G.R. No.

L-48349 December 29, 1986 money as to constitute an indebtedness on the part

of the lessor.
FRANCISCO HERRERA, plaintiff-appellant, vs.
PETROPHIL CORPORATION, defendant-appellee. Usury Law is inapplicable in this case.
FACTS: There is no usury in this case because no money
was given by the defendant-appellee to the plaintiff-
On December 5, 1969, the Herrera and ESSO
appellant, nor did it allow him to use its money
Standard Eastern. Inc., (later substituted by
already in his possession. 9 There was neither loan
Petrophil Corporation) entered into a "Lease
nor forbearance but a mere discount which the
Agreement" whereby the former leased to the latter
plaintiff-appellant allowed the defendant-appellee to
a portion of his property for a period of twenty (20)
deduct from the total payments because they were
years. The agreement contains a provision, that the
being made in advance for eight years.
Lessor is paid 8 years advance rental based on
P2,930.70 per month discounted at 12% interest Wherefore, Petrophil Corporation is ordered to pay
per annum or a total net amount of P130,288.47 plaintiff-appellant the amount of Sixty Five
before registration of lease. On December 31, Thousand One Hundred Fourteen pesos and
1969, pursuant to the said contract, the Petrophil Thirty-Five Centavos (P65,114.35), with interest at
Corporation paid to the Herrera advance rentals for the legal rate until fully paid, plus Ten Thousand
the first eight years, subtracting therefrom the Pesos (P10,000.00) as attorney's fees.
amount of P101,010.73, the amount it computed as
constituting the interest or discount for the first eight
years, in the total sum P180,288.47. On August 20, Principles:
1970, Petrophil Corporation, explaining that there
had been a mistake in computation, paid to the The difference between a discount and a loan or
appellant the additional sum of P2,182.70, thereby forbearance is that the former does not have to be
reducing the deducted amount to only P98,828.03. repaid. The loan or forbearance is subject to
On October 14, 1974, the Herrera sued the repayment and is therefore governed by the laws
Petrophil Corporation for the sum of P98,828.03, on usury. It has been held that the elements of
with interest, claiming this had been illegally usury are (1) a loan, express or implied; (2) an
deducted from him in violation of the Usury Law. 4 understanding between the parties that the money
He also prayed for moral damages and attorney's lent shall or may be returned; that for such loan a
fees. The Court of First instance ruled in favor of greater rate or interest that is allowed by law shall
the Petrophil. be paid, or agreed to be paid, as the case may be;
and (4) a corrupt intent to take more than the legal
ISSUE: rate for the use of money loaned. Unless these four
things concur in every transaction, it is safe to
Is the agreement between Herrera and Petrophil a
affirm that no case of usury can be declared. The
contract of loan or a contract of lease?
deduction made was not proper.
Was the deduction made by Petrophil in violation of
the Usury Law?
HELD:
It is a contract of lease.
As its title plainly indicates, the contract between
the parties is one of lease and not of loan. It is
clearly denominated a "LEASE AGREEMENT."
Nowhere in the contract is there any showing that
the parties intended a loan rather than a lease. The
provision for the payment of rentals in advance
cannot be construed as a repayment of a loan
because there was no grant or forbearance of
 PRISMA CONSTRUCTION & DEVELOPMENT
CORP. and ROGELIO PANTALEON v. ARTHUR
MENCHAVEZ
(Medel case NOT APPLICABLE)
FACTS:
 On December 8, 1993 – Pantaleon,
President & Chairman of the Board of
PRISMA obtained a P1 Million loan from
Menchavez with a monthly interest of P40
Thousand payable in 6 months
 To secure payment, Pantaleon issued a
Promissory Note (PN) indicating:
1. “acknowledge receipt of ONE MILLION
TWO HUNDRED FORTY THOUSAND
PESOS” and
2. Schedule of payment:
January 8,
1994.......................P40,000.00
February 8,
1994......................P40,000.00
March 8,
1994..........................P40,000.00
April 8,
1994.............................P40,000.00
May 8, 1994.............................
P40,000.00
June 8,
1994....................... P1,040,000.00
Total                                    
P1,240,000.00
 Pantaleon signed the PN in his personal
capacity and as duly authorized by
PRISMA. Attached with the PN is a Board
Resolution of PRISMA allowing Pantaleon
to transact and obtain a loan but only up to
4% interest rate.
 PRISMA & Pantaleon failed to completely
pay within the 6-month period stipulated. As
of January 4, 1997, PRISMA & Pantaleon
has only paid P 1,108,772.00 and according
to Menchavez, there is still an outstanding
balance of P 1, 364,151.00.
