CASE DIGEST
UNITED COCONUT PLANTERS BANK v. ANG
[G.R. No. 222448, November 24, 2021]
THIRD DIVISION, CARANDANG, J.
Obligations and Contracts; Banking Law; Interest Rates; Mutuality of Contracts; Extrajudicial Foreclosure; Void Interest Stipulation
Even if the interest stipulation in the loan obligation is nullified, the entire obligation does not become void; the unpaid principal debt still remains valid and only the stipulation as to the interest is rendered void.
While a stipulation granting a bank the
unilateral authority to determine, review, or reset interest rates violates the
principle of mutuality of contracts and is therefore void, such nullity does
not extinguish the principal loan obligation nor automatically invalidate a
foreclosure sale. A debtor who remains in default on the principal obligation
may still be subjected to foreclosure notwithstanding the invalidity of the
interest stipulation.
On April 30, 1997, United Coconut Planters Bank (UCPB) granted Editha Ang and Violeta Fernandez a credit line amounting to approximately ₱16 million, evidenced by five promissory notes and secured by several real estate mortgages over their resort and other properties.
The borrowers paid only about ₱2.35 million and thereafter defaulted on their amortizations. Consequently, UCPB demanded payment and initiated extrajudicial foreclosure proceedings. The mortgaged properties were sold at public auction on August 2, 1999, where UCPB emerged as the highest bidder.
Ang and Fernandez later filed a petition seeking to nullify the foreclosure sale, alleging that the loan documents contained invalid provisions allowing UCPB to unilaterally determine and increase interest rates, in violation of the Civil Code and the Truth in Lending Act.
The RTC
eventually upheld the foreclosure sale but declared the interest stipulations
void. On appeal, the Court of Appeals likewise declared the interest
stipulations void and further nullified the foreclosure sale, ruling that the
bank had failed to properly determine the borrowers’ true indebtedness. UCPB
elevated the matter to the Supreme Court
Whether the stipulations allowing UCPB to determine, review, and reset interest rates were valid.
NO. The Supreme Court held that the interest rate stipulations were void for violating the principle of mutuality of contracts under Article 1308 of the Civil Code. The Credit Agreement allowed UCPB to determine which market reference rate would apply and to review and reset such rates at its option. Although the agreement referred to objective market-based benchmarks such as the Manila Reference Rate and Treasury Bill Rates, the ultimate discretion to choose, review, and reset the applicable rate rested solely with the bank.
The Court
emphasized that a contract cannot leave its fulfillment solely to the will of
one party. By granting UCPB unilateral authority to determine future interest
rates, the stipulation deprived the borrowers of genuine consent regarding
future interest adjustments. Accordingly, the provisions on interest rates were
declared null and void.
Whether UCPB
violated the Truth in Lending Act.
NO. The Court ruled that UCPB did not violate
the Truth in Lending Act (R.A. No. 3765).
The RTC had found that the bank violated the law by allegedly requiring the borrowers to sign blank disclosure statements and promissory notes. However, the Supreme Court agreed with the Court of Appeals that the borrowers failed to specifically deny under oath the genuineness and due execution of the disclosure statements and financial documents presented by the bank. Consequently, these documents were deemed admitted pursuant to Rule 8 of the Rules of Court.
Thus, the
borrowers failed to establish any violation of the Truth in Lending Act. The
promissory notes and disclosure statements remained valid.
Whether the
extrajudicial foreclosure and auction sale remained valid despite the nullity
of the interest rate provisions.
YES. The Supreme Court held that the extrajudicial foreclosure and auction sale were valid despite the nullity of the interest stipulations.
The Court explained that the invalidity of an interest provision does not extinguish the principal loan obligation. A void interest stipulation merely results in the substitution of the applicable legal interest rate. The creditor’s right to recover the principal debt remains intact, including the right to enforce the mortgage securing the obligation.
The Court distinguished the case from Spouses Andal v. Philippine National Bank, where foreclosure was invalidated because the borrowers’ default was caused solely by the bank’s imposition of unconscionable interest rates and where the borrowers had already paid a substantial portion of the loan. In contrast, Ang and Fernandez paid only about ₱2.35 million out of a ₱16 million obligation and admitted that their inability to pay was due to dollar shortages and foreign exchange difficulties, not solely because of the questioned interest rates.
Applying the doctrine in UCPB v. Spouses Beluso, the Court ruled that even if the bank’s demand contained excessive amounts, the demand remained valid as to the proper amount due. Consequently, the borrowers were still in default with respect to their unpaid principal obligation. Since the principal debt remained due and demandable, UCPB validly foreclosed the mortgaged properties.
The Court
further noted that the borrowers made no meaningful effort to settle even the
undisputed principal amount despite years of litigation. Their continued
failure to pay justified the foreclosure of the mortgaged properties.
Accordingly, the Court reinstated the validity of the foreclosure sale and
dismissed the borrowers’ petition.