Exorbitant

This is a case involving a loan secured by a real estate mortgage with an alleged iniquitous or unconscionable interest and penalty. This is the case of Yoly, a businesswoman operating a poultry farm.

To finance the construction of two broiler houses and a feeds warehouse, Yoly obtained a loan of P1.1 million from the Land Bank of the Philippines (LBP) on April 21, 1993. The loan was secured by a mortgage of a parcel of land titled in Yoly’s name to bear interest based on the prevailing lender’s rates/special financing rate and penalty charge of 12% per annum in case of default in the settlement thereof.

After making partial payments on the loan, Yoly suffered business losses due to poor quality of feeds supplied to her. So she and the bank executed a Restructuring Agreement on April 18, 1996 wherein Yoly agreed to pay her outstanding loan then already amounting to P1,171,467.18 by making an “up front” payment of P300,625.55 to cover partial payment of principal and settle the penalty and interest. The balance of the loan in the sum of P840,843.63 shall be payable in quarterly amortization with interest at 17% per annum. Failure to pay two consecutive quarterly amortizations shall be sufficient ground to initiate foreclosure proceedings.

Since Yoly likewise defaulted in the payment of the amortization, LBP initiated foreclosure proceedings. While Yoly sought to stop the foreclosure by filing a case in court, the public auction sale of her land still proceeded because her petition for preliminary injunction was denied. Thus Yoly amended her complaint by also praying for the annulment of the foreclosure proceeding and the Certificate of Sale on the ground that the amount for which LBP sought to have the property sold at public auction is mostly an accumulation of usurious interest.

The lower court however dismissed her complaint. But on appeal to the Court of Appeals (CA), the lower court’s decision was modified by declaring the foreclosure sale of Yoly’s property null and void although she was ordered to pay the principal amount of P592,792.42. The CA found the interest rate of 17% per annum and the penalty charge of 12% per annum exorbitant and thus reduced them to 12% per annum and 5% per annum respectively. Was the CA correct?

Yes. Jurisprudence empowers courts to equitably reduce interest rates and the law (Article 1229 Civil Code) empowers them to reduce penalty charges when the principal obligation has been partly complied with, or even if there is no partial performance, if it is iniquitous or unconscionable.

Whether an interest rate or penalty charge is iniquitous or unreasonable is addressed to the sound discretion of the court depending on the circumstances of each case. In the case at bar, the purpose of the loan was to finance the construction of the two broiler houses and feeds warehouse. Under the Agriculture and Fisheries Modernization Act of 1997 the LBP mandate is to deliver credit services to the agriculture and fisheries sectors especially small farmers and fisherfolk. The loan extended to Yoly was part of that social assistance program to improve the plight of farmers. In this case, since Yoly’s profits greatly diminished due to poor quality of feeds and coupled with the fact that she had nevertheless made partial payments on both the original and restructured loan, the reduction of the interest rate and penalty charge is justified.

While the nullity of the interest rate and penalty charges does not affect LBP’s right to recover the principal amount of the loan, the public auction of the mortgaged property is nevertheless null and void because the amount indicated as mortgage indebtedness included excessive, iniquitous and exorbitant interest rate and penalty charge. So the foreclosure proceeding cannot be given effect (Land Bank of the Philippines vs. David, G.R. 176344, August 22, 2008).

Note: Books containing compilation of my articles on Labor Law and Criminal Law (Vols. I and II) are now available. Call tel. 7249445.

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