G.R. No. L-82082. March 25, 1988.
INSULAR BANK OF ASIA AND AMERICA, plaintiff-appellant, vs. SPOUSES EPIFANIA SALAZAR and RICARDO SALAZAR, defendants-appellees.

FACTS

The spouses Salazar obtained a loan from Insular Bank of Asia and America (IBAA) evidenced by a promissory note for P42,050.00, payable by December 12, 1980. The note stipulated 19% annual interest, an escalation clause allowing IBAA to increase the rate without notice, a 2% per month penalty on unpaid amounts, and attorney’s fees equivalent to 25% of the sum due. Pursuant to Central Bank Circular No. 705, IBAA unilaterally increased the interest rate to 21%. The spouses defaulted but made partial payments totaling P68,676.75 by November 25, 1983, which IBAA applied solely to penalty and interest charges. IBAA filed a collection suit claiming P87,647.19 as of September 1984. The trial court rendered summary judgment, ordering the spouses to pay only P11,253.25 with 19% interest from the complaint’s filing, P1,000.00 attorney’s fees, and costs.
IBAA appealed, assigning errors on the disallowance of the 21% interest, the 2% monthly penalty, the 25% attorney’s fees, the computation of the obligation, and the failure to order joint and several liability.

ISSUE

Whether the trial court erred in not enforcing the stipulated escalation clause, penalty charges, and attorney’s fees, and in its computation of the outstanding obligation.

RULING

The Supreme Court modified the trial court’s decision. On the escalation clause, the Court, citing Banco Filipino v. Navarro, ruled such clauses are valid only if the loan’s remaining maturity exceeded 730 days as of the date of the applicable Central Bank circular authorizing an increase. The promissory note matured on December 12, 1980. Central Bank Circular No. 705 took effect on December 1, 1979. As the remaining maturity from December 1, 1979, was less than 730 days, IBAA could not validly increase the interest rate to 21%. The original 19% rate stood.
On the 2% monthly penalty, the Court found it iniquitous under Article 1229 of the Civil Code. The spouses demonstrated good faith through substantial partial payments, and the bank had already profited by P26,626.75 in interest over six years. The penalty was reduced to 1% per month or 12% per annum from the due date. Regarding attorney’s fees, the Court upheld the trial court’s reduction to P1,000.00 as reasonable, noting the judicial power to reduce unconscionable stipulated fees.
Recalculating, the Court found the spouses owed P38,915.18 as of the complaint’s filing date (principal plus 19% interest and reduced 12% penalty, minus payments made). This amount was to earn legal interest of 12% per annum from filing until full payment. The obligation remained joint and several. The modified decision ordered the Salazar spouses to pay IBAA P38,915.18 with 12% annual interest from September 12, 1984.