Investors Finance Corp vs. Autoworld Sales Corp G.R. No. 128990. September 21, 2000 Facts

INVESTORS FINANCE CORP VS.
AUTOWORLD SALES CORP

G.R. No. 128990. September 21, 2000
Facts:
Investors Finance is a financing company doing business with Autoworld since 1975. The
president of Autoworld, also held the same position at its affiliate corporation, Pio Barretto
Realty Corporation. In 1980, Autoworld applied for a direct loan with Investors Finance but was
denied and was informed thereafter that although it could not grant direct loans it could extend
funds to Autoworld by purchasing any of its outstanding receivables at a discount. After a series
of negotiations, the parties agreed to execute an Installment Paper Purchase (IPP) transaction
to enable Autoworld to acquire the additional capital it needed.
The parties signed 3 contracts to implement the IPP:

1. Contract to Sell where Barretto sold a parcel of land to Autoworld together with the
improvements for the price of P12,999,999.60 payable in 60 consecutive and equal
monthly installments of P216,666.66.
2. Deed of Assignment where Barretto assigned and sold in favor of Investors Finance all
its rights, title and interest to all the money and other receivables due from Autoworld
under the Contract to Sell, subject to the condition that the assignee (Investors Finance)
has the right of recourse against the assignor (Barretto) in the event that the payor
(Autoworld) defaulted in the payment of its obligations.
3. Real Estate Mortgage where Barretto, as assignor, mortgaged the property subject of
the Contract to Sell to Investors Finance as security for payment of its obligation under
the Deed of Assignment.
Autoworld started paying the monthly installments to Investors Finance.
In 1982, Autoworld transacted with Investors Finance for the second time obtaining a loan of
P3,000,000.00 with an effective interest rate of 28% per annum. Autoworld and Barretto, as co-
makers, then signed a PN in favor of Investors Finance payable in 60 consecutive monthly
installments. To secure the promissory note, Autoworld mortgaged a parcel of land located in
Sampaloc, Manila, to Investors Finance.
After paying 19 monthly installments on the first transaction and 3 monthly installments on the
second transaction, Autoworld advised Investors Finance that it intended to pre-terminate the 2
transactions by paying their outstanding balances in full. However, it disagreed with the
Investors Finance’s computation of its outstanding balances where Autoworld is required to pay
a total amount of P10,026,736.78, where P6,784,551.24 was the amount to settle the first
transaction while P3,242,165.54 was the amount to settle the second transaction. Despite its
objections, Autoworld reluctantly paid Investors Finance the amount of P10,026,736.78.
Then after, Autoworld asked Investors Finance for a refund of its overpayments in the total
amount of P3,082,021.84. After both parties failed to reconcile their accounting figures,
AUTOWORLD filed an action before the RTC of Makati to annul the Contract to Sell, the Deed
of Assignment and the Real Estate Mortgage. It also prayed for the nullification of the PN and
the Real Estate Mortgage alleging that these contracts were only perfected to facilitate a
usurious loan and therefore should be annulled and that Investors Finance should refund the
amounts of P2,586,035.44 excess for the first transaction and P418,262.00 excess payment for
the second transaction. RTC ruled in favor of Investors Finance.
On appeal, the Court of Appeals modified the decision of the trial court and concluded
that the "IPP" transaction, comprising of the 3 contracts, was merely a scheme by the parties to
disguise a usurious loan. It ordered the annulment of the contracts and required Investors
Finance to reimburse Autoworld P2,586,035.44 as excess interest payments over the 12%
ceiling rate. However, with regard to the second transaction, the appellate court ruled that at the
time it was executed the ceiling rates imposed by the Usury Law had already been lifted thus
allowing the parties to stipulate any rate of interest.
Issue:
Whether the 3 contracts were executed to implement a legitimate Installment Paper
Purchase (IPP) transaction or merely to conceal a usurious loan?
Ruling:
YES.
Generally, the courts only need to rely on the face of written contracts to determine the intention
of the parties. "However, the law will not permit a usurious loan to hide itself behind a legal form”
If from a construction of the whole transaction it becomes apparent that there exists a corrupt
intention to violate the Usury Law, the courts should and will permit no scheme, however
ingenious, to becloud the crime of usury.
The Usury Law recognizes the legitimate purchase of negotiable mercantile paper by innocent
purchasers. But even the law has anticipated the potential abuse of such transactions to
conceal usurious loans. Thus, the law itself made a qualification. It would recognize legitimate
purchase of negotiable mercantile paper, whether usurious or otherwise, only if the purchaser
had no intention of evading the provisions of the Usury Law and that the purchase was not a
part of the original usurious transaction. Otherwise, the law would not hesitate to annul such
contracts.
Also, in Article 1957 CC, it states that: “Contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws on usury shall be void. The borrower may recover in
accordance with the laws on usury.”
In the case at bar, the attending factors surrounding the execution of the 3 contracts clearly
establish that the parties intended to transact a usurious loan. These contracts should therefore
be declared void. Having declared the transaction between the parties as void, we are now
tasked to determine how much reimbursement Autoworld is entitled to.
In usurious loans, the creditor can always recover the principal debt. However, the stipulation on
the interest is considered void thus allowing the debtor to claim the whole interest paid. In a loan
of P1,000.00 with interest at 20% per annum or P200.00 per year, if the borrower pays P200.00,
the whole P200.00 would be considered usurious interest, not just the portion thereof in excess
of the interest allowed by law.
The SC affirmed the decision of CA that the transaction was a usurious loan. Finance is ordered
to pay Autoworld Sales the amount of P3,921,217.78 representing the entire usurious interest it
paid.

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INVESTORS FINANCE CORP VS.

AUTOWORLD SALES CORP

The parties signed 3 contracts to implement the IPP:

Autoworld started paying the monthly installments to Investors Finance.

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