LETICIA Y. MEDEL DR.

RAFAEL MEDEL and SERVANDO

FRANCO, petitioners, vs. COURT OF APPEALS, SPOUSES VERONICA
R. GONZALES and DANILO G. GONZALES, JR., doing lending
business under the trade name and style "GONZALES CREDIT
ENTERPRISES", respondents.

DECISION
PARDO, J.:

The case before the Court is a petition for review on certiorari, under Rule
45 of the Revised Rules of Court, seeking to set aside the decision of the Court
of Appeals,[1] and its resolution denying reconsideration, [2] the dispositive
portion of which decision reads as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED
such that defendants are hereby ordered to pay the plaintiff: the
sum of P500,000.00, plus 5.5% per month interest and 2%
service charge per annum effective July 23, 1986, plus 1% per
month of the total amount due and demandable as penalty
charges effective August 23, 1986, until the entire amount is fully
paid.
"The award to the plaintiff of P50,000.00 as attorney's fees
is affirmed. And so is the imposition of costs against the
defendants.

SO ORDERED."[3]

The Court required the respondents to comment on the petition, [4] which
was filed on April 3, 1998,[5] and the petitioners to reply thereto, which was
filed on May 29, 1998.[6] We now resolve to give due course to the petition and
decide the case.
The facts of the case, as found by the Court of Appeals in its decision,
which are considered binding and conclusive on the parties herein, as the
appeal is limited to questions of law, are as follows:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter
Servando and Leticia) obtained a loan from Veronica R. Gonzales (hereafter
Veronica), who was engaged in the money lending business under the name
"Gonzales Credit Enterprises", in the amount of P50,000.00, payable in two
months. Veronica gave only the amount of P47,000.00, to the borrowers, as
she retained P3,000.00, as advance interest for one month at 6% per
month. Servado and Leticia executed a promissory note for P50,000.00, to
evidence the loan, payable on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from Veronica
another loan in the amount of P90,000.00, payable in two months, at 6%
interest per month. They executed a promissory note to evidence the loan,
maturing on January 19, 1986. They received only P84,000.00, out of the
proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the
indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still
another loan in the amount of P300,000.00, maturing in one month, secured
by a real estate mortgage over a property belonging to Leticia Makalintal
Yaptinchay, who issued a special power of attorney in favor of Leticia Medel,
authorizing her to execute the mortgage. Servando and Leticia executed a
promissory note in favor of Veronica to pay the sum of P300,000.00, after a
month, or on July 11, 1986. However, only the sum of P275,000.00, was given
to them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on
maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr.
Rafael Medel, consolidated all their previous unpaid loans
totaling P440,000.00, and sought from Veronica another loan in the amount
of P60,000.00, bringing their indebtedness to a total of P500,000.00, payable
on August 23, 1986. The executed a promissory note, reading as follows:
"Baliwag, Bulacan July 23, 1986
"Maturity Date August 23, 1986

"P500,000.00
"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to
the order of VERONICA R. GONZALES doing business in the business
style of GONZALES CREDIT ENTERPRISES, Filipino, of legal age,
married to Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of
PESOS ........ FIVE HUNDRED THOUSAND ..... (P500,000.00) Philippine
Currency with interest thereonat the rate of 5.5 PER CENT per month p
lus 2% service charge per annum from date hereof until fully paid
according to the amortization schedule contained herein. (Underscoring
supplied)
"Payment will be made in full at the maturity date.
"Should I/WE fail to pay any amortization or portion hereof when due,
all the other installments together with all interest accrued shall
immediately be due and payable and I/WE hereby agree to pay
an additional amount equivalent to one per cent (1%) per month of the a
mount due and demandable as penalty charges in the form of liquidated
damages until fully paid; and the
further sum ofTWENTY FIVE PER CENT (25%) thereon in full, without
deductions as Attorney's Fee whether actually incurred or not, of the
total amount due and demandable, exclusive of costs and judicial or
extra judicial expenses. (Underscoring supplied)
"I, WE further agree that in the event the present rate of interest on loan
is increased by law or the Central Bank of the Philippines, the holder
shall have the option to apply and collect the increased interest charges
without notice although the original interest have already been collected
wholly or partially unless the contrary is required by law.
"It is also a special condition of this contract that the parties herein
agree that the amount of peso-obligation under this agreement is based
on the present value of peso, and if there be any change in the value
thereof, due to extraordinary inflation or deflation, or any other cause or
reason, then the peso-obligation herein contracted shall be adjusted in
accordance with the value of the peso then prevailing at the time of the
complete fulfillment of obligation.
"Demand and notice of dishonor waived. Holder may accept partial
payments and grant renewals of this note or extension of payments,
 reserving rights against each and all indorsers and all parties to this
note.
"IN CASE OF JUDICIAL Execution of this obligation, or any part of it,
the debtors waive all his/their rights under the provisions of Section 12,
Rule 39, of the Revised Rules of Court."
On maturity of the loan, the borrowers failed to pay the indebtedness
of P500,000.00, plus interests and penalties, evidenced by the above-quoted
promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo
G. Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at
Malolos, Bulacan, a complaint for collection of the full amount of the loan
including interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990,
defendant Servando alleged that he did not obtain any loan from the plaintiffs;
that it was defendants Leticia and Dr. Rafael Medel who borrowed from the
plaintiffs the sum of P500,000.00, and actually received the amount and
benefited therefrom; that the loan was secured by a real estate mortgage
executed in favor of the plaintiffs, and that he (Servando Franco) signed the
promissory note only as a witness.
In their separate answer filed on April 10,1990, defendants Leticia and
Rafael Medel alleged that the loan was the transaction of Leticia Yaptinchay,
who executed a mortgage in favor of the plaintiffs over a parcel of real estate
situated in San Juan, Batangas; that the interest rate is excessive at 5.5% per
month with additional service charge of 2% per annum, and penalty charge of
1% per month; that the stipulation for attorney's fees of 25% ofthe amount due
is unconscionable, illegal and excessive, and that substantial payments made
were applied to interest, penalties and other charges.
After due trial, the lower court declared that the due execution and
genuineness of the four promissory notes had been duly proved, and ruled that
although the Usury Law had been repealed, the interest charged by the
plaintiffs on the loans was unconscionable and "revolting to the
conscience". Hence, the trial court applied "the provision of the New [Civil]
Code" that the "legal rate of interest for loan or forbearance of money, goods or
credit is 12% per annum."[7]
Accordingly, on December 9, 1991, the trial court rendered judgment, the
dispositive portion of which reads as follows:

"WHEREFORE, premises considered, judgment is hereby rendered, as

follows:

"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and
severally, to pay plaintiffs the amount of P47,000.00 plus 12% interest per
annum from November 7, 1985 and 1% per month as penalty, until the entire
amount is paid in full.

"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs,
jointly and severally the amount of P84,000.00 with 12% interest per annum
and 1% per cent per month as penalty from November 19,1985 until the whole
amount is fully paid;
"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the
amount of P285,000.00 plus 12% interest per annum and 1% per month as
penalty from July 11, 1986, until the whole amount is fully paid;

"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount
of P50,000.00 as attorney's fees;

"5. All counterclaims are hereby dismissed.

"With costs against the defendants."[8]

In due time, both plaintiffs and defendants appealed to the Court of

Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note,
which consolidated all the unpaid loans of the defendants, is the law that
governs the parties. They further argued that Circular No. 416 of the
Central Bank prescribing the rate of interest for loans or forbearance of money,
goods or credit at 12% per annum, applies only in the absence of a stipulation
on interest rate, but not when the parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It
ruled that "the Usury Law having become 'legally inexistent' with the
promulgation by the Central Bank in 1982 of Circular No. 905, the lender and
borrower could agree on any interest that may be charged on the loan". [9] The
Court of Appeals further held that "the imposition of 'an additional amount
equivalent to 1% per month of the amount due and demandable as penalty
charges in the form of liquidated damages until fully paid' was allowed by law".
[10]

Accordingly, on March 21, 1997, the Court of Appeals promulgated it

decision reversing that of the Regional Trial Court, disposing as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED
such that defendants are hereby ordered to pay the plaintiffs the
sum of P500,000.00, plus 5.5% per month interest and 2%
service charge per annum effective July 23, 1986, plus 1% per
month of the total amount due and demandable as penalty
charges effective August 24, 1986, until the entire amount is fully
paid.
"The award to the plaintiffs of P50,000.00 as attorney's fees
is affirmed. And so is the imposition of costs against the
defendants.
"SO OREDERED."[11]
On April 15, 1997, defendants-appellants filed a motion for reconsideration
of the said decision. By resolution dated November 25, 1997, the Court of
Appeals denied the motion.[12]
Hence, defendants interposed the present recourse via petition for review
on certiorari.[13]
We find the petition meritorious.
Basically, the issue revolves on the validity of the interest rate stipulated
upon. Thus, the question presented is whether or not the stipulated rate of
interest at 5.5% per month on the loan in the sum of P500,000.00, that
plaintiffs extended to the defendants is usurious. In other words, is the Usury
Law still effective, or has it been repealed by Central Bank Circular No. 905,
adopted on December 22, 1982, pursuant to its powers under P.D. No. 116, as
amended by P.D. No. 1684?
We agree with petitioners that the stipulated rate of interest at 5.5% per
month on the P500,000.00 loan is excessive, iniquitous, unconscionable and
exorbitant.13 However, we can not consider the rate "usurious" because this
Court has consistently held that Circulr No. 905 of the Central Bank, adopted
on December 22, 1982, has expressly removed the interest ceilings prescribed
by the Usury Law[14] and that the Usury Law is now "legally inexistent". [15]
In Security Bank and Trust Company vs. Regional Trial Court of Makati,
Branch 61[16] the Court held that CB Circular No. 905 "did not repeal nor in
anyway amend the Usury Law but simply suspended the latter's
effectivity." Indeed, we have held that "a Central Bank Circular can not repeal a
law. Only a law can repeal another law."[17] In the recent case of Florendo vs.
Court of Appeals[18], the Court reiterated the ruling that "by virtue of CB
Circular 905, the Usury Law has been rendered ineffective". "Usury has been
legally non-existent in our jurisdiction. Interest can now be charged as lender
and borrower may agree upon."[19]
Nevertheless, we find the interest at 5.5% per month, or 66% per annum,
stipulated upon by the parties in the promissory note iniquitous or
unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not
against the law.[20] The stipulation is void.[21] The courts shall reduce equitably
liquidated damages, whether intended as an indemnity or a penalty if they are
iniquitous or unconscionable.[22]
Consequently, the Court of Appeals erred in upholding the stipulation of
the parties. Rather, we agree with the trial court that, under the
circumstances, interest at 12% per annum, and an additional 1% a month
penalty charge as liquidated damages may be more reasonable.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision
of the Court of Appeals promulgated on March 21, 1997, and its resolution
dated November 25, 1997. Instead, we render judgment REVIVING and
AFFIRMING the decision dated December 9, 1991, of the Regional Trial Court
of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving
the same parties.
No pronouncement as to costs in this instance

Facts: Defendants obtained a loan from Plaintiff in the amount P50, 000.00,
payable in 2 months and executed a promissory note. Plaintiff gave only the
amount of P47, 000.00 to the borrowers and retained P3, 000.00 as advance
interest for 1 month at 6% per month.
Defendants obtained another loan from Defendant in the amount of P90,
000.00, payable in 2 months, at 6% interest per month. They executed a
promissory note to evidence the loan and received only P84, 000.00 out of the
proceeds of the loan.

