G.R. No. 159912, August 17, 2007
YES
UNITED COCONUT PLANTERS BANK
VS.
SPOUSES SAMUEL AND ODETTE BELUSO
UCPB granted the spouses Beluso a Promissory Notes Line under a Credit
Agreement whereby the latter could avail from the former credit of up to a
maximum amount of P1.2 Million pesos. The spouses Beluso constituted, other
than their promissory notes, a real estate mortgage over parcels of land. The Credit
Agreement was subsequently amended to increase the amount of the Promissory
Notes Line to a maximum of P2.35 Million pesos.
3 promissory notes were renewed several times. The payment of the
principal and interest of the two promissory notes (500k and 800k) were debited
from the spouses Beluso's account with UCPB; yet, a consolidated loan for P1.3
Million was again released to the spouses Beluso under one promissory note. To
completely avail themselves of the P2.35 Million credit line extended to them by
UCPB, the spouses Beluso executed two more promissory notes for a total of
P350,000.00. However, the spouses Beluso alleged that the amounts covered by
these last two promissory notes (200k and 150k) were never released or credited to
their account and, thus, claimed that the principal indebtedness was only P2
Million.
UCPB applied interest rates on the different promissory notes ranging from
18% to 34%. The spouses Beluso were able to pay the total sum of P763,692.03.
UCPB continued to charge interest and penalty on the obligations of the spouses
Beluso. The spouses Beluso, failed to make any payment.
UCPB demanded that the spouses Beluso pay their total obligation of
P2,932,543.00 plus 25% attorney's fees, but the spouses Beluso failed to comply
therewith. UCPB foreclosed the properties mortgaged by the spouses Beluso to
secure their credit line, which, by that time, already ballooned to P3,784,603.00.
Spouses Beluso filed a Petition for Annulment, Accounting and Damages
against UCPB with the RTC of Makati City. The RTC ruled in favor of the spouses
Beluso declaring the interest rate used by UCPB void and the foreclosure and
Sheriff's Certificate of Sale void. UCPB is hereby ordered to return to the spouses
Beluso the properties subject of the foreclosure. The spouses Beluso are hereby
ordered to pay UCPB the sum of P1,560,308.00. The Court of Appeals affirmed
the RTC Decision.
ISSUE: (1) W/N the interest rate is void.
(2) W/N UCPB is liable for violation of the Truth in Lending Act.
I.
The Court of Appeals held that the imposition of interest in the following
provision found in the promissory notes of the spouses Beluso is void, as the
interest rates and the bases therefor were determined solely by petitioner UCPB:
“FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND
ODETTE BELUSO (BORROWER), jointly and severally promise to pay to UNITED COCONUT
PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the
sum of ______________ PESOS, (P_____), Philippine Currency, with interest thereon at the rate
indicative of DBD retail rate or as determined by the Branch Head.”
We agree with the Court of Appeals. Art. 1308. The contract must bind
both contracting parties; its validity or compliance cannot be left to the will of one
of them.
The provision stating that the interest shall be at the "rate indicative of
DBD retail rate or as determined by the Branch Head" is indeed dependent solely
on the will of petitioner UCPB. Under such provision, petitioner UCPB has two
choices on what the interest rate shall be: (1) a rate indicative of the DBD retail
rate; or (2) a rate as determined by the Branch Head. As UCPB is given this choice,
the rate should be categorically determinable in both choices. If either of these two
choices presents an opportunity for UCPB to fix the rate at will, the bank can easily
choose such an option, thus making the entire interest rate provision violative of
the principle of mutuality of contracts.
Not just one, but rather both, of these choices are dependent solely on the
will of UCPB. Clearly, a rate "as determined by the Branch Head" gives the latter
unfettered discretion on what the rate may be. The Branch Head may choose any
rate he or she desires. As regards the rate "indicative of the DBD retail rate," the
same cannot be considered as valid because it does not specify any margin above
or below the DBD retail rate. UCPB can peg the interest at any percentage above
or below the DBD retail rate, again giving it unfettered discretion in determining
the interest rate.
The stipulation in the promissory notes subjecting the interest rate to
review does not render the imposition by UCPB of interest rates on the obligations
of the spouses Beluso valid. It should be pointed out that the authority to review
the interest rate was given UCPB alone as the lender. Moreover, UCPB may apply
the considerations enumerated in this provision as it wishes.
II. YES
The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00
for UCPB's alleged violation of Republic Act No. 3765, otherwise known as the
Truth in Lending Act.
 UCPB challenges this imposition; that it runs counter to Section 6(a) of the Truth
in Lending Act. UCPB further claims that the action to recover the penalty for the violation
of the Truth in Lending Act had been barred by the one-year prescriptive period provided
for in the Act.
The Court of Appeals ruled that admittedly, the original complaint did not
explicitly allege a violation of the 'Truth in Lending Act' and no action to formally admit
the amended petition was made either by spouses Beluso and the lower court. We find that
its infringement may be inferred or implied from allegations that when spouses Beluso
executed the promissory notes, the interest rate chargeable thereon were left blank. Thus,
UCPB failed to discharge its duty to disclose in full to Spouses Beluso the charges
applicable on their loans.
We agree with the Court of Appeals. The allegations in the complaint are
controlling. The allegation that the promissory notes grant UCPB the power to
unilaterally fix the interest rates certainly also means that the promissory notes do
not contain a "clear statement in writing" of: (6) the finance charge expressed in
terms of pesos and centavos; and (7) the percentage that the finance charge bears
to the amount to be financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation. Furthermore, the spouses Beluso's prayer "for
such other reliefs just and equitable in the premises" should be deemed to include
the civil penalty provided for in Section 6(a) of the Truth in Lending Act.
UCPB's contention that this action to recover the penalty for the violation
of the Truth in Lending Act has already prescribed is likewise without merit. The
penalty for the violation of the act is P100 or an amount equal to twice the finance
charge required by such creditor in connection with such transaction, whichever is
greater, except that such liability shall not exceed P2,000.00 on any credit
transaction. As this penalty depends on the finance charge required of the
borrower, the borrower's cause of action would only accrue when such finance
charge is required.
In the case at bar, the date of the demand for payment of the finance charge
is 2 September 1998, while the foreclosure was made on 28 December 1998. The
filing of the case on 9 February 1999 is therefore within the one-year prescriptive
period.
UCPB argues that a violation of the Truth in Lending Act, being a criminal
offense, cannot be inferred nor implied from the allegations made in the complaint.
Pertinent provisions of the Act read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to
any person any information in violation of this Act or any regulation issued thereunder shall be liable
to such person in the amount of P100 or in an amount equal to twice the finance charge required by
such creditor in connection with such transaction, whichever is the greater, except that such liability
shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by
such person within one year from the date of the occurrence of the violation, in any court of competent
jurisdiction. In any action under this subsection in which any person is entitled to a recovery, the
creditor shall be liable for reasonable attorney's fees and court costs as determined by the court.
(c) Any person who willfully violates any provision of this Act or any regulation issued
thereunder shall be fined by not less than P1,000 or more than P5,000 or imprisonment for not less
than 6 months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act,
the violation of the said Act gives rise to both criminal and civil liabilities. Section
6(c) considers a criminal offense the willful violation of the Act, imposing the
penalty therefor of fine, imprisonment or both. Section 6(a), on the other hand,
clearly provides for a civil cause of action for failure to disclose any information
of the required information to any person in violation of the Act. The action to
recover such penalty may be instituted by the aggrieved private person separately
and independently from the criminal case for the same offense.
In the case at bar, therefore, the civil action to recover the penalty under
Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the
action to declare the interests in the promissory notes void, and (2) the action to
declare the foreclosure void. This joinder is allowed under Rule 2, Section 5 of the
Rules of Court.
In attacking the RTC's disposition on the violation of the Truth in Lending
Act since the same was not alleged in the complaint, UCPB is actually asserting a
violation of due process. Indeed, due process mandates that a defendant should be
sufficiently apprised of the matters he or she would be defending himself or herself
against. However, in the pre-trial brief filed by the spouses Beluso before the RTC,
the claim for civil sanctions for violation of the Truth in Lending Act was expressly
alleged. In the same pre-trial brief, the spouses Beluso also expressly raised the
issue: Does the expression indicative rate of DBD retail (sic) comply with the Truth
in Lending Act provision to express the interest rate as a simple annual percentage
of the loan?
These assertions are so clear and unequivocal that any attempt of UCPB to
feign ignorance of the assertion of this issue in this case as to prevent it from putting
up a defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has
jurisdiction to try and adjudicate the alleged violation of the Truth in Lending Act,
considering that the present action allegedly involved a single credit transaction as
there was only one Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty
under Section 6(a) of the Truth in Lending Act had been jointly instituted with (1)
the action to declare the interests in the promissory notes void, and (2) the action
to declare the foreclosure void. There had been no question that the above actions with particularity the interest rate to be applied to the loan covered by said
belong to the jurisdiction of the RTC. promissory notes.

