Andal v. Philippine National Bank
REITERATIONFacts
The Antecedents: Spouses Bayani H. Andal and Gracia G. Andal (petitioners-spouses) obtained a loan from Philippine National Bank (PNB) amounting to P21,805,000.00, evidenced by twelve (12) promissory notes with initial interest rates ranging from 17.5% to 27% per interest period. To secure the loan, they executed a real estate mortgage over five parcels of land. Despite a partial payment of P14,800,000.00 made by the petitioners-spouses to avoid foreclosure, PNB proceeded to foreclose the mortgage on three of the parcels of land. PNB emerged as the highest bidder in the subsequent public auction sale, consolidated ownership, and obtained new titles. This prompted the petitioners-spouses to file a complaint for annulment of the mortgage, sheriff's certificate of sale, and declaration of nullity of increased interest rates and penalty charges, alleging that the exorbitant and unilaterally imposed interest rates prevented them from paying their obligation and that they signed the promissory notes in blank. Procedural History: The Regional Trial Court (RTC), Branch 84, Batangas City, ruled in favor of the petitioners-spouses, declaring the foreclosure sales, certificates of sale, and consolidation of titles illegal and void. The RTC reduced the interest rate to 6% per annum, to be applied on a declining balance after considering partial payments, and ordered the cancellation of penalty charges and the reinstatement of the original titles in the names of the petitioners-spouses. PNB appealed this decision to the Court of Appeals (CA). The CA, while agreeing that the interest rates were void due to unilateral imposition and violation of the principle of mutuality of contracts, modified the RTC's decision by setting the interest rate at 12% per annum from the date of default, instead of the 6% ordered by the RTC. PNB's motion for reconsideration was denied by the CA. The Petition: Petitioners-spouses are now before the Supreme Court via a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking to partially set aside the Decision and Resolution of the Court of Appeals. They reiterate their position that no interest should be imposed on their loan, or at the very least, interest should only be computed from the finality of the judgment declaring the foreclosure sale null and void, citing CA decisions in Spouses Mercado v. China Banking Corporation and Spouses Caraig v. The Ex-Officio Sheriff of RTC, Batangas City. They argue that if the interest rate stipulation is potestative or void, then no interest is due, or alternatively, interest should only commence from the finality of the judgment annulling the foreclosure sale, based on the doctrine of operative facts.
Issue(s)
Whether the unilateral imposition of interest rates by the respondent bank is valid. Whether the foreclosure sale is valid despite the alleged illegal interest rates. Whether petitioners-spouses are entitled to recover the principal loan obligation without interest or with interest computed only from the finality of the judgment declaring the foreclosure sale null and void.
Ruling
The Supreme Court denied the petition and affirmed the judgment of the Court of Appeals with modification. The Court ruled that the 12% interest per annum shall be applied from the date of default until June 30, 2013, after which date and until fully paid, the outstanding obligation shall earn interest at 6% per annum. The case was remanded to the trial court for proper computation.
Ratio Decidendi
On the validity of unilateral imposition of interest rates: The Court reiterated that the unilateral determination and imposition of interest rates by a bank without the borrower's assent violates the principle of mutuality of contracts, as enshrined in Article 1308 of the Civil Code. The fact that the petitioners-spouses were made to sign promissory notes in blank regarding interest rates, which were subsequently filled in by the bank with exorbitant rates, rendered these stipulations void. This is consistent with the principle that contracts of adhesion, where one party dictates the terms, are strictly construed against the party who prepared them, especially when they involve onerous stipulations like interest rates. The Court emphasized that while the stipulation on the interest rate was void, the obligation to pay interest itself, as agreed upon in the loan contract, remained valid. Therefore, the petitioners-spouses are liable to pay interest from the time they defaulted in their payment until the loan is fully paid. On the validity of the foreclosure sale: The Court affirmed the findings of the lower courts that the foreclosure proceedings were invalidated because the respondent bank had no right to foreclose the properties. The petitioners-spouses could not be considered in default due to their inability to pay the arbitrarily, illegally, and unconscionably adjusted interest rates and penalty charges unilaterally imposed by the bank. Consequently, the foreclosure was premature. The Court clarified that the nullity of the interest rate stipulation did not automatically mean no interest was due, but it invalidated the basis for the foreclosure. The foreclosure sale was declared illegal and void because it was predicated on an obligation that was not yet legally demandable due to the void interest rates. On the computation of interest and default: The Court disagreed with the petitioners-spouses' contention that no interest should be due or that interest should only be computed from the finality of the judgment. The Court held that the stipulation requiring the payment of interest remained valid, even if the rate was declared void. The petitioners-spouses were considered in default not from the initial demand by the bank, but from the date the Supreme Court's Resolution in a related case (G.R. No. 194164), which denied the respondent bank's appeal, became final and executory on May 20, 2011. This marked the point from which the loan obligation became definitively due and demandable. Pursuant to BSP Circular No. 799, series of 2013, and the ruling in Dario Nacar v. Gallery Frames, the legal rate of interest was adjusted. Thus, the 12% per annum interest rate, as previously imposed by the CA, would apply from the date of default (May 20, 2011) until June 30, 2013. Thereafter, the interest rate would be reduced to 6% per annum until the obligation is fully paid.
Main Doctrine
The unilateral determination and imposition of interest rates by a bank without the borrower's assent violates the principle of mutuality of contracts. While the nullity of the interest rate stipulation does not extinguish the obligation to pay interest, the rate must be based on what was legally stipulated or, in its absence, the legal rate. Default, for purposes of computing interest, commences from the finality of the judgment declaring the foreclosure sale null and void, unless otherwise stipulated.