For the third time, Defendants secured from Plaintiff another loan in the
amount of P300, 000.00, maturing in 1 month, and secured by a real estate
mortgage. They executed a promissory note in favor of the Plaintiff. However,
only the sum of P275, 000.00, was given to them out of the proceeds of the
loan.
Upon maturity of the three promissory notes, Defendants failed to pay the
indebtedness.

Defendants consolidated all their previous unpaid loans totalling P440, 000.00,
and sought from Plaintiff another loan in the amount of P60, 000.00, bringing
their indebtedness to a total of P50,000.00. They executed another promissory
note in favor of Plaintiff to pay the sum of P500, 000.00 with a 5.5% interest
per month plus 2% service charge per annum, with an additional amount of
1% per month as penalty charges.

On maturity of the loan, the Defendants failed to pay the indebtedness which
prompt the Plaintiffs to file with the RTC a complaint for collection of the full
amount of the loan including interests and other charges.

Declaring that the due execution and genuineness of the four promissory notes
has been duly proved, the RTC ruled that although the Usury Law had
been repealed, the interest charged on the loans was unconscionable and
“revolting to the conscience” and ordered the payment of the amount of the
first 3 loans with a 12% interest per annum and 1% per month as penalty.
On appeal, Plaintiff-appellants argued that the promissory note, which
consolidated all the unpaid loans of the defendants, is the law that governs the
parties.

The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground

that the Usury Law has become legally inexistent with the promulgation by the
Central Bank in 1982 of Circular No. 905, the lender and the borrower could
agree on any interest that may be charged on the loan, and ordered the
Defendants to pay the Plaintiffs the sum of P500,000, plus 5.5% per month
interest and 2& service charge per annum , and 1% per month as penalty
charges.

Defendants filed the present case via petition for review on certiorari.

Issue: WON the stipulated 5.5% interest rate per month on the loan in the sum
of P500, 000.00 is usurious.
Held: No.
A stipulated rate of interest at 5.5% per month on the P500, 000.00 loan is
excessive, iniquitous, unconscionable and exorbitant, but it cannot be
considered “usurious” because Central Bank Circular No. 905 has expressly
removed the interest ceilings prescribed by the Usury Law and that the Usury
Law is now “legally inexistent.”

Doctrine: A CB Circular cannot repeal a law. Only a law can repeal another
law.
Jurisprudence provides that CB Circular did not repeal nor in a way amend the
Usury Law but simply suspended the latter’s effectivity (Security Bank and
Trust Co vs RTC). Usury has been legally non-existent in our jurisdiction.
Interest can now be charged as lender and borrower may agree upon.

Law: Article 2227, Civil Code

The courts shall reduce equitably liquidated damages, whether intended as an
indemnity or a penalty if they are iniquitous or unconscionable.
FLORANTE VITUG, PETITIONER, VS. EVANGELINE A. ABUDA, RESPONDENT.

DECISION

LEONEN, J.:
Parties who have validly executed a contract and have availed themselves of its
benefits may not, to escape their contractual obligations, invoke irregularities
in its execution to seek its invalidation.

This is a Petition for Review on Certiorari under Rule 45 assailing the Court of
Appeals' October 26, 2011 Decision and its March 8, 2012 Resolution. The
Court of Appeals affirmed the Regional Trial Court's December 19, 2008
Decision upholding the validity of the mortgage contract executed by petitioner
Florante Vitug (Vitug) and respondent Evangeline A. Abuda (Abuda).

On March 17, 1997, Abuda loaned P250,000.00 to Vitug and his wife, Narcisa
Vitug.[1] As security for the loan, Vitug mortgaged to Abuda his property in
Tondo Foreshore along R-10, Block A-50-3, Del Pan to Kagitingan Streets,
Tondo, Manila.[2] The property was then subject of a conditional Contract to Sell
between the National Housing Authority and Vitug. Pertinent portions of the
mortgage deed reads:

That, Mortgagor, is the owner, holder of a Conditional Contract to Sell of the

National Housing Authority (NHA) over a piece of property located at the Tondo
Foreshore along R-10, Block "A-50-3, Delpan to Kagitingan Streets in the
district of Tondo, Manila;

That, with the full consent of wife Narcisa Vitug, hereby mortgage to Evangeline
A. Abuda, with full consent of husband Paulino Abuda, said property for TWO
HUNDRED FIFTY THOUSAND PESOS ONLY (P250,000.00), in hand paid by
Mortgagee and in hand received to full satisfaction by Mortgagor, for SIX
MONTHS (6) within which to pay back the full amount plus TEN PERCENT
(10%) agreed interest per month counted from the date stated hereon;

That, upon consummation and completion of the sale by the NHA of said
property, the title-award thereof, shall be received by the Mortgagee by virtue of
a Special Power of Attorney, executed by Mortgagor in her favor, authorizing
Mortgagee to expedite, follow-up, cause the release and to received [sic] and
take possession of the title award of the said property from the NHA, until the
mortgage amount is fully paid for and settled[.] [3]

On November 17, 1997, the parties executed a "restructured"[4] mortgage

contract on the property to secure the amount of P600,000.00 representing the
original P250,000.00 loan, additional loans,[5] and subsequent credit
accommodations[6] given by Abuda to Vitug with an interest of five (5) percent
per month.[7] By then, the property was covered by Transfer Certificate of Title
No. 234246 under Vitug's name.[8]

Spouses Vitug failed to pay their loans despite Abuda's demands.[9]

On November 21, 2003, Abuda filed a Complaint for Foreclosure of Property

before the Regional Trial Court of Manila.[10]
On December 19, 2008, the Regional Trial Court promulgated a Decision in
favor of Abuda.[11] The dispositive portion of the Decision reads:

WHEREFORE, judgment is rendered in favor of the plaintiffs [sic] and against

the defendant:

1. Ordering the defendant to pay unto the court and/or to the judgment debtor
within the reglementary period of Ninety (90) days the principal sum of
P600,000.00 with interest at 5% per month from May 31, 2002 to actual date
of payment plus P20,000.00 as and for attorney's fees;

2. Upon default of the defendant to fully pay the aforesaid sums, the subject
mortgaged property shall be sold at public auction to pay off the mortgage debt
and its accumulated interest plus attorney's fees, expenses and costs; and

3. After the confirmation of the sale, ordering the defendant and all persons
claiming rights under her [sic] to immediately vacate the subject premises.

SO ORDERED.[12]

Vitug appealed the December 19, 2008 Regional Trial Court Decision before the
Court of Appeals.[13] He contended that the real estate mortgage contract he
and Abuda entered into was void on the grounds of fraud and lack of consent
under Articles 1318, 1319, and 1332 of the Civil Code.[14] He alleged that he
was only tricked into signing the mortgage contract, whose terms he did not
really understand. Hence, his consent to the mortgage contract was vitiated. [15]

On October 26, 2011, the Court of Appeals promulgated a Decision, [16] the
dispositive portion of which reads:

WHEREFORE, the instant appeal is PARTIALLY GRANTED. The Decision of

the RTC dated December 19, 2008 in Civil Case No. 03-108470 in favor of the
appellee and against the appellant is AFFIRMED with
the MODIFICATION that an interest rate of 1% per month or 12% per annum
shall be applied to the principal loan of P600,000.00, computed from the date
of judicial demand, i.e., November 21, 2003; and 12% interest per annum on
the amount due from the date of the finality of the Decision until fully paid.

SO ORDERED.[17]

The Court of Appeals found that Vitug failed to pay his obligation within the
stipulated six-month period under the March 17, 1997 mortgage contract.[18] As
a result of this failure, the parties entered into a restructured mortgage
contract on November 17, 1997.[19] The new mortgage contract was signed
before a notary public by Vitug, his wife Narcisa, and witnesses Rolando Vitug,
Ferdinand Vitug, and Emily Vitug.[20]

The Court of Appeals also found that all the elements of a valid mortgage
contract were present in the parties' mortgage contract.[21] The mortgage
contract was also clear in its terms—that failure to pay the P600,000.00 loan
amount, with a 5% interest rate per month from November 17, 1997 to
November 17, 1998, shall result in the foreclosure of Vitug's mortgaged
property.[22] No evidence on record showed that Vitug was defrauded when he
entered into the agreement with Abuda.[23]

However, the Court of Appeals found that the interest rates imposed on Vitug's
loan were "iniquitous, unconscionable[,] and exorbitant." [24] It instead ruled that
a legal interest of 1% per month or 12% per annum should apply from the
judicial demand on November 21, 2003.[25]

On November 23, 2011, Vitug moved for the reconsideration of the Court of
Appeals' October 26, 2011 Decision.[26] He pointed out that not all the
requisites of a valid mortgage contract were present since he did not have free
disposal of his property when he mortgaged it to Abuda. His transfer certificate
of title had an annotation by the National Housing Authority, which restricted
his right to dispose or encumber the property.[27] The restriction clause
provided that the National Housing Authority's consent must first be obtained
before he may dispose or encumber his property.[28]

Abuda, according to Vitug, failed to get the National Housing Authority's

consent before the property was mortgaged to him.

Vitug also argued in his Motion for Reconsideration that the property was
exempt from execution because it was constituted as a family home before its
mortgage.

In the Resolution promulgated on March 8, 2012,[29] the Court of Appeals

denied Vitug's Motion for Reconsideration.

Vitug filed this Petition for Review on Certiorari under Rule 45 to assail the
Court of Appeals' October 26, 2011 Decision and its March 8, 2012 Resolution.

Vitug raises the following issues:

First, whether petitioner Florante Vitug may raise in this Petition issues
regarding the National Housing Authority's alleged lack of consent to the
mortgage, as well as the exemption of his property from execution;

Second, whether the restriction clause in petitioner's title rendered invalid the
real estate mortgage he and respondent Evangeline Abuda executed; and

Lastly, whether petitioner's property is a family home that is free from

execution, forced sale, or attachment under the Family Code. [30]

We deny the Petition.

Petitioner argues that not all the requisites of a valid mortgage are present. [31] A
mortgagor must have free disposal of the mortgaged property.[32] The existence
of a restriction clause[33] in his title means that he does not have free disposal of
his property.[34] The restriction clause does not allow him to mortgage the
property without the National Housing Authority's approval. [35] Since the
National Housing Authority never gave its consent to the mortgage, [36] the
mortgage contract between him and respondent is invalid.[37]

On the other hand, respondent argues that the only issue in this case should
be the validity of the real estate mortgage executed by petitioner in her favor.
[38]
Petitioner raised other issues, such as the alleged lack of written consent by
the National Housing Authority (and the property's exemption from execution),
only in his Motion for Reconsideration before the Court of Appeals. [39]

Respondent also argues that the National Housing Authority issued a Permit to
Mortgage the property. This was formally offered in evidence before the
Regional Trial Court as Exhibit "E."[40] The National Housing Authority even
accepted respondent's personal checks to settle petitioner's mortgage
obligations to the National Housing Authority. [41] The National Housing
Authority would have already foreclosed petitioner's property if not for the loan
that respondent extended to petitioner.[42]

Petitioner counters that the Permit to Mortgage cited by respondent was only
valid for 90 days and was subject to the conditions that respondent failed to
fulfill. These conditions are:

(1) The Mortgage Contract must provide that:

"In the event of foreclosure, the NHA shall be notified of the date, time and
place of the auction sale so that it can participate in the foreclosure sale of the
property."

