G.R. No.

148163

December 6, 2004

BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitioner,

vs.
JUANITA B. YBAEZ, CHARLES B. YBAEZ, JOSEPH B. YBAEZ and JEROME B. YBAEZ, respondents.

FACTS:
On March 7, 1978, respondents obtained a loan secured by a Deed of Real Estate Mortgage over Transfer
Certificate of Title (TCT) from petitioner bank. The loan was used for the construction of a commercial building in
Cebu City. On October 25, 1978, respondents obtained an additional loan from the petitioner thus increasing their
obligation to one million pesos. A corresponding Amendment of Real Estate Mortgage was thereafter executed.
On December 24, 1982, the loan was again re-structured, increasing the loan obligation to P1,225,000 and the Real
Estate Mortgage was again amended. Respondents executed a Promissory Note for the sum of P1,225,000
payable in fifteen years, with a stipulated interest of 21% per annum, and stipulating monthly payments.
Respondents total payment from 1983 to 1988 amounted to P1,455,385.07, However, From 1989 onwards,
respondents did not pay a single centavo. They aver that Banco Filipino had ceased operations and/or was not
allowed to continue business, having been placed under liquidation by the Central Bank.
On January 15, 1990, respondents lawyer wrote Special Acting Liquidator, Renan Santos, and requested that
plaintiff return the mortgaged property of the respondents since it had sufficiently profited from the loan and that
the interest and penalty charges were excessive. Petitioner bank denied the request.
Banco Filipino was closed on January 1, 1985 and re-opened for business on July 1, 1994. From its closure to its reopening, petitioner bank did not transact any business with its customers.
On August 24, 1994, respondents were served a Notice of Extra Judicial Sale of their property covered by TCT
No. 69836 to satisfy their indebtedness allegedly of P6,174,337.46 which includes the principal, interest, surcharges
and 10% attorneys fees.
On September 19, 1994, respondents filed a suit for Injunction, Accounting and Damages, alleging that there
was no legal and factual basis for the foreclosure proceedings since the loan had already been fully paid. A
restraining order was issued the following day by the lower court enjoining petitioner to cease and desist from
selling the property at a public auction.
Lower court rendered a Decision, directing defendant Banco Filipino Savings and Mortgage Bank to render a
correct accounting of the obligations of plaintiffs with it after eliminating interest from January 1, 1985 to July 1,
1994 when it was closed, and reducing interest from 21% to 17% per annum, at the time it was in operation, and
totally eliminating [the] surcharge of 1% per month, within a period of fifteen (15) days from the time the judgment
shall have become final and executory.
Not satisfied with the decision, both parties appealed the case to the Court of Appeals. The Court of Appeals
rendered a Decision affirming the decision of the trial court. Hence, this Petition.
ISSUE:
THE COURT OF APPEALS COMMITTED AN ERROR IN RULING THAT THE PLAINTIFFS-BORROWERS (HEREIN
RESPONDENTS) CANNOT BE CONSIDERED TO HAVE DEFAULTED IN THEIR PAYMENT SINCE DEFENDANT BANK
CEASED OPERATION FROM 1985 TO 1991.
HELD:

To resolve the controversy we shall address the following pertinent question: (1) What is the effect of the temporary
closure of Banco Filipino from January 1, 1985 to July 1, 1994 on the loan?
In Banco Filipino Savings and Mortgage Bank v. Monetary Board, the validity of the closure and receivership of
Banco Filipino was put in issue. But the pendency of the case did not diminish the authority of the designated
liquidator to administer and continue the banks transactions. The Court allowed the banks liquidator to continue
receiving collectibles and receivables or paying off creditors claims and other transactions pertaining to normal
operations of a bank. Among these transactions were the prosecution of suits against debtors for collection and for
foreclosure of mortgages. The bank was allowed to collect interests on its loans while under liquidation, provided
that the interests were legal.
WHEREFORE, the Decision of the Regional Trial Court, which was sustained by the Court of Appeals, is hereby
MODIFIED as follows: (1) the interest rate at 21% per annum is hereby declared VALID; (2) the 3% monthly
surcharge is NULLIFIED for being violative of the Usury Law at the time; and (3) respondents are ORDERED to pay
petitioner the amount of P2,581,294.93 within 30 days from receipt of this Decision.
DECISION

QUISUMBING, J.:
In this petition for review, Banco Filipino Savings and Mortgage Bank seeks the reversal of the Decision 1 dated April
17, 2001 of the Court of Appeals in CA-G.R. CV No. 57927 affirming the Decision 2 dated July 16, 1997 of the
Regional Trial Court, Branch 13 of Cebu City in Civil Case No. CEB-16548.
The facts of this case are as follows:
On March 7, 1978, respondents obtained a loan secured by a Deed of Real Estate Mortgage over Transfer
Certificate of Title (TCT) No. 69836 from petitioner bank. The loan was used for the construction of a commercial
building in Cebu City. On October 25, 1978, respondents obtained an additional loan from the petitioner thus
increasing their obligation to one million pesos. A corresponding Amendment of Real Estate Mortgage was
thereafter executed.
On December 24, 1982, the loan was again re-structured, increasing the loan obligation to P1,225,000 and the Real
Estate Mortgage was again amended. Respondents executed a Promissory Note for the sum of P1,225,000
payable in fifteen years, with a stipulated interest of 21% per annum, and stipulating monthly payments ofP22,426.
The first payment was payable on January 24, 1983, and the succeeding payments were due every 24 thof each
month thereafter.3 The note also stipulated that in case of default in the payment of any of the monthly
amortization and interest, respondents shall pay a penalty equivalent to 3% of the amount due each month. 4
Respondents total payment from 1983 to 1988 amounted 5 to P1,455,385.07, broken down as follows:
1983