 On August 28, 1997, Menchavez filed a
complaint for collection of sum of money
with the RTC for the unpaid amount and as
well as applying the 4% monthly interest
rate. PRISMA & Pantaleon, in its answer,
only admitted the loan of P 1, 240,000.00
and that there was no stipulation in the PN
that there is a 4% monthly installment.
 RTC ruled in favor of Menchavez and stated
that PRISMA & Pantaleon is indebted to
Menchavez P 3, 526,117.00 as of February
11, 1999. The court ordered the payment of
the same plus 4% monthly interest until fully
paid.
 CA also ruled in favor of Menchavez stating
that there was indeed stipulation of 4%
monthly interest between the parties as
evidenced by the Board Resolution attached
with the PN. However, it stated that the 4%
monthly interest or 48% per annum rate in
unreasonable, thus it reduced the interest
rate to 12% per annum.
ISSUE:
Did the parties agree to a 4% monthly interest rate?
If so, does the rate of the interest apply to the 6-
month payment period or until full payment?
RULING:
 No. The CA erred in taking the Board Reso
as evidence as it is only for the
authorization of Pantaleon to transact on
 behalf of PRISMA. There was no stipulation
in the PN of payment of 4% monthly
interest, BUT parties agreed to a fixed
equivalent rate which is a specific sum of
P40 Thousand per month which
corresponds only to the 6-month period
of the loan.

 NO APPLICATION OF MEDEL. In Medel,

the terms of the loans were open-ended and
the stipulated interests were applied for an
indefinite period.

In this case, there is no application of Medel

because there is no other stipulation that
exists for the payment of any extra
amount except a specific sum of P40
Thousand per month on the principal
loan payable within 6 months.

 12% per annum interest rate shall be added

only after the judicial demand.
RESTITUTA IMPERIAL V. ALEX JAUCIAN
(Mutuum-Interest)
Doctrines:
- The interest rate of 16% per month or 192%
per annum for a loan of Php320,000 is
unconscionable.
- The penalty charge may be equitably
reduced by the judge if the debtor has partially
complied with his obligation (Art 1229, CC)
- In this case, it was improper for the RTC to
rule on the constitutionality of C.B Circular No. 905
without judicial inquiry.
FACTS:
Imperial obtained six (6) separate loans
amounting to P 320,000.00 from Jaucian. In the
written agreement, they agreed upon the 16%
interest per month plus penalty charge of 5% per
month and the 25% attorney’s fee of the total
amount.
Imperial executed six (6) separate
promissory notes and issued several checks as
guarantee for payment. When the said loans
become overdue and unpaid, especially when the
petitioner’s checks issued were dishonored,
Jaucian made repeated oral and written demands
for payment.
The petitioner was able to pay only P
116,540.00 as found by the RTC. Although she
alleged that she had already paid the amount of P
441,780.00 and the excess of P 121,780.00 is more
than the interest that could be legally charged, the
Court affirms the findings of RTC that petitioner is
still indebted to the respondent.
YES. The rate must be equitably reduced
for being iniquitous, unconscionable and exorbitant.
While the Usury Law ceiling on interest rates was
lifted by C.B. Circular No. 905, nothing in the said
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.
When the agreed rate is iniquitous or
unconscionable, it considered contrary to morals, if
not against the law. Such stipulation is void. Since
the stipulation is void, it is as if there was no
express contract thereon. Hence, courts may
reduce the interest rate as reason and equity
demand.
The interest rate of 16% per month was
reduced to 1.167% per month or 14% per annum
and the penalty charge of 5% per month was also
reduced to 1.167% per month or 14% per annum.
The attorney’s fees here are in the nature
of liquidated damages and the stipulation therefor is
aptly called a penal clause. So long as the
stipulation does not contravene the law, morals,
public order or public policy, it is binding upon the
obligor. Nevertheless, in the case at bar,
petitioner’s failure to comply fully with her obligation
was not motivated by ill will or malice. The partial
payments she made were manifestations of her
good faith. Hence the attorney’s fees were reduced
to 10% of the total due and payable.

ISSUE:
Whether or not the stipulated interest of
16% per month, 5% per month for penalty charge
and 25% attorney’s fee are usurious.

HELD:
 INTEREST – Exception to Medel Case
JOCELYN M. TOLEDO vs. MARILOU M. HYDEN
Doctrine: The imposition of an unconscionable rate
of interest on a money debt is immoral and unjust
and the court may come to the aid of the aggrieved
party to that contract. However, the law will not
relieve a party from the effects of an unwise, foolish
or disastrous contract if such party had full
awareness of what she was doing.
Facts:
Petitioner Jocelyn M. Toledo (Jocelyn), who was
then the Vice-President of the College Assurance
Plan (CAP) Phils., Inc., obtained several loans from
respondent Marilou M. Hyden (Marilou). Jocelyn
had been religiously paying Marilou the stipulated
monthly interest by issuing checks and depositing
sums of money in the bank account of the latter.
