UNITED COCONUT PLANTERS BANK, substituted by LAND BANK OF THE PHILIPPINES, Petitioner, – versus – EDITHA F. ANG and VIOLETA M. FERNANDEZ, Respondents. (G.R. No. 222448, Resolution promulgated March 03, 2025) (CASE DIGEST)

Facts

The case stemmed from an extrajudicial foreclosure sale conducted on August 2, 1999. The underlying dispute concerned the loan granted to the respondents, Editha F. Ang and Violeta M. Fernandez, wherein the interest rates imposed were contested. It was established that the interest rates were imposed unilaterally by the petitioner (UCPB), rendering them unlawful, unconscionable, and violative of the principle of mutuality of contracts. Consequently, the Credit Agreement and other loan documents relative to the loan were deemed null and void for being potestative in character.

Issues

1. Whether or not the foreclosure proceedings due to non-payment of the loan may be held valid, given that the interest rates imposed by the lender were proven to be improper and unlawful.
2. Whether the doctrine established in previous jurisprudence (like Spouses Andal) denying the nullity of foreclosure based purely on usurious interest rates should apply when the interest rates were unconscionable or unilaterally imposed by the bank.

Ruling

“ACCORDINGLY, the instant Motion for Reconsideration is GRANTED. The Decision dated November 24, 2021, finding for petitioner United Coconut Planters Bank in the instant case is hereby VACATED and in lieu thereof, a new one is entered AFFIRMING IN TOTO the Decision dated May 11, 2015 of the Court of Appeals in CA-G.R. CV No. 04270. SO ORDERED.”

Essential Elements of Jurisprudence

The controlling doctrine revolves around the interplay between void interest stipulations, the principle of mutuality of contracts, and the subsequent validity of foreclosure:

1. Unconscionable Interest is Void: The imposition of an unconscionable rate of interest is repugnant to stipulation, unlawful, and unjust. Stipulations authorizing iniquitous or unconscionable interests are deemed inexistent and void ab initio for being contrary to morals, pursuant to Article 1409 of the Civil Code.
2. Mutuality of Contracts: The interest rates imposed unilaterally by the petitioner are void because they are potestative and violate the principle of mutuality of contracts (Articles 1308 and 1309 of the Civil Code).
3. Effect of Void Interest on Principal and Foreclosure:
   • While the nullity of the stipulation of usurious interest does not automatically affect the lender’s right to recover the principal of a loan, the right to foreclose subsists only if the debtor fails to pay the debt due.
   • However, foreclosure proceedings may not be instituted when the debtor was not given an opportunity to settle the debt at the correct amount due to the imposition of a null and void interest rate scheme.
   • In situations where the interest rates are found to be unconscionable or unilaterally imposed by the petitioner, the subsequent foreclosure proceedings must be annulled. The registration of such a foreclosure sale is invalid and cannot vest title over the mortgaged property.

Sample Q&A

Question: Bank UCPB foreclosed a real estate mortgage after the borrower failed to pay the outstanding debt. It was later determined by the Supreme Court that the interest rates stipulated in the loan agreement were unilaterally imposed by UCPB, making them void ab initio. Was the subsequent foreclosure sale valid? Explain, citing the relevant provisions of law.

Answer: No, the subsequent foreclosure sale is void and must be annulled.

The Supreme Court established that when interest rates are unconscionable or unilaterally imposed by the lender, they are potestative and violate the principle of mutuality of contracts. This renders the interest stipulations void ab initio for being contrary to morals and law, pursuant to Article 1409 (Void Contracts) and Articles 1308 and 1309 (Mutuality of Contracts) of the Civil Code.

Jurisprudence dictates that no foreclosure proceedings may be instituted where the debtor was prevented from settling his or her debt at the correct amount due to the imposition of a null and void interest rate scheme. Since the underlying obligation demanded was overstated by the inclusion of void and unilateral interest rates, the debtor was not in default on the true, legal obligation, and thus, the foreclosure based on that void amount is invalid and cannot vest title over the mortgaged property.

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