FACTS:

This case involves a dispute between the petitioner bank, Consolidated Bank and Trust Corporation (Solidbank), and the private respondents, George King Tim Pua and George and George Trade, Inc. George King Tim Pua obtained six separate loans from the bank on different dates. These loans were payable on specific dates and had a 14% interest rate compounded monthly in case of default. Additionally, Pua agreed to pay attorney's fees and a penalty interest of 3% per annum.

Later, George King Tim Pua, on behalf of George and George Trade, Inc., also obtained three loans from the bank. These loans had interest charges and penalties in case of default. To secure the payment of his personal obligation, Pua assigned the proceeds of a fire insurance policy to the bank. The insurance proceeds fully satisfied his personal obligations.

The bank claimed that after deducting the entirety of Pua's personal account from the insurance proceeds, there remained a balance which was then applied to the unpaid loans of George and George Trade, Inc., leaving a balance.

Petitioner filed an action against the private respondents for the recovery of the unpaid balances on the promissory notes. The trial court ruled in favor of the bank, but the Court of Appeals reversed the decision. The issue in this petition is whether private respondents are indebted to the bank in a certain amount or if they are entitled to reimbursement from the bank in a different amount.

ISSUES:

1. Whether the interest rate of 14% charged by the petitioner is within the limits set by the Usury Law.

2. Whether the charging of compounded interest is proper.

3. Whether the petitioner is authorized to collect handling charges on loans over P500,000.00.

4. Whether the petitioner bank can charge the private respondents handling charges.

5. Whether the payment of penalty imposed by the petitioner is reasonable and proper.

6. Whether the stipulation of attorney's fees in the promissory notes is enforceable.

RULING:

1. The 14% interest rate charged by the petitioner is within the limits set by Section 3 of the Usury Law, as amended.

2. The charging of compounded interest is proper as long as the payment thereof has been agreed upon by the parties. In this case, the respondents agreed to the payment of 14% interest per annum, compounded monthly, in case they fail to pay the principal loan on the date of maturity.

3. The petitioner is authorized to collect handling charges on loans over P500,000.00, as stated under Central Bank Circular No. 504.

4. The petitioner bank cannot charge the private respondents handling charges as the promissory notes signed by the private respondents do not contain any stipulation on the payment of handling charges.

5. The payment of penalty imposed by the petitioner is considered reasonable and proper as it was provided for under the terms and conditions of the promissory notes.

6. The stipulation of attorney's fees in the promissory notes is only enforceable if the petitioner was compelled to litigate with third persons or incur expenses to protect its interest. Since neither of these conditions are present in the case, the private respondents are not obligated to pay attorney's fees.

PRINCIPLES:

• The interest rate charged must be within the limits set by the Usury Law.

• Compounded interest can be charged if agreed upon by the parties.

• Banks are authorized to collect handling charges on loans over a certain amount, in accordance with Central Bank regulations.

• The payment of penalty is sanctioned by law, although it may be reduced if it is iniquitous or unconscionable.

• A stipulation regarding the payment of attorney's fees is enforceable as long as it does not contravene law, good morals, good customs, public order, or public policy.

• The award of attorney's fees lies within the discretion of the court and must be justified by factual, legal, and equitable justification. The reason for the award must be stated in the text of the court's decision.