Mallari v. Prudential Bank
REITERATIONFacts
The Antecedents: Petitioners Spouses Florentino and Aurea Mallari obtained two loans from respondent Prudential Bank: a ₱300,000.00 loan in December 1984, secured by a Deed of Assignment of a time deposit, and a ₱1.7 million loan in December 1989, secured by a Deed of Real Estate Mortgage. Petitioners failed to settle their obligations. The bank sent demand letters for the outstanding amounts, which had accumulated significantly due to stipulated interest and penalty charges. Procedural History: The bank initiated extrajudicial foreclosure proceedings for the mortgaged property. Petitioners filed a complaint for annulment of mortgage, injunction, and damages, alleging, among others, that the ₱300,000.00 loan should have been considered paid by the assigned time deposit and that the bank unilaterally increased charges. The Regional Trial Court (RTC) initially denied the injunction but later issued a restraining order, which was subsequently lifted. The bank proceeded with the foreclosure, and a Certificate of Sale was issued. The RTC eventually granted the bank's demurrer to evidence and dismissed the complaint, finding no evidence of bad faith. The RTC ruled that the time deposit only covered the principal of the first loan, not the accumulated interest and penalties, and that the second loan's accumulated amount justified the foreclosure. The Court of Appeals (CA) affirmed the RTC's decision. The Petition: Petitioners elevated the case to the Supreme Court, arguing that the CA erred in affirming the RTC's decision, particularly concerning the alleged unconscionable interest rate and penalty charge.
Issue(s)
Whether the 23% per annum interest rate and 12% per annum penalty charge on the ₱1,700,000.00 loan are excessive or unconscionable; and whether the RTC and CA erred in dismissing the complaint and affirming the foreclosure.
Ruling
The Supreme Court denied the petition for review, affirming the Decision of the Court of Appeals which upheld the Regional Trial Court's dismissal of the complaint. The Court found the stipulated interest rate of 23% per annum and penalty charge of 12% per annum to be not unconscionable.
Ratio Decidendi
On the issue of unconscionable interest rates and penalty charges and the dismissal of the complaint: The Court reiterated the principle that parties are free to enter into agreements and stipulate terms and conditions, provided they are not contrary to law, morals, good customs, public order, or public policy, as stated in Article 1306 of the Civil Code. The Court distinguished the present case from previous rulings where significantly higher interest rates (e.g., 66% p.a., 3-5% per month) were declared unconscionable. The agreed-upon rate of 23% per annum, which is less than 2% per month, was found to be much lower than those previously deemed excessive. Citing jurisprudence such as Villanueva v. Court of Appeals and Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and Mortgage Bank, the Court held that a 24% per annum interest rate is not considered unconscionable. Therefore, the 23% per annum interest rate agreed upon by the petitioners and the respondent bank was not deemed excessive or unconscionable. Similarly, the 12% per annum penalty charge was found not to be excessive or unconscionable. The Court cited Ruiz v. CA, which held that a surcharge or penalty stipulated in a loan agreement in case of default partakes of the nature of liquidated damages and is expressly recognized by law. Since the petitioners defaulted in their payment and there was no showing that their failure was due to force majeure or the acts of the creditor, they are bound to pay the stipulated penalty charge. The contract, being the law between the parties, binds them to its stipulations. Therefore, the RTC and CA did not err in dismissing the complaint and affirming the foreclosure.
Main Doctrine
Stipulated interest rates and penalty charges of 23% per annum and 12% per annum, respectively, are not unconscionable when freely agreed upon by the parties in a loan contract, especially when they are lower than rates previously deemed excessive by jurisprudence.