247,631.54

1984

81,797.24

1985

173,875.77

1986

284,364.82

1987

380,000.00

1988

287,715.706

From 1989 onwards, respondents did not pay a single centavo. They aver that Banco Filipino had ceased operations
and/or was not allowed to continue business, having been placed under liquidation by the Central Bank.
On January 15, 1990, respondents lawyer wrote Special Acting Liquidator, Renan Santos, and requested that
plaintiff return the mortgaged property of the respondents since it had sufficiently profited from the loan and that
the interest and penalty charges were excessive. Petitioner bank denied the request. 7
Banco Filipino was closed on January 1, 1985 and re-opened for business on July 1, 1994. From its closure to its reopening, petitioner bank did not transact any business with its customers. 8
On August 24, 1994, respondents were served a Notice of Extra Judicial Sale of their property covered by TCT
No. 69836 to satisfy their indebtedness allegedly of P6,174,337.46 which includes the principal, interest, surcharges
and 10% attorneys fees. The public auction was scheduled on September 22, 1994 at 2:00 in the afternoon.
On September 19, 1994, respondents filed a suit for Injunction, Accounting and Damages, alleging that there
was no legal and factual basis for the foreclosure proceedings since the loan had already been fully paid. A
restraining order was issued the following day by the lower court enjoining petitioner to cease and desist from
selling the property at a public auction.9
On July 16, 1997, the lower court rendered a Decision, disposing as follows:
WHEREFORE, judgment is hereby rendered directing defendant Banco Filipino Savings and Mortgage Bank
to render a correct accounting of the obligations of plaintiffs with it after eliminating interest from January
1, 1985 to July 1, 1994 when it was closed, and reducing interest from 21% to 17% per annum, at the time
it was in operation, and totally eliminating [the] surcharge of 1% per month, within a period of fifteen (15)
days from the time the judgment shall have become final and executory.
Plaintiffs are directed to pay the bank within a period of thirty (30) days from the time they will receive
defendant banks true and correct accounting, otherwise the order of injunction will be lifted/dissolved.
Defendants are enjoined from foreclosing the real estate mortgage on the property of plaintiffs, unless the
latter fail to pay in accordance with the [preceding] paragraph.
Without special pronouncement as to costs.
SO ORDERED.10
Not satisfied with the decision, both parties appealed the case to the Court of Appeals. Petitioner filed its Notice of
Appeal on August 19, 1997, while respondents filed theirs on August 22, 1997. On April 17, 2001, the Court of
Appeals rendered a Decision affirming the decision of the trial court stating:
WHEREFORE, for lack of merit, both appeals are DISMISSED and the Decision appealed from is AFFIRMED.
SO ORDERED.11
Petitioner now alleges the following errors:
I. THE COURT OF APPEALS ERRED IN CONCURRING WITH THE TRIAL COURTS DECISION ORDERING THE
DEFENDANT BANK (HEREIN PETITIONER) TO RENDER A CORRECT ACCOUNTING OF PLAINTIFFS LOAN
BECAUSE THE STATEMENT OF ACCOUNT (EXH. 5 and 6 Defendant) SUBMITTED BY DEFENDANT BANK
DOES NOT REFLECT THE TRUE AND CORRECT AMOUNT AS IT IMPOSES A 21% PER ANNUM INTEREST
WHICH THE COURT OF APPEALS CONSIDERED AS EXCESSIVE AND THAT IT HAS NO PROBATIVE VALUE AS
ITS SIGNATORIES WERE NOT PRESENTED AS WITNESSES.
II. THE COURT OF APPEALS ERRED IN ORDERING THE DELETION OF THE 3% PER MONTH SURCHARGE
SIMPLY BECAUSE THE PLAINTIFF-BORROWER HAD MADE SUBSTANTIAL PAYMENTS FROM 1983 TO 1988.

