Eleazar v. Abaya
REITERATIONFacts
The Antecedents: In June 1919, Gonzalo Abaya and his wife Segunda Abella, needing P4,000, entered into a deed of sale with right to repurchase (Exhibit A) with Joaquin A. Eleazar, as the plaintiff refused to grant a loan on unregistered lands. The defendants remained in possession and paid P40 monthly rent. They repurchased the property in April 1920. In June 1920, needing P4,000 again, they executed another deed of sale with right to repurchase (Exhibit B) under similar conditions, with a six-month repurchase period and P40 monthly rent. An extension was granted. In December 1921, facing financial difficulties, Gonzalo Abaya requested an additional P2,000 loan, leading to a mortgage deed (Exhibit C) for P6,000 at 10% per annum for five years, totaling P9,000, with P150 monthly payments (P100 to principal, P50 to interest). Payments were made until December 1922. In July 1923, needing P5,000, a new deed (Exhibit D) was executed. This consolidated the outstanding balance from Exhibit C (P4,650 principal and P2,050 interest) with the new loan of P5,570.15, totaling P10,220.15, payable in eight years with 5% annual interest, with monthly installments of P106.46 for principal and P2,612.22 for interest, leaving a balance of P8,113.77. Procedural History: The plaintiff, Joaquin A. Eleazar, filed a complaint against Gonzalo Abaya and Segunda Abella for the unpaid balance of P8,113.77, plus P1,300 in attorney's fees, and prayed for the sale of the mortgaged property in case of default. The defendants denied the allegations, asserting the contracts were usurious and should be declared null and void. The Court of First Instance of Laguna ruled in favor of the plaintiff, ordering the defendants to pay the sum, with interest and attorney's fees, and ordering the sale of the mortgaged property in default thereof. The Petition: The defendants appealed the decision, assigning errors related to the court's findings that the deeds were not loans secured by mortgages, that the loans were not usurious, that the plaintiff should have been ordered to pay the defendant, and that the preponderance of evidence favored the plaintiff.
Issue(s)
Whether the deeds of sale with pacto de retro (Exhibits A and B) and the subsequent mortgage contracts were usurious. Whether the gradual decrease of the principal in an installment loan makes the fixed interest payments usurious.
Ruling
The judgment of the Court of First Instance of Laguna is modified such that the 5% annual interest shall be computed from September 11, 1931. In all other respects, the judgment is affirmed, with costs against the appellants.
Ratio Decidendi
On Issue 1: The Court held that even if the deeds of sale with pacto de retro were treated as equitable mortgages, they were not usurious. A monthly rental/interest of P40 on a P4,000 loan represents a 12% annual interest rate, which was within the legal limit for loans secured by real property. Citing the precedent in Lopez and Javelona v. El Hogar Filipino, the Court reiterated that the payment of interest in advance does not render a contract usurious. Therefore, the structure of the initial loans did not violate the Usury Law. The classification of the contract as a sale or a mortgage was ultimately immaterial to the usury claim because the rate itself was lawful. On Issue 2: Regarding the installment-based mortgage, the Court admitted that a gradual decrease in principal could theoretically lead to usurious interest if payments remained fixed. However, the Court emphasized that the actual conduct of the parties and the interest truly collected must be evaluated. In this case, the defendants did not pay punctually or fully according to the agreed schedule. Applying the rule from Lopez and Javelona, the Court calculated the average interest collected during the actual period the defendants were paying. The evidence showed that the plaintiff did not at any time collect interest in excess of the legal limit relative to the outstanding balance. Consequently, the defense of usury was rejected as the actual interest rate applied did not breach the law.
Main Doctrine
Contracts denominated as sales with pacto de retro, where the vendor remains in possession and pays rent, may be considered as loans secured by mortgages. Usurious interest is determined by the average rate collected over the period of the loan, not solely by the stipulated rates at inception, especially when payments are not made punctually or in full.