However, the total principal amount of P290,000.00
remained unpaid. A document entitled
Acknowledgment of Debt for the amount of
P290,000.00 was signed by Jocelyn with two of her
subordinates as witnesses. Jocelyn issued seven
checks to Marilou representing renewal payment of
her five previous loans. Jocelyn ordered the stop
payment on the remaining checks and on October
27, 1998, filed with the RTC of Cebu City a
complaint against Marilou for Declaration of Nullity
and Payment, Annulment, Sum of Money,
Injunction and Damages.
Jocelyn averred that Marilou forced, threatened and
intimidated her into signing the Acknowledgment of
Debt and at the same time forced her to issue the
seven postdated checks. She claimed that Marilou
even threatened to sue her for violation of Batas
Pambansa (BP) Blg. 22 or the Bouncing Checks
Law if she will not sign the said document and draw
the above-mentioned checks. Jocelyn further
claimed that the application of her total payment of
P528,550.00 to interest alone is illegal, unfounded,
unjust, oppressive and contrary to law because
there was no written agreement to pay interest.
Jocelyn posits that the CA erred when it held that
the imposition of interest at the rates of 6% to 7%
per month is not contrary to law, not
unconscionable and not contrary to morals. She
likewise contends that the CA erred in ruling that
the Acknowledgment of Debt is valid and binding.
Issue:
Was imposition of interest at the rate of six
percent (6%) to seven percent (7%) contrary to law,
morals, good customs, public order or public policy.
Ruling:
The 6% to 7% interest per month paid by
Jocelyn is not excessive under the circumstances
of this case. In view of Central Bank Circular No.
905 s. 1982, which suspended the Usury Law
ceiling on interest effective January 1, 1983, parties
to a loan agreement have wide latitude to stipulate
interest rates. Nevertheless, such stipulated
interest rates may be declared as illegal if the same
is unconscionable. In fact, in Medel v. Court of
Appeals, the court annulled a stipulated 5.5% per
month or 66% per annum interest with additional
service charge of 2% per annum and penalty
charge of 1% per month on a P500,000.00 loan for
being excessive, iniquitous, unconscionable and
exorbitant.
In this case, however, we cannot consider the
disputed 6% to 7% monthly interest rate to be
iniquitous or unconscionable vis-à-vis the principle
laid down in Medel. Noteworthy is the fact that in
Medel, the defendant-spouses were never able to
pay their indebtedness from the very beginning and
when their obligations ballooned into a staggering
sum, the creditors filed a collection case against
them. In this case, there was no urgency of the
need for money on the part of Jocelyn, the debtor,
which compelled her to enter into said loan
transactions. She used the money from the loans to
make advance payments for prospective clients of
educational plans offered by her employer. In this
way, her sales production would increase, thereby
entitling her to 50% rebate on her sales. This is the
reason why she did not mind the 6% to 7% monthly
interest. Notably too, a business transaction of this
nature between Jocelyn and Marilou continued for
more than five years. Jocelyn religiously paid the
agreed amount of interest until she ordered for stop
payment on some of the checks issued to Marilou.
The checks were in fact sufficiently funded when
she ordered the stop payment and then filed a case
questioning the imposition of a 6% to 7% interest
rate for being allegedly iniquitous or
unconscionable and, hence, contrary to morals.
 In fact, when she availed of said loans, an advance
interest of 6% to 7% was already deducted from the
loan amount, yet she never uttered a word of
protest. After years of benefiting from the proceeds
of the loans bearing an interest rate of 6% to 7%
per month and paying for the same, Jocelyn cannot
now go to court to have the said interest rate
annulled on the ground that it is excessive,
iniquitous, unconscionable, exorbitant, and
absolutely revolting to the conscience of man. We
are convinced that Jocelyn did not come to court for
equitable relief with equity or with clean hands. It is
patently clear from the above summary of the facts
that the conduct of Jocelyn can by no means be
characterized as nobly fair, just, and reasonable.
PNB V CA
G.R. 109563, JULY 9,1996
FACTS:
Bascos obtain a loan from PNB evidenced by a
promissory note secured with a real mortgage. The
promissory note contains an escalation clause.
Thereafter, the interest rate per annum of 14% was
then increased gradually yearly for up to 28%. RTC
ruled in favor of Bascos ruling that the absence of a
de-escalation clause rendered the stipulated
escalation clause void. CA affirmed.
ISSUE:
Is the escalation clause valid?
HELD:
No. As reiterated by the Supreme Court, an
stipulation of escalation clause is valid provided the
following conditions are present: 1) in writing and
agreed by the parties, 2) escalation clause is
coupled with a de-escalation clause, and 3) the
increase or decrease be based on the
pronouncement of Bangko Sentral ng Pilipinas.