III. THE COURT OF APPEALS COMMITTED AN ERROR IN RULING THAT THE PLAINTIFFS-BORROWERS (HEREIN
RESPONDENTS) CANNOT BE CONSIDERED TO HAVE DEFAULTED IN THEIR PAYMENT SINCE DEFENDANT
BANK CEASED OPERATION FROM 1985 TO 1991.12
To resolve the controversy we shall address the following pertinent questions: (1) What is the effect of the
temporary closure of Banco Filipino from January 1, 1985 to July 1, 1994 on the loan? (2) Is the rate of interest set at
21% per annum legal? and (3) Is the 3% monthly surcharge valid?
In Banco Filipino Savings and Mortgage Bank v. Monetary Board, 13 the validity of the closure and receivership of
Banco Filipino was put in issue. But the pendency of the case did not diminish the authority of the designated
liquidator to administer and continue the banks transactions. The Court allowed the banks liquidator to continue
receiving collectibles and receivables or paying off creditors claims and other transactions pertaining to normal
operations of a bank. Among these transactions were the prosecution of suits against debtors for collection and for
foreclosure of mortgages. The bank was allowed to collect interests on its loans while under liquidation, provided
that the interests were legal.
Petitioner contends that the 21% annual interest was freely and voluntarily agreed upon by the parties, and that it
was neither excessive nor violative of the Usury Law.14
On the other hand, respondents state that the rate of 21% was usurious because the loan was incurred on
December 24, 1982, before the de facto repeal of the Usury Law on January 1, 1983.15 Respondents add that the
normal rate by which petitioner charges its borrowers at that time was only 17%, or 4% lower than the rate it gave
to respondents.
It is an elementary rule of contracts that the contracting parties are free to stipulate the terms of their contract for
as long as the terms are not contrary to law, morals, good customs, public policy, public order, and national
interests.16 Laws in force at the time the contract was made generally govern its interpretation and application. The
loan agreement between petitioner and respondents specifies the obligation of the debtor to pay interest. In
principle said stipulation is binding between the parties. 17
We note that at the time the parties entered into the said loan agreement, the pertinent law, Act No. 2655, already
provided that the rate of interest for the forbearance of money when secured by a mortgage upon real estate
should not be more than 12% per annum or the maximum rate prescribed by the Monetary Board and in force at
the time the loan was granted. On December 1, 1979, the Monetary Board of the Central Bank of the
Philippines18had issued CBP Circular No. 705-79.19 On loan transactions with maturities of more than 730 days, it
fixed the effective rate of interest at 21% per annum for both secured and unsecured loans. Since the loan in
question has fixed 15 years for its maturity, it fell within the coverage of said CBP Circular. Thus, we agree that the
21% interest is not violative of the Usury Law as it stood at the time of the loan transaction.
As to the monthly surcharge, petitioner relies on CBP Circular No. 905-82. 20 The ceiling on interest rates prescribed
by the Usury Law, according to petitioner, were expressly removed. Petitioner argues that the said circular had
retroactive effect since it is merely procedural in nature. Hence according to petitioner, the imposition of 3%
monthly surcharge by the bank against the borrower is legal.
On this matter, we disagree with petitioner. CBP Circular No. 905-82, which was effective January 1, 1983, did not
repeal nor in any way amend the Usury Law. The Circular simply suspended the effectivity of the Usury Law. A
Central Bank Circular cannot repeal a law. Only a law can repeal another law. Thus, the retroactive application of a
CBP Circular cannot, and should not, be presumed. 21 The loan was entered into on December 24, 1982, but CBP
Circular No. 905-82 was given force and effect only on January 1, 1983. Thus, CBP Circular No. 905-82 could not be
made applicable to the loan agreement in this case, and petitioner could not rely on this Circular for its imposition
of 3% monthly surcharge.
Petitioner also argues that the 3% monthly surcharge partakes of the nature of a penalty clause. 22 A penal clause is
an accessory undertaking to assume greater liability in case of breach and is attached to an obligation in order to
secure its performance.23 The penalty shall substitute the indemnity for damages and the payment of interests in
case of non-compliance.24 But if such stipulation is found contrary to law for being usurious, it can be nullified by the
courts without affecting the principal obligation.25
In the loan agreement between the parties in this case, the total interest and other charges exceed the prescribed
21% ceiling. Hence, the imposition of the 3% monthly surcharge, as the penal clause to the obligation, violated the
limit imposed by the Usury Law. Said surcharge of 3% monthly must be declared null and void.

To recapitulate: the respondents principal obligation to pay the monthly amortization of P22,426, validly subsists.
Only the 3% monthly surcharge is void. The monthly amortization of P22,426, for 15 years, would amount
toP4,036,680. To date, respondents already paid the amount of P1,455,385.07. Thus, only the outstanding balance
of P2,581,294.93 remains due.
Respondents were given by the RTC 30 days from receipt of decision, within which to pay their outstanding
obligation. We now reiterate that period of 30 days, from receipt of this Decision, for respondents to pay the amount
of P2,581,294.93 to the bank as full payment of the outstanding balance on their loan obligation. Otherwise, the
order of injunction restraining petitioner from foreclosing the property shall be lifted.
WHEREFORE, the Decision of the Regional Trial Court, which was sustained by the Court of Appeals, is hereby
MODIFIED as follows: (1) the interest rate at 21% per annum is hereby declared VALID; (2) the 3% monthly
surcharge is NULLIFIED for being violative of the Usury Law at the time; and (3) respondents are ORDERED to pay
petitioner the amount of P2,581,294.93 within 30 days from receipt of this Decision. No pronouncement as to costs.
SO ORDERED.

Liam Law v. Olympic Sawmill Co., 129 SCRA 439 (1984) Case Digest
Obligations and Contracts: Usurious Transactions Article 1175
Facts:
On or about September 7, 1957, the petitioner loaned P10,000.00, without interest, to the respondent. The loan
became ultimately due on January 31, 1960 but was not paid. The petitioner asked for a 3-month extension, or up
to April 30, 1960. On March 17, 1960, the parties executed another loan document for the payment of P10, 000.00
extended up to April 30, 1960 but the obligation was increased by P6,000.00 to answer for the attorneys fees, legal
interest, and other cost incident thereto. The petitioner again failed to pay their obligation by April 30, 1960. On
September 23, 1957, the respondent instituted a collection case. The petitioner admitted the P10, 000.00 principal
obligation but claimed that the additional P6, 000.00 constituted usurious interest.
Issue:
Whether or not the additional P6, 000.00 constituted usurious interest.
Held:
No. Usury has been legally non-existent. Interest can now be charged as lender and borrower may agree upon. In
the present case, the petitioner had not proven that the P6, 000.00 additional obligation was illegal.
MELENCIO-HERRERA, J.:
This is an appeal by defendants from a Decision rendered by the then Court of First Instance of Bulacan. The appeal
was originally taken to the then Court of Appeals, which endorsed it to this instance stating that the issue involved
was one of law.
It appears that on or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to defendant
partnership and defendant Elino Lee Chi, as the managing partner. The loan became ultimately due on January 31,
1960, but was not paid on that date, with the debtors asking for an extension of three months, or up to April 30,
1960.
On March 17, 1960, the parties executed another loan document. Payment of the P10,000.00 was extended to April
30, 1960, but the obligation was increased by P6,000.00 as follows:
That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine currency shall form part of the
principal obligation to answer for attorney's fees, legal interest, and other cost incident thereto to
be paid unto the creditor and his successors in interest upon the termination of this agreement.
Defendants again failed to pay their obligation by April 30, 1960 and, on September 23, 1960, plaintiff instituted
this collection case. Defendants admitted the P10,000.00 principal obligation, but claimed that the additional
P6,000.00 constituted usurious interest.
Upon application of plaintiff, the Trial Court issued, on the same date of September 23, 1960, a writ of Attachment
on real and personal properties of defendants located at Karanglan, Nueva Ecija. After the Writ of Attachment was
implemented, proceedings before the Trial Court versed principally in regards to the attachment.
On January 18, 1961, an Order was issued by the Trial Court stating that "after considering the manifestation of
both counsel in Chambers, the Court hereby allows both parties to simultaneously submit a Motion for Summary
Judgment. 1 The plaintiff filed his Motion for Summary Judgment on January 31, 1961, while defendants filed theirs
on February 2, 196l. 2
On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff "the amount of P10,000.00
plus the further sum of P6,000.00 by way of liquidated damages . . . with legal rate of interest on both amounts
from April 30, 1960." It is from this judgment that defendants have appealed.
We have decided to affirm.

Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00 obligation,
"it is presumed that it exists and is lawful, unless the debtor proves the contrary". No evidentiary hearing having
been held, it has to be concluded that defendants had not proven that the P6,000.00 obligation was illegal.
Confirming the Trial Court's finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as
of March 17, 1960, representing loss of interest income, attorney's fees and incidentals.
The main thrust of defendants' appeal is the allegation in their Answer that the P6,000.00 constituted usurious
interest. They insist the claim of usury should have been deemed admitted by plaintiff as it was "not denied
specifically and under oath". 3
Section 9 of the Usury Law (Act 2655) provided:
SEC. 9. The person or corporation sued shall file its answer in writing under oath to any complaint
brought or filed against said person or corporation before a competent court to recover the
money or other personal or real property, seeds or agricultural products, charged or received in
violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will
mean the admission of the facts contained in the latter.
The foregoing provision envisages a complaint filed against an entity which has committed usury, for the recovery
of the usurious interest paid. In that case, if the entity sued shall not file its answer under oath denying the
allegation of usury, the defendant shall be deemed to have admitted the usury. The provision does not apply to a
case, as in the present, where it is the defendant, not the plaintiff, who is alleging usury.
Moreover, for sometime now, usury has been legally non-existent. Interest can now be charged as lender and
borrower may agree upon. 4 The Rules of Court in regards to allegations of usury, procedural in nature, should be
considered repealed with retroactive effect.
Statutes regulating the procedure of the courts will be construed as applicable to actions pending
and undetermined at the time of their passage. Procedural laws are retrospective in that sense
and to that extent. 5
... Section 24(d), Republic Act No. 876, known as the Arbitration Law, which took effect on 19
December 1953, and may be retroactively applied to the case at bar because it is procedural in
nature. ... 6
WHEREFORE, the appealed judgment is hereby affirmed, without pronouncement as to costs.
SO ORDERED.

Security Bank vs Makati

RTC
In 1983, Eusebio acquired 3 separate loans from Security Bank amounting to P265k. The
agreed interest rate was 23% per annum. The promissory note was freely and voluntarily
signed by both parties. Leia Ventura was the co-maker. Eusebio defaulted from paying.
Security Bank sued for collection. Judge Gorospe of the Makati RTC ordered Eusebio to
pay but he lowered the interest rate to 12% per annum.
ISSUE: Whether or not the courts have liberality to reduce stipulated interest rates to the
legal rate of 12% per annum.
HELD: No. From the examination of the records, it appears that indeed the agreed rate of
interest as stipulated on the three (3) promissory notes is 23% per annum. The applicable
provision of law is the Central Bank Circular No. 905 which took effect on December 22,
1982:
Sec. 1. The 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
judicial, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law,
as amended.
Only in the absence of stipulations will the 12% rate be applied or if the stipulated rate is
grossly excessive.
Further, Eusebio never questioned the rate. He merely expressed to negotiate the terms
and conditions. The promissory notes were signed by both parties voluntarily. Therefore,
stipulations therein are binding between them.
DECISION
HERMOSISIMA, JR. J.:
Questions of law which are of first impression are sought to be resolved in this case: Should
the rate of interest on a loan or forbearance of money, goods or credits, as stipulated in a

contract, far in excess of the ceiling prescribed under or pursuant to the Usury Law, prevail
over Section 2 of Central Bank Circular No. 905 which prescribes that the rate of interest
thereof shall continue to be 12%per annum? Do the Courts have the discretion to arbitrarily
override stipulated interest rates of promissory notes and stipulated interest rates of
promissory notes and thereby impose a 12% interest on the loans, in the absence of
evidence justifying the imposition of a higher rate?
This is a petition for review on certiorari for the purpose of assailing the decision of
Honorable Judge Fernando V. Gorospe of the Regional Trial Court of Makati, Branch 61,
dated March 30, 1993, which found private respondent Eusebio liable to petitioner for a sum
of money. Interest was lowered by the court a quo from 23%per annum as agreed upon the
parties to 12%per annum.
The undisputed facts are as follows:
On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note No.
TL/74/178/83 in favor of petitioner Security Bank and Trust Co. (SBTC) in the total amount
of One Hundred Thousand Pesos (P100,000.00) payable in six monthly installments with a
stipulated interest of 23%per annum up to the fifth installment. 1
On July 28, 1983, respondent Eusebio again executed Promissory Note No. TL/74/1296/83
in favor of petitioner SBTC. Respondent bound himself to pay the sum of One Hundred
Thousand Pesos (P100,000.00) in six (6) monthly installments plus 23% interestper
annum. 2
Finally, another Promissory Note No. TL74/1491/83 was executed on August 31, 1983 in the
amount of Sixty Five Thousand Pesos (P65,000.00). Respondent agreed to pay this note in
six (6) monthly installments plus interest at the rate of 23%per annum. 3
On all the abovementioned promissory notes, private respondent Leila Ventura had signed
as co-maker. 4
Upon maturity which fell on the different dates below, the principal balance remaining on the
notes stood at:
1)
PN
No.
TL/74/748/83