(2) The mortgage contract must be submitted to NHA for verification and final
approval[.][43]

Thus, according to petitioner, there was neither written consent nor approval
by the National Housing Authority of the mortgage contracts. [44]

Petitioner further contends that the alleged lack of NHA consent on the
mortgage (and, being a family home, his property's exemption from execution)
was raised in his Answer to respondent's complaint for foreclosure filed before
the Regional Trial Court, thus:

20. Similarly, defendant has constituted their family home over said mortgage
property and should that property be sold, defendant and his family will be left
with no place to reside with [sic] within Metro Manila, hence, for humanitarian
reason[s], the defendant prayed that he be given ample time within which to
settle his obligation with the plaintiff;

21. Lastly, the Memorandum of Encumbrances contained at the back of

defendant's title prohibits her from selling, encumbering, mortgaging, leasing,
sub-leasing or in any manner altering or disposing the lot or right thereon, in
whole or in part within the period often (10) years from the time of issuance of
said title without first obtaining the consent of the NHA. As reflected in the
title, the same was issued on 25 June 1997 hence, the mortgage executed even
prior to the issuance of said title should be declared void. [45]

Due process[46] dictates that arguments not raised in the trial court may not be
considered by the reviewing court.[47]

Petitioner may raise in his Petition the issues of lack of the National Housing
Authority's consent to the mortgage and his property's alleged exemption from
execution.

The records show that petitioner mentioned these issues as early as in his
Answer to respondent's Complaint[48] and Pre-trial Brief.[49]The trial court
acknowledged these issues, but found that his defenses based on these
grounds could not be given credence:

The defendant further stated that he is willing to pay the obligation is

unconscionable. Further, the said property constituted their family home. The
defendant claimed that Memorandum of Encumbrance prohibits her from
selling, encumbering, mortgaging, leasing, subleasing or in any manner
altering or disposing the lot or right thereon in whole or in part within ten (10)
years from the time of issuance of the said title without obtaining the consent
of the NHA.

. . . The court opines that the defendant has failed to raise a legitimate and
lawful ground in order to bar the herein plaintiff from asserting its lawful right
under the law.

The contention of the defendant that the subject mortgaged property is their
family home is irrelevant as the debt secured by mortgages on the premises
before or after the constitution of the family home does not exempt the same
from execution (Rule 106 of the Rules of Court).[50]

Whether these arguments seasonably raised are valid is, however, a different
matter.

II

All the elements of a valid mortgage contract were present. For a mortgage
contract to be valid, the absolute owner of a property must have free disposal
of the property.[51] That property must be used to secure the fulfillment of an
obligation.[52] Article 2085 of the Civil Code provides:

Art. 2085. The following requisites are essential to contracts of pledge and
mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;

(3) That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose.

....

Petitioner, who held under his name a transfer certificate of title to the
property, mortgaged the property to respondent to secure the payment of his
loan of P600,000.00.
Petitioner claims that he only borrowed P250,000.00 and that he was only
made to sign another mortgage contract whose terms he did not agree to.

These claims were already found by the trial court and the Court of Appeals to
be unsupported by evidence. Petitioner's consent to the mortgage contract
dated November 17, 1997 was not vitiated. He voluntarily signed it in the
presence of a notary public, his wife, and other witnesses.[53]

Further, the amount of P600,000.00 under the November 17, 1997 mortgage
contract represented the initial loan of P250,000.00 and the subsequent loan
amounts, which were found to have been actually released to petitioner. The
November 17, 1997 mortgage contract reflected the changes in the parties'
obligations after they executed the March 17, 1997 mortgage contract.

This court is not a trier of facts. As a general rule, findings of fact of the lower
court and of the Court of Appeals are not reviewable and are binding upon this
court[54] unless the circumstances of the case are shown to be covered by the
exceptions.[55] Petitioner failed to show any ground for this court to review the
trial court's and the Court of Appeals' finding that petitioner mortgaged his
property in consideration of a loan amounting to P600,000.00.

Petitioner's undisputed title to and ownership of the property is sufficient to

give him free disposal of it. As owner of the property, he has the right to enjoy
all attributes of ownership including jus disponendi or the right to encumber,
alienate, or dispose his property "without other limitations than those
established by law."[56]

Petitioner's claim that he lacks free disposal of the property stems from the
existence of the restrictions imposed on his title by the National Housing
Authority. These restrictions were annotated on his title, thus:

Entry No. 4519/V-013/T-234246 -RESTRICTION-that the Vendee shall not

sell, encumber, mortgage, lease, sub-let or in any manner, alter or dispose the
lot or right therein at any time, in whole or in part without obtaining the
written consent of the Vendor. Other restrictions set forth in Doc. No. 287;
Page No. 59; Book No. 250; SERIES of 1997 of Notary Public for Quezon City,
Liberty S. Perez.

Date of instrument - June 24, 1997

Date of inscription- June 25, 1997- 11:39 a.m.[57]

The National Housing Authority's restrictions were provisions in a contract it

executed with petitioner. This contract bound petitioner to certain conditions
before transferring or encumbering the property. Specifically, when the
National Housing Authority sold the property to petitioner, petitioner became
obligated not to sell, encumber, mortgage, lease, sublease, alter, or dispose the
property without the National Housing Authority's consent.

These restrictions do not divest petitioner of his ownership rights. They are
mere burdens or limitations on petitioner's jus disponendi.Thus, petitioner may
dispose or encumber his property. However, the disposition or encumbrance of
his property is subject to the limitations and to the rights that may accrue to
the National Housing Authority. When annotated to the title, these restrictions
serve as notice to the whole world that the National Housing Authority has
claims over the property, which it may enforce against others.

Contracts entered into in violation of restrictions on a property owner's rights

do not always have the effect of making them void ab initio.[58] This has been
clarified as early as 1956 in Municipality of Camiling v. Lopez.[59]

The Municipality of Camiling sought to collect from Diego Z. Lopez payments

for the lease of "certain fisheries." As. a defense, Diego Z. Lopez invoked the
alleged nullity of the lease contract he entered into with the Municipality of
Camiling.

Citing Municipality of Hagonoy v. Evangelista, [60] the trial court ruled that the
lease contract between the Municipality of Camiling and Diego Z. Lopez was
void since it "was not approved by the provincial governor in violation of section
2196 of the Revised Administrative Code."[61] This court reversed the trial
court's Decision and noted the incorrect interpretation in Municipality of
Hagonoy of the term "nulos" under Article 4 of the then Civil Code: "Son nulos
los actos ejecutados contra lo dispuesto en la ley, salvo los casos en que la
naisma ley or dene su validez."[62]

In Municipality of Camiling, this court explained that void acts declared in

Article 4 of the Old Civil Code[63] refer to those made in violation of the law. Not
all those acts are void from the beginning. Void acts may be "those that
are ipso facto void and those which are merely voidable."[64]

The lease contract executed by the Municipality of Camiling and Diego Z. Lopez
was not treated as ipso facto void. Section 2196 of the Administrative Code
required the provincial governor's approval before the municipal council
entered into contracts. However, the same provision did not prohibit the
municipal council from entering into contracts involving the properties of the
municipality.[65] The municipal council's exercise of power to enter into these
contracts might have been limited, but its power was recognized. This court
found that aside from the lack of approval, the contract had no badge of
illegality that would make it ipso facto void. The execution of the contract was
not tainted with violation of public order, morality, or public policy. The
contract could have been ratified. Hence, this court said that it was "merely
voidable at the option of the party who in law is granted the right to invoke its
invalidity."[66]

The same doctrine was repeated in Sarmiento v. Salud,[67] which involved a

property in Kamuning, Quezon City. The property was sold by Philippine
Homesite and Housing Corp. to Spouses Francisco and Marcelina Sarmiento.
The transfer certificate of title that covered the property contained an
annotation stating that the property was sold on the condition that it could not
be resold within 25 years from contract date. Sale could be made within the
period only to People's Homesite and Housing Corporation. [68] Spouses
Sarmiento later mortgaged the property to Jorge Salud. Because Spouses
Sarmiento failed to redeem the property, the sheriff auctioned and sold the
property to Jorge Salud, who was issued a certificate of sale.

Spouses Sarmiento sought to prevent the foreclosure of the property by filing

an action for annulment of the foreclosure proceedings, sale, and certificate of
sale on the ground that the prohibition against sale of the property within 25
years was violated.
This court did not declare the contract void for violating the condition that the
property could not be resold within 25 years. Instead, it recognized People's
Homesite and Housing Corporation's right to cause the annulment of the
contract. Since the condition was made in favor of People's Homesite and
Housing Corporation, it was the Corporation, not Spouses Sarmiento, who had
a cause of action for annulment.[69] In effect, this court considered the contract
between Spouses Sarmiento and Jorge Salud as merely voidable at the option
of People's Homesite and Housing Corporation.

Thus, contracts that contain provisions in favor of one party may be void ab
initio or voidable.[70] Contracts that lack consideration,[71]those that are against
public order or public policy,[72] and those that are attended by illegality[73] or
immorality[74] are void ab initio.

Contracts that only subject a property owner's property rights to conditions or

limitations but otherwise contain all the elements of a valid contract are merely
voidable by the person in whose favor the conditions or limitations are made. [75]

The mortgage contract entered into by petitioner and respondent contains all
the elements of a valid contract of mortgage. The trial court and the Court of
Appeals found no irregularity in its execution. There was no showing that it
was attended by fraud, illegality, immorality, force or intimidation, and lack of
consideration.

At most, therefore, the restrictions made the contract entered into by the
parties voidable[76] by the person in whose favor they were made—in this case,
by the National Housing Authority.[77] Petitioner has no actionable right or
cause of action based on those restrictions.[78]

Having the right to assail the validity of the mortgage contract based on
violation of the restrictions, the National Housing Authority may seek the
annulment of the mortgage contract.[79] Without any action from the National
Housing Authority, rights and obligations, including the right to foreclose the
property in case of non-payment of the secured loan, are still enforceable
between the parties that executed the mortgage contract.

The voidable nature of contracts entered into in violation of restrictions or

conditions necessarily implies that the person in whose favor the restrictions
were made has two (2) options. It may either: (1) waive[80] its rights accruing
from such restrictions, in which case, the duly executed subsequent contract
remains valid; or (2) assail the subsequent contract based on the breach of
restrictions imposed in its favor.