Moreso, the court discussed about the principle of
mutuality whereby notice must be given to the other
party and consent of the parties must be given.
Hence, increase in the interest rate may not be
done unilaterally.
 SPOUSES ANDAL v. PNB
G.R. No. 194201. November 27, 2013
FACTS:
Sept. 7, 1995, petitioners obtained a loan from
respondent bank (P21.8M) for which 12 promissory
notes were executed, with varying interest rates
(17.5-27%). It was agreed that the rate of interest
may be increased or decreased with prior notice to
the petitioners in the event of changes in interest
rates prescribed by law or the Monetary Board.
Petitioners also executed a real estate mortgage in
favor of the respondent bank over 5 parcels of
lands, including all improvements thereon, covered
by Transfer of Certificate Titles of the Registry of
Deeds.
Respondent bank advised petitioners to pay their
loan, otherwise they would declare it due and
demandable. Petitioners paid P14.8M to avoid
foreclosure. Respondent bank executed a release
of real estate mortgage over two of the parcels of
land. Despite payment, respondent foreclosed the
remaining real estate mortgage over the remaining
three parcels of land.
A public auction sale resulted in respondent bank
as the winning bidder. A Certificate of sale of the
properties was issued.
Petitioners filed a complaint for annulment of
mortgage, sheriff’s certificate of sale, declaration of
nullity of the increased interest rates and penalty
charges plus damages.
CONTENTION OF THE PETITIONERS:
1. They tried to pay their loan
obligation but the exorbitant rate of
interest unilaterally determined and
imposed by the respondent bank.
2. They signed the promissory notes in
blank, relying on the representation
that they were bank requirements
3. The exobrbitant and unilateral
interest rates are a form of unjust
enrichment, giving respondent
4. bank no right to foreclose the
mortgages
RTC Ruling: In favor of petitioners, ordering that
the rate of interest be reduced to 6% in accordance
with Art. 2209, NCC and declaring the foreclosure
sales as void.
CA Ruling: Affirmed the RTC decision with the
modification that the interest be 12% per annum
instead of 6%. Stipulations in a contract have the
force of law between the parties so long as they are
not contrary to law, morals, etc. Since parties
expressly stipulated in the promissory notes that a
rate of interest would be applied, the petitioners are
bound thereby.
The CA finds it more credible that the petitioners
had signed blank promissory notes which
respondent bank had filled with high interest rates.
This violates the principle of mutuality of contracts.
Since the interest rates in the promissory notes are
void, the rate of interest should be 12% (since what
is involved is a loan or forebearance of money).
Petitioners-spouses insist that "if the application of
the doctrine of operative facts is upheld, as applied
in Caraig vs. Alday, interest in the instant case
would be computed only from the finality of
judgment declaring the foreclosure sale null and
void. If Mercado vs. China Banking Corporation,
applying by analogy the rule on void usurious
interest to void potestative interest rate, is further
sustained, no interest is due when the potestative
interest rate stipulation is declared null and void, as
in the instant case.
ISSUES: Whether interest should be imposed
on the loan.
RULING: Yes. The petitioners had agreed to
payment of interest on their loan obligation. The
subsequent declaration that the rate of interest was
illegal does not entitle them to stop payment of
interest. Only the rate was declared void, but the
stipulation requiring them to pay interest remains
valid and binding. They are liable to pay interest
from the time they defaulted until the obligation is
fully paid.
Petition is DENIED and the CA decision is
AFFIRMED with the MODIFICATION that the 12%
interest per annum shall be applied from the date of
default until June 30, 2013, after which date and
until fully paid, the obligation shall earn interest at
6% per annum.
 PCI LEASING AND FINANCE, INC. vs. TROJAN
METAL INDUSTRIES INCORPORATED,
WALFRIDO DIZON, ELIZABETH DIZON, and
JOHN DOE
G.R. No. 176381               December 15, 2010
FACTS:
Trojan Metal Industries, Inc. (TMI) came to
petitioner PCI Leasing and Finance, Inc. (PCILF) to
seek a loan. Instead of extending a loan, PCILF
offered to buy various equipment TMI owned.
PCILF of the various equipment in consideration of
the total and TMI immediately executed deeds of
sale. PCILF and TMI then entered into a lease
agreement, dated 8 April 1997, whereby the latter
leased from the former the various equipment it
previously owned.To obtain additional loan from
another financing company, TMI used the leased
equipment as temporary collateral. PCILF
considered the second mortgage a violation of the
lease agreement. PCILF sent TMI a demand
letter for the payment of the latter’s outstanding
obligation. PCILF’s demand remained unheeded.