P16,665.00
as
of
September
2)
PN
No.
TL/74/1296/83

P83,333.00
as
of
August
3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.

1983.
1983.

Upon the failure and refusal of respondent Eusebio to pay the aforestated balance payable,
a collection case was filed in court by petitioner SBTC. 5 On March 30, 1993, the court a
quo rendered a judgment in favor of petitioner SBTC, the dispositive portion which reads:
WHEREFORE, premises above-considered, and plaintiffs claim having been duly proven,
judgment is hereby rendered in favor of plaintiff and as against defendant Eusebio who is
hereby ordered to:
1. Pay the sum of P16,655.00, plus interest of 12%per annum starting 27 September 1983,
until fully paid;
2. Pay the sum of P83,333.00, plus interest of 12%per annum starting 28 August 1983, until
fully paid;
3. Pay the sum of P65,000.00, plus interest of 12%per annum starting 31 August 1983, until
fully paid;
4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as and by
way of attorneys fees; and to
5. Pay the costs of this suit.
SO ORDERED. 6
On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC
contending that:
(1) the interest rate agreed upon by the parties during the signing of the promissory notes
was 23%per annum;
(2) the interests awarded should be compounded quarterly from due date as provided in the
three (3) promissory notes;
(3) defendants Leila Ventura should likewise be held liable to pay the balance on the
promissory notes since she has signed as co-maker and as such, is liable jointly and
severally with defendant Eusebio without a need for demand upon her. 7
Consequently, an Order was issued by the court a quo denying the motion to grant the rates
of interest beyond 12%per annum; and holding defendant Leila Ventura jointly and severally
liable with co-defendants Eusebio.

Hence, this petition.

The sole issue to be settled in this petition is whether or not the 23% rate of interestper
annum agreed upon by petitioner bank and respondents is allowable and not against the
Usury Law.
We find merit in this petition.
From the examination of the records, it appears that indeed the agreed rate of interest as
stipulated on the three (3) promissory notes is 23%per annum. 8 The applicable provision of
law is the Central Bank Circular No. 905 which took effect on December 22, 1982,
particularly Sections 1 and 2 which state: 9
Sec. 1. The 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
judicial, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law,
as amended.
Sec. 2. The rate of interest for the loan or forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of express contract as to such rate of interest,
shall continue to be twelve per cent (12%)per annum.
CB Circular 905 was issued by the Central Banks Monetary Board pursuant to P.D. 1684
empowering them to prescribe the maximum rates of interest for loans and certain
forbearances, to wit:
Sec. 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as follows:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate of
interest for the loan or renewal thereof or the forbearance of any money, goods or credits,
and to change such rate or rates whenever warranted by prevailing economic and social
conditions: Provided, That changes in such rate or rates may be effected gradually on
scheduled dates announced in advance.
In the exercise of the authority herein granted, the Monetary Board may prescribe higher
maximum rates for loans of low priority, such as consumer loans or renewals thereof as well
as such loans made by pawnshops, finance companies and other similar credit institutions
although the rates prescribed for these institutions need not necessarily be uniform. The
Monetary Board is also authorized to prescribed different maximum rate or rates for different

types of borrowings, including deposits and deposit substitutes, or loans of financial

intermediaries. 10
The court has ruled in the case of Philippine National Bank v. Court of Appeals 11 that:
P.D. No. 1684 and C.B. Circular No. 905 no more than 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.
All the promissory notes were signed in 1983 and, therefore, were already covered by CB
Circular No. 905. Contrary to the claim of respondent court, this circular did not repeal nor in
anyway amend the Usury Law but simply suspended the latters effectivity.
Basic is the rule of statutory construction that when the law is clear and unambiguous, the
court is left with no alternative but to apply the same according to its clear language. As we
have held in the case of Quijano v.Development Bank of the Philippines: 12
. . . We cannot see any room for interpretation or construction in the clear and unambiguous
language of the above-quoted provision of law. This Court had steadfastly adhered to the
doctrine that its first and fundamental duty is the application of the law according to its
express terms, interpretation being called for only when such literal application is
impossible. No process of interpretation or construction need be resorted to where a
provision of law peremptorily calls for application. Where a requirement or condition is made
in explicit and unambiguous terms, no discretion is left to the judiciary.
It must see to it that is mandate is obeyed.
The rate of interest was agreed upon by the parties freely. Significantly, respondent did not
question that rate. It is not for respondent court a quo to change the stipulations in the
contract where it is not illegal. Furthermore, Article 1306 of the New Civil Code provides that
contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy. We find no valid reason for the respondent court a quo to impose a
12% rate of interest on the principal balance owing to petitioner by respondent in the
presence of a valid stipulation. In a loan or forbearance of money, the interest due should
be that stipulated in writing, and in the absence thereof, the rate shall be 12%per
annum. 13 Hence, 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. 14
IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is hereby
AFFIRMED with the MODIFICATION that the rate of interest that should be imposed be
23%per annum.
SO ORDERED.