In Sarmiento, this court recognized that the right to waive follows from the
right to invoke any violation of conditions under the contract. Only the person
who has the right to invoke this violation has the cause of action for annulment
of contract. The validity or invalidity of the contract on the ground of the
violation is dependent on whether that person will invoke this right. Hence,
there was effectively a waiver on the part of People's Homesite and Housing
Corporation when it did not assail the validity of the mortgage in that case:

It follows that on the assumption that the mortgage to appellee Salud and the
foreclosure sale violated the condition in the Sarmiento contract, only the
PHHC was entitled to invoke the condition aforementioned, and not the
Sarmientos. The validity or invalidity of the sheriffs foreclosure sale to
appellant Salud thus depended exclusively on the PHHC; the latter could
attack the sale as violative of its right of exclusive reacquisition; but it (PHHC)
also could waive the condition and treat the sale as good, in which event, the
sale can not be assailed [for] breach of the condition aforestated. Since it does
not appear anywhere in the record that the PHHC treated the mortgage and
foreclosure sale as an infringement of the condition, the validity of the
mortgage, with all its consequences, including its foreclosure and sale thereat,
can not be an issue between the parties to the present case. In the last
analysis, the appellant, as purchaser at the foreclosure sale, should be
regarded as the owner of the lot, subject only to the right of PHHC to have his
acquisition of the land set aside if it so desires.[81]

There is no showing that the National Housing Authority assailed the validity of
the mortgage contract on the ground of violation of restrictions on petitioner's
title. The validity of the mortgage contract based on the restrictions is not an
issue between the parties. Petitioner has no cause of action against respondent
based on those restrictions. The mortgage contract remains binding upon
petitioner and respondent.

In any case, there was at least substantial compliance with the consent
requirement given the National Housing Authority's issuance of a Permit to
Mortgage. The Permit reads:

25 November 1997

MR. FLORANTE VITUG

901 Del Pan Street
Tondo, Manila

PERMIT TO MORTGAGE

Dear Mr. Vitug,

Please be informed that your request dated 20 November 1997 for permission
to mortgage Commercial Lot 5, Block 1, Super Block 3, Area I, Tondo Foreshore
Estate Management Project covered by TCT No. 234246 is hereby GRANTED
subject to the following terms and conditions:

1. The Mortgage Contract must provide that:

"In the event of foreclosure, the NHA shall be notified of the date, time and
place of the auction sale so that it can participate in the foreclosure sale of the
property."

2. The mortgage contract must be submitted to NHA for verification and final
approval; and

3. This permit shall be good only for a period of ninety (90) days from date of
receipt hereof.

Very truly yours,

(Signed)
 Mariano M. Pineda
General Manager[82]

Petitioner insists that the Permit cannot be treated as consent by the National
Housing Authority because of respondent's failure to comply with its
conditions.

However, a reading of the mortgage contract executed by the parties on

November 17, 1997 shows otherwise. The November 17, 1997 mortgage
contract had references to the above conditions imposed by the National
Housing Authority, thus:

It is the essence of this Contract, that if and should the Mortgagor fails to
comply and pay the principal obligations hereon within the period of the
Contract, the Mortgage shall be foreclosed according to law and in which case
the NHA shall be duly notified of the matter.

That this mortgage contract shall be submitted to the NHA for verifixation [sic]
and final approval in accordance with NHA permit to mortgage the property.
[83]
(Emphasis supplied)

Assuming there was non-compliance with the conditions set forth in the
Permit, petitioner cannot blame respondent. The restrictions were part of the
contract between the National Housing Authority and petitioner. It was
petitioner, not respondent, who had the obligation to notify and obtain the
National Housing Authority's consent within the prescribed period before sale
or encumbrance of the property.

Petitioner cannot invoke his own mistake to assail the validity of a contract he
voluntarily entered into.[84]

III

Even if the mortgage contract were illegal or wrongful, neither of the parties
may assail the contract's validity as against the other because they were
equally at fault.[85] This is the principle of in pari delicto (or in delicto) as
embodied in Articles 1411 and 1412 of the Civil Code:

Art. 1411. When the nullity proceeds from the illegality of the cause or object of
the contract, and the act constitutes a criminal offense, both parties being in
pari delicto, they shall have no action against each other, and both shall be
prosecuted. Moreover, the provisions of the Penal Code relative to the disposal
of effects or instruments of a crime shall be applicable to the things or the price
of the contract.

This rule shall be applicable when only one of the parties is guilty; but the
innocent one may claim what he has given, and shall not be bound to comply
with his promise.

Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may
recover what he has given by virtue of the contract, or demand the performance
of the other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what
he has given by reason of the contract, or ask for the fulfillment of what has
been promised him. The other, who is not at fault, may demand the return of
what he has given without any obligation to comply his promise.

Under this principle, courts shall not aid parties in their illegal acts. [86] The
court shall leave them as they are.[87] It is an equitable principle that bars
parties from enforcing their illegal acts, assailing the validity of their acts, or
using its invalidity as a defense.[88]

In the 1906 case of Batarra v. Marcos,[89] this court declared that a person
cannot enforce a promise to marry based on the consideration of "carnal
connection." This court ruled that whether or not such consideration was a
crime, neither of the parties can recover because the acts "were common to
both parties."[90]

In Bough v. Cantiveros,[91] this court refused to enforce in favor of the guilty

parties a contract of sale that was not only simulated but also executed to
defeat any attempt by a husband to recover properties from his wife.

Another case, Liguez v. Court of Appeals,[92] involves a party's claim over a

property based on a deed of donation executed in her favor when she was 16
years old. The heirs of the donor assailed the donation on the ground of having
an illicit causa.

The donor in that case was found to have had sexual relations with the
claimant. The donation was done to secure the claimant's continuous
cohabitation with the donor, as well as to gratify the donor's sexual impulses.
At the time of the donation, the donor was married to another woman. The
donated property was part of their conjugal property.

This court held that the donation was founded on an illicit causa. While this
court found the principle of in pari delicto inapplicable in that case given the
claimant's minority at the time of donation, it had the occasion to say that the
parties were barred "from pleading the illegality of the bargain either as a cause
of action or as a defense."[93] The claimant was declared entitled to the donated
property, without prejudice to the share and legitimes of the donor's forced
heirs.

In the later case of Villegas v. Rural Bank of Tanjay, Inc.,[94] this court ruled that
the petitioners in that case were not entitled to relief because they did not come
to court with clean hands.

This court found that they "readily participated in a ploy to circumvent the
Rural Banks Act and offered no objection when their original loan of
P350,000.00 was divided into small separate loans not exceeding P50,000.00
each."[95] They and respondent bank were in pari delicto. They could not be
given affirmative relief against each other.[96] Hence, Spouses Villegas may not
seek the annulment of the loan and mortgage contracts they voluntarily
executed with respondent bank on the ground that these contracts were
simulated to make it appear that the loans were sugar crop loans, allowing
respondent bank to approve it pursuant to Republic Act No. 720, otherwise
known as the Rural Banks Act.

The principle of in pari delicto admits exceptions. It does not apply when the
result of its application is clearly against statutory law, morals, good customs,
and public policy.[97]

In Philippine Banking Corporation, representing the Estate of Justina Santos v.

Lui She,[98] this court refused to apply the principle of in pari delicto. Applying
the principle meant that this court had to declare as valid between the parties
a 50-year lease contract with option to buy, which was executed by a Filipino
and a Chinese citizen. This court ruled that the policy to conserve land in favor
of Filipinos would be defeated if the principle of in pari delicto was applied
instead of setting aside the contracts executed by the parties.[99]

Petitioner in this case did not come to this court with clean hands. He was
aware of the restrictions in his title when he executed the loan and mortgage
contracts with respondent. He voluntarily executed the contracts with
respondent despite this knowledge. He also availed himself of the benefits of
the loan and mortgage contract. He cannot now assail the validity of the
mortgage contract to escape the obligations incurred because of it. [100]

Petitioner also failed to show that upholding the validity of the mortgage
contract would be contrary to law, morals, good customs, and public policy.

Petitioner's contract with the National Housing Authority is not a law

prohibiting the transfer or encumbrance of his property. It does not render
subsequent transactions involving the property a violation of morals, good
customs, and public policy. Violation of its terms does not render subsequent
transactions involving the property void ab initio.[101] It merely provides the
National Housing Authority with a cause of action to annul subsequent
transactions involving the property.

IV

Petitioner argues that the property should be exempt from forced sale,
attachment, and execution, based on Article 155 of the Family Code.
[102]
Petitioner and his family have been neighbors with respondent since 1992,
before the execution of the mortgage contract.[103]

Even though petitioner's property has been constituted as a family home, it is

not exempt from execution. Article 155 of the Family Code explicitly provides
that debts secured by mortgages are exempted from the rule against execution,
forced sale, or attachment of family home:

Art. 155. The family home shall be exempt from execution, forced sale or
attachment except:

(3) For debts secured by mortgages on the premises before or after such
constitution[.]

Since petitioner's property was voluntarily used by him as security for a loan
he obtained from respondent, it may be subject to execution and attachment.

The Court of Appeals correctly found that the interest rates of 5% or 10% per
month imposed on petitioner's loan were unconscionable.

Parties are free to stipulate interest rates in their loan contracts in view of the
suspension of the implementation of the Usury Law ceiling on interest effective
January 1, 1983.[104]

The freedom to stipulate interest rates is granted under the assumption that
we have a perfectly competitive market for loans where a borrower has many
options from whom to borrow. It assumes that parties are on equal footing
during bargaining and that neither of the parties has a relatively greater
bargaining power to command a higher or lower interest rate. It assumes that
the parties are equally in control of the interest rate and equally have options
to accept or deny the other party's proposals. In other words, the freedom is
granted based on the premise that parties arrive at interest rates that they are
willing but are not compelled to take either by force of another person or by
force of circumstances.[105]

However, the premise is not always true. There are imperfections in the loan
market. One party may have more bargaining power than the other. A borrower
may be in need of funds more than a lender is in need of lending them. In that
case, the lender has more commanding power to set the price of borrowing
than the borrower has the freedom to negotiate for a lower interest rate.

Hence, there are instances when the state must step in to correct market
imperfections resulting from unequal bargaining positions of the parties.

Article 1306 of the Civil Code limits the freedom to contract to promote public
morals, safety, and welfare:[106]

Art. 1306. The 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.

In stipulating interest rates, parties must ensure that the rates are neither
iniquitous nor unconscionable. Iniquitous or unconscionable interest rates are
illegal and, therefore, void for being against public morals. [107] The lifting of the
ceiling on interest rates may not be read as "grant[ing] lenders carte
blanche [authority] to raise interest rates to levels which will either enslave
their borrowers or lead to a hemorrhaging of their assets." [108]

Voluntariness of stipulations on interest rates is not sufficient to make the

interest rates valid.[109] In Castro v. Tan:[110]

The imposition of an unconscionable rate of interest on a money debt, even if

knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to
a repugnant spoliation and an iniquitous deprivation of property, repulsive to
the common sense of man. It has no support in law, in principles of justice, or
in the human conscience nor is there any reason whatsoever which may justify
such imposition as righteous and as one that may be sustained within the
sphere of public or private morals.[111]

Thus, even if the parties voluntarily agree to an interest rate, courts are given
the discretionary power to equitably reduce it if it is later found to be iniquitous
or unconscionable.[112] Courts approximate what the prevailing market rate
would have been under the circumstances had the parties had equal
bargaining power.