PCIL filed in the Regional Trial Court
(Branch 79) of Quezon City a complaint against
TMI, spouses Dizon, and John Doe (collectively
referred to as "respondents" hereon) for recovery of
sum of money and personal property with prayer for
the issuance of a writ of replevin. the RTC granted
the prayer of PCILF in its complaint. The RTC ruled
that the lease agreement must be presumed valid
as the law between the parties even if some of its
provisions constituted unjust enrichment on the part
of PCILF. The Court of Appeals ruled that the sale
with lease agreement was in fact a loan secured by
chattel mortgage.
ISSUE: Whether the sale with lease agreement
entered by the parties was a financial lease or a
loan secured by chattel mortgage?
RULING:
The court held that Section 3(d) of RA 8556
defines financial leasing as:
a mode of extending credit through a non-
cancelable lease contract under which the lessor
purchases or acquires, at the instance of the
lessee, machinery, equipment, motor vehicles,
appliances, business and office machines, and
other movable or immovable property in
consideration of the periodic payment by the lessee
of a fixed amount of money sufficient to amortize at
least seventy (70%) of the purchase price or
acquisition cost, including any incidental expenses
and a margin of profit over an obligatory period of
not less than two (2) years during which the lessee
has the right to hold and use the leased property
with the right to expense the lease rentals paid to
the lessor and bears the cost of repairs,
maintenance, insurance and preservation thereof,
but with no obligation or option on his part to
purchase the leased property from the owner-lessor
at the end of the lease contract.
Thus, in a true financial leasing, whether
under RA 5980 or RA 8556, a finance company
purchases on behalf of a cash-strapped lessee the
equipment the latter wants to buy but, due to
financial limitations, is incapable of doing so. The
finance company then leases the equipment to the
lessee in exchange for the latter’s periodic payment
of a fixed amount of rental.
In this case, however, TMI already owned
the subject equipment before it transacted with
PCILF. Therefore, the transaction between the
parties in this case cannot be deemed to be in the
nature of a financial leasing as defined by law.
Hence, had the true transaction between
the parties been expressed in a proper instrument,
it would have been a simple loan secured by a
chattel mortgage, instead of a simulated financial
leasing. Thus, upon TMI’s default, PCILF was
entitled to seize the mortgaged equipment, not as
owner but as creditor-mortgagee for the purpose of
foreclosing the chattel mortgage.
 SPOUSES EDUARDO and LYDIA
SILOS, Petitioners,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
FACTS: Spouses Eduardo and Lydia Silos
(petitioners) have been in business for about two
decades of operating a department store and
buying and selling of ready-to-wear apparel.
Respondent Philippine National Bank (PNB) is a
banking corporation organized and existing under
Philippine laws.
To secure a one-year revolving credit line of
₱150,000.00 obtained from PNB, petitioners
constituted a Real Estate Mortgage. The credit line
was increased to ₱1.8 million and the mortgage
was correspondingly increased to ₱1.8 million.
Supplement to the Existing Real Estate
Mortgage was executed to cover the same credit
line, which was increased to ₱2.5 million, and
additional security was given in the form of a 134-
square meter lot. In addition, petitioners issued
eight Promissory Notes and signed a Credit
Agreement. This July 1989 Credit Agreement
contained a stipulation on interest which provides
as follows:
(a) The Loan shall have interest rate of
19.5% per annum. Interest shall be payable
in advance every one hundred twenty days
at the rate prevailing at the time of the
renewal.
(b) The Borrower agrees that the Bank may
modify the interest rate in the Loan
depending on whatever policy the Bank may
adopt in the future, including without
limitation, the shifting from the floating
interest rate system to the fixed interest rate
system, or vice versa. The Borrower hereby
agrees that the Bank may, without need of
notice to the Borrower, increase or
decrease its spread over the floating
interest rate at any time depending on
whatever policy it may adopt in the future.  equivalent to 24% per annum in case of default.
The eight Promissory Notes, on the other hand,
contained a stipulation granting PNB the right to
increase or reduce interest rates "within the limits
allowed by law or by the Monetary Board."
The Real Estate Mortgage agreement provided the
same right to increase or reduce interest rates "at
any time depending on whatever policy PNB may
adopt in the future."
Amendment to Credit Agreement mas made.
Petitioners issued in favor of PNB the 18
Promissory Notes, which petitioners settled –
except the last (the note covering the principal).
The 9th up to the 17th promissory notes provide for
the payment of interest at the "rate the Bank may at
any time without notice, raise within the limits
allowed by law x x x."
On the other hand, the 18th up to the 26th
promissory notes – including PN 9707237, which is
the 26th promissory note – carried the following
provision:
I/We agree that the rate of interest herein
stipulated may be increased or decreased
for the subsequent Interest Periods, with
prior notice to the Borrower in the event of
changes in interest rate prescribed by law or
the Monetary Board of the Central Bank of
the Philippines, or in the Bank’s overall cost
of funds. I/We hereby agree that in the
event I/we are not agreeable to the interest
rate fixed for any Interest Period, I/we shall
have the option top repay the loan or credit
facility without penalty within ten (10)
calendar days from the Interest Setting
Date.
