G.R. No. L-46158 November 28, 1986
TAYUG RURAL BANK, plaintiff-appellee, vs. CENTRAL BANK OF THE PHILIPPINES, defendant-appellant.

FACTS

Tayug Rural Bank obtained thirteen loans from the Central Bank via rediscounting between 1962 and 1963, evidenced by promissory notes stipulating interest rates but containing no provision for a penalty on past due accounts. On December 23, 1964, the Central Bank, through a Monetary Board resolution and a subsequent Memorandum Circular (DLC-8), imposed a 10% per annum penalty interest on all past due loans of rural banks, effective January 4, 1965, and enforced from July 4, 1965. Tayug Rural Bank, with an outstanding balance, was assessed this penalty. The bank filed suit to recover the penalties already collected and to restrain further imposition, arguing the promissory notes contained no such penal clause. The Central Bank counterclaimed for the outstanding balance plus accrued interest and the 10% penalty, justifying its action under its rule-making authority.

ISSUE

The core legal issue is whether the Central Bank, through the Monetary Board, could validly impose a 10% penalty interest on past due loans contracted before the issuance of the penal regulation, absent a stipulation in the governing promissory notes.

RULING

The Supreme Court ruled in favor of Tayug Rural Bank, affirming the trial court with modification. The legal logic is anchored on the principle of non-impairment of contracts and the nature of the Central Bank’s regulatory power. The Court held that the promissory notes constituted the contract between the parties. Since these notes executed prior to December 1964 contained no penalty clause for past due obligations, the subsequent imposition of the 10% penalty via Memorandum Circular DLC-8 could not retroactively alter the terms of that contract. Such retroactive application would unconstitutionally impair the obligation of contracts. The Central Bank’s authority to promulgate reasonable rules and regulations under its charter does not extend to unilaterally adding substantive penal terms to pre-existing contracts. The Court noted that the Central Bank itself later revised its loan form to include a penalty clause prospectively, which tacitly admitted the need for contractual incorporation. However, the Court upheld the contractual provision in the promissory notes for a 10% collection cost/attorney’s fees in case of suit. Consequently, while the retroactive penalty was invalidated, Tayug Rural Bank was ordered to pay this stipulated collection cost on its outstanding debt.