An interest rate is not inherently conscionable or unconscionable. Interest

rates become unconscionable in light of the context in which they were
imposed or applied. In Medel v. Court of Appeals,[113] this Court ruled that the
stipulated interest of 5.5% or 66% per annum was unconscionable and
contrary to morals. It was declared void. This court reduced the interest rate to
1% per month or 12% per annum.[114]

This court also ruled that the interest rates of 3%, 5%, and 10% per month
were unconscionable, thus justifying the need to reduce the interest rates to
12% per annum.[115]

On the other hand, despite rulings that interest rates of 3% and 5% per month
are unconscionable, this court in Toledo v. Hydenu[116]found that the interest
rate of 6% to 7% per month was not unconscionable. This court noted
circumstances that differentiated that case from Medel and found that the
borrower in Toledo was not in dire need of money when she obtained a loan;
this implied that the interest rates were agreed upon by the parties on equal
footing. This court also found that it was the borrower in Toledo who was guilty
of inequitable acts:

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.

It was clearly shown that before Jocelyn availed of said loans, she knew fully
well that the same carried with it an interest rate of 6% to 7% per month, yet she
did not complain. 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. "This is so because among the maxims of equity are (1) he
who seeks equity must do equity, and (2) he who comes into equity must come
with clean hands. The latter is a frequently stated maxim which is also
expressed in the principle that he who has done inequity shall not have equity.
It signifies that a litigant may be denied relief by a court of equity on the
ground that his conduct has been inequitable, unfair and dishonest, or
fraudulent, or deceitful as to the controversy in issue."

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.This Court likewise notes certain acts of Jocelyn before
filing the case with the RTC. In September 1998, she requested Marilou not to
deposit her checks as she can cover the checks only the following month. On the
next month, Jocelyn again requested for another extension of one month. It
turned out that she was only sweet-talking Marilou into believing that she had
no money at that time. But as testified by Serapio Romarate, an employee of the
Bank of Commerce where Jocelyn is one of their clients, there was an available
balance of P276,203.03 in the latter's account and yet she ordered for the stop
payments of the seven checks which can actually be covered by the available
funds in said account. She then caught Marilou by surprise when she
surreptitiously filed a case for declaration of nullity of the document and for
damages.[117] (Emphases supplied, citations omitted)

Under the circumstances of this case, we find no reason to uphold the

stipulated interest rates of 5% to 10% per month on petitioner's loan. Petitioner
obtained the loan out of extreme necessity. As pointed out by respondent, the
property would have been earlier foreclosed by the National Housing Authority
if not for the loan. Moreover, it would be unjust to impose a heavier burden
upon petitioner, who would already be losing his and his family's home.
Respondent would not be unjustly deprived if the interest rate is reduced. After
all, respondent still has the right to foreclose the property. Thus, we affirm the
Court of Appeals Decision to reduce the interest rate to 1% per month or 12%
per annum.

However, we modify the rates in accordance with the guidelines set forth
in Nacar v. Gallery Frames:[118]

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum

of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6%
per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169
 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages,
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with
reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be
so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made
(at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes

final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 6% per annum from
such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory
prior to July 1, 2013, shall not be disturbed and shall continue to be
implemented applying the rate of interest fixed therein.[119]

Thus, the interest rate for petitioner's loan should be further reduced to 6% per
annum from July 1, 2013 until full satisfaction.

WHEREFORE, the Petition is DENIED. The Court of Appeals Decision dated

October 26, 2011 and its Resolution dated March 8, 2012 are AFFIRMED. The
interest rate for the loan of P600,000.00 is further reduced to 6% per annum
from July 1, 2013 until fully paid.

SO ORDERED.
CORAZON G. RUIZ, petitioner, vs. COURT OF APPEALS and CONSUELO
TORRES, respondents.

DECISION
PUNO, J.:

On appeal is the decision[1] of the Court of Appeals in CA-G.R. CV No.

56621 dated 25 August 2000, setting aside the decision [2] of the trial court
dated 19 May 1997 and lifting the permanent injunction on the foreclosure sale
of the subject lot covered by TCT No. RT-96686, as well as its subsequent
Resolution[3] dated 26 January 2001, denying petitioners Motion for
Reconsideration.
The facts of the case are as follows:
Petitioner Corazon G. Ruiz is engaged in the business of buying and selling
jewelry.[4] She obtained loans from private respondent Consuelo Torres on
different occasions, in the following
amounts: P100,000.00; P200,000.00; P300,000.00; and P150,000.00.[5] Prior to
their maturity, the loans were consolidated under one (1) promissory note
dated March 22, 1995, which reads as follows:[6]

P750,000.00 Quezon City, March 22, 1995

PROMISSORYNOTE

For value received, I, CORAZON RUIZ, as principal and ROGELIO RUIZ as

surety in solidum, jointly and severally promise to pay to the order
of CONSUELO P. TORRES the sum of SEVEN HUNDRED FIFTY THOUSAND
PESOS (P750,000.00) Philippine Currency, to earn an interest at the rate of
three per cent (3%) a month, for thirteen months, payable every _____ of the
month, and to start on April 1995 and to mature on April 1996, subject to
renewal.

If the amount due is not paid on date due, a SURCHARGE of ONE PERCENT of
the principal loan, for every month default, shall be collected.

Remaining balance as of the maturity date shall earn an interest at the rate of
ten percent a month, compounded monthly.

It is finally agreed that the principal and surety in solidum, shall pay attorneys
fees at the rate of twenty-five percent (25%) of the entire amount to be
collected, in case this note is not paid according to the terms and conditions
set forth, and same is referred to a lawyer for collection.

In computing the interest and surcharge, a fraction of the month shall be

considered one full month.

In the event of an amicable settlement, the principal and surety in solidum

shall reimburse the expenses of the plaintiff.

(Sgd.) Corazon Ruiz __________________

Principal Surety
 The consolidated loan of P750,000.00 was secured by a real estate
mortgage on a 240-square meter lot in New Haven Village, Novaliches, Quezon
City, covered by Transfer Certificate of Title (TCT) No. RT-96686, and registered
in the name of petitioner.[7] The mortgage was signed by Corazon Ruiz for
herself and as attorney-in-fact of her husband Rogelio. It was executed on 20
March 1995, or two (2) days before the execution of the subject promissory
note.[8]
Thereafter, petitioner obtained three (3) more loans from private
respondent, under the following promissory notes: (1) promissory note dated 21
April 1995, in the amount of P100,000.00;[9] (2) promissory note dated May 23,
1995, in the amount of P100,000.00;[10] and (3) promissory note dated
December 21, 1995, in the amount of P100,000.00.[11] These combined loans
of P300,000.00 were secured by P571,000.00 worth of jewelry pledged by
petitioner to private respondent.[12]
From April 1995 to March 1996, petitioner paid the stipulated 3% monthly
interest on the P750,000.00 loan,[13] amounting to P270,000.00.[14] After March
1996, petitioner was unable to make interest payments as she had difficulties
collecting from her clients in her jewelry business.[15]
Due to petitioners failure to pay the principal loan of P750,000.00, as well
as the interest payment for April 1996, private respondent demanded payment
not only of the P750,000.00 loan, but also of the P300,000.00 loan.[16] When
petitioner failed to pay, private respondent sought the extra-judicial foreclosure
of the aforementioned real estate mortgage.[17]
On September 5, 1996, Acting Clerk of Court and Ex-Officio Sheriff Perlita
V. Ele, Deputy Sheriff In-Charge Rolando G. Acal and Supervising Sheriff
Silverio P. Bernas issued a Notice of Sheriffs Sale of subject lot. The public
auction was scheduled on October 8, 1996.[18]
On October 7, 1996, one (1) day before the scheduled auction sale,
petitioner filed a complaint with the RTC of Quezon City docketed as Civil Case
No. Q-96-29024, with a prayer for the issuance of a Temporary Restraining
Order to enjoin the sheriff from proceeding with the foreclosure sale and to fix
her indebtedness to private respondent to P706,000.00. The computed amount
of P706,000.00 was based on the aggregate loan of P750,000.00, covered by
the March 22, 1995 promissory note, plus the other loans of P300,000.00,
covered by separate promissory notes, plus interest, minus P571,000.00
representing the amount of jewelry pledged in favor of private respondent.[19]
The trial court granted the prayer for the issuance of a Temporary
Restraining Order,[20] and on 29 October 1996, issued a writ of preliminary
injunction.[21] In its Decision dated May 19, 1997, it ordered the Clerk of Court
and Ex-Officio Sheriff to desist with the foreclosure sale of the subject property,
and it made permanent the writ of preliminary injunction. It held that the real
estate mortgage is unenforceable because of the lack of the participation and
signature of petitioners husband. It noted that although the subject real estate
mortgage stated that petitioner was attorney-in-fact for herself and her
husband, the Special Power of Attorney was never presented in court during
the trial.[22]
The trial court further held that the promissory note in question is a
unilateral contract of adhesion drafted by private respondent. It struck down
the contract as repugnant to public policy because it was imposed by a
dominant bargaining party (private respondent) on a weaker party (petitioner).
[23]
Nevertheless, it held that petitioner still has an obligation to pay the private
respondent. Private respondent was further barred from imposing on petitioner
the obligation to pay the surcharge of one percent (1%) per month from March
1996 onwards, and interest of ten percent (10%) a month, compounded
monthly from September 1996 to January 1997. Petitioner was thus ordered to
pay the amount of P750,000.00 plus three percent (3%) interest per month, or
a total of P885,000.00, plus legal interest from date of [receipt of] the decision
until the total amount of P885,000.00 is paid.[24]
Aside from the foregoing, the trial court took into account petitioners
proposal to pay her other obligations to private respondent in the amount
of P392,000.00.[25]
The trial court also recognized the expenses borne by private respondent
with regard the foreclosure sale and attorneys fees. As the notice of the
foreclosure sale has already been published, it ordered the petitioner to
reimburse private respondent the amount of P15,000.00 plus attorneys fees of
the same amount.[26]
Thus, the trial court computed petitioners obligation to private respondent,
as follows:

Principal Loan . P 750,000.00

Interest.. 135,000.00

Other Loans..392,000.00

Publication Fees.15,000.00

Attorneys Fees 15,000.00

TOTAL P1,307,000.00

with legal interest from date of receipt of decision until payment of total
amount of P1,307,000.00 has been made.[27]
Private respondents motion for reconsideration was denied in an Order
dated July 21, 1997.
Private respondent appealed to the Court of Appeals. The appellate court
set aside the decision of the trial court. It ruled that the real estate mortgage is
valid despite the non-participation of petitioners husband in its execution
because the land on which it was constituted is paraphernal property of
petitioner-wife. Consequently, she may encumber the lot without the consent of
her husband.[28] It allowed its foreclosure since the loan it secured was not
paid.
Nonetheless, the appellate court declared as invalid the 10% compounded
monthly interest[29] and the 10% surcharge per month stipulated in the
promissory notes dated May 23, 1995 and December 1, 1995, [30] and so too the
1% compounded monthly interest stipulated in the promissory note dated 21
April 1995,[31] for being excessive, iniquitous, unconscionable, and contrary to
morals. It held that the legal rate of interest of 12% per annum shall apply after
the maturity dates of the notes until full payment of the entire amount due,
and that the only permissible rate of surcharge is 1% per month, without
compounding.[32] The appellate court also granted attorneys fees in the amount
of P50,000.00, and not the stipulated 25% of the amount due, following the
ruling in the case of Medel v. Court of Appeals.[33]
Now, before this Court, petitioner assigns the following errors:
(1) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN RULING
THAT THE PROMISSORY NOTE OF P750,000.00 IS NOT A CONTRACT OF
ADHESION DESPITE THE CLEAR SHOWING THAT THE SAME IS A READY-
MADE CONTRACT PREPARED BY (THE) RESPONDENT CONSUELO TORRES
AND DID NOT REFLECT THEIR TRUE INTENTIONS AS IT WEIGHED HEAVILY
IN FAVOR OF RESPONDENT AND AGAINST PETITIONER.