G.R. No. 174055

February 12, 2008

PHILIPPINE NATIONAL BANK, petitioner,

vs.
SPOUSES WILFREDO and ESTELA ENCINA, respondents.
DECISION
TINGA, J.:
The Philippine National Bank (PNB) assails the Decision1 of the Court of Appeals dated 15 May
2005, rendered in CA-G.R. CV No. 79094 which, among others, declared null and void the interest
rate imposed by PNB on the loan obtained from it by respondents and the consequent extrajudicial
foreclosure of the properties offered as security for the loan.
The facts are summarized by the appellate court, thus:
On September 13, 1995, as additional capital for their metal craft business, plaintiffsappellants ENCINA obtained a P500,000.00 loan with defendant-appellee PNB, secured by
a promissory note, a real estate mortgage, and a credit agreement, on parcels of land
covered by Transfer Certificate of Title (TCT) Nos. T-6788 and T-6789 located at Occidental
Mindoro.
Thereafter, or on September 6, 1996, plaintiffs-appellants obtained an
additional P200,000.00 loan with defendant-appellee PNB as additional capital for palay
production, embodied in a credit agreement and a promissory note, secured by the same
parcels of land. The loan obligations of plaintiffs-appellants ENCINA were fully paid on
February 4, 1997.
Another loan in the amount of P400,000.00 as capital for a common carrier business was
obtained by plaintiffs-appellants ENCINA with defendant-appellee PNB, secured by a
promissory note and a time loan commercial credit agreement, likewise secured by the
parcels of land covered by TCT Nos. T-6788 and T-6789.
Defendant-appellee PNB subsequently granted a P1,250,000.00 all purpose credit facility to
plaintiffs-appellants ENCINA to be used by plaintiffs-appellants ENCINA exclusively for their
metal craft business. Plaintiffs-appellants ENCINA availed of the amount of P1,050,000.00 of
the credit facility, evidenced by a promissory note dated February 13, 1998 secured by the
same parcels of land as well. Plaintiffs-appellants ENCINA later on availed of the
remaining P200,000.00 credit facility, secured by a promissory note dated May 22, 1998.
On the maturity date of the P1,250,000.00 loan obligation, plaintiffs-appellants ENCINA failed
to pay, prompting defendant-appellee PNB to demand the same from plaintiffs-appellants
ENCINA, in letters dated January 5, 1999, January 21, 1999, March 5, 1999, April 16, 1999,
and May 27, 1999. Demands from defendant-appellee PNB were left unheeded, prompting
defendant appellee PNB to file a petition for sale of the mortgaged properties with defendant-

appellee Ex-Officio Sheriff of the Regional Trial Court of San Jose, Occidental Mindoro on
September 20, 1999.
The extra-judicial sale of the mortgaged properties of plaintiff-appellant ENCINA was
published in "The Island Observer," a newspaper of general circulation in the province of
Occidental Mindoro, on October 4, 11, and 18, 1999. A notice of extra-judicial sale was
issued on October 4, 1999. The foreclosure sale was thereafter conducted on November 15,
1999 with defendant-appellee PNB as the highest bidder. A certificate of sale dated
November 16, 1999 was then issued in favor of defendant-appellee PNB.
Thereafter, or on January 22, 2001, titles to the subject properties were consolidated in
defendant-appellee PNBs name, to which TCT Nos. 16919 and 16920 were issued.
On November 15, 2001, a contract of lease was executed between defendant-appellee PNB
and plaintiffs-appellants ENCINA over the subject properties, pursuant to a request made by
plaintiffs-appellants ENCINA that they be allowed by defendant-appellee PNB to lease the
subject premises for a monthly rental ofP7,500.00.
Finally, on July 18, 2002, plaintiffs-appellants ENCINA sued defendants-appellees in an
action for the nullification of foreclosure sale and damages, with prayer for extension and/or
grace period, with the RTC of San Jose, Occidental [Mindoro], Branch 46, docketed as Civil
Case No. R-1304, alleging that their loan obligations, being agricultural, hence, with longer
gestation periods, should have been restructured by defendant-appellee PNB for a longer
period of at least seven years; that no penalties should have been imposed by defendantappellee PNB; that the extra-judicial foreclosure sale of their properties was null and void;
that for being in violation of the Usury Law, the loan contracts and all accessory contracts
pertaining thereto were null and void; and that the foreclosure proceedings under RA 3135
were not complied with, hence, the entire foreclosure proceedings were null and void.
In the motion to dismiss filed by defendant-appellee PNB on October 11, 2002, it averred that
plaintiffs-appellants ENCINA could no longer seek for (sic) longer gestation periods for their
agricultural loans, since plaintiffs-appellants ENCINAs agricultural loans dated September
13, 1995 and February 13, 1998 have already been fully paid by them on February 4, 1997;
that plaintiffs-appellants ENCINA failed to settle their loan for metal craft business and not
their agricultural loans; that the Usury Law was inapplicable being legally non-existent; that
defendant-appellee PNB complied with the requirements of posting and publication set forth
in RA 3135; and that plaintiffs-appellants ENCINA had already waived their right to question
PNBs title to the properties, considering that plaintiffs-appellants [ENCINA] requested from
PNB that they be allowed to lease the subject premises from PNB.2
In its Order3 dated 10 March 2003, the trial court dismissed the complaint.
The dismissal was reversed by the Court of Appeals principally on its finding that there was no
definite agreement as to the interest rate to be imposed on the loan. Therefore, the loan cannot be
said to have matured so as to justify the extrajudicial foreclosure of the mortgaged properties. The
appellate court denied reconsideration in its Resolution 4 dated August 4, 2006.

