SPOUSES NELSON R. VILLANUEVA and MYRA P. VILLANUEVA, Petitioners, vs.

THE COURT OF APPEALS, PROVIDENT RURAL BANK OF SANTA CRUZ (LAGUNA), INC., and THE CLERK OF COURT OF THE REGIONAL TRIAL COURT OF LAGUNA AS EX-OFFICIO PROVINCIAL SHERIFF, Respondents. NATURE: Petition for review on certiorari FACTS:

5. Petitioners then wrote a letter-request to the Officer-in-Charge of the

Office of the Clerk of Court of the RTC questioning the amount of its outstanding obligations to Rural Bank and requesting that the public auction scheduled be suspended until after its objection to the amount being sought by respondent Bank is resolved by the court. a. However, petitioners letter-request was denied.

1. Petitioners applied for separate loans amounting to P100,000

and P125,000, which were granted by respondent Provident Rural Bank. a. As security for the loans, petitioners executed two separate promissory notes. b. They also executed two separate real estate mortgages over a parcel of agricultural land.

6. Petitioners filed a Petition for Declaratory Relief, Accounting and

Damages praying that the stipulated interests, charges and expenses on its loans be declared null and void for being contrary to law, morals, good customs, public order or public policy as they are exorbitant, usurious, iniquitous and unconscionable.

7. Respondent Bank filed a Motion to Dismiss contending that the 2. Later on, petitioners failed to pay their loans when they became due.
petition is barred by res judicata and that petitioners are guilty of forum shopping. Respondent Bank argued that: a. petitioners filed a complaint against it before the RTC, seeking to declare as usurious the interests, penalties and other charges which petitioners and respondent Bank had agreed upon in the subject real estate mortgages and promissory notes;

3. Consequently, Rural Bank filed a petition for extrajudicial

foreclosure of the two mortgages. a. Petitioners' obligations amounted to P287,187.50, plus interests, charges and expenses. b. Provincial Sheriff issued a Notice of Sale of the subject mortgaged property.

8. *RTC: dismissed petitioners' Petition for Declaratory Relief as said

Petition is barred by prior judgment, since CA already settled the issues of usury and the right of petitioners to claim the abolition or reduction of the subject interest rates, which are the same issues raised by petitioners in their Petition for Declaratory Relief.

4. However, the auction sale did not push through because Rural Bank
re-applied for extrajudicial foreclosure of the same mortgage. a. Provincial Sheriff issued a Notice of Sale Re-Application of Foreclosure Case and set the public auction of the subject property. b. Petitioners' mortgage debt grew to P713,465.35, plus interests, charges and expenses.

9. *CA: Petitioners filed an appeal assailing the Order of the RTC. a. affirmed the Order of the RTC. All the elements of res judicata are
present.

10. *SC: Petitioners contend that res judicata does not apply on the
ground that there is no identity of subject matter and cause of action in both civil cases. 11. Petitioners further argue that even if all the elements of res judicata are present in the instant case, equity dictates that this principle should not be applied; otherwise, the court would be sanctioning respondent Bank's enrichment at the expense of petitioners through the imposition of exorbitant, unconscionable and usurious interest rates, penalties and other charges; in such a case, petitioners claim that justice would be sacrificed in favor of technicality. ISSUE: W/N the exception to res judicata applies as the interests, penalties, and charges stipulated in this case are illegal for being unconscionable HELD: Yes The elements of res judicata are: (1) the judgment sought to bar the new action must be final; (2) the decision must have been rendered by a court having jurisdiction over the subject matter and the parties; (3) the disposition of the case must be a judgment on the merits; and (4) there must be as between the first and second action, identity of parties, subject matter, and causes of action. There is no dispute that the first three elements, as enumerated above, are present. With respect to the fourth element, there is also no dispute that there is identity of parties. However, the Court is not persuaded by petitioners' argument that there is no identity of subject matter and cause of action. On the issue of identity of subject matter, this Court has held that the subject of an action is defined as the matter or thing with respect to which the controversy has arisen, concerning which a wrong has been done. The issues (W/N the interest rates, penalties and charges imposed by respondent Bank are usurious and unconscionable) and the reliefs sought (reduction of the said interest rates, penalties and surcharges to an amount not exceeding 12% per annum) in both cases are essentially the same. SC is not persuaded by petitioners' contention that the Court should not apply the principle of res judicata because to do so would be tantamount to allowing respondent Bank to unjustifiably and illegally enrich itself at the expense of petitioners by imposing interests,

penalties and other charges beyond what the law and equity allows. The present case does not fall under this exception. Petitioners contend that the interest rate of 24% per annum stipulated in the mortgage contract, which they executed in favor of respondent Bank, is usurious. This Court has consistently held that for sometime now, usury has been legally non-existent and that interest can now be charged as lender and borrower may agree upon. In fact, Section 1 of Central Bank Circular No. 905, Series of 1982, which took effect on January 1, 1983, expressly provides that "[t]he rate of interest, including commissions, premiums, fees and other charges, on a loan or forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person, whether natural or juridical, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended." Nonetheless, this Court has also held in a number of cases, that nothing in the circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. Thus, the stipulated interest rates are illegal if they are unconscionable. SUB-ISSUE: W/N the 24% per annum interest rate is unreasonable under the circumstances obtaining in the present case. HELD: NO The Court finds that the 24% per annum interest rate, provided for in the subject mortgage contracts for a loan of P225,000.00, may not be considered unconscionable. Moreover, considering that the mortgage agreement was freely entered into by both parties, the same is the law between them and they are bound to comply with the provisions contained therein. SUB-ISSUE: W/N the 6% per annum is valid The Court also upholds the validity of the 6% per annum penalty charge. In Development Bank of the Philippines v. Family Foods Manufacturing Co., Ltd.,24 this Court, sustaining the validity of an 8% per annum penalty charge on separate loans of P500,000.00 and P440,000.00, held that:
This Court has recognized a penalty clause as an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by imposing on the debtor a special prestation (generally consisting in the payment of a sum of money) in

case the obligation is not fulfilled or is irregularly or inadequately fulfilled. The enforcement of the penalty can be demanded by the creditor only when the non-performance is due to the fault or fraud of the debtor. The non-performance gives rise to the presumption of fault; in order to avoid the payment of the penalty, the debtor has the burden of proving an excuse the failure of the performance was due to either force majeure or the acts of the creditor himself.

In this case, respondents failed to discharge the burden. Thus, they cannot avoid the payment of the agreed penalty charge.25 In a similar manner, herein petitioners bound themselves to pay the stipulated penalty charge of 6% per annum "of the principal amount of loan as penalty for inexcusable neglect to pay any amount of t[he] loan when due." Since petitioners failed to present evidence that their failure to perform their obligation was due to either force majeure or the acts of respondent Bank or to any justifiable or excusable cause, they are obliged to pay the penalty charge as agreed upon. WHEREFORE, the petition is DENIED.