Spouses Puerto v. Court of Appeals
REITERATIONFacts
The Antecedents: Petitioners, Spouses Sinfronio and Esperanza Puerto, were the registered owners of a house and lot. They mortgaged this property to private respondents, Spouses Inocencio and Eleuteria Cortes, for a loan of P200,000.00, payable within one year, with a stipulation that private respondents could foreclose the property upon default and be appointed receiver. Petitioners claimed the actual consideration was P150,000.00, with the P50,000.00 difference representing prepaid interest, and alleged a verbal agreement to conceal the usurious nature of the loan. Petitioners failed to pay the loan upon maturity, leading to foreclosure and public auction where private respondents were the highest bidders. Subsequently, petitioners entered into a lease contract with private respondents for the same property, paying P3,000.00 monthly as rentals, which was allegedly a disguised interest payment. Petitioners failed to pay rentals, prompting an ejectment case. Procedural History: Petitioners filed an action for the declaration of nullity of the Deed of Real Estate Mortgage. The trial court dismissed the complaint, ordering petitioners to pay monthly sums and costs. The Court of Appeals initially reversed the trial court, declaring the mortgage contract null and void and ordering the cancellation of the title. However, upon motion for reconsideration, the Court of Appeals reinstated the trial court's decision, affirming the dismissal of the complaint. The Petition: Petitioners sought review of the Court of Appeals' amended decision, arguing that the appellate court overlooked significant facts and circumstances, erred in its pronouncements contrary to Supreme Court decisions, and acted with grave abuse of discretion. The principal issue was whether the loan contract violated the Usury Law.
Issue(s)
Whether the contract of loan secured by a real estate mortgage violated the Usury Law, and the effect of such violation on the principal loan obligation. The effect of a usurious contract on the mortgage contract and its subsequent foreclosure, and the propriety of awarding interest as damages.
Ruling
The Supreme Court granted the petition, reversed the amended decision of the Court of Appeals, and reinstated its earlier decision dated September 30, 1998. The Court declared the mortgage contract usurious and void, consequently rendering the foreclosure of the property ineffectual. Petitioners were ordered to pay the principal loan of P150,000.00 with legal interest at 12 percent per annum from the date of demand by way of damages. The transfer certificate of title in the name of private respondents was ordered cancelled, and a new one to be issued in favor of petitioners. This is without prejudice to the right of respondents to proceed against petitioners for the principal obligation including damages.
Ratio Decidendi
On the issue of usury and its effect on the principal loan: The Court found the contract usurious because the difference between the stated loan amount and the actual loan, including prepaid interest, exceeded the legal rate. The Court emphasized looking beyond the form to prevent usury law evasions. The principal stipulation to pay the debt remains valid, while the accessory stipulation of usurious interest is void. The loan becomes one without stipulated interest, and the debtor must still pay the principal amount. The Court awarded 12 percent per annum interest as compensatory damages for the breach of the obligation to pay the principal loan, computed from the time of default, in conformity with Eastern Shipping Lines, Inc. vs. Court of Appeals. On the validity of the foreclosure: The Court held that the foreclosure was invalid because it stemmed from a usurious mortgage contract. Citing Delgado vs. Alonso Duque Valgona, the Court affirmed that if the mortgage contract is void due to usury, the foreclosure proceedings based on such contract are ineffectual. Contracts and stipulations intended to circumvent the laws against usury are void, and parties must be restored to their original positions. Consequently, the transfer certificate of title issued to private respondents was ordered cancelled, and the property was to be returned to the petitioners.
Main Doctrine
A contract of loan with usurious interest consists of principal and accessory stipulations; the principal one is to pay the debt, and the accessory stipulation is to pay interest thereon. These two stipulations are divisible, and only the accessory stipulation of usurious interest is void, while the principal stipulation to pay the debt remains valid. The loan becomes one without a stipulation as to payment of interest, and the debtor must pay the principal loan with legal interest by way of damages from the time of default.