Reformina v. Hon. Tomol and Shell, Inc. and Michael, Inc.

FACTS: On June 7, 1972, judgment was rendered by the CFI in a civil case in favor of the plaintiffs,
ordering defendants and third party plaintiffs Shell and Michael, Inc. to pay jointly and severally
(g)plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of
the boat F B Pacita Ill together with its accessories, fishing gear and equipment minus P80,000.00
which is the value of the insurance recovered and the amount of P10,000.00 a month as the estimated
monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time they are actually paid or
already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the
complaint until paid The CA affirmed but modified the decision.

The said decision having become final on October 24, 1980, the case was remanded to the lower court
for execution. In the computation of the "legal interest" decreed in the judgment sought to be executed,
petitioners claim that the "legal interest" should be at the rate of twelve (12%) percent per annum,
invoking in support of their aforesaid submission, Central Bank of the Philippines Circular No. 416.
Upon the other hand, respondents insist that said legal interest should be at the rate of six (6%) percent
per annum only, pursuant to and by authority of Article 2209 of the New Civil Code in relation to Articles
2210 and 2211 thereof.

ISSUE: W/N the interest to be paid is 6% or 12%? 6%

HELD: Central Bank Circular No. 416 which took effect on July 29, 1974 was issued and promulgated by
the Monetary Board pursuant to the authority granted to the Central Bank by P.D. No. 116, which
amended Act No. 2655, otherwise known as the Usury Law.

Section 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of
interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to
change such rate or rates whenever warranted by prevailing economic and social conditions: Provided,
That such changes shall not be made oftener than once every twelve months

The Monetary Board increased the rate of legal interest from that of 6% per annum originally allowed
under Section I of Act No. 2655 to 12% per annum. It will be noted that Act No. 2655 deals with interest
on (1) loans; (2) forbearances of any money, goods, or credits; and (3) rate allowed in judgments.

ISSUE: what kind of judgment is referred to under the said law?

HELD: The judgments spoken of and referred to are Judgments in litigations involving loans or
forbearance of any 'money, goods or credits. Any other kind of monetary judgment which has
nothing to do with, nor involving loans or forbearance of any money, goods or credits does not
fall within the coverage of the said law for it is not within the ambit of the authority granted to the
Central Bank.

The Monetary Board cannot rewrite other laws. That function is vested solely with the legislative authority.
Statutes should be construed as a whole. A word or phrase in a statute is always used in association with
other words or phrases and its meaning may thus be modified or restricted by the latter.

Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for
Damages for injury to persons and loss of property and does not involve any loan, much less
forbearances of any money, goods or credits. As correctly argued by the private respondents, the law
applicable to the said case is Article 2209 of the New Civil Code which reads

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest agreed
upon, and in the absence of stipulation, the legal interest which is six percent per annum.
The above provision remains untouched despite the grant of authority to the Central Bank by Act No.
2655, as amended. To make Central Bank Circular No. 416 applicable to any case other than those
specifically provided for by the Usury Law will make the same of doubtful constitutionality since the
Monetary Board will be exercising legislative functions which was beyond the intendment of P.D. No. 116.
First Metro Investment v. Este de Sol

FACTS: Petitioner FMIC granted respondent Este del Sol a loan of P7,385,500.00 to finance the
construction and development of the Este del Sol Mountain Reserve, a sports/resort complex project
located at Barrio Puray, Montalban, Rizal.

Under the terms of the Loan Agreement, the proceeds of the loan were to be released on staggered
basis. Interest on the loan was pegged at 16% per annum based on the diminishing balance. The loan
was payable in 36 equal and consecutive monthly amortizations to commence at the beginning of the
thirteenth month from the date of the first release in accordance with the Schedule of Amortization. In
case of default, an acceleration clause was provided and the amount due was made subject to a 20%
one-time penalty on the amount due and such amount shall bear interest at the highest rate
permitted by law from the date of default until full payment thereof plus liquidated damages at the
rate of 2% percent per month compounded quarterly on the unpaid balance and accrued interests
together with all the penalties, fees, expenses or charges thereon until the unpaid balance is fully paid,
plus attorneys fees.