Respondent regularly renewed the line from 1990
up to 1997, and petitioners made good on the
promissory notes, religiously paying the interests
without objection or fail. But in 1997, petitioners
faltered when the interest rates soared due to the
Asian financial crisis. Petitioners’ sole outstanding
promissory note for ₱2.5 million – PN 9707237
executed in July 1997 and due 120 days later or on
October 28, 1997 – became past due, and despite
repeated demands, petitioners failed to make good
on the note.
Incidentally, PN 9707237 provided for the penalty
Without need for notice or demand, failure
to pay this note or any installment thereon,
when due, shall constitute default and in
such cases or in case of garnishment,
receivership or bankruptcy or suit of any
kind filed against me/us by the Bank, the
outstanding principal of this note, at the
 option of the Bank and without prior notice
of demand, shall immediately become due
and payable and shall be subject to a
penalty charge of twenty four percent (24%)
per annum based on the defaulted principal
amount.
PNB prepared a Statement of Account as of
October 12, 1998, detailing the amount due and
demandable from petitioners in the total amount of
₱3,620,541.60.
Despite demand, petitioners failed to pay the
foregoing amount. Thus, PNB foreclosed on the
mortgage, and on January 14, 1999, TCTs T-14250
and T-16208 were sold to it at auction for the
amount of ₱4,324,172.96.
More than a year later, or on March 24, 2000,
petitioners filed Civil Case No. 5975, seeking
annulment of the foreclosure sale and an
accounting of the PNB credit.
On cross-examination, Lydia testified that she has
been in business for 20 years; that she also
borrowed from other individuals and another bank;
that it was only with banks that she was asked to
sign loan documents with no indicated interest rate;
that she did not bother to read the terms of the loan
documents which she signed; and that she
received several PNB statements of account
detailing their outstanding obligations, but she did
not complain; that she assumed instead that what
was written therein is correct.
ISSUES:
(1) Whether or not there should be
nullification of the interest rate of the
credit agreement.
(2) Whether or not the legal interest rate
should be applied.
RULING: The Court grants the Petition.
It appears that respondent’s practice, more than
once proscribed by the Court, has been carried
over once more to the petitioners. In a number of
decided cases, the Court struck down provisions in
credit documents issued by PNB to, or required of,
its borrowers which allow the bank to increase or
decrease interest rates "within the limits allowed by
law at any time depending on whatever policy it
may adopt in the future."
The stipulations must be invalidated, as was
done in previous cases. The common denominator
in these cases is the lack of agreement of the
parties to the imposed interest rates. For this case,
this lack of consent by the petitioners has been
made obvious by the fact that they signed the
promissory notes in blank for the respondent to fill.
We find credible the testimony of Lydia in this
respect. Respondent failed to discredit her; in fact,
its witness PNB Kalibo Branch Manager Aspa
admitted that interest rates were fixed solely by its
Treasury Department in Manila, which were then
simply communicated to all PNB branches for
implementation. If this were the case, then this
would explain why petitioners had to sign the
promissory notes in blank, since the imposable
interest rates have yet to be determined and fixed
by respondent’s Treasury Department in Manila.
Moreover, in Aspa’s enumeration of the factors that
determine the interest rates PNB fixes – such as
cost of money, foreign currency values, bank
administrative costs, profitability, and
considerations which affect the banking industry – it
can be seen that considerations which affect PNB’s
borrowers are ignored. A borrower’s current
financial state, his feedback or opinions, the nature
and purpose of his borrowings, the effect of foreign
currency values or fluctuations on his business or
borrowing, etc. – these are not factors which
influence the fixing of interest rates to be imposed
on him. Clearly, respondent’s method of fixing
interest rates based on one-sided, indeterminate,
and subjective criteria such as profitability, cost of
money, bank costs, etc. is arbitrary for there is no
fixed standard or margin above or below these
considerations.
Any modification in the contract, such as the
interest rates, must be made with the consent of
the contracting parties.1âwphi1 The minds of all the
parties must meet as to the proposed modification,
especially when it affects an important aspect of the
agreement. In the case of loan agreements, the
rate of interest is a principal condition, if not the
most important component. Thus, any modification
thereof must be mutually agreed upon; otherwise, it
has no binding effect.
What is even more glaring in the present case is
that, the stipulations in question no longer provide
that the parties shall agree upon the interest rate to
be fixed; -instead, they are worded in such a way
that the borrower shall agree to whatever interest
rate respondent fixes.
