FACTS : On April 30, 1999, Vasudave Sabnani obtained a ₱7,450,000.00 loan from Estrella Pabalan, secured by two Promissory Notes (PNs) and a Real Estate Mortgage (REM) over his condominium unit. The loan carried monthly interest rates of 8% and 5%, with additional provisions imposing 20% monthly default interest, 20% penalty interest, 50% liquidated damages, and 25% attorney’s fees in case of default. After Sabnani failed to pay the installment due on May 31, 1999, Pabalan demanded payment and, upon continued default, initiated the extrajudicial foreclosure of the mortgaged property. Despite Sabnani’s suit to annul the REM, PNs, and foreclosure sale and his application for injunctive relief, the RTC denied the application, allowing the foreclosure to proceed, where Pabalan emerged as the highest bidder.
Sabnani later amended his complaint, alleging that Pabalan made unauthorized deductions from the loan proceeds, including service fees and other charges, such that he actually received only ₱6,447,700.00 instead of the full loan amount. He argued that these deductions should have been applied to the payment of interest, thereby preventing his default and rendering the foreclosure premature. He likewise claimed that the loan documents lacked consideration because he merely acted as an accommodation borrower for his business partner, and that the stipulated interest rates, penalties, and charges were illegal, excessive, and unconscionable. During the proceedings, he also questioned Pabalan’s legal capacity to engage in lending, alleging that she was an American citizen not authorized to conduct a financing business in the Philippines.
The RTC dismissed Sabnani’s complaint, upholding the validity of the loan documents and the foreclosure sale. It ruled that the deductions were authorized, as evidenced by Sabnani’s signed receipt acknowledging full receipt of the loan proceeds, and held that the agreed interest rates and penalties were enforceable because the Usury Law had been suspended, allowing parties to freely stipulate interest. Although the RTC granted a new trial upon Sabnani’s motion, it ultimately reinstated its original decision. On appeal, the Court of Appeals affirmed the validity of the loan, the REM, and the foreclosure proceedings, but reduced the stipulated interest rates, penalty charges, liquidated damages, and attorney’s fees, finding them iniquitous and unconscionable.
ISSUE : WON CA erred: (1) in reducing the stipulated rates of interest, penalty charges, liquidated damages, and attorney's fees; and (2) in ordering Pabalan to return the surplus of her winning bid price to Sabnani
HELD : The Supreme Court granted the petition and reinstated the RTC's ruling, holding that the stipulated interest rates, penalty charges, liquidated damages, and attorney's fees were valid and enforceable under the circumstances. While Central Bank Circular No. 905 (1982) suspended the Usury Law, the Court emphasized that Article 1306 of the Civil Code still limits the freedom to contract by prohibiting stipulations contrary to law, morals, good customs, public order, or public policy. Citing Vitug v. Abuda, the Court explained that the unconscionability of interest rates depends on the circumstances of each case, particularly whether the parties negotiated on equal footing. It also discussed DBP v. Family Foods, Toledo v. Hyden, Prisma Construction v. Menchavez, and Lara's Gifts and Decors v. Midtown Industrial Sales, recognizing that although courts may reduce unconscionable interest rates, intervention is unwarranted where the parties voluntarily agreed to the terms without fraud, coercion, or unequal bargaining power.
The Court found that Sabnani and Pabalan dealt on equal footing. Sabnani was an experienced British businessman with substantial investments and valuable assets in the Philippines, while Pabalan was likewise an established businesswoman. The loan was not obtained out of financial distress but as a short-term business accommodation to facilitate Claparols' investment in Sabnani's project. Before executing the loan documents, Sabnani knowingly secured two BPI checks from Claparols to cover both the loan obligation and the possible foreclosure of his condominium, demonstrating his full awareness of the interest rates, penalties, and risks involved. Having voluntarily entered into the agreement and benefited from the loan proceeds, Sabnani was estopped from later challenging the validity of the loan terms. Consistent with Article 1159 of the Civil Code, which provides that obligations arising from contracts have the force of law between the parties and must be complied with in good faith, the Court ruled that the parties were bound by their express stipulations.
Accordingly, the Court held that the stipulated interest rates, penalties, liquidated damages, and attorney's fees were not unconscionable, iniquitous, or illegal under the peculiar facts of the case. The CA erred in reducing these charges and in ordering Pabalan to return the alleged surplus from the foreclosure sale. Since the foreclosure bid correctly reflected the parties' valid contractual stipulations, there was no surplus to return. Thus, the Court granted the petition, reversed and set aside the CA Decision and Resolution, deleted the reduction of the stipulated charges and the award of the alleged excess bid price to Sabnani, and reinstated in full the RTC Decision upholding the validity of the loan, mortgage, promissory notes, and foreclosure sale.
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