First Metro Investment vs.

Estate of Del Sol (2001)

Petitioners: FIRST METRO INVESTMENT CORPORATION
Respondents: ESTE DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR.,
MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G. ASUNCION, ALBERTO
M. LADORES, VICENTE M. DE VERA, JR., AND FELIPE B. SESE
Ponente: DE LEON, JR.
Topic: Remedies for Breach
SUMMARY: (1-2 sentence summary of facts, issue, ratio and ruling)
FACTS:
-

January 31, 1978: FMIC loaned Este del Sol P7.3M for the construction of a resort in
Montalban, Rizal with 16% interest per annum, subject to (a) a onetime penalty of
20% of the amount due which shall bear interest at the highest rate permitted by
law from the date of default until full payment, (b) liquidated damages at 2% per
month compounded quarterly on the unpaid balance and accrued interests
together with all the penalties, fees, expenses or charges until the balance is fully
paid, and (c) Attorneys fees equivalent to 25% for the sum sought to be recovered.
The loans were released on a staggered basis.
On the same day, as provided in the loan agreement, the parties also entered into an
Underwriting Agreement, (a) whereby FMIC shall underwrite on a best-efforts basis the
public offering of 120,000 common shares of Este del Sol's capital stock for a one-time
underwriting fee of P200,000.00; (b) an annual supervision fee of P200,000 for four
consecutive years to be paid to FMIC for supervising the public offering of the shares;
(c) and a consultancy fee of P332,500.00 per annum for 4 consecutive years to
FMIC.
Simultaneously, a Consultancy Agreement was executed whereby Estedel Sol engaged
FMICs services for a fee as consultant to render general consultancy services
February 22, 1978: FMIC billed Este del Sol for the underwriting (P200k) and
supervision fees (P200k), as well as P1.3M worth of consultancy fees for 4 years. These
were all deducted from the first release of the loan.
June 23, 1980: Este del Sol failed to meet the payment schedules, incurring P12.6M due
to FMIC.
FMIC caused the foreclosure of P7.5M worth of properties mortgaged by Este del Sol.
Of the P9M from the foreclosure and auction, P3.1M was deducted for attorneys fees
and P5.8M for interests and penalties, and partly on the principal.
November 11: FMIC initiated a collection suit against respondents-sureties for the
remaining P6.8M owed by Este del Sol.
The respondents argued that the Underwriting and Consultancy Agreements were
integral parts of the Loan Agreement and were merely subterfuges to camouflage the
usurious interest charged by FMIC.
The trial court sided with FMIC and ordered respondents to pay the P6.8M balance.

The CA reversed. It found and declared that the fees provided for in the Underwriting
and Consultancy Agreements were mere subterfuges to camouflage the excessively
usurious interest charged by FMIC on the loan of Este del Sol; and that the stipulated
penalties, liquidated damages and attorney's fees were "excessive, iniquitous,
unconscionable and revolting to the conscience. It declared that in lieu thereof, the
stipulated one time 20% penalty on the amount due and 10% of the amount due as
attorney's fees would be reasonable and suffice to compensate FMIC for those items.
Thus, it ordered FMIC to pay or reimburse Este del Sol P971,000.00 representing the
difference between what is due to FMIC and what is due to Este del Sol.
Thus, this appeal by FMIC, assailing the factual findings and conclusion of the CA. (SC:
We are not a trier of facts.)

ISSUES:

WoN the Underwriting and Consultancy Agreements were merely camouflages for
usurious interest
o YES. First, there is no merit to petitioner FMIC's contention that Central Bank
Circular No. 905 which took effect on January 1, 1983 and removed the ceiling
on interest rates for secured and unsecured loans, regardless of maturity, should
be applied retroactively to a contract executed on January 31, 1978, as in this
case, while the Usury Law was in full force and effect. It is an elementary rule of
contracts that the laws, in force at the time the contract was made and entered
into, govern it. More significantly, Central Bank Circular No. 905 did not repeal
nor in any way amend the Usury Law but simply suspended the latter's effectivity.
o Second, the form of the contract is not conclusive for the law will not permit a
usurious loan to hide itself behind a legal form. Parol evidence is admissible to
show that a written document though legal in form was in fact a device to cover
usury.
o Several facts and circumstances taken altogether show that the Underwriting and
Consultancy Agreements were simply cloaks or devices to cover an illegal
scheme employed by FMIC to conceal and collect excessively usurious interest:
The Underwriting and Consultancy Agreements were executed
simultaneously with the Loan Agreement and were set to mature or shall
remain effective during the same period of time.
The P1.3M for four years worth of consultancy fees was charged in
February 1978 when the agreement is for P332.5K for every year.
The P1.3M, along with the underwriting and supervision fees, were
charged from the first release of the loan. Thus, P1.73M reverted to FMIC
as part of the loan to Este del Sol.
FMIC failed to comply with its underwriting and consultancy obligations,
notwithstanding the fact that these were not necessary since Este del
Sols marketing arm and officers were more than capable.
o The underwriting and consultancy agreements were essential conditions for the
grant of the loan. An apparently lawful loan is usurious when it is intended that
additional compensation for the loan be disguised by an ostensibly unrelated

NOTES:

contract providing for payment by the borrower for the lenders services which
are of little value or which are not in fact to be rendered.
Art. 1957: Contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury shall be void. The borrower may
recover in accordance with the laws on usury.
In usurious loans, the entire obligation does not become void because of an
agreement for usurious interest; the unpaid principal debt still stands and
remains valid but the stipulation as to the usurious interest is void, consequently,
the debt is to be considered without stipulation as to the interest.
Angel Jose Warehousing Co., Inc. v. Child Enterprises: In simple loan
with stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Article 1350, Civil
Code), is not illegal. The illegality lies only as to the prestation to pay the
stipulated interest; hence, being separable, the latter only should be
deemed void, since it is the only one that is illegal.