UNITED COCONUT PLANTERS BANK, substituted by LAND BANK OF THE PHILIPPINES v. ANG [G.R. No. 222448, March 3, 2025 — Resolution]

 CASE DIGEST

UNITED COCONUT PLANTERS, substituted by LAND BANK OF THE PHILIPPINES v. ANG

[G.R. No. 222448, March 3, 2025 — Resolution]

SPECIAL THIRD DIVISION, ROSARIO, J.

 

Mutuality of Contracts; Articles 1308 and 1309, Civil Code; Potestative Interest Stipulation; Void Interest Clause; Article 1252, Civil Code; Default; Extrajudicial Foreclosure; Premature Foreclosure; Motion for Reconsideration; Vacated Decision

 

A stipulation on interest that leaves the rate, or the power to change it, entirely to the will or discretion of the creditor is potestative and void for want of mutuality of contracts under Articles 1308 and 1309 of the Civil Code. Where such a void provision has been used to compute the debtor's obligation, the resulting figure is unlawfully inflated, and the debtor's failure to pay it does not place the debtor in default — for under Article 1252 of the Civil Code, if a debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. Default presupposing a valid, ascertained, and demandable obligation, an extrajudicial foreclosure premised on a default so computed is premature and cannot stand.

 

Respondents Editha F. Ang and Violeta M. Fernandez obtained a loan from petitioner United Coconut Planters Bank (UCPB) in the principal amount of PHP 16,000,000.00, secured by a real estate mortgage. UCPB was later substituted by the Land Bank of the Philippines. 

The loan documents carried an interest provision that was not shown to have been agreed to by the respondents and was instead unilaterally set or alterable by the bank, rendering it potestative and void under Articles 1308 and 1309 of the Civil Code. 

Respondents paid PHP 2,349,514.95 toward the obligation before UCPB treated the account as in default and extrajudicially foreclosed. The auction sale was held on August 2, 1999. 

The Regional Trial Court of Kalibo, Aklan and thereafter the Court of Appeals, in its Decision of May 11, 2015, held the foreclosure void, the void interest stipulation meaning that respondents were never validly in default. 

On UCPB's petition, the Supreme Court, in a Decision dated November 24, 2021 penned by Carandang, J., reversed the Court of Appeals and upheld the foreclosure, reasoning that the nullity of a usurious interest stipulation does not affect the lender's right to recover the principal and that in a usurious loan with mortgage the right to foreclose subsists. Respondents moved for reconsideration. It is that motion which the present Resolution of March 3, 2025 resolves.

 

 

Whether a stipulation on interest left to the sole will of the lender is void for lack of mutuality of contracts.

YES. Such a provision is potestative, making fulfillment of the obligation as to interest depend upon the will of only one party. Being potestative, the principle of mutuality of contracts found in Articles 1308 and 1309 of the Civil Code could not have been present, making the provisions on interest void. A valid contract requires that its validity and compliance not be left to the will of one party alone.

 

 

Whether the debtor may be considered in default for failing to pay an obligation computed using a void interest rate.

NO. The Court held that in a situation wherein null and void interest rates are imposed under a contract of loan, the non-payment of the principal loan obligation does not place the debtor in a state of default, considering that under Article 1252 of the Civil Code, if a debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. 

The void interest component being unenforceable, the amount demanded by the bank does not represent a lawfully due and demandable obligation, and the debtor's failure to pay that partly void figure does not constitute default.

 

 

Whether a foreclosure premised on a default so computed can stand.

NO. No valid default existing when the bank foreclosed, the foreclosure was premature. Adopting the rule in Spouses Andal v. Philippine National Bank, the Court held that borrowers cannot be considered in default for their inability to pay arbitrary, illegal and unconscionable interest rates, and that because those rates are null and void the bank has no right to foreclose. Not being in a state of default, the foreclosure of the subject properties should not have proceeded.

 

 

Whether the Court's earlier Decision of November 24, 2021 still stands.

NO. The Court vacated its Decision of November 24, 2021 in its entirety and entered a new one in its place. In doing so it discarded the distinction that Decision had drawn between these borrowers and those in Andal based on the cause of their non-payment, and expressly found the dissent in the 2021 Decision to be more in accord with the law. Nothing in the vacated Decision survives as authority.

 

 

DISPOSITION: The Motion for Reconsideration was GRANTED. The Decision dated November 24, 2021 was VACATED, and in lieu thereof a new one was entered AFFIRMING IN TOTO the Decision dated May 11, 2015 of the Court of Appeals — that is, the nullification of the foreclosure stands.



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