NEW SAMPAGUITA BUILDERS CONSTRUCTION, INC vs PHILIPPINE NATIONAL BANK

G.R. No. 148753 | July 30, 2004

FACTS
1. NSB approved Board Resolution No. 05, s. 89 authorizing the company to apply for or secure a Commercial Loan with
PNB (P8M) under such terms agreed by the Bank and NSB:
 Mortgaged the REP of NSB’s President/Chairman of the Board
 Authorized Petitioner-Spouses to secure the loan and sign any/all documents that may be required by PNB

2. PNB approved NSB’s request. The P8M loan was broken down into a Revolving Credit Line of P7.7M and an
Unadvised Line of P 300K.
 Revolving Credit Line: a line of credit where the customer pays a commitment fee to a financial institution to
borrow money, and is then allowed to use the funds when needed. Usually used for operating purposes and
the amount drawn can fluctuate each month depending on the customer's current cash flow needs.
 Unadvised Line: a line of credit approved by bank. Until some specific event happens unadvised line of credit
is not disclosed to the borrower. When the event happens line of credit is informed to the customer. Usually it
is a request for funding from the borrower.

3. NSB’s loan was secured by a mortgage on 10 REP and PN. NSB also signed the Credit Agreement relating to the
Revolving Credit Line and Unadvised Line

4. NSB failed to comply with its obligations under the PN.

5. Eduardo Dee wrote PNB for a request of a 90-day extension for the payment of interests and the restructuring of its
loan for another term. NSB then tendered a P1M payment to PNB through 3 checks.

6. PNB’s bank manager wrote to Dee informing him that NSB’s proposal was acceptable provided that the total payment
should be different.

7. Dee wrote back the PNB branch manager reiterating his proposals for the settlement of NSB’s past due loan (P7M).

8. 2 post-dated checks were dishonored.

9. PNB wrote to Dee informing him to make good the dishonored checks or else consequences will arise.

10. NSB failed to pay their loan obligations within the timeframe given them. Thus, foreclosure proceedings were instituted
resulting in the public auction of the mortgaged REP (P10.3M).

11. Later on, PNB informed NSB that the proceeds of the sale were insufficient to cover its total claim of P12.5M and thus
demanded that NSB to pay the deficiencies.

12. NSB refused.

RTC
Dismissed PNB’s petition: No cause of action.

CA
Reversed RTC ruling: NSB did not avail of PNB’s Debt Relief Package;
Increased in PNB’s loan rates were authorized by law and the Monetary Board; and
The increases were binding upon NSB having been freely and voluntarily entered into via the signing of the Credit
Agreements.

ISSUES
1. WON the loan accounts are bloated
2. WON the extrajudicial foreclosure and subsequent claim for deficiency are valid and proper

SUPREME COURT RULING

1. YES. NSB’S LOAN ACCOUNT WAS BLOATED WITH INTERESTS, PENALTIES, AND OTHER CHARGES

FIRST: PROMISSORY NOTES

 NSB’s accessory duty to pay interests on the loan DID NOT give PNB unrestrained freedom to charge any rate other
than that agreed upon. No interest shall be due unless expressly stipulated in writing. It would be the zenith of farcicality to
specify and agree upon rates that could be subsequently upgraded at whim by only one party.

The unilateral determination and imposition of increased rates is violative of the principle of mutuality of contracts. These
one-sided impositions do not have the force of law between the parties because such impositions are not based on the
parties’ essential equality.

Although Escalation Clauses are valid, giving PNB unbridled right to adjust the interest independently and upwardly would
completely take away NSB’s right to assent to an important modification in their agreement and negate the element of
mutuality in their contracts.

While the Usury Law ceiling on interest rates was lifted by CBC Circular No. 905, nothing in said Circular grants lenders
carte blanche authority to raise interest rates to levels which would either enslave their borrowers or lead to a
hemorrhaging of their assets.

Assent to the increase cannot be implied from their request for loan restructuring or their lack of response to the
statements of accounts sent by PNB. Such request does not indicate any agreement to an interest increase. No one
receiving a proposal to modify a loan contract (specifically interest rate) is obliged to answer such proposal.

Aside from sending demand letters, PNB did not at all exercise its option to enforce collection nor did it renew or extend
the account. No complaint for collection was filed with the courts. Instead a Petition for Sale of Mortgaged Properties was
filed with the Provincial Sheriff.