Furthermore, opening a credit line does not create a credit transaction of

loan or mutuum, since the former is merely a preparatory contract to the contract
of loan or mutuum. Under such credit line, the bank is merely obliged, for the
considerations specified therefor, to lend to the other party amounts not exceeding
the limit provided. The credit transaction thus occurred not when the credit line was
opened, but rather when the credit line was availed of. In the case at bar, the
violation of the Truth in Lending Act allegedly occurred not when the parties
executed the Credit Agreement, where no interest rate was mentioned, but when
the parties executed the promissory notes, where the allegedly offending interest
rate was stipulated.

UCPB further argues that since the spouses Beluso were duly given copies
of the subject promissory notes after their execution, then they were duly notified
of the terms thereof, in substantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly

provides:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent applicable
and in accordance with rules and regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2)
(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.

The rationale of this provision is to protect users of credit from a lack of

awareness of the true cost thereof, proceeding from the experience that banks are
able to conceal such true cost by hidden charges, uncertainty of interest rates,
deduction of interests from the loaned amount, and the like. The law thereby seeks
to protect debtors by permitting them to fully appreciate the true cost of their loan,
to enable them to give full consent to the contract, and to properly evaluate their
options in arriving at business decisions. Upholding UCPB's claim of substantial
compliance would defeat these purposes of the Truth in Lending Act.

In addition, the promissory notes, the copies of which were presented to

the spouses Beluso after execution, are not sufficient notification from UCPB. As
earlier discussed, the interest rate provision therein does not sufficiently indicate