Development Bank v. Philippine United Foundry
REITERATIONFacts
The Antecedents: In March 1968 the Development Bank of the Philippines (DBP) granted industrial loans to petitioners in the aggregate and took promissory notes and mortgages as security. The loans were restructured and refinanced over time, notably by a consolidation and new promissory notes in November 1975 and by foreign-currency denominated promissory notes dated December 11, 1980, June 5, 1981 and December 16, 1981. The promissory notes contained variable interest provisions, service fees and penalty charges; DBP later initiated foreclosure in October 1985 claiming arrearages computed in the tens of millions of pesos. Respondents contested the computation, alleged prior payments and raised defenses including failure of consideration arising from a separate contract with the Armed Forces of the Philippines. Procedural History: Foreclosure proceedings were suspended and respondents filed suit on December 23, 1986. The trial court issued a temporary restraining order and later a writ of preliminary injunction and, after trial, rendered judgment finding respondents liable only for the original P6.2 million loan and applied prior payments to interest and penalties, permanently enjoining foreclosure. The Court of Appeals affirmed the trial court in CA-G.R. CV No. 49239 dated May 7, 1999. The Privatization and Management Office (successor-in-interest to DBP/Asset Privatization Trust) sought relief by filing this petition for review on certiorari under Rule 45. The Petition: Petitioners challenged the CA ruling on grounds that the appellate court disregarded contractual stipulations, improperly related respondents' separate manufacturing contract with the Armed Forces to their loan obligations with DBP, and unlawfully upheld a permanent injunction in violation of Presidential Decree No. 385. Petitioners sought reversal and remand for correct determination of respondents' indebtedness under the operative promissory notes.
Issue(s)
Whether the Court of Appeals erred in disregarding the binding force of the promissory notes and mortgage contracts executed by the parties. Whether the Court of Appeals erred in treating respondents' separate manufacturing agreement with the Armed Forces of the Philippines as affecting their loan obligations to DBP. Whether the permanent injunction enjoining foreclosure violated Presidential Decree No. 385. Whether respondents' total indebtedness is P62,954,473.68 as claimed by DBP or limited to the original P6.2 million as held by the trial court and appellate court. Whether the interest rates and other charges imposed under the operative promissory notes are usurious and therefore subject to the legal rate under the Usury Law. Whether respondents' consent to the refinancing and restructuring was vitiated by undue influence or coercion.
Ruling
The petition is partly granted. The Supreme Court reversed and set aside the decision of the Court of Appeals dated May 7, 1999 and remanded the case to the trial court for determination of the total amount of respondents' obligation based on the promissory notes dated December 11, 1980, June 5, 1981 and December 16, 1981, applying the interest rate agreed upon by the parties or the legal rate of 12% per annum, whichever is lower. No costs.
Ratio Decidendi
On Whether the CA erred in disregarding the promissory notes and mortgages: The Court held that the promissory notes and mortgage contracts reflecting the restructuring and refinancing unequivocally express the terms and conditions governing the parties' loan relationship and are binding between the parties. The Court reasoned that parties are free to stipulate terms, and courts generally have no power to relieve parties from obligations voluntarily assumed merely because those contracts later become disadvantageous or unwise. It emphasized that where the signatures of duly authorized representatives on such instruments have been admitted, the genuineness and due execution are conclusive, and estoppel and mutuality of contracts preclude a party from denying obligations after having benefited from the transaction. The Court explained that refinancing is an exchange of an old debt for a new debt and that restructuring implies modification of essential terms; consequently, the second set of promissory notes governs the contractual relation of the parties. Finally, the Court concluded that the lower courts erred in ignoring those operative instruments and in unilaterally modifying contractual obligations already assumed by respondents. On Whether the CA improperly linked the AFP manufacturing agreement to the loan obligations: The Court held that the loan contract between respondents and DBP is distinct and separate from respondents' manufacturing agreement with the Armed Forces of the Philippines and that any failure of the AFP to perform under the manufacturing agreement provides a remedy against the AFP, not against DBP. The Court reasoned that there is no evidence that DBP was a party to the manufacturing contract or that DBP agreed to condone respondents' credit if the manufacturing contract failed, and that absent such an agreement the alleged failure of consideration vis-à-vis AFP cannot discharge respondents' obligations to their creditor. The Court further observed that the CA's reliance on alleged failure of consideration to annul the mortgage while upholding the loan was erroneous because a mortgage is accessory to the principal obligation, and its validity depends upon the validity of the loan it secures. On Whether the injunction violated Presidential Decree No. 385: The Court held that Presidential Decree No. 385 does not provide blanket authority to the government to deny borrowers due process and that the decree requires a hearing to determine whether the prerequisite (payment of 20% of arrearages) has been satisfied before injunctions may be denied. The Court explained that where the amount actually received by the borrower or the extent of arrearages is disputed, the trial court may make a provisional determination on the basis of evidence before it; hence PD 385 cannot be invoked to automatically bar injunctive relief in such circumstances. The Court therefore agreed with the CA that PD 385 did not by itself render the issuance of the injunction improper in the present posture. On Whether the indebtedness is as claimed by DBP or limited to the original loan amount: The Court found that the computation of the outstanding obligation involves legal principles governing computation of debt and is not purely factual; accordingly it remanded for the trial court to determine the total amount due under the operative promissory notes. The Court noted that DBP should have been given an opportunity to explain its Statement of Account entries and that the matter required calculation according to the terms of the promissory notes or, where the interest stipulated exceeds the legal maximum, by applying the legal rate of 12% per annum. On Whether the interest and charges are usurious: The Court recognized that if the interest applied exceeded the maximum allowed under the Usury Law (Act No. 2655 as amended by Presidential Decree No. 116), those stipulations should be struck out and the unpaid principal would remain enforceable with the legal rate of interest imposed. The Court explained the established rule that in usurious loans the stipulation as to interest is void but the principal debt subsists and the legal rate applies in the absence of an express rate; therefore if usury is found the trial court must recompute the obligation accordingly. On Whether consent was vitiated by undue influence: The Court held that the fact respondents were in financial distress and signed the restructuring documents to avert foreclosure does not, by itself, establish undue influence. The Court applied the definition of undue influence requiring that the influence exercised must have overpowered the contracting party's free agency and found no clear showing that respondents' representatives were deprived of reasonable freedom of choice when they executed the notes and mortgages. The Court therefore rejected the contention that the contracts were annulable on grounds of undue influence.
Main Doctrine
Courts must enforce the clear terms of freely executed promissory notes and mortgage contracts; usurious stipulations are void as to interest and the legal rate of 12% per annum applies in their stead; Presidential Decree No. 385 does not automatically bar injunctions where material facts such as the extent of arrearages and the amount actually received are in dispute.