United Coconut Planters Bank v. Ang
REVERSALFacts
The Antecedents: Respondents Editha F. Ang and Violeta M. Fernandez obtained a P16,000,000.00 loan from United Coconut Planters Bank (UCPB, now substituted by Land Bank of the Philippines), secured by real estate mortgage, documented via Credit Agreement and promissory notes referencing vague rates like Manila Reference Rate, Treasury Bill Rates, or other market-based rates subject to quarterly review and resetting at UCPB's sole option. These interest provisions were potestative, entirely dependent on UCPB's will, with no shown agreement by respondents, violating mutuality under Civil Code Articles 1308 and 1309, and Truth in Lending Act disclosure requirements as notes were allegedly signed in blank. Respondents paid P2,349,514.95 but defaulted citing dollar shortage and high exchange rates; UCPB extrajudicially foreclosed and auctioned the property on August 2, 1999 for P21,985,000.00. Respondents filed petition for nullity of foreclosure, auction sale, promissory notes, and fixing of true account receivable. All courts, including this Resolution, found interests unlawful and void, but disputed foreclosure validity. Procedural History: RTC (Branch 9, Kalibo, Aklan) initially declared interest provisions, promissory notes, and auction null/void, ordering recomputation; on MR, upheld auction valid, held respondents liable for P16M principal plus 12% legal interest/penalty from demand, deducting payments and auction proceeds. CA (18th Division, Cebu) partially granted respondents' appeal: upheld promissory notes valid but nullified interest provisions and auction sale as premature sans default, remanded for recomputation of total indebtedness (principal payments + 12% interest to June 30, 2013; 6% thereafter). SC Third Division Decision (Nov 24, 2021, per Carandang, J.) set aside CA, declared foreclosure/auction valid relying on Advocates v. BSM, distinguishing Andal/Albos on facts (respondents' low payments vs. Andal's 68%). Respondents' MR urged adoption of Andal/Albos; UCPB opposed. The Petition: In MR, respondents argued prior SC reliance on Advocates' obiter misplaced (not on-point re: unilateral interests); Andal (2013, post-Advocates) directly held no default/invalid foreclosure for inability to pay arbitrary/unconscionable unilateral rates/penalties; Albos nullified foreclosure citing Espiritu (overstated demand deprived settlement chance). UCPB countered no mistake, distinguished cases (respondents defaulted due to dollar issues, low payments vs. Andal), urged indiscriminate non-application of Andal to avoid banking distrust.
Issue(s)
Whether the extrajudicial foreclosure and auction sale on August 2, 1999 may be valid despite the loan's interest rates being null and void for being potestative and violative of mutuality of contracts under Articles 1308 and 1309 of the Civil Code. Whether prior SC Decision correctly relied on Advocates v. BSM over Spouses Andal v. PNB, Spouses Albos v. Spouses Embisan, and related cases.
Ruling
The Motion for Reconsideration is GRANTED. The Decision dated November 24, 2021 is VACATED. The CA Decision dated May 11, 2015 in CA-G.R. CV No. 04270 is AFFIRMED IN TOTO, declaring the extrajudicial foreclosure and auction sale of August 2, 1999 NULL AND VOID, with remand for recomputation of indebtedness.
Ratio Decidendi
On validity of foreclosure despite void interests: The Court grants MR, reversing prior stance, holding foreclosure invalid as potestative interests (unilaterally set by UCPB via vague references subject to its option) violate mutuality (Arts. 1308-1309, Civil Code), rendering them void; sans valid interest demand, no default under Art. 1252 (principal not due until interests covered, but illegal interests non-demandable), depriving respondents of chance to pay correct amount (principal + legal interest). This applies Andal (no default for inability to pay arbitrary/unilateral rates, foreclosure premature/illegal), Albos/Espiritu (nullify if overstated demand prevents settlement; registration invalid, no title vesting), and Vasquez (null interests prevent default/foreclosure; unjust to lose property to inflated loan). Rejects prior distinctions (dollar shortage, low payments irrelevant; disposition not cause/percentage-dependent but on unilateral imposition). Equity demands fair opportunity to settle sans mercy to creditor; aligns with civil law fairness. Prior Advocates reliance erroneous (obiter on usury, not potestative unilateral rates). Justice Zalameda's dissent adopted. On jurisprudential conflict: Prior Decision misapplied Advocates/ Beluso (principal recovery/foreclosure subsists post-nullity) by distinguishing Andal/Albos on 'peculiar circumstances'; Resolution clarifies no such dependency—void unilateral interests alone annul foreclosure, per Vasquez's extensive synthesis (quoting Espiritu: 'no foreclosure... until correct amount'; Albos/Andal/Castro: null if overstated/iniquitous). Solidifies: bloated demands from void schemes invalidate proceedings; legal interest (12%/6%) imputable post-nullity.
Main Doctrine
Where loan documents impose potestative interest rates unilaterally determined by the lender in violation of the mutuality of contracts under Articles 1308 and 1309 of the Civil Code, such stipulations are null and void, preventing the lender from validly demanding payment inclusive of those interests and thus precluding a state of default by the borrower. Absent a valid demand for the correct amount (principal plus legal interest), no default occurs, rendering extrajudicial foreclosure proceedings premature and invalid, as the borrower is deprived of the opportunity to settle the true obligation. This principle applies regardless of the cause of non-payment (e.g., dollar shortage) or the portion of principal paid, focusing solely on the unilateral/potestative nature of the interests. Foreclosure sales conducted under such circumstances are nullified, with proceeds not vesting title to the purchaser, and courts must remand for recomputation of liability at legal rates (12% per annum pre-July 1, 2013; 6% thereafter). The rule aligns with equity, protecting mortgagors from losing property due to inflated demands from void interests, as reiterated in Spouses Andal v. PNB, Spouses Albos v. Spouses Embisan, Heirs of Espiritu v. Landrito, and Vasquez v. PNB.