Development Bank of the Philippines v. Family Foods Manufacturing Co. Ltd., and Spouses Julianco and Catalina Centeno
REITERATIONFacts
The Antecedents: Respondent Family Foods Manufacturing Co. Ltd. (FAMILY FOODS), owned by Spouses Julianco and Catalina Centeno, obtained two loans from petitioner Development Bank of the Philippines (DBP): an industrial loan of ₱500,000.00 on September 15, 1982, payable in seven years with 18% interest and 8% penalty charge; and an additional loan of ₱440,000.00 on October 14, 1984, with 22% interest and 8% penalty charge. Both loans were secured by real estate and chattel mortgages over properties in Los Baños, Laguna. FAMILY FOODS failed to pay the loans. DBP initiated extrajudicial foreclosure proceedings, and the properties were awarded to DBP as the highest bidder. A certificate of sale was issued and registered. Before the redemption period expired, FAMILY FOODS entered into a contract of lease with DBP for the foreclosed properties, paying advance rentals but refusing to pay subsequent rentals. FAMILY FOODS also failed to redeem the properties, leading DBP to consolidate its title. Procedural History: Spouses Centeno filed a suit for Annulment of Sale, claiming substantial payments were made and that DBP imposed excessive interest and charges. They also alleged the foreclosure was void due to improper publication of the notice of auction sale and a defective certificate of posting. DBP countered that the foreclosure was valid, respondents were notified, and that respondents were estopped from questioning the sale due to the subsequent lease contract. The Regional Trial Court (RTC) dismissed the complaint, finding the foreclosure valid and respondents estopped by the lease agreement. The Court of Appeals (CA) modified the RTC decision, upholding the auction sale's validity but reducing the interest rates to 12% per annum and the penalty to 3% per annum, deeming the original rates iniquitous and unconscionable. Both parties moved for reconsideration, which were denied. The Petition: DBP filed a petition for review on certiorari, challenging the CA's reduction of the stipulated interest and penalty charges, arguing that these issues were not raised in the lower courts and that the stipulated rates were not unconscionable.
Issue(s)
Whether the reasonableness of the stipulated penalty charge and interest rates are within the issues of the instant case. Whether the justification provided for the reduction of the stipulated penalty charge and interest rates is supported by the evidence on record. Whether the stipulated penalty charge of 8% per annum and interest rates of 18% and 22% per annum are unreasonable, iniquitous, and unconscionable under the applicable decisions of the Supreme Court.
Ruling
The petition is GRANTED. The assailed Decision and Resolution of the Court of Appeals are REVERSED and SET ASIDE. The January 30, 2003 Decision of the Regional Trial Court of Calamba, Branch 92, dismissing the complaint, is REINSTATED.
Ratio Decidendi
On the issue of whether the reasonableness of the stipulated penalty charge and interest rates are within the issues of the instant case: The Supreme Court held that the Court of Appeals erred in ruling on the reasonableness of the stipulated interest and penalty charges. The records showed that respondents never raised the nullity of the stipulated interest as a ground for annulment of the auction sale in their complaint, nor was it an issue during the pre-trial conference or trial. The validity of the stipulated interest rate was raised for the first time on appeal in the appellants' brief, invoking the ruling in Medel v. Court of Appeals. The Court reiterated the well-settled principle that issues raised for the first time on appeal are barred by estoppel, as arguments not raised in the original proceedings violate basic principles of fair play. Therefore, the CA had no basis to reduce the stipulated interest rates. On the issue of whether the justification provided for the reduction of the stipulated penalty charge and interest rates is supported by the evidence on record: The Supreme Court found that respondents' own evidence showed they agreed to the stipulated interest rates of 18% and 22%, and the 8% penalty charge, in each promissory note. The Court emphasized that parties are bound by the stipulations in contracts voluntarily entered into, provided they are not contrary to law, morals, good customs, public order, or public policy. There was no showing of fraud or that respondents were at a disadvantage due to any handicap that would warrant the vigilant protection of the courts under Article 24 of the Civil Code. The Court cited Vales v. Villa and Spouses Pascual v. Ramos to underscore that courts cannot extricate parties from bad bargains or protect them from unwise investments unless there is a violation of law or an actionable wrong. On the issue of whether the stipulated penalty charge of 8% per annum and interest rates of 18% and 22% per annum are unreasonable, iniquitous, and unconscionable under the applicable decisions of the Supreme Court: The Supreme Court ruled that the stipulated interest rates of 18% and 22% were not unconscionable or excessive. It cited Garcia v. Court of Appeals, where 18% and 24% interest rates were sustained, and Bautista v. Pilar Development Corporation, where a 21% interest rate was upheld. Thus, the stipulated rates on respondents' promissory notes could not be struck down for being contrary to public policy. Similarly, the 8% penalty charge was upheld. The Court referenced Development Bank of the Philippines v. Go, stating that a penalty clause is a valid accessory obligation to ensure performance. Respondents failed to discharge the burden of proving an excuse for non-performance, such as force majeure or acts of the creditor, and thus could not avoid the agreed penalty charge.
Main Doctrine
Issues not raised in the lower courts cannot be raised for the first time on appeal. Parties are bound by the stipulations in contracts voluntarily entered into, provided they are not contrary to law, morals, good customs, public order, or public policy. Stipulated interest rates of 18% and 22% per annum, and an 8% penalty charge, are not inherently unconscionable or excessive.