PNB contends that the Court of Appeals should not have rendered a decision on the merits
considering that the parties have not offered evidence on their respective claims and defenses, the
complaint having been dismissed by the trial court on PNBs motion. It also argues that respondents
should be deemed to have admitted PNBs ownership over and title to the foreclosed properties
when they leased the foreclosed properties from PNB.
It insists that the determination of the applicable interest rate was not left to its sole will because
respondents agreed that the interest rates are to be set by PNBs management for each of the
interest periods and the latter had the option to accept or reject the rate imposed on their loan. It
further avers that there is nothing on record to support the appellate courts conclusion that the
foreclosure proceedings, the public sale, and the certificate of sale are null and void. 5
Respondents insist on the nullity of the provision in the promissory notes to the effect that the rate of
interest "will be set by the Management" of PNB, echoing the appellate courts declaration that this
provision violates the principle of mutuality of contracts.6
The case before the Court of Appeals was filed pursuant to Rule 41 of the 1997 Rules of Civil
Procedure which provides that an ordinary appeal may be filed to question a judgment or final order
of the Regional Trial Court rendered in the exercise of its original jurisdiction. The appeal limits the
questions to be reviewed to errors of fact or law committed by the trial court.
In this case, the issue presented to the appellate court was the propriety of the dismissal of
respondents complaint principally on the ground that it states no cause of action. The appellate
court was called upon to review the sufficiency of the allegations made in the complaint constituting
the cause of action and thereafter to determine whether the trial court erred in dismissing the
complaint.
A cause of action exists if the following elements are present, namely: (1) a right in favor of the
plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the
part of the named defendant to respect or not to violate such right; and (3) an act or omission on the
part of such defendant violative of the right of the plaintiff or constituting a breach of the obligation of
the defendant to the plaintiff for which the latter may maintain an action for recovery of damages. 7
In order to sustain a dismissal on the ground that the complaint states no cause of action, the
insufficiency of the cause of action must appear on the face of the complaint, and the test of the
sufficiency of the facts alleged in the complaint to constitute a cause of action is whether or not,
admitting the facts alleged, the court could render a valid judgment upon the same in accordance
with the prayer of the complaint. For this purpose, the motion to dismiss must hypothetically admit
the truth of the facts alleged in the complaint.8
In their complaint, respondents averred:
FIRST CAUSE OF ACTION:
5. The loan is an agricultural loan to be used as operating capital in palay production as
evidenced by the Credit Agreement (hereto attached as Annex "H");

6. Being an agricultural loan with long gestation period, the loan should have been
restructured for a longer period of at least seven (7) years and no penalties should have
been imposed pursuant to Central Bank Circulars and the Agricultural Modernization Act of
1997;
7. Inspite of the request of the Plaintiffs to restructure the loan or for a grace period, the
Defendant Bank failed and refused to do so. Furthermore, penalty charges should not have
been imposed;
8. The Plaintiffs requested for a detailed computation of the amount due considering the
payments that were made but the Defendant Bank failed and refused to do so;
9. That in view of the violation of the Central Bank Circulars and the Agricultural
Modernization Act of 1997, the Extra-judicial Foreclosure Sale of the subject properties
issued in favor of the Defendant Bank is null and void, including all proceedings thereto.
SECOND CAUSE OF ACTION
10. Considering that all the loan covered by the said Promissory Notes are secured with a
mortgage upon registered real estate, all those contracts of loan are null and void because
they are in violation of or contrary to the provisions of the Usury Law (Act No. 2655, as
amended) particularly Section 2 thereof which is photocopied hereunder from Philippine
Permanent and General Statutes, to wit:
xxx
11. In view of the violation of the Usury Law, the contracts of loan, and its accessory
contracts are likewise null and void, namely: a) Real Estate Mortgage Contract, as well as
Promissory Notes executed therewith are also null and void.
12. That in view of the nullity of the contracts of loan and the real estate mortgage contracts,
the Extra-judicial Foreclosure Sale of subject property issued in favor of the Defendant Bank
is also null and void, including all proceedings thereto, the minutes and the subsequent
Certificate of Sale is also void;
THIRD CAUSE OF ACTION
13. The Extra-judicial foreclosure proceedings and public auction sale of the properties of the
Plaintiffs failed to comply with the provisions of Section 3, of Act No. 3135, as amended,
which provides:
Section 3. Notice shall be given by posting notices of the sale for not less than twenty
days in at least three public places of the municipality or city where the property is
situated, and if such property is worth more than four hundred

