Topic: Loan; Interest; Truth in Lending Act

Facts:

1. This is a Petition for Review on Certiorari declaring void the interest rate provided in the promissory
notes executed by the respondents Spouses Samuel and Odette Beluso (spouses Beluso) in favor of
petitioner United Coconut Planters Bank (UCPB)

2. 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 for a term
ending on 30 April 1997. The spouses Beluso constituted, other than their promissory notes, a real
estate mortgage over parcels of land in Roxas City, covered by Transfer Certificates of Title No. T-31539
and T-27828, as additional security for the obligation. The Credit Agreement was subsequently amended
to increase the amount of the Promissory Notes Line to a maximum of P2.35 Million pesos and to
extend the term thereof to 28 February 1998.

3. On 30 April 1997, the payment of the principal and interest of the latter two promissory notes 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 with a due date of 28 February 1998.
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 were never released or credited to
their account and, thus, claimed that the principal indebtedness was only P2 Million.

4. The spouses Beluso, however, failed to make any payment of the foregoing amounts.

5. On 2 September 1998, 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. On 28
December 1998, 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.

6. On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages
against UCPB with the RTC of Makati City.

7. Trial court declared in its judgment that:

a. the interest rate used by [UCPB] void

b. the foreclosure and Sheriff’s Certificate of Sale void

c. UCPB is ordered to return to [the spouses Beluso] the properties subject of the foreclosure

d. UCPB to pay [the spouses Beluso] the amount of P50,000.00 by way of attorney’s fees

e. UCPB to pay the costs of suit.

f. Spouses Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00.

8. Court of Appeals affirmed Trial court's decision subject to the modification that defendant-appellant
UCPB is not liable for attorney’s fees or the costs of suit.
Issue/s:

1. Whether or not the interest rate stipulated was void

2. Whether or not Spouses Beluso are subject to 12% interest and compounding interest stipulations
even if
declared amount by UCPB was excessive.- Yes

3. Whether or not foreclosure was void - NO

Ruling:

1.
Yes, stipulated interest rate is void because it contravenes on the principle of mutuality of
contracts and it violates the Truth in lending Act.

Article 1308 of the Civil Code provides:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them.

In order that obligations arising from contracts may have the force of law between the parties, there
must be mutuality between the parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia v. Rita Legarda, Inc., 21 SCRA 555).

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. 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 with particularity the interest rate to be applied to the loan covered by said
promissory notes which is required in Truth in Lending Act.

2.

Yes. Default commences upon judicial or extrajudicial demand. The excess amount in such a
demand does not nullify the demand itself, which is valid with respect to the proper amount. There
being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are considered in default
with respect to the proper amount and, therefore, the interests and the penalties began to run at that
point.

As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized
that said legal interest should be imposed, thus: “There being no valid stipulation as to interest, the legal
rate of interest shall be charged.”[27] It seems that the RTC inadvertently overlooked its non-inclusion in
its computation. It must likewise uphold the contract stipulation providing the compounding of interest.
The provisions in the Credit Agreement and in the promissory notes providing for the compounding of
interest were neither nullified by the RTC or the Court of Appeals, nor assailed by the spouses Beluso in
their petition with the RTC. The compounding of interests has furthermore, been declared by this Court
to be legal.

3. Whether or not foreclosure was void

No. The foreclosure proceedings are valid since there was a valid demand made by UCPB upon
the spouses Beluso. Despite being excessive, the spouses Beluso are considered in default with respect
to the proper amount of their obligation to UCPB and, thus, the property they mortgaged to secure such
amounts may be foreclosed. Consequently, proceeds of the foreclosure sale should be applied to the
extent of the amounts to which UCPB is rightfully entitled.