First Metro Investment Corp. v. Este del Sol Mountain Reserve, Inc.
REITERATIONFacts
The Antecedents: Petitioner First Metro Investment Corporation (FMIC) granted respondent Este del Sol Mountain Reserve, Inc. (Este del Sol) a loan of P7,385,500.00. The loan agreement stipulated an interest rate of 16% per annum, a 20% one-time penalty for default, 2% monthly compounded liquidated damages, and 25% attorney's fees. Simultaneously, Este del Sol executed an Underwriting Agreement and a Consultancy Agreement with FMIC, involving substantial fees for underwriting, supervision, and consultancy services over four years. These fees, totaling P1,730,000.00, were deducted from the first release of the loan. Este del Sol defaulted on its loan obligations. FMIC foreclosed the real estate mortgage securing the loan and bid P9,000,000.00. A deficiency balance remained, prompting FMIC to file a collection suit against Este del Sol and its individual sureties. Procedural History: The Regional Trial Court (RTC) ruled in favor of FMIC, ordering the defendants to pay the deficiency balance, interest, and attorney's fees. The Court of Appeals reversed the RTC decision, finding that the Underwriting and Consultancy Agreements were mere subterfuges to camouflage usurious interest. The appellate court declared the stipulated penalties, liquidated damages, and attorney's fees excessive and unconscionable, reducing the penalty to 20% and attorney's fees to 10% of the foreclosure sale proceeds. It ordered FMIC to reimburse Este del Sol the difference between the amounts due to each party. The Petition: FMIC filed a petition for review on certiorari with the Supreme Court, assailing the Court of Appeals' findings that the underwriting and consultancy agreements were part of a usurious scheme and that the stipulated penalties and fees were unconscionable.
Issue(s)
Whether the Underwriting and Consultancy Agreements should be considered separate and distinct from the Loan Agreement. Whether the Underwriting and Consultancy Agreements were mere subterfuges to camouflage usurious interest charged by the petitioner. Whether the stipulated penalties, liquidated damages, and attorney's fees were excessive, iniquitous, unconscionable, and revolting to the conscience. Whether Central Bank Circular No. 905, which removed interest rate ceilings, should be applied retroactively to a contract executed prior to its effectivity.
Ruling
The Supreme Court denied the petition and affirmed the Decision of the Court of Appeals. It held that the Underwriting and Consultancy Agreements were indeed subterfuges to camouflage usurious interest. The Court also found the stipulated penalties and attorney's fees to be excessive and unconscionable, upholding the appellate court's reduction of these amounts. The Court reiterated that Central Bank Circular No. 905 cannot be applied retroactively.
Ratio Decidendi
On the separation of agreements: The Court held that the Underwriting and Consultancy Agreements were not separate and distinct from the Loan Agreement. The fact that they were executed simultaneously on the same date, with the fees set to coincide with the loan term, and that the underwriting agreement was a condition precedent for the loan, indicated they were integral parts of a single transaction. The Court emphasized that the form of a contract is not conclusive, and the law will not permit a usurious loan to hide behind a legal form. On the nature of the fees as subterfuges: The Court found ample evidence that the fees were designed to conceal usurious interest. This was supported by the fact that FMIC billed P1,330,000.00 for consultancy fees despite the agreement stipulating P332,500.00 per annum. Furthermore, FMIC failed to perform its obligations under the Underwriting Agreement, such as organizing an underwriting syndicate, and there was no real need for such an agreement as Este del Sol had its own marketing arm. The Court concluded that these agreements were exacted as essential conditions for the loan, constituting a corrupt intention to violate the Usury Law. On the excessiveness of penalties and fees: The Court agreed with the appellate court that the stipulated penalties, liquidated damages, and attorney's fees were excessive, iniquitous, and unconscionable. The attorney's fees of 25% of the alleged amount due, amounting to P3,188,630.75, were deemed manifestly exorbitant. Applying Articles 1229 and 2227 of the New Civil Code, the Court upheld the reduction of attorney's fees to 10% of the foreclosure sale proceeds as reasonable and sufficient compensation. On the retroactivity of Central Bank Circular No. 905: The Court reiterated the elementary rule that laws in force at the time a contract is made govern it. Central Bank Circular No. 905, which removed interest rate ceilings, took effect on January 1, 1983, long after the loan agreement in 1978. The Court clarified that a Central Bank Circular cannot repeal a law, and thus, its retroactive application to a contract executed while the Usury Law was in effect was impermissible.
Main Doctrine
Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury. In usurious loans, the entire obligation does not become void because of an agreement for usurious interest; the unpaid principal debt still stands and remains valid but the stipulation as to the usurious interest is void, consequently, the debt is to be considered without stipulation as to the interest.