By requiring the petitioners to sign the credit
documents and the promissory notes in blank, and
then unilaterally filling them up later on, respondent
violated the Truth in Lending Act, and was remiss in
its disclosure obligations. In one case, which the
Court finds applicable here, it was held:
Section 4 of the Truth in Lending Act clearly
provides that the disclosure statement must
be furnished prior to the consummation of
the transaction.
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.
As earlier discussed, the interest rate provision
therein does not sufficiently indicate with
particularity the interest rate to be applied to the
loan covered by said promissory notes.
However, the one-year period within which an
action for violation of the Truth in Lending Act may
be filed evidently prescribed long ago, or sometime
in 2001, one year after petitioners received the
March 2000 demand letter which contained the
illegal charges.
The fact that petitioners later received several
statements of account detailing its outstanding
obligations does not cure respondent’s breach. To
repeat, the belated discovery of the true cost of
credit does not reverse the ill effects of an already
consummated business decision.
Neither may the statements be considered
proposals sent to secure the petitioners’ conformity;
they were sent after the imposition and application
of the interest rate, and not before. And even if it
were to be presumed that these are proposals or
offers, there was no acceptance by petitioners. "No
one receiving a proposal to modify a loan contract,
especially regarding interest, is obliged to answer
the proposal."
Loan and credit arrangements may be made
enticing by, or "sweetened" with, offers of low initial
interest rates, but actually accompanied by
provisions written in fine print that allow lenders to
later on increase or decrease interest rates
unilaterally, without the consent of the borrower,
and depending on complex and subjective factors.
Because they have been lured into these contracts
by initially low interest rates, borrowers get caught
and stuck in the web of subsequent steep rates and
penalties, surcharges and the like. Being ordinary
individuals or entities, they naturally dread legal
complications and cannot afford court litigation;
they succumb to whatever charges the lenders
impose. At the very least, borrowers should be
charged rightly; but then again this is not possible
in a one-sided credit system where the temptation
to abuse is strong and the willingness to rectify is
made weak by the eternal desire for profit.
The Court cannot validly consider that, as
stipulated in the 18th up to the 26th promissory
notes, petitioners are granted the option to prepay
the loan or credit facility without penalty within 10
calendar days from the Interest Setting Date if they
are not agreeable to the interest rate fixed. It has
been shown that the promissory notes are
executed and signed in blank, meaning that by the
time petitioners learn of the interest rate, they are
already bound to pay it because they have already
pre-signed the note where the rate is subsequently
entered.
Thus said, respondent’s arguments relative to the
credit documents – that documentary evidence
prevails over testimonial evidence; that the credit
documents are in proper form, presumed regular,
and endure, against arbitrary claims by petitioners,
experienced business persons that they are, they
signed questionable loan documents whose
provisions for interest rates were left blank, and yet
they continued to pay the interests without protest
for a number of years – deserve no consideration.
With regard to interest, the Court finds that since
the escalation clause is annulled, the principal
amount of the loan is subject to the original or
stipulated rate of interest, and upon maturity, the
amount due shall be subject to legal interest at the
rate of 12% per annum. However, the 12% interest
shall apply only until June 30, 2013. Starting July1,
2013, the prevailing rate of interest shall be 6% per
annum pursuant to our ruling in Nacar v. Gallery
Frames99 and Bangko Sentral ng Pilipinas-
Monetary Board Circular No. 799.
Now to the issue of penalty.
The Court sustains petitioners’ view that the penalty
may not be included as part of the secured amount.
Having found the credit agreements and
promissory notes to be tainted, we must accord the
same treatment to the mortgages. After all, "[a]
mortgage and a note secured by it are deemed
parts of one transaction and are construed
together."101 Being so tainted and having the
attributes of a contract of adhesion as the principal
credit documents, we must construe the mortgage
contracts strictly, and against the party who drafted
it. An examination of the mortgage agreements
reveals that nowhere is it stated that penalties are
to be included in the secured amount. Construing
this silence strictly against the respondent, the
Court can only conclude that the parties did not
intend to include the penalty allowed under PN
9707237 as part of the secured amount. Given its
resources, respondent could have – if it truly
wanted to – conveniently prepared and executed
an amended mortgage agreement with the
petitioners, thereby including penalties in the
amount to be secured by the encumbered
properties. Yet it did not.
SECURITY BANK AND TRUST COMPANY vs.
RTC OF MAKATI, MAGTANGGOL EUSEBIO and
LEILA VENTURA
FACTS
Private respondent Magtanggol Eusebio executed
three (3) promissory note in favor or petitionaer
Security Bank and Trust Co. (SBTC) in the total
amount of three hundred sixty-five thousand pesos
(P365,000.00) payable in six monthly installments
with a stipulated interest of 23% per annum.
Respondent Leila Ventura signed as co-maker in
the three promissory notes.
Upon the failure and refusal of respondent Eusebio
to pay the balance payable, a collection case was
filed in court by petitioner SBTC.  