(2) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN

DECLARING THAT THE PROPERTY COVERED BY THE SUBJECT DEED OF
MORTGAGE OF MARCH 20, 1995 IS A PARAPHERNAL PROPERTY OF THE
PETITIONER AND NOT CONJUGAL EVEN THOUGH THE ISSUE OF WHETHER
OR NOT THE MORTGAGED PROPERTY IS PARAPHERNAL WAS NEVER
RAISED, NOR DISCUSSED AND ARGUED BEFORE THE TRIAL COURT.

(3) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN

DISREGARDING THE TRIAL COURTS COMPUTATION OF THE ACTUAL
OBLIGATIONS OF THE PETITIONER WITH (THE) RESPONDENT TORRES
EVEN THOUGH THE SAME IS BASED ON EVIDENCE SUBMITTED BEFORE
IT.

The pertinent issues to be resolved are:

(1) Whether the promissory note of P750,000.00 is a contract of adhesion;
(2) Whether the real property covered by the subject deed of mortgage dated
March 20, 1995 is paraphernal property of petitioner; and
(3) Whether the rates of interests and surcharges on the obligation of
petitioner to private respondent are valid.
I
We hold that the promissory note in the case at bar is not a contract of
adhesion. In Sweet Lines, Inc. vs. Teves,[34] this Court discussed the nature of
a contract of adhesion as follows:

. . . there are certain contracts almost all the provisions of which have been
drafted only by one party, usually a corporation. Such contracts are
called contracts of adhesion, because the only participation of the other party is
the signing of his signature or his adhesion thereto. Insurance contracts, bills
of lading, contracts of sale of lots on the installment plan fall into this category.
[35]

. . . it is drafted only by one party, usually the corporation, and is sought to be

accepted or adhered to by the other party . . . who cannot change the same and
who are thus made to adhere hereto on the take it or leave it basis . . . [36]

In said case of Sweet Lines,[37] the conditions of the contract on the 4 x 6

inches passenger ticket are in fine print. Thus we held:

. . . it is hardly just and proper to expect the passengers to examine their

tickets received from crowded/congested counters, more often than not during
rush hours, for conditions that may be printed thereon, much less charge them
with having consented to the conditions, so printed, especially if there are a
number of such conditions in fine print, as in this case.[38]

We further stressed in the said case that the questioned Condition No. 14
was prepared solely by one party which was the corporation, and the other
party who was then a passenger had no say in its preparation. The passengers
have no opportunity to examine and consider the terms and conditions of the
contract prior to the purchase of their tickets.[39]
In the case at bar, the promissory note in question did not contain any fine
print provision which could not have been examined by the
petitioner. Petitioner had all the time to go over and study the stipulations
embodied in the promissory note. Aside from the March 22, 1995 promissory
note for P750,000.00, three other promissory notes of different dates and
amounts were executed by petitioner in favor of private respondent. These
promissory notes contain similar terms and conditions, with a little variance in
the terms of interests and surcharges. The fact that petitioner and private
respondent had entered into not only one but several loan transactions shows
that petitioner was not in any way compelled to accept the terms allegedly
imposed by private respondent. Moreover, petitioner, in her complaint [40] dated
October 7, 1996 filed with the trial court, never claimed that she was forced to
sign the subject note.Paragraph five of her complaint states:

That on or about March 22, 1995 plaintiff was required by the defendant
Torres to execute a promissory note consolidating her unpaid principal loan
and interests which said defendant computed to be in the sum
of P750,000.00 . . .

To be required is certainly different from being compelled. She could have

rejected the conditions made by private respondent. As an experienced
business- woman, she ought to understand all the conditions set forth in the
subject promissory note. As held by this Court in Lee, et al. vs. Court of
Appeals, et al.,[41] it is presumed that a person takes ordinary care of his
concerns.[42] Hence, the natural presumption is that one does not sign a
document without first informing himself of its contents and
consequences. This presumption acquires greater force in the case at bar
where not only one but several documents were executed at different times by
petitioner in favor of private respondent.
II
We also affirm the ruling of the appellate court that the real property
covered by the subject deed of mortgage is paraphernal property. The property
subject of the mortgage is registered in the name of Corazon G. Ruiz, of legal
age, married to Rogelio Ruiz, Filipinos. Thus, title is registered in the name of
Corazon alone because the phrase married to Rogelio Ruiz is merely descriptive
of the civil status of Corazon and should not be construed to mean that her
husband is also a registered owner. Furthermore, registration of the property in
the name of Corazon G. Ruiz, of legal age, married to Rogelio Ruiz is not proof
that such property was acquired during the marriage, and thus, is presumed to
be conjugal. The property could have been acquired by Corazon while she was
still single, and registered only after her marriage to Rogelio Ruiz. Acquisition
of title and registration thereof are two different acts. [43] The presumption under
Article 116 of the Family Code that properties acquired during the marriage are
presumed to be conjugal cannot apply in the instant case. Before such
presumption can apply, it must first be established that the property was in
fact acquired during the marriage. In other words, proof of acquisition during
the marriage is a condition sine qua non for the operation of the presumption
in favor of conjugal ownership.[44] No such proof was offered nor presented in
the case at bar. Thus, on the basis alone of the certificate of title, it cannot be
presumed that said property was acquired during the marriage and that it is
conjugal property. Since there is no showing as to when the property in
question was acquired, the fact that the title is in the name of the wife alone is
determinative of its nature as paraphernal, i.e., belonging exclusively to said
spouse.[45] The only import of the title is that Corazon is the owner of said
property, the same having been registered in her name alone, and that she is
married to Rogelio Ruiz.[46]
III
We now resolve the issue of whether the rates of interests and surcharges
on the obligation of petitioner to private respondent are legal.
The four (4) unpaid promissory notes executed by petitioner in favor of
private respondent are in the following amounts and maturity dates:
(1) P750,000.00, dated March 22, 1995 matured on April 21, 1996;
(2) P100,000.00, dated April 21, 1995 matured on August 21, 1995;
(3) P100,000.00, dated May 23, 1995 matured on November 23, 1995; and
(4) P100,000.00, dated December 21, 1995 matured on March 1, 1996.
The P750,000.00 promissory note dated March 22, 1995 has the following
provisions:
(1) 3% monthly interest, from the signing of the note until its maturity date;
(2) 10% compounded monthly interest on the remaining balance at
maturity date;
(3) 1% surcharge on the principal loan for every month of default; and
(4) 25% attorneys fees.
The P100,000.00 promissory note dated April 21, 1995 has the following
provisions:
(1) 3% monthly interest, from the signing of the note until its maturity date;
(2) 10% monthly interest on the remaining balance at maturity date;
(3) 1% compounded monthly surcharge on the principal loan for every
month of default; and
(4) 10% attorneys fees.
The two (2) other P100,000.00 promissory notes dated May 23, 1995 and
December 1, 1995 have the following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity date;
(2) 10% compounded monthly interest on the remaining balance at
maturity date;
(3) 10% surcharge on the principal loan for every month of default; and
(4) 10% attorneys fees.
We affirm the ruling of the appellate court, striking down as invalid the
10% compounded monthly interest, the 10% surcharge per month stipulated in
the promissory notes dated May 23, 1995 and December 1, 1995, and the 1%
compounded monthly interest stipulated in the promissory note dated April 21,
1995. The legal rate of interest of 12% per annum shall apply after the
maturity dates of the notes until full payment of the entire amount due. Also,
the only permissible rate of surcharge is 1% per month, without
compounding. We also uphold the award of the appellate court of attorneys
fees, the amount of which having been reasonably reduced from the stipulated
25% (in the March 22, 1995 promissory note) and 10% (in the other three
promissory notes) of the entire amount due, to a fixed amount
of P50,000.00. However, we equitably reduce the 3% per month or 36% per
annum interest present in all four (4) promissory notes to 1% per month or
12% per annum interest.
The foregoing rates of interests and surcharges are in accord with Medel
vs. Court of Appeals,[47] Garcia vs. Court of Appeals,[48] Bautista vs. Pilar
Development Corporation,[49]and the recent case of Spouses Solangon vs.
Salazar.[50] This Court invalidated a stipulated 5.5% per month or 66% per
annum interest on a P500,000.00 loan in Medel[51] and a 6% per month or 72%
per annum interest on a P60,000.00 loan in Solangon[52] for being excessive,
iniquitous, unconscionable and exorbitant. In both cases, we reduced the
interest rate to 12% per annum. We held that while the Usury Law has been
suspended by Central Bank Circular No. 905, s. 1982, effective on January 1,
1983, and parties to a loan agreement have been given wide latitude to agree
on any interest rate, still stipulated interest rates are illegal if they are
unconscionable. 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. [53] On the other hand,
in Bautista vs. Pilar Development Corp.,[54] this Court upheld the validity of a
21% per annum interest on a P142,326.43 loan, and in Garcia vs. Court of
Appeals, sustained the agreement of the parties to a 24% per annum interest
on an P8,649,250.00 loan. It is on the basis of these cases that we reduce the
36% per annum interest to 12%. An interest of 12% per annum is deemed fair
and reasonable. While it is true that this Court invalidated a much higher
interest rate of 66% per annum in Medel[55] and 72% in Solangon[56] it has
sustained the validity of a much lower interest rate of 21% in Bautista[57]and
24% in Garcia.[58] We still find the 36% per annum interest rate in the case at
bar to be substantially greater than those upheld by this Court in the two (2)
aforecited cases.
The 1% surcharge on the principal loan for every month of default is
valid. This surcharge or penalty stipulated in a loan agreement in case of
default partakes of the nature of liquidated damages under Art. 2227 of the
New Civil Code, and is separate and distinct from interest payment. [59] Also
referred to as a penalty clause, it is expressly recognized by law. It is an
accessory undertaking to assume greater liability on the part of an obligor in
case of breach of an obligation.[60] The obligor would then be bound to pay the
stipulated amount of indemnity without the necessity of proof on the existence
and on the measure of damages caused by the breach. [61] Although the courts
may not at liberty ignore the freedom of the parties to agree on such terms and
conditions as they see fit that contravene neither law nor morals, good
customs, public order or public policy, a stipulated penalty, nevertheless, may
be equitably reduced if it is iniquitous or unconscionable. [62] In the instant
case, the 10% surcharge per month stipulated in the promissory notes dated
May 23, 1995 and December 1, 1995 was properly reduced by the appellate
court.
In sum, petitioner shall pay private respondent the following:

1. Principal of loan under promissory note dated

March 22, 1995 ... P750,000.00

 a. 1% interest per month on principal from March 22,
1995 until fully paid, less P270,000.00 paid by petitioner as
interest from April 1995 to March 1996

b. 1% surcharge per month on principal from May

1996 until fully paid

2. Principal of loan under promissory note dated

April 21, 1995 .. P100,000.00

a. 1% interest per month on principal from April 21,

1995 until fully paid

b. 1% surcharge per month on principal from

September 1995 until fully paid

3. Principal of loan under promissory note dated

May 23, 1995 .... P100,000.00

a. 1% interest per month on principal from May 23, 1995 until

fully paid

b. 1% surcharge per month on principal from December 1995

until fully paid

4. Principal of loan under promissory note dated

December 1, 1995 ... P100,000.00

a. 1% interest per month on principal from December

1, 1995 until fully paid

b. 1% surcharge per month on principal from April

1996 until fully paid

5. Attorneys fees...P 50,000.00

Hence, since the mortgage is valid and the loan it secures remains unpaid,
the foreclosure proceedings may now proceed.
IN VIEW WHEREOF, the appealed Decision of the Court of Appeals is
AFFIRMED, subject to the MODIFICATION that the interest rate of 36% per
annum is ordered reduced to 12 % per annum.
SO ORDERED.

