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CATALINA F. ISLA v. GENEVIRA P. ESTORGA

FACTS:

Petitioners Catalina F. Isla, Elizabeth Isla, and Gilbert F. Isla obtained a loan in the amount of P100,000.00 from respondent Genevira P. Estorga. The loan was payable anytime from six months to one year and subject to an interest rate of ten percent per month. As security, a real estate mortgage was constituted over a parcel of land in Pasay City. When petitioners failed to pay the loan, respondent sought assistance from the barangay and an agreement was executed. However, petitioners still failed to comply with the agreement, prompting respondent to send a demand letter. Petitioners again failed to comply, leading to a Petition for Judicial Foreclosure filed against them.

Petitioners argued that the subject mortgage was not a real estate mortgage but a mere loan and that the interest rate was exorbitant and unconscionable. They also claimed that they could not have validly constituted the mortgage since they were not the absolute owners of the subject property. The Regional Trial Court (RTC) ruled in favor of respondent, granting the Petition for Judicial Foreclosure and ordering petitioners to pay the loan with interest and attorney's fees. On appeal, the Court of Appeals (CA) affirmed the RTC decision with modifications. Petitioners filed a petition for review on certiorari disputing the CA's ruling on the interest rate and attorney's fees.

ISSUES:

  1. Whether the CA erred in awarding twelve percent interest on the principal obligation until full payment and attorney's fees.

  2. Whether the applicable interest rate on the loan is six percent (6%) per annum or twelve percent (12%) per annum.

  3. Whether the Court of Appeals (CA) correctly imposed a straight monetary interest rate of 12% per annum on the principal loan obligation of the petitioners to the respondent.

  4. Whether the CA properly awarded attorney's fees.

RULING:

  1. The petition is partly meritorious. The argument of the petitioners regarding the interest rate is untenable. There are two types of interest: monetary interest and compensatory interest. Monetary interest is the compensation fixed by the parties, while compensatory interest is imposed by law or courts as a penalty or indemnity for damages. The right to recover interest arises either from a contract or by law. In this case, the interest rate of twelve percent per annum imposed by the CA is valid. However, the award of attorney's fees is not supported by factual justification and should be deleted.

  2. The applicable interest rate on the loan is twelve percent (12%) per annum. The courts found the stipulated interest rate of ten percent (10%) per month to be unconscionable and struck it down. They then applied the prevailing legal rate of interest at the time the loan was contracted, which was twelve percent (12%) per annum. The legal rate of interest is deemed to persist regardless of shifts in the legal rate.

  3. The CA correctly imposed a straight monetary interest rate of 12% per annum on the principal loan obligation of the petitioners to the respondent, reckoned from the date of extrajudicial demand until finality of the ruling. The principal amount and monetary interest due shall also earn compensatory interest at the legal rate of 12% per annum from judicial demand, i.e., the date of the filing of the complaint, until June 30, 2013, and thereafter, at the rate of 6% per annum until fully paid.

  4. The CA failed to clearly state the reasons for awarding attorney's fees in the body of its decision, hence the proper remedy is to delete the award.

PRINCIPLES:

  • There are two types of interest, monetary interest and compensatory interest.

  • The parties are free to stipulate their preferred interest rate, but courts may equitably temper excessive, iniquitous, unconscionable, and/or exorbitant interest rates.

  • The legal rate of interest is the presumptive reasonable compensation for borrowed money when the parties failed to specify the interest rate.

  • If a written instrument fails to specify an interest rate, the legal rate of interest shall apply, which is currently six percent (6%) per annum.

  • The legal rate of interest, when applied as conventional interest, shall always be the legal rate at the time the agreement was executed and shall not be susceptible to shifts in the rate.

  • The Court can impose a straight monetary interest rate on a loan obligation or forbearance of money at a rate fixed or ascertainable by law or contract (ECE Realty, Inc. v. Guevarra, G.R. No. 191544, December 5, 2018).

  • Article 2212 of the Civil Code provides that interest due shall earn legal interest from the time it is judicially demanded, even if the obligation is silent on the matter. Thus, both the principal amount and the monetary interest due shall earn compensatory interest at the legal rate upon judicial demand (Spouses Angeles v. Land Bank of the Philippines, G.R. No. 172609, April 7, 2014).

  • Attorney's fees cannot be recovered as part of damages unless there is factual, legal, and equitable justification for their award (Estate of Mota v. Serra, G.R. No. 199839, January 30, 2019). The reasons for awarding attorney's fees must be clearly stated in the body of the decision, and not merely in the dispositive portion (Sarmiento v. Court of Appeals, G.R. No. 124860, June 20, 2001).