Metrobank v. Co
REITERATIONFacts
1. The Antecedents: Spouses Edmund and Lily Co, owners of Mega Bedding Industries (MBI), maintained a long-term borrowing relationship with Metropolitan Bank and Trust Company (Metrobank) through its Magdalena Center branch. Between 1997 and 1998, the spouses entered into two written credit line agreements totaling PHP 17 million, secured by real estate mortgages over properties in Quezon City and San Juan. However, the spouses claimed that based on their dealings with the branch manager, Go Bon Juan, they were granted an oral credit line of up to PHP 48 million. When Go was replaced in 1999, the new management refused to extend fresh loans, leading to liquidity problems for MBI. The spouses eventually defaulted on their restructured loans in 2001, prompting Metrobank to initiate extrajudicial foreclosure proceedings. 2. Procedural History: The spouses filed a complaint for the nullification of the mortgages and foreclosure, arguing that Metrobank breached the PHP 48 million credit line agreement and imposed unconscionable interest rates. The Regional Trial Court (RTC) initially ruled in favor of the spouses, applying promissory estoppel. However, upon Metrobank's Motion for Reconsideration, the RTC reversed itself, finding no proof of a PHP 48 million promise. On appeal, the Court of Appeals (CA) reversed the RTC's second order and reinstated the original decision, ruling that Metrobank was estopped from denying the PHP 48 million limit and that the foreclosure was premature. 3. The Petition: Metrobank filed a Rule 45 petition before the Supreme Court, arguing that: (a) there was no evidence of a PHP 48 million credit line; (b) the branch manager had no authority to increase credit limits; (c) the foreclosure was justified by the spouses' admitted default; and (d) the interest rates were validly agreed upon and reflective of market conditions during the Asian financial crisis.
Issue(s)
Whether Metrobank is estopped from denying the existence of a PHP 48 million credit line based on its prior lending patterns. Whether the 'prevailing rate' interest stipulations in the credit line agreements and promissory notes are valid. Whether the extrajudicial foreclosure of the mortgaged properties is valid despite the invalidity of the interest rate stipulations.
Ruling
The Petition is PARTIALLY GRANTED. The Supreme Court reversed the CA's finding on the PHP 48 million credit line but affirmed the nullification of the foreclosure due to invalid interest rates. The interest is reduced to the legal rate, and all awards for damages are deleted.
Ratio Decidendi
On Issue 1: The Court ruled that no PHP 48 million credit line existed because promissory estoppel requires a promise that is plain, unambiguous, and specific. The spouses failed to prove that Metrobank or its authorized officers made a definite promise to maintain a PHP 48 million limit; rather, the spouses merely inferred this limit from a series of case-to-case loan approvals. Furthermore, the power to approve such credit lines rested with the bank's Executive Committee, not the branch manager, and the spouses could not rely on the manager's alleged practice to override written contracts. The written agreements for PHP 17 million constitute the only definitive manifestation of the parties' intent. Consequently, Metrobank did not breach any contract by refusing to extend further credit once those limits were exhausted. On Issue 2: The interest rate stipulations were declared void for violating the principle of mutuality of contracts under Article 1308 of the Civil Code. The Court found that the 'prevailing rate' clause, which was subject to review every availment or repriced every 30 days at the bank's sole discretion, lacked a market-based reference rate. Following the doctrine in Security Bank Corporation v. Spouses Mercado, the Court held that for a floating interest rate to be valid, it must be pegged to an external, verifiable indicator such as the Manila Reference Rates (MRR) or T-Bill rates. Since Metrobank unilaterally determined the rates on a 'take it or leave it' basis, the spouses' consent was effectively vitiated. Therefore, the interest rates ranging from 15% to 35% were unenforceable, and the legal interest rate must apply instead. On Issue 3: The extrajudicial foreclosure was nullified because the demand for payment was based on an overinflated amount resulting from the void interest rates. Applying the rulings in Heirs of Espiritu v. Spouses Landrito and Vasquez v. Philippine National Bank, the Court explained that a valid foreclosure requires a valid demand for the correct amount of the debt. Under Article 1253 of the Civil Code, payments are applied to interest first; if the interest is illegal and non-demandable, the debtor cannot be considered in a state of default for the principal. Because the spouses were not given the opportunity to settle their obligation at the correct legal interest rate, the foreclosure proceedings were premature and void. The Court ordered the cancellation of the bank's titles and the restoration of the properties to the spouses, subject to the payment of the principal plus legal interest.
Main Doctrine
Promissory estoppel requires a promise that is plain, unambiguous, and specific enough to induce reliance; a mere pattern of lending or the practice of a branch manager does not constitute a binding promise for a specific credit limit. Furthermore, interest rate stipulations that grant a lender unilateral discretion to set 'prevailing rates' without market-based references violate the principle of mutuality of contracts. Consequently, a foreclosure based on a demand overinflated by such void interest rates is null and void, as the debtor was not placed in a valid state of default regarding the correct amount due. The legal interest rate must be applied in such instances, and the foreclosure sale must be nullified to allow the debtor to settle the actual obligation.