PNB did not follow the stipulation in the PN providing for conversion of the portion that remained unpaid after 730 days
from date of original release – into a medium-term loan (subject to the applicable rate to be applied from the dates of
original release). Also, PNB did not supply the interest rate to be charged on medium-term loans granted by automatic
conversion. Because of this, the legal rate of 12% per annum on loans and forbearance of money shall be used as
prescribed by CB Circular 416.

SECOND: CREDIT AGREEMENTS

The First Credit Agreement cannot be given weight because it was not signed by PNB through its branch manager, it was
objected to by NSB, and there was no attached annex that contained the General Stipulations.

The Second Credit Agreement provided the prime rate plus applicable spread on the Revolving Credit Line. However, it
did not state any provision on its increase or decrease. It was not the agreement but the Credit Line that expired. Thus,
the T&C continued to apply even if drawdowns could no longer be made. (Gradual accessing of credit funds;
Drawdown happens when the loan monies are taken up by the borrower. The loan will appear in the balance sheet as a
liability. The loan period will determine whether this is a long; medium or short term liability.) The rate of 21.5% agreed
upon in the 2nd PN continued to apply until its conversion into a medium-term loan.

The Third Credit Agreement provided for the same rate of interest as that in the 2 nd Agreement but since there was no
mention in the 3rd Agreement of any stipulation in increases or decreases in interest, there would be no basis in for
imposing amounts higher than the prime rate plus spread.

THIRD: DISCLOSURE STATEMENTS

The DS furnished by PNB set forth the interest rates as those respectively indicated in the PN. However, the three DS as
well as the two Credit Agreements did not provide for any increase in the specified interest rates. Thus, none would now
be permitted.

UNJUSTIFIED PENALTIES OR INCREASES

When the borrower is not clearly informed of the DS prior to the consummation of the availment or drawdown, the lender
will have NO RIGHT to collect upon such charge or increase thereof, even if stipulated in the Notes. Since Notes are
considered as contracts of adhesion, not invalid per se, any apparent ambiguity in the loan contract shall be construed
against the one who caused it.

OTHER CHARGES UNWARRANTED

Since the penalty rate has again been unilaterally increased by PNB to 36% without its consent, the liquidated damages
intended as penalty shall be equitably reduced by the Court to zilch for being iniquitous and unconscionable.

DEBT RELIEF PACKAGE NOT AVAILED OF

NSB failed to establish satisfactorily that it had been seriously and directly affected by the economic slowdown in the
peripheral areas of the then US military bases. For short-term loans, there is still a need to conduct a thorough review of
the borrower’s repayment possibilities.

NSB has neither shown enough margin of equity based on the latest loan value of hard collaterals to be eligible for the
DRB. The branch manager’s recommendation to restructure the loan not exceeding P8M is not final but subject to the
approval of PNB’s Branches Department Credit Committee to be reported to its BOD.

Under the GBL, banks shall grant loans and other credit accommodations only in amounts and for periods of time
essential to the effective completion of operations to be financed consistent with safe and sound banking practices.

2. EXTRAJUDICIAL FORECLOSURE IS VALID BUT DEFICIENCY CLAIMS ARE EXCESSIVE

■ The Bid Price is Adequate: It may be lower than the property’s fair market value. A low bid price will make it
subsequently easier for the owner to redeem their properties.

As no redemption was exercised within a year after the date of registration of the Certificate of Sale with the RD,
petitioner-spouses shall lose all their rights to the properties.

■ No Deficiency Claim Receivable: After the foreclosure and sale of the mortgaged properties, the REM is
extinguished. Although the mortgagors, being third persons, are not liable for any deficiency in the absence of a
contrary stipulation, the action for recovery of such amount – being clearly sureties to the principal obligation –
may still be directed against them. However, PNB may only impose the 19.5% and 21.5% on the respective
availments and further reduced to the 12% legal rate revision upon automatic conversion into medium-term loans.

The payments made by NSB were pro-rated. On the basis of rates, the deficiency claim receivable amounting to
P2.1M vanishes. Instead, there is an overpayment by more than P3.6M as shown in the Schedules.

Under solutio indebiti, there is no deficiency receivable in favor of PNB but rather an excess claim or surplus
payable by PNB to petitioner-spouses.