Respondent Este del Sol executed several documents as security for payment, among them, (a) a Real
Estate Mortgage over 2 parcels of land being utilized as the site of its development project (b) individual
Continuing Suretyship agreements by co-respondents to guarantee the payment of all the obligations of
respondent Este del Sol up to the aggregate sum of P7,500,000 00 each.

Respondent Este del Sol also executed, as provided for by the Loan Agreement, an Underwriting
Agreement whereby petitioner FMIC shall underwrite on a best-efforts basis the public offering of 120,000
common shares of respondent Este del Sols capital stock for a one-time underwriting fee of
P200,000.00 . In addition to the underwriting fee, the Underwriting Agreement provided that for
supervising the public offering of the shares, respondent Este del Sol shall pay petitioner FMIC an annual
supervision fee of P200,000.00 per annum for a period of 4 consecutive years. The Underwriting
Agreement also stipulated for the payment by respondent Este del Sol to petitioner FMIC a consultancy
fee of P332,500.00 per annum for a period of 4 consecutive years. Simultaneous with the execution of
and in accordance with the terms of the Underwriting Agreement, a Consultancy Agreement was also
executed whereby respondent Este del Sol engaged the services of petitioner FMIC for a fee as
consultant to render general consultancy services.

Petitioner billed respondent Este del Sol P200,000.00 as the underwriting fee, P1,330,000.00 as
consultancy fee for a period of 4 years and P200,000.00 as supervision fee for the year beginning
February, 1978. The said amounts of fees were deemed paid by respondent Este del Sol to
petitioner FMIC which deducted the same from the first release of the loan.

Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a revised
Schedule of Amortization, it appeared to have incurred a total obligation of P12,679,630.98. FMIC caused
the extrajudicial foreclosure of the real estate mortgage, which left a balance of P6,863,297.73 on the
principal amount of the loan. Failing to secure from the individual respondents, as sureties of the loan,
petitioner instituted an instant collection suit for the balance plus 21% interest per annum. The trial court
rendered its decision in favor of petitioner FMIC. The appellate court reversed, and declared that the fees
provided for in the Underwriting and Consultancy Agreements were mere subterfuges to camouflage
the excessively usurious interest charged by the petitioner FMIC on the loan of respondent Este
del Sol. The CA ordered FMIC to pay back the excess obtained from the foreclosure removing the
usurious fees of 1.7 M.

ISSUE: W/N the fees were usurious interests? Yes.

HELD: First, Central Bank Circular No. 905 does not apply which took effect on January 1, 1983 and
removed the ceiling on interest rates for secured and unsecured loans, and should not be applied
retroactively to a contract executed on January 31, 1978, as in the case at bar, that is, while the Usury
Law was in full force and effect. It is an elementary rule of contracts that the laws, in force at the time the
contract was made and entered into, govern it. Central Bank Circular No. 905 did not repeal nor in any
way amend the Usury Law but simply suspended the latters effectivity. The illegality of usury is wholly the
creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another law.
Thus, retroactive application of a Central Bank Circular cannot, and should not, be presumed.

Second, when a contract between two (2) parties is evidenced by a written instrument, such document is
ordinarily the best evidence of the terms of the contract. However, the form of the contract is not
conclusive for the law will not permit a usurious loan to hide itself behind a legal form. Parol
evidence is admissible to show that a written document though legal in form was in fact a device to
cover usury. If from a construction of the whole transaction it becomes apparent that there exists a
corrupt intention to violate the Usury Law, the courts should and will permit no scheme, however
ingenious, to becloud the crime of usury.

