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L.M. HANDICRAFT MANUFACTURING CORPORATION v. CA

FACTS:

Allied Banking Corporation filed a complaint to collect sums of money with damages against L.M. Handicraft Manufacturing Corporation, Leovigildo M. Diapo, Jr., Virgilita M. Diapo, and Leonora Q. Mabasa. The complaint was based on 20 promissory notes executed by L.M. Handicraft Manufacturing Corporation and guaranteed by the three individuals, which were either not paid or not fully paid despite formal demands. The trial court rendered a decision in favor of Allied Banking Corporation, ordering the defendants to pay the plaintiff the amounts due with interests, service charges of 2% per month, and penalty charges of 1% per month from the date of filing the complaint. Both parties appealed the case to the Court of Appeals. The appellate court affirmed the decision of the trial court but deleted the stipulated service and penalty charges.

ISSUES:

  1. Whether the promissory notes and guaranty agreements are valid and enforceable.

  2. Whether the Court of Appeals erred in deleting the payment of service and penalty charges.

  3. Whether the Allied Banking Corporation is entitled to attorney's fees.

RULING:

  1. The Court ruled that the promissory notes and guaranty agreements are valid and enforceable. The defendants failed to substantiate their defense of fraud, bad faith, and undue influence on the part of the bank. The defendants also offered a settlement of their outstanding obligation, which effectively admitted their liability.

  2. The Court further ruled that the Court of Appeals erred in deleting the payment of service and penalty charges. The defendants agreed to pay a penalty of 1% of the amounts due for every month that the loan remains unpaid, as stated in the promissory notes. However, the service charge should only be 2% per annum instead of 2% per month as ordered by the trial court. The Court cited Central Bank Circular No. 504, which allows a maximum 2% service charge on a per annum basis for loans not exceeding P500,000.

  3. Lastly, the Court awarded attorney's fees to Allied Banking Corporation but reduced it to only P5,000 instead of the requested 25% of the total amount due and outstanding.

PRINCIPLES:

  • Promissory notes and guaranty agreements are valid and enforceable.

  • Service and penalty charges stated in writing in the contract must be paid if agreed upon by the parties.

  • The service charge should be computed at a maximum of 2% per annum for loans not exceeding P500,000.

  • Attorney's fees may be awarded based on what is just and reasonable under the circumstances.