Facts:
Petitioner Corazon G. Ruiz is engaged in the business of buying and
selling jewelry.4 She obtained loans from private respondent Consuelo Torres
on different occasions, in the following amounts: P100,000.00; P200,000.00;
P300,000.00; and P150,000.00.5 Prior to their maturity, the loans were
consolidated under one (1) promissory note. The consolidated loan of
P750,000.00 was secured by a real estate mortgage and the lot was registered
in the name of petitioner.
Thereafter, petitioner obtained three (3) more loans from private
respondent, and it was secured by three promissory notes in the amount of
100,000 each. These combined loans of P300,000.00 were secured by
P571,000.00 worth of jewelry pledged by petitioner to private respondent.
Petitioner paid the stipulated 3% monthly interest on the P750,000.00
loan, amounting to P270,000.00. After that, petitioner was unable to make
interest payments as she had difficulties collecting from her clients in her
jewelry business.
Due to petitioner’s failure to pay the principal loan of P750,000.00, as
well as the interest payment, private respondent demanded payment not only
of the P750,000.00 loan, but also of the P300,000.00 loan. When petitioner
failed to pay, private respondent sought the extra-judicial foreclosure of the
aforementioned real estate mortgage.
Acting Clerk of Court and Ex-Officio Sheriff Perlita V. Ele, Deputy Sheriff
In-Charge Rolando G. Acal and Supervising Sheriff Silverio P. Bernas issued a
Notice of Sheriff’s Sale of subject lot. One (1) day before the scheduled auction
sale, petitioner filed a complaint with the RTC, with a prayer for the issuance of
a TRO to enjoin the sheriff from proceeding with the foreclosure sale and to fix
her indebtedness to private respondent to P706,000.00. The computed amount
of P706,000.00 was based on the aggregate loan of P750,000.00, plus the other
loans of P300,000.00, covered by separate promissory notes, plus interest,
minus P571,000.00 representing the amount of jewelry pledged in favor of
private respondent.
The trial court further held that the promissory note in question is a
unilateral contract of adhesion drafted by private respondent. It struck down
the contract as repugnant to public policy because it was imposed by a
dominant bargaining party (private respondent) on a weaker party (petitioner).

Issue:
Whether or not the promissory note of P750,000.00 is a contract of
adhesion

Ruling:
The Supreme Court held that promissory note in the case at bar is not a
contract of adhesion. There are certain contracts almost all the provisions of
which have been drafted only by one party, usually a corporation. Such
contracts are called contracts of adhesion, because the only participation of the
other party is the signing of his signature or his ‘adhesion’ thereto. Insurance
contracts, bills of lading, contracts of sale of lots on the installment plan fall
into this category.
In the case at bar, the promissory note in question did not contain any
fine print provision which could not have been examined by the petitioner.
Petitioner had all the time to go over and study the stipulations embodied in
the promissory note. Aside from the March 22, 1995 promissory note for
P750,000.00, three other promissory notes of different dates and amounts were
executed by petitioner in favor of private respondent. These promissory notes
contain similar terms and conditions, with a little variance in the terms of
interests and surcharges. The fact that petitioner and private respondent had
entered into not only one but several loan transactions shows that petitioner
was not in any way compelled to accept the terms allegedly imposed by private
respondent. Moreover, petitioner, in her complaint dated October 7, 1996 filed
with the trial court, never claimed that she was forced to sign the subject note.
 To be required is certainly different from being compelled. She could
have rejected the conditions made by private respondent. As an experienced
business- woman, she ought to understand all the conditions set forth in the
subject promissory note

SPOUSES TAGUMPAY N. ALBOS AND AIDA C. ALBOS, PETITIONERS, VS.

SPOUSES NESTOR M. EMBISAN AND ILUMINADA A. EMBISAN, DEPUTY
SHERIFF MARINO V. CACHERO, AND THE REGISTER OF DEEDS OF
QUEZON CITY, RESPONDENTS.

DECISION

VELASCO JR., J.:

Nature of the Case

Before the Court is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court seeking the reversal and the setting aside of the Decision [1] of
the Court of Appeals (CA) dated May 29, 2013 and its Resolution dated
January 13, 2014 in CA-G.R. CV No. 93667. Said rulings upheld the validity of
the extra-judicial foreclosure sale over the property that petitioners, spouses
Tagumpay and Aida Albos, mortgaged in favor of private respondents.

The Facts

On October 17, 1984, petitioners entered into an agreement,denominated as

"Loan with Real Estate Mortgage,"[2] with respondent spouses Nestor and
IluminadaEmbisan (spouses Embisan) in the amount of P84,000.00 payable
within 90 days with a monthly interest rate of 5%. To secure the indebtedness,
petitioners mortgaged to the spouses Embisan a parcel of land in Project 3,
Quezon City, measuring around 207.6 square meters and registered under
their name, as evidenced by Transfer Certificate Title No. 257697. [3]

For failure to settle their account upon maturity, petitioner Aida Albos
requested and was given an extension of eleven (11) months, or until December
17, 1985, within which to pay the loan obligation. However, when the said
deadline came anew, petitioners once again defaulted and so, on agreement of
the parties,another extension of five (5) months, or until May 17, 1986, was
set.

May 17, 1986 came and went but the obligation remained unpaid. Thus, when
the petitioners requested a third extension, as will later be alleged by the
respondent spouses, an additional eight (8) months was granted on the
condition that the monthly 5% interest from then on, i.e. June 1986 onwards,
will be compounded. This stipulation, however, was not reduced in writing.

On February 9, 1987, respondent spouses addressed a letter[4] to petitioners

demanding the payment of P234,021.90, representing the unpaid balance and
interests from the loan. This was followed, on April 14, 1987, by another
letter[5] of the same tenor, but this time demanding from the petitioners the
obligation due amounting to P258,009.15.

Obviously in a bid to prevent the foreclosure of their mortgaged property,

petitioners paid respondent spouses the sum of P44,500.00 on October 2,
1987. The respondent spouses accepted the partial payment of the principal
loan amount owed to them, which, based on the Statement of Account [6] the
respondent spouses prepared, by that time, has already ballooned to
P296,658.70. As extrapolated from the Statement of Account:

Month Year Loan Interest Payment Balance

October 1984 84,000.00 84,000.00

November 1984 4,200.00 8,000.00 80,200.00

December 1984 4,200.00 84,400.00

January 1985 4,200.00 4,000.00 84,600.00

February 1985 4,200.00 88,800.00

March 1985 4,200.00 93,000.00

April 1985 4,200.00 97,200.00

May 1985 4,200.00 101,400.00

June 1985 4,200.00 105,600.00

July 1985 4,200.00 109,800.00

August 1985 4,200.00 114,000.00

September 1985 4,200.00 118,200.00

October 1985 4,200.00 122,400.00

November 1985 4,200.00 126,600.00

December 1985 4,200.00 130,800.00

January 1986 4,200.00 135,000.00

February 1986 4,200.00 139,200.00

March 1986 4,200.00 143,400.00

April 1986 4,200.00 147,600.00

May 1986 4,200.00 151,800.00

June 1986 7,590.00 159,390.00

July 1986 7,969.50 167,359.50

August 1986 8,367.98 175,727.45

September 1986 8,786.37 184,513.82

October 1986 9,225.69 192,739.50

November 1986 9,417.50 202,157.00

December 1986 10,107.75 212,264.75

January 1987 10,613.25 222,878.00

February 1987 11,143.90 234,021.90

March 1987 11,701.10 245,723.00

April 1987 12,286.15 258,009.15

May 1987 12,900.45 270,909.60

June 1987 13,545.48 284,455.10

July 1987 14,222.75 298,677.85

August 1987 14,933.90 313,611.75

September 1987 15,680.60 329,292.35

October 1987 44,500.00 284,792.35

Interest for
7,119.80 291,912.15
15 days

Interest for
4,746.55 296,658.70
10 days

Due to petitioners' failure to settle their indebtedness, respondent spouses

proceeded to extra-judicially foreclose the mortgaged property on October 12,
1987. At the auction sale conducted by the respondent sheriff, respondent
spouses emerged as the highest bidders at P330,000.00 and were later issued
a Sheriff's Certificate of Sale.[7]

The property was never redeemed, and so the respondent spouses executed an
Affidavit of Consolidation[8] over the property on November 23, 1988. The
affidavit was subsequently registered with the Registry of Deeds of Quezon
City, consolidating ownership to the spouses Embisan. Petitioners alleged that
afterwards, on February 4, 1989, they were pressured by the respondent
spouses to execute a Contract of Lease[9] over the property wherein the
petitioners, as lessees, are obligated to pay the respondent spouses, as lessors,
monthly rent in the amount of P2,500.00.

On August 14, 1989, herein petitioners filed a complaint for the annulment of
the Loan with Real Estate Mortgage, Certificate of Sale, Affidavit of
Consolidation, Deed of Final Sale, and Contract of Lease before the Regional
Trial Court of Quezon City (RTC). In their complaint, docketed as Civil Case No.
89-3246, and later raffled to Branch 99 of the court, petitioners alleged that
the foreclosure sale is void because respondents only released P60,000.00 out
of the P84,000.00 amount loaned, which has already been paid. As petitioner
Aida Albos testified during trial, she was able to pay P50,000 out of the
P60,000 principal loan released, and also P4,500.00 monthly interests, as
evidenced by receipts dated December 19, 1984 and February 9, 1985.[10]

In their Answer, the spouses Embisan countered that the loan was legally and
validly entered at arms length after a series of meetings and negotiations; that
petitioners agreed to pay compounded interest in exchange for extending the
payment period the third time; that never during the life of the mortgage did
petitioners pay P50,000.00; and, that petitioners, having defaulted, left the
spouses Embisan with no other option except to extra-judicially foreclose the
property security as stipulated in the mortgage.

Ruling of the Trial Court

Following trial, the RTC rendered a Decision[11] on December 15, 2008

dismissing the complaint for lack of merit, the dispositive portion of which
reads:

WHEREFORE, in view of the foregoing considerations, the complaint filed by

plaintiff is DISMISSED for lack of merit.

Defendants' counterclaim is denied.

SO OREDERED.

In so doing, the trial court did not give credence to petitioners' claim that only
P60,000.00 of the loaned amount was released to them. It also found that
between October 17, 1984 to October 28, 1987, petitioners only paid the total
amount of P56,000.00, which is not sufficient to cover both the principal loan
and the accrued interest. In addition, the trial court shrugged aside
petitioners'contention that they were forced to affix their signatures in the
adverted Contract of Lease, adding that having signed the lease agreement,
they were estopped from asserting title over the property.

