Hodges v. Salas
REITERATIONFacts
The Antecedents: Defendants Carlota and Paz Salas executed a power of attorney in favor of their brother-in-law, Felix S. Yulo, authorizing him to obtain a loan and secure it with a mortgage on their real property. Yulo, acting under this power, obtained a loan of P28,000 from plaintiff C. N. Hodges, payable within ten years with 12% annual interest payable in advance. A promissory note and a mortgage deed were executed, which was registered. The P28,000 was not delivered entirely to Yulo but was applied to various transactions, including P8,188.29 for a mortgage constituted by Yulo, P2,000 for Yulo's purchase of property, and P9,200 to cancel a mortgage constituted by the defendants. The defendants failed to pay the stipulated interest, and the plaintiff filed an action to foreclose the mortgage. Procedural History: The Court of First Instance of Occidental Negros absolved the defendants, ruling that they were liable only for P14,451.71 of the capital, that the transactions and interest charged were usurious, that payments made should be applied to the capital, and that the plaintiff must refund P3,327.06 and pay costs. The Petition: The plaintiff appealed the decision, assigning errors concerning the foreclosure suit's substantiation, the finding of usury, the statute of limitations for the usury action, the award of attorney's fees, and the interpretation of the power of attorney and computation of the capital and interest owed.
Issue(s)
Whether the unobjected oral testimony regarding the registration of the mortgage is sufficient to sustain a foreclosure action despite the Best Evidence Rule. Whether the charging of one year's interest in advance and subsequent unstipulated compound interest renders the contract usurious. Whether an agent authorized by SPA to borrow money for a principal may validly apply portions of that loan to satisfy personal debts to the lender. Whether the defense of prescription for the recovery of usurious interest must be specifically pleaded.
Ruling
The appealed judgment is modified. The defendants are ordered to pay jointly and severally to the plaintiff the sums of P19,133.50 and P1,781.17. Within three months, they shall make payment or deposit these sums with the clerk of court, at the disposal of the plaintiff. Failure to do so will result in the mortgaged property being sold at public auction to satisfy the debt.
Ratio Decidendi
On Issue 1: The Court ruled that while Section 284 of the Code of Civil Procedure generally requires the writing itself to prove its contents, secondary evidence is admissible if not objected to. Since the defendants' counsel did not object to Hodges' oral testimony that the mortgage was registered and noted on the title, the trial court erred in dismissing the foreclosure character of the action. It is a 'universally accepted' principle that incompetent evidence, once admitted without objection, must be given the probatory value it deserves. Consequently, the registration of the mortgage was sufficiently established for the purpose of foreclosure. On Issue 2: The Court clarified that under Section 5 of Act No. 2655 (as amended by Act No. 3291), a creditor is expressly permitted to charge interest in advance for not more than one year. Therefore, the advance collection of the first year's interest did not make the contract usurious. Regarding the compound interest, while Hodges did charge it without stipulation (a violation of the Usury Law), such a subsequent illegal act does not render the original contract void ab initio. The illegal interest should simply be applied to the payment of the stipulated unpaid interest and the principal capital. On Issue 3: The Court held that the agent, Yulo, exceeded his authority under Article 1714 of the Civil Code. The SPA authorized him to borrow money 'in our respective names and representation,' implying the funds were for the principals. Using P10,188.29 to pay Yulo's personal debt to Hodges was an act outside the scope of the agency. The lender, Hodges, was aware of this diversion of funds; thus, the defendants (principals) cannot be held liable for the portion of the loan that was never placed at their disposal or used for their benefit. The principal capital for which defendants are liable was reduced to P17,811.71. On Issue 4: The Court reiterated that prescription is an affirmative defense that must be specifically pleaded in the answer and proven with certainty. Although more than two years had passed since the payment of usurious interest (the prescriptive period under Section 6 of Act No. 2655), Hodges failed to allege prescription in his reply to the defendants' cross-complaint. Having failed to raise the defense in the lower court, he cannot invoke it for the first time on appeal. Therefore, the defendants were entitled to credit for the usurious interest paid.
Main Doctrine
A loan and mortgage are not usurious or illegal for charging interest annually in advance, as permitted by law. However, charging compound interest not stipulated in the contract constitutes a violation of the Usury Law, making the lender liable for attorney's fees of the borrower. An agent acting under a special power of attorney to borrow money and secure it with a mortgage exceeds their authority if they apply part of the loan to their personal debts without express authorization from the principals.