In the instant case, several facts and circumstances taken altogether show that the Underwriting and
Consultancy Agreements were simply cloaks or devices to cover an illegal scheme employed by
petitioner FMIC to conceal and collect excessively usurious interest:

a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is the same
date of the Loan Agreement. Furthermore, under the Underwriting Agreement payment of the supervision
and consultancy fees was set for a period of four (4) years to coincide ultimately with the term of the Loan
Agreement.

b) The Loan Agreement stipulated for the execution and delivery of an underwriting agreement, which is a
condition precedent for petitioner FMIC to extend the loan to respondent Este del Sol, indicating that such
Underwriting Agreement is part and parcel of the Loan Agreement.

c) Respondent Este del Sol was billed P1,330,000.00 as consultancy fee despite the clear provision in the
Consultancy Agreement that the said agreement is for P332,500.00 per annum for four (4) years and that
only the first year consultancy fee shall be due upon signing of the said consultancy agreement.

d) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any share of
stock of respondent Este del Sol and much less to supervise such a syndicate, thus failing to comply with
its obligation under the Underwriting Agreement.

e) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement, aside from the
fact that there was no need for a Consultancy Agreement, since respondent Este del Sols officers
appeared to be more competent to be consultants in the development of the projected sports/resort
complex.

f) It is from the first partial release of the loan that the bills for Underwriting, Supervision and Consultancy
fees were deducted and apparently paid, thus, reverting back to petitioner FMIC the total amount of
(P1,730,000.00) as part of the amount loaned to respondent Este del Sol.

Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the
laws against usury shall be void. The borrower may recover in accordance with the laws on usury.

In usurious loans, the entire obligation does not become void because of an agreement for
usurious interest; the unpaid principal debt still stands and remains valid but the stipulation as to
the usurious interest is void, consequently, the debt is to be considered without stipulation as to
the interest. Thus, the nullity of the stipulation on the usurious interest does not affect the lenders right to
receive back the principal amount of the loan.
David v. CA
FACTS: The RTC issued a writ of attachment over real properties covered by TCT Nos. 80718 and 10289
of private respondents. The judge also ordered private respondent Afable to pay petitioner
P66,500.00 plus interest from July 24, 1974, until fully paid, plus P5,000.00 as attorneys fees, and to
pay the costs of suit. On June 20, 1980, however, Judge Diaz issued an Order amending said Decision,
so that the legal rate of interest should be computed from January 4, 1966, instead of from July 24,
1974. This decision was affirmed by both the CA and the SC.

Upon petitioners motion, respondent Judge issued an Alias Writ of Execution by virtue of which
respondent Sheriff Pea conducted a public auction. Sheriff Pea informed the petitioner that the total
amount of the judgment is P270,940.52. The amount included a computation of simple interest.
Petitioner, however, claimed that the judgment award should be P3,027,238.50, because the
amount due ought to be based on compounded interest.

Although the auctioned properties were sold to the petitioner, Sheriff Pea did not issue the Certificate of
Sale because there was an excess in the bid price in the amount of P2,941,524.47, which the
petitioner failed to pay despite notice. This excess was computed on the basis of petitioners bid price
of P3,027,238.50 minus the amount of P270,940.52 computed in the judgment award.

Petitioner filed a motion to order respondent Sheriff Pea to prepare and execute a certificate of sale in
favor of the petitioner, placing therein the amount of the judgment as P3,027,238.50, the amount he bid
during the auction which he won. His reason is that compound interest, which is allowed by Article 2212
of the Civil Code, should apply in this case. This motion was denied.

In accordance with CB Circular No. 416 and as construed in Reformina vs. Tomol, legal interest on
P66,500.00 corresponds to 6% per annum for the period January 4, 1966 to July 28, 1974 and 12% per
annum from July 29, 1974 up to April 26, 1993, amounting to P34,180.92 and P149,582.32, respectively,
or a grand total of P183,763.24.

ISSUE: W/N simple interest only should be paid?