Petitioners filed a Motion for Reconsideration, but the same was denied by the
trial court through a Resolution dated January 13, 2014. Aggrieved, they
elevated the case to the CA.

Ruling of the Court of Appeals

On appeal, petitioners argued that the imposition by the respondent spouses of

a 5% compounded interest on the loan, without the petitioners' consent or
knowledge, is fraudulent and contrary to public morals. Respondents, on the
other hand, insisted that the compounding of the interest was agreed upon as
a condition for the third and final extension of time given for the petitioners to
make good their promise to pay.

On May 29, 2013, the CA promulgated the assailed Decision,affirming in

toto the ruling of the trial court. The appellate court held that, under the
circumstances, inasmuch as the request for the third extension for another
eight months was made after the expiration of one year and four months from
when the payment first became due, the agreement to compound the interest
was just and reasonable. It added that it was precisely the petitioners' repeated
non-compliance which prompted the imposition of a compounded interest rate
and, therefore, petitioners could no longer feign ignorance of its imposition.

Through the challenged Resolution dated January 13, 2014, the CA denied
petitioners' Motion for Reconsideration.

Hence, the instant petition.

The Issues

Petitioners anchor their plea for the reversal of the assailed Decision on the
following grounds:[12]

I.

THERE IS NO DOCUMENTARY PROOF TO SHOW THAT THE PETITIONERS

AGREED IN WRITING TO THE IMPOSITION OF THE 5% COMPOUNDED
MONTHLY INTEREST, CONTRARY TO ARTICLE 1956 OF THE CIVIL CODE

II.

THE 5% COMPOUNDED MONTHLY INTEREST UNILATERALLY IMPOSED BY

RESPONDENT EMBISAN ON THE PETITIONERS IS EXCESSIVE,
EXORBITANT, OPPRESSIVE, INIQUITOUS AND UNCONSCIONABLE,
THEREFORE, THE SAME IS VOID FOR BEING CONTRARY TO LAW AND
MORALS

III.

THE FORECLOSURE PROCEEDINGS INSTITUTED BY THE RESPONDENT

SPOUSES EMBISAN SHOULD BE NULLIFIED FOR BEING BASED ON A
WRONG COMPUTATION OF THE OUTSTANDING LOAN OF THE PETITIONERS
WHICH WAS WRONGLY COMPUTED ON THE BASIS OF A 5% COMPOUNDED
MONTHLY INTEREST

Succinctly put,the pivotal issue to be resolved is whether or not the extra-

judicial foreclosure proceedings should be nullified for being based on an
allegedly erroneous computation of the loan's interest.

Respondent spouses, in their Comment, contend that the issues raised in the
petition are questions of fact that cannot be entertained by this Court; that
parole evidence can be introduced, as was properly appreciated by the RTC and
CA, to ascertain the true intention of the parties on how the interest on the
loan will accrue; and that petitioners' cause of action is barred by prescription,
counting four (4) years from the original due date of the loan, which was
December 17, 1984.

The Court's Ruling

The petition is meritorious.

The compounding of interest should be in writing

For academic purposes, We first determine whether or not the stipulation

compounding the interest charged should specifically be indicated in a written
agreement.

We rule in the affirmative.

Article 1956 of the New Civil Code, which refers to monetary interest, provides:

Article 1956. No interest shall be due unless it has been expressly stipulated
in writing.

As mandated by the foregoing provision, payment of monetary interest shall be

due only if: (1) there was an express stipulation for the payment of interest;
and (2) the agreement for such payment was reduced in writing. Thus, We have
held that collection of interest without any stipulation thereof in writing is
prohibited by law.[13]

In the case at bar, it is undisputed that the parties have agreed for the loan to
earn 5% monthly interest,the stipulation to that effect put in writing. When the
petitioners defaulted, the period for payment was extended, carrying over the
terms of the original loan agreement, including the 5% simple interest.
However, by the third extension of the loan, respondent spouses decided to
alter the agreement by changing the manner of earning interest rate,
compounding it beginning June 1986. This is apparent from the Statement of
Account prepared by the spouses Embisan themselves.

Given the circumstances, We rule that the first requirement that there be an
express stipulation for the payment of interest is not sufficiently complied with,
for purposes of imposing compounded interest on the loan. The requirement
does not only entail reducing in writing the interest rate to be earned but also
the manner of earning the same, if it is to be compounded. Failure to specify
the manner of earning interest, however, shall not automatically render the
stipulation imposing the interest rate void since it is readily apparent from the
contract itself that the parties herein agreed for the loan to bear interest.
Instead, in default of any stipulation on the manner of earning interest, simple
interest shall accrue.

Settled is the rule that ambiguities in a contract are interpreted against the
party that caused the ambiguity. Any ambiguity in a contract whose terms are
susceptible of different interpretations must be read against the party who
drafted it.[14] In the extant case, respondent spouses, having imposed,
unilaterally at that, the compounded interest rate, had the correlative duty of
clarifying and reducing in writing how the said interest shall be earned. Having
failed to do so, the silence of the agreement on the manner of earning interest
is a valid argument for prohibiting them from charging interest at a
compounded rate.

Further, by analogy, We have had the occasion to hold that, when a final
money judgment ordered the payment of "legal interest" without mention of
payment of compound interest, a judge who orders payment of compound
interest does so in excess of his authority.[15] As held in Philippine American
Accident Insurance v. Flores:[16]

The judgment which was sought to be executed ordered the payment of simple
"legal interest" only. It said nothing about the payment of compound interest.
Accordingly, when the respondent judge ordered the payment of compound
interest he went beyond the confines of his own judgment which had been
affirmed by the Court of Appeals and which had become final. x x x

Therefore, in default of any unequivocal wording in the contract, the legal

interest stipulated by the parties should be understood to be simple, not
compounded.

Imposing 5% monthly interest, whether compounded or simple, is

unconscionable

Nevertheless, even if there was such an agreement that interest will be

compounded, We agree with the petitioners that the 5% monthly rate, be it
simple or compounded, written or verbal, is void for being too exorbitant, thus
running afoul of Article 1306 of the New Civil Code, which provides:
Article 1306. The 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.
(emphasis added)

As case law instructs, the imposition of an unconscionable rate of interest on a

money debt, even if knowingly and voluntarily assumed, is immoral and
unjust. It is tantamount to a repugnant spoliation and an iniquitous
deprivation of property, repulsive to the common sense of man. It has no
support in law, in principles of justice, or in the human conscience nor is there
any reason whatsoever which may justify such imposition as righteous and as
one that may be sustained within the sphere of public or private morals.[17]

Summarizing the jurisprudential trend towards this direction is the recent case
of Castro v. Tan[18] in which We held:

While we agree with petitioners that parties to a loan agreement have wide
latitude to stipulate on any interest rate in view of the Central Bank Circular
No. 905 s. 1982 which suspended the Usury Law ceiling on interest effective
January 1, 1983, it is also worth stressing that interest rates whenever
unconscionable may still be declared illegal. There is certainly nothing in said
circular which 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.

In several cases, we have ruled that stipulations authorizing iniquitous or

unconscionable interests are contrary to morals, if not against the law.
In Medel v. Court of Appeals,[19] we annulled a stipulated 5.5% per month or
66% per annum interest on a P500,000.00 loan and a 6% per month or 72%
per annum interest on a P60,000.00 loan, respectively, for being excessive,
iniquitous, unconscionable and exorbitant. In Ruiz v. Court of Appeals,[20] we
declared a 3% monthly interest imposed on four separate loans to be excessive.
In both cases, the interest rates were reduced to 12% per annum.

In this case, the 5% monthly interest rate, or 60% per annum,

compounded monthly, stipulated in the Kasulatan is even higher than the
3% monthly interest rate imposed in the Ruiz case. Thus, we similarly
hold the 5% monthly interest to be excessive, iniquitous, unconscionable
and exorbitant, contrary to morals, and the law. It is therefore void ab
initio for being violative of Article 1306 of the Civil Code. With this, and
in accord with the Medel and Ruiz cases, we hold that the Court of
Appeals correctly imposed the legal interest of 12% per annum in place of
the excessive interest stipulated in the Kasulatan. (emphasis added)

As can be gleaned, jurisprudence on the nullity of excessive interest rates is

both clear and consistent. We find no cogent reason to deviate therefrom. As
the lender in Castro, respondent spouses herein similarly imposed a 5%
monthly interest in the loan contracted by petitioners. Following the judicial
pronouncement in the said cases, the interest rate so imposed herein is
nullified for being unconscionable. In lieu thereof, a simple interest of 12% per
annum should be imposed.

The foreclosure sale should be nullified

In view of the above disquisitions, We are constrained to nullify the foreclosure

proceedings with respect to the mortgaged property in this case, following the
doctrine in Heirs of Zoilo and Primitiva Espiritu v. Landrito.[21]

In Heirs of Espiritu, the spouses Maximo and Paz Landrito, sometime in 1986,
borrowed from the spouses Zoilo and Primitiva Espiritu the amount of
P350,000.00, secured by a real estate mortgage. Because of the Landritos'
continued inability to pay the loan, the due date for payment was extended on
the condition that the interest that has already accrued shall, from then on,
form part of the principal. As such, after the third extension, the principal
amounted to P874,125.00 in only two years. Despite the extensions, however,
the debt remained unpaid, prompting the spouses Espiritu to foreclose the
mortgaged property.

The foreclosure proceeding in Heirs of Espiritu, however,was eventually nullified

by this Court because the Landritos were deprived of the opportunity to settle
the debt, in view of the overstated amount demanded from them. As held:

Since the Spouses Landrito, the debtors in this case, were not given an
opportunity to settle their debt, at the correct amount and without the
iniquitous interest imposed, no foreclosure proceedings may be instituted. A
judgment ordering a foreclosure sale is conditioned upon a finding on the
correct amount of the unpaid obligation and the failure of the debtor to pay the
said amount. In this case, it has not yet been shown that the Spouses Landrito
had already failed to pay the correct amount of the debt and, therefore, a
foreclosure sale cannot be conducted in order to answer for the unpaid debt. x
xx

As a result, the subsequent registration of the foreclosure sale cannot transfer

any rights over the mortgaged property to the Spouses Espiritu. The
registration of the foreclosure sale, herein declared invalid, cannot vest title
over the mortgaged property. x x x

Applying Espiritu, the extra-judicial foreclosure of the mortgaged property

dated October 12, 1987 is declared null, void, and of no legal effect.

WHEREFORE, in view of the foregoing, the petition is GRANTED. The Decision

and Resolution of the Court of Appeals, dated May 29, 2013 and January 13,
2014, respectively, in CA-G.R. CV No. 93667 are hereby REVERSED and SET
ASIDE. Let a new Decision be entered, the dispositive portion of which reads:
 1. The stipulation in the Loan with Real Estate Mortgage imposing an
interest of 5% monthly is declared void.

2. In view of the nullity of the interest imposed on the loan which affected
the total arrearages upon which foreclosure was based, the foreclosure of
mortgage, Certificate of Sale, Affidavit of Consolidation, Deed of Final
Sale, and Contract of Lease are declared void.

3. The case is remanded to the Regional Trial Court to compute the current
arrearages of petitioners taking into account the partial payments made
by them and the imposition of the simple interest rate of 12% per
annum.

SO ORDERED.