pesos, such notice shall also be published once a week for at least three consecutive
weeks in a newspaper of general circulation in the municipality or city.
14. The failure of the Defendants to comply with the foreclosure proceedings under Section 3
of Act 3135, as amended, would render the foreclosure proceedings null and void; 9
PNB should be deemed to have admitted the foregoing averments, at least hypothetically, when it
filed a motion to dismiss the complaint. Its motion, however, assails the veracity of these allegations,
claiming that the foreclosure of the mortgaged properties was due to the non-payment by the Encina
spouses of their metal craft business loan and not their agricultural loan.
Nothing is more settled than the rule that in a motion to dismiss for failure to state a cause of action,
the inquiry is into the sufficiency, not the veracity, of the material allegations. If the motion assails,
directly or indirectly, the veracity of the allegations in the complaint, it is improper to grant the motion
upon the assumption that the averments in the motion are true and those in the complaint are not.
The sufficiency of the motion should be tested on the strength of the allegations of fact contained in
the complaint and no other. If the allegations of the complaint are sufficient in form and substance
but their veracity and correctness are assailed, it is incumbent upon the court to deny the motion to
dismiss and require the defendant to answer and go to trial to prove his defense. The veracity of the
assertions of the parties can be ascertained at the trial of the case on the merits. 10
Assuming the facts alleged in the complaint to be true, i.e., that the Encina spouses incurred an
agricultural loan which, under the Agricultural Modernization Act of 1997, has a long gestation period
and is not subject
to imposition of penalties, the trial court may render a valid judgment. Thus, we find that, at least as
regards the first cause of action, the complaint sufficiently establishes a cause of action. The trial
court should not have dismissed the same regardless of the defenses averred by PNB. It is
incumbent upon PNB to disprove the existence of the cause of action by evidence whether at the
trial or at the preliminary hearing of affirmative defenses.
The Court of Appeals, however, exacerbated the error by going beyond the issues in the appeal and
resolving the case on the basis only of the pleadings of the parties. Worse, the appellate court
reversed the trial courts decision on the ground that the mechanism for setting the interest rate as
stipulated in the loan contract violated the principle of mutuality of contractsan issue which was
never raised in the complaint nor even in the Encina spouses brief as plaintiffs-appellants. PNB was
obviously deprived of its right to be heard on this issue.
As borne by the records, the Encina spouses never challenged the validity of their loan and the
accessory contracts with PNB on the ground that they violated the principle of mutuality of contracts
in view of the provision therein that the interest rate shall "be set by management." Their only
contention concerning the interest rate was that the charges imposed by the bank violated the Usury
Law. This was the essence of the second cause of action alleged in the complaint.
It should be definitively ruled in this regard that the Usury Law had been rendered legally ineffective
by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank, and later

by Central Bank Circular No. 905 which took effect on 1 January 1983 and removed the ceiling on
interest rates for secured and unsecured loans regardless of maturity. The effect of these circulars is
to allow the parties to agree on any interest that may be charged on a loan. The virtual repeal of the
Usury Law is within the range of judicial notice which courts are bound to take into account. 11 After
all, the fundamental tenet is that the law is deemed part of the contract. 12Thus, the trial court was
correct in ruling that the second cause of action was without basis.
In any event, the Court of Appeals ruled that even if there was no stipulated interest rate, the
mortgage itself remained valid. If that is so, the foreclosure proceedings cannot be invalidated based
solely on the alleged violation of the principle of mutuality. The appellate court held:
The promissory notes and the real estate mortgages however remain valid even
assuming arguendo that there was no stipulated interest rate that was agreed upon. The
obligation of plaintiffs-appellants ENCINA to pay the principal loan is nevertheless valid even
if the interest is void. This is so because a contract of loan should be divided into two parts:
(1) the principal and (2) the accessory stipulations the principal one is to pay the debt and
the accessory stipulation is to pay interest thereon. The two stipulations are divisible and
the principal can still stand without the stipulation on the interest. The prestation of the
debtor to pay the principal debt, which is the cause of the contract, is not illegal. The
illegality lies only in the failure to stipulate or agree on the interest leaving it to only
one of the parties to fix or determine. Being separable, only the interest unilaterally
fixed by one party should be deemed void,which cannot be interpreted to mean forfeiture
even of the principal, for this would unjustly enrich the borrower at the expense of the lender.
Plaintiffs-appellants ENCINA freely and voluntarily agreed to the provisions in regard to
repayment of the principal when they affixed their signatures thereto. Thus, the said
mortgage contract binds them because Article 1159 of the New Civil Code provides that
obligations arising from contracts have the force of law between the contracting parties.
Since the promissory notes and the real estate mortgage are valid and only the unilaterally
imposed interest rates are wholly void, plaintiffs-appellants ENCINA have still to be directed
to pay defendant-appellee PNB the principal amount of the loan which remains valid with
interest at the legal rate of 12% per annum from the date the loan was granted up to full
payment, less payments already made, within ninety (90) days from the finality of the
decision, otherwise, the defendant-appellee PNB shall be entitled to foreclose the mortgaged
property and sell the same at public auction to satisfy the loan.(Emphasis not ours) 13
Curiously, even as they assert that the principle of mutuality was violated by the failure to stipulate
an interest rate, the Encina spouses concurred with the appellate court and even reproduced
verbatim the latters discussion on the validity of the promissory notes and real estate
mortgages,14 effectively admitting that these contracts are binding on them.
As regards the third cause of action, we deem the allegations in the complaint groundless as well.
The complaint merely reproduced the provision of Act 3135 which the Encina spouses claim PNB
had violated but failed to state the ultimate facts constituting such violation. The statement of a mere

conclusion of law renders a complaint vulnerable to a motion to dismiss on the ground of failure to
state a cause of action.15
In sum, in view of the factual issues raised by PNB in its motion to dismiss, the just and fair
resolution of the present controversy demands further proceedings in the RTC with regard to the first
cause of action mentioned in the complaint. We shall refrain from taking them up in this Decision.
WHEREFORE, premises considered, the petition is GRANTED IN PART. The Decision of the Court
of Appeals dated 15 May 2005 and its Resolution dated 4 August 2006 are REVERSED and SET
ASIDE. This case is orderedREMANDED to the court of origin which is directed to resolve the same
with dispatch only with respect to the first cause of action alleged in the Complaint. Costs against
petitioner.
SO ORDERED.