Castro v. Tan
REITERATIONFacts
The Antecedents: Spouses Tan obtained a loan of ₱30,000.00 from Spouses Castro, secured by a real estate mortgage over a residential lot. The loan agreement stipulated an interest rate of 5% per month, compounded monthly, payable within six months. Procedural History: Respondent Tan failed to pay the loan upon maturity. Petitioners demanded payment of ₱359,000.00, which included an accumulated sum based on the stipulated interest. Petitioners foreclosed the mortgage extrajudicially, becoming the sole bidder. The redemption period expired, and title was consolidated in favor of petitioners. Respondent Tan, joined by other respondents, filed a complaint for nullification of the mortgage and foreclosure, alleging unconscionable interest rates. The Regional Trial Court (RTC) partially rescinded the agreement, reducing the interest rate to 12% per annum and allowing redemption for ₱200,000.00. The Court of Appeals (CA) affirmed the RTC's decision, modifying it to allow redemption by paying the principal amount of ₱30,000.00 with 12% interest per annum and penalty charges until full payment. The Petition: Petitioners assail the CA's decision, arguing that the CA erred in nullifying the voluntarily agreed-upon interest rate, unilaterally changing the contract terms, and extending the redemption period beyond the one-year statutory limit.
Issue(s)
Whether the Court of Appeals erred in nullifying the interest rate voluntarily agreed upon by the parties. Whether the Court of Appeals erred in unilaterally changing the terms and conditions of the mortgage contract. Whether the Court of Appeals erred in extending the period of redemption in favor of the respondents.
Ruling
The petition is denied. The assailed Decision of the Court of Appeals is affirmed with the modification that the award of 1% liquidated damages per month is deleted, and petitioners are ordered to reconvey the subject property to respondents conditioned upon the payment of the loan together with the rate of interest fixed herein.
Ratio Decidendi
On the issue of the unconscionable interest rate: The Court held that while parties have wide latitude to stipulate on interest rates due to the suspension of the Usury Law ceiling, interest rates can still be declared illegal if unconscionable. The 5% monthly interest rate, or 60% per annum, compounded monthly, stipulated in the Kasulatan is excessive, iniquitous, unconscionable, and exorbitant, contrary to morals and the law. Such a stipulation is void ab initio for being violative of Article 1306 of the Civil Code. Therefore, the Court of Appeals correctly imposed the legal interest of 12% per annum in place of the excessive interest stipulated in the Kasulatan, citing previous rulings in Medel v. Court of Appeals and Ruiz v. Court of Appeals. On the issue of unilateral alteration of contract terms: The Court found that the CA did not unilaterally change the contract terms. The freedom of contract is not absolute and is subject to limitations, such as Article 1306 of the Civil Code, which prohibits stipulations contrary to law, morals, good customs, public order, or public policy. Since the compounded interest rate of 5% per month was deemed iniquitous and unconscionable, it was a void stipulation, inexistent from the beginning. The debt is to be considered without this stipulation, and the legal interest of 12% per annum is imposed in lieu thereof, aligning with established jurisprudence. On the issue of extending the redemption period: The Court nullified the foreclosure proceedings held on March 3, 1999, because the amount demanded as the outstanding loan was overstated due to the unconscionable interest. Consequently, it was not shown that the respondents failed to pay the correct amount of their outstanding obligation. Therefore, the registration of the foreclosure sale was declared invalid and could not vest title over the mortgaged property. The issue of extending the redemption period was rendered moot by the nullification of the foreclosure proceedings. The Court ordered the reconveyance of the property conditioned upon the payment of the loan with the legally fixed interest rate.
Main Doctrine
Stipulations authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law, and are thus void ab initio. The legal interest of 12% per annum shall be imposed in lieu of excessive interest stipulated in an agreement. Furthermore, foreclosure proceedings conducted based on an overstated outstanding loan amount are nullified.