The court ruled in favor of SBTC ordering Eusebio
to pay the balance payable, plus interest 12% per
annum.
SBTC filed a motion for partial reconsideration
contending that the parties agreed on a 23% per
annum interest rate and that Leila Ventura should
be also liable.
The court denied motion to grant the rates of
interest beyond 12% per annum; and holding
defendant Leila Ventura jointly and severally liable
with co-defendants Eusebio.
ISSUE
Whether or not the 23% rate of interest per
annum agreed upon by petitioner bank and
respondents is allowable and not against the Usury
Law.
RULING
The rate of interest that should be imposed be
23% per annum.
The Central Bank Circular No. 905 is applicable in
the case which allow contracting parties to stipulate
freely regarding any subsequent adjustment in the
interest rate that shall accrue on a loan or
forbearance of money, goods or credits. In fine,
they can agree to adjust, upward or downward, the
interest previously stipulated. Only in the absence
of a stipulation can the court impose the 12% rate
of interest.
The promissory notes were signed by both parties
voluntarily. Therefore, stipulations therein are
binding between them. Respondent Eusebio,
likewise, did not question any of the stipulations
therein. In fact, in the Comment filed by respondent
Eusebio to this court, he chose not to question the
decision and instead expressed his desire to
negotiate with the petitioner bank for "terms within
which to settle his obligation." 
G.R. No. 80294-95 September 21, 1988
CATHOLIC VICAR APOSTOLIC OF THE
MOUNTAIN PROVINCE
vs. COURT OF APPEALS, HEIRS OF EGMIDIO
OCTAVIANO AND JUAN VALDEZ,
GANCAYCO, J.:
FACTS:
After the church and the convent were destroyed,
the heirs’ predecessors' house was borrowed by
Vicar. Vicar, in 1951 declared the Lots 1,2,3,4 for
tax declaration. In 1962, he applied for registration
of title of the four lots. The heirs filed their
Opposition for Lots 2 and 3. The land registration
court confirmed the registration of the four lots,
however was modified by the Court of Appeals
denying the registration of Lots 2 and 3. The
Supreme Court in a minute resolution denied the
Motion for Reconsideration of the Heirs to have the
lots registered in their names and the Petition for
Certiorari of Vicar for the review of the denial of the
registration of Lots 2 and 3.
The Heirs of Octaviano filed a Civil Case for
recovery of possession of Lot 3; and the Heirs of
Juan Valdez filed a Civil Case likewise for recovery
of possession of Lot 2. They arque that the Vicar is
barred from setting up the defense of ownership
and/or long and continuous possession of the two
lots in question since this is barred by prior
judgment of the Court of Appeals in under the
principle of res judicata. They contend that the
question of possession and ownership have
already been determined by the Court of Appeals
and affirmed by the Supreme Court. Vicar
maintains that the principle of res judicata would
not prevent them from litigating the issues of long
possession and ownership because the dispositive
portion of the prior judgment merely dismissed their
application for registration and titling of lots 2 and 3.
Vicar contends that only the dispositive portion of
the decision, and not its body, is the controlling
pronouncement of the Court of Appeals.
ISSUES:
1. Whether or not Catholic Vicar acquired Lots
2 and 3 via acquisitive prescription.
2. Whether or not Catholic Vicar is a bailee in
commodatum
HELD:
Yes, Catholic Vicar is a bailee in commodatum and
that he neither acquired the properties through
ordinary nor extraordinary prescription.
Catholic Vicar did not meet the requirement of 30
years possession for acquisitive prescription over
Lots 2 and 3. Neither did it satisfy the requirement
of 10 years possession for ordinary acquisitive
prescription because of the absence of just titleBy
the very admission of petitioner Vicar, Lots 2 and 3
were owned by Valdez and Octaviano. Both Valdez
and Octaviano had Free Patent Application for
those lots since 1906. The predecessors of private
respondents, not petitioner Vicar, were in
possession of the questioned lots since 1906.
The Heirs were able to prove that their
predecessors' house was borrowed by Vicar after
the church and the convent were destroyed. They
never asked for the return of the house, but when
they allowed its free use, they became bailors in
commodatum and the petitioner the bailee. The
bailees' failure to return the subject matter of
commodatum to the bailor did not mean adverse
possession on the part of the borrower. The bailee
held in trust the property subject matter of
commodatum. The adverse claim of petitioner
came only in 1951 when it declared the lots for
taxation purposes. The action of petitioner Vicar by
such adverse claim could not ripen into title by way
of ordinary acquisitive prescription because of the
absence of just title.
The predecessors-in-interest and private
respondents were possessors under claim of
ownership in good faith from 1906; that petitioner
Vicar was only a bailee in commodatum; and that
the adverse claim and repudiation of trust came
only in 1951.