HELD: This Court has interpreted Article 2212, and defined the standards for its application in Philippine
American Accident Insurance vs. Flores. Article 2212 contemplates the presence of stipulated or
conventional interest which has accrued when demand was judicially made. In cases where no
interest had been stipulated by the parties, no accrued conventional interest could further earn
interest upon judicial demand. When the judgment sought to be executed ordered the payment of
simple interest only and said nothing about payment of compound interest, but the respondent judge
orders payment of compound interest, then, he goes beyond the confines of a final judgment.

Note that in the case now before us, the Court of Appeals made the factual finding that . . . no interest
was stipulated by the parties. In the promissory note denominated as Compromise Agreement signed by
the private respondent which was duly accepted by petitioner no interest was mentioned. In his complaint,
petitioner merely prayed that defendant be ordered to pay plaintiff the sum of P66,500.00 with interest
thereon at the legal rate from the date of the filing of the complaint until fully paid.

In the present case, after the case was remanded to the lower court, petitioner filed a motion for the
issuance of an alias Writ of Execution. The motion was only finally resolved on July 5, 1993. When
Central Bank Circular No. 416 took effect on July 29, 1974, the suit was still pending. Hence, when
respondent Judge ordered the computation of legal interest for the execution of the amended order, he
correctly took judicial notice of the Courts pronouncement in Reformina vs. Tomol, Jr. In Reformina, the
Court applied Central Bank Circular No. 416 which took effect on July 29,1974, pursuant to P.D. 116,
amending Act. 2655 (Usury Law) and raising the legal rate of interest from 6% to 12% per annum.
Respondent Judge followed Reformina and did not err in modifying the Order of October 31, 1979. The
passage of the Central Bank Circular No. 416 was a supervening event which happened after the
decision had become executory. Had respondent Judge failed to order the assailed amendment, the
result would have been iniquitous.
Investors v. Autoworld
FACTS: Petitioner Investors Finance Corporation, then known also as FNCB Finance (now Citytrust
Finance Corporation), is a financing company doing business with private respondent Autoworld Sales
Corporation.Anthony Que, president of AUTOWORLD, also held the same position at its affiliate
corporation, private respondent Pio Barretto Realty Corporation (BARETTO).

Anthony Que, president, in behalf of AUTOWORLD, applied for a direct loan with FNCB. However, since
the Usury Law imposed an interest rate ceiling at that time, FNCB informed Anthony Que that it was not
engaged in direct lending; consequently, AUTOWORLD's request for loan was denied. But sometime
thereafter, FNCB informed Anthony Que that although it could not grant direct loans it could extend
funds to AUTOWORLD by purchasing any of its outstanding receivables at a discount. The parties
agreed to execute an Installment Paper Purchase ("IPP") transaction to enable AUTOWORLD to
acquire the additional capital it needed.

The parties signed three (3) contracts as agreed upon to implement the IPP transaction:

(1) Contract to Sell whereby BARRETTO sold a parcel of land to AUTOWORLD for the price of
P12,999,999.60 payable in sixty (60) consecutive and equal monthly installments of P216,666.66.

(2) Deed of Assignment whereby BARRETTO assigned and sold in favor of FNCB all its rights, title and
interest to all the money and other receivables due from AUTOWORLD under the Contract to Sell,
subject to the condition that the assignee (FNCB) has the right of recourse against the assignor
(BARRETTO) in the event that the payor (AUTOWORLD) defaulted in the payment of its obligations.

(3) Real Estate Mortgage whereby BARRETTO, as assignor, mortgaged the property subject of the
Contract to Sell to FNCB as security for payment of its obligation under the Deed of Assignment.

After the 3 contracts were concluded AUTOWORLD started paying the monthly installments to FNCB.

AUTOWORLD transacted with FNCB for the second time obtaining a loan of P3,000,000.00 with an
effective interest rate of 28% per annum. AUTOWORLD and BARRETTO, as co-makers, then signed a
promissory note in favor of FNCB worth P5,604,480.00 payable in 60 consecutive monthly installments of
P93,408.00. To secure the promissory note, AUTOWORLD mortgaged a parcel of land located in
Sampaloc, Manila, to FNCB. Thereafter, AUTOWORLD began paying the installments.

