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

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UNITED COCONUT PLANTERS BANK, 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; Default; Extrajudicial Foreclosure; Real Estate Mortgage; Motion for Reconsideration

 

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 in character and void for want of mutuality of contracts under Articles 1308 and 1309 of the Civil Code, a valid obligation being incapable of depending upon the will of only one of the contracting parties. Where such a void interest provision has been used to compute the debtor's total outstanding obligation, the resulting figure is unlawfully inflated, and the debtor's failure or inability to pay that amount — including the unlawful interest component — does not place the debtor in default, default presupposing a valid, ascertained, and demandable obligation. Consequently, an extrajudicial foreclosure initiated on the premise that the debtor was in default of an obligation computed using the void interest rate is itself infirm: foreclosure requires an actual, lawfully computed default, and a sale conducted prematurely on that basis cannot be sustained.

 

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 over their property. UCPB was later substituted in this case by the Land Bank of the Philippines. 

The loan documents contained an interest provision which the trial court, the Court of Appeals, and ultimately the Supreme Court all found to be unlawful: the rate 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 principal obligation before UCPB treated the account as in default and proceeded to extrajudicially foreclose the mortgaged property. The auction sale was held on August 2, 1999.

 

The Regional Trial Court of Kalibo, Aklan ruled on the challenge to the foreclosure, and the Court of Appeals affirmed the nullity of the foreclosure, agreeing that the void interest stipulation meant respondents were not validly in default when the bank foreclosed. 

UCPB elevated the case to the Supreme Court, which in a Decision dated November 24, 2021 set aside the appellate ruling and upheld the foreclosure, holding that the nullity of a void interest stipulation does not affect the lender's right to recover the principal. Respondents moved for reconsideration, and it is that motion which the present Resolution resolves.

 

 

Whether a stipulation on interest that leaves the rate, or the power to change it, to the sole will of the lender is void for lack of mutuality of contracts.

YES. Such a provision is potestative in character because it makes fulfillment of the obligation, as to the interest component, dependent upon the will of only one party — the lender. 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; an interest clause unilaterally controlled by the bank fails that requirement.

 

 

Whether the imposition of a void interest rate precludes a valid finding of default when the debtor fails to pay the resulting inflated obligation.

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

 

 

Whether a foreclosure premised on a default computed from an unlawfully inflated obligation can stand.

NO. No valid default existing at the time the bank initiated foreclosure — the claimed default having been computed using the void interest stipulation — the foreclosure was premature and could not be sustained. As the Court put it, since there was no default yet, it was premature for the bank to foreclose the properties subject of the real estate mortgage contract. The Court accordingly affirmed the nullification of the foreclosure proceedings in toto.

 

DISPOSITION: The Motion for Reconsideration was GRANTED. The Court's earlier Decision dated November 24, 2021 was VACATED, and the Decision of the Court of Appeals nullifying the foreclosure proceedings was AFFIRMED IN TOTO, the Court expressly finding the dissent in the 2021 Decision more in accord with the law.




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