usury grounds. The award of P5,000 in attorney’s fees to the appellants for bringing the suit was also denied. The judgment ordering the return of the P13,567.57 excess to the Rivera spouses was affirmed. The action regarding the Geniza mortgage was correctly dismissed as premature since no foreclosure had occurred.