After paying 19 monthly installments of P216,666.66 on the first transaction and 3 monthly installments of
P93,408.00 on the second transaction, AUTOWORLD advised FNCB that it intended to preterminate
the 2 transactions by paying their outstanding balances in full. FNCB sent AUTOWORLD its
computation requiring it to pay a total amount of P10,026,736.78, where P6,784,551.24 was the amount
to settle the first transaction while P3,242,165.54 was the amount to settle the second transaction.
AUTOWORLD reluctantly paid after stating its disagreement.

According to AUTOWORLD, it overpaid P2,586,035.44 to settle the first transaction and P418,262.00
to settle the second transaction, and asked for a refund.

AUTOWORLD to file an action before the RTC of to annul the Contract to Sell, the Deed of Assignment
and the Real Estate Mortgage. It likewise prayed for the nullification of the Promissory Note and the Real
nd
Estate Mortgage for the 2 transaction. The RTC ruled in favor of FNCB declaring that the parties
voluntarily and knowingly executed a legitimate "IPP" transaction or the discounting of receivables. The
Court of Appeals modified the decision of the trial court and concluded that the IPP transaction,
st
comprising of the 3 contracts perfected (1 transaction), was merely a scheme employed by the parties to
disguise a usurious loan, ordering FNCB to reimburse AUTOWORLD P2,586,035.44 as excess interest
payments over the 12% ceiling rate.
st
ISSUE: whether the 3 contracts for the 1 transaction were executed to implement a legitimate IPP
transaction or merely to conceal a usurious loan.

HELD: Generally, the courts only need to rely on the face of written contracts to determine the intention of
the parties. However, the law will not permit a usurious loan to hide itself behind a legal form. Parol
evidence is admissible to show that a written document though legal in form was in fact a device to cover
usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt
intention to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to
becloud the crime of usury.

The following circumstances show that such scheme was indeed employed:

First, Petitioner claims that it was never a party to the Contract to Sell between AUTOWORLD and
BARRETTO, and it merely purchased receivables at a discount. Petitioner admitted that its lawyers were
the ones who drafted all the 3 contracts involved which were executed on the same day. Also, petitioner
was the one who procured the services of the Asian Appraisal Company to determine the fair market
value of the land to be sold way back 6 months prior to the sale. If it were true that petitioner was never
privy to the Contract to Sell, then why was it interested in appraising the lot six (6) months prior to the
sale? Obviously, petitioner actively participated in the sale to ensure that the appraised lot would
serve as adequate collateral for the usurious loan it gave to AUTOWORLD.

Second, petitioner insists that the transaction was a legitimate IPP transaction where it only bought the
receivables of BARRETTO from AUTOWORLD amounting to P12,999,999.60 at a discounted price of
P6,980,000.00. However, per instruction of petitioner the whole purchase price of the receivables was to
be "flowed back" to AUTOWORLD. Petitioner also gave instructions on how BARRETTO should apply the
proceeds worth P6,980,000.00.

The foregoing circumstances confirm that the P6,980,000.00 was really an indirect loan extended to
AUTOWORLD so that it could settle its previous debts to petitioner. Had petitioner entered into a
legitimate purchase of receivables, then BARRETTO, as seller, would have received the whole purchase
price, and free to dispose of such proceeds in any manner it wanted. It would not have been obliged to
follow the "Application of Proceeds" stated in petitioners letter.

Third, petitioner itself designated the proceeds of the "IPP" transaction as a loan. In that letter, petitioner
stated that the loan proceeds amounting to P6,980,000.00 would be released to BARRETTO only upon
submission of the documents it required. And as previously mentioned, one of the required documents
was a letter agreement between BARRETTO and AUTOWORLD stipulating that the P6,980,000.00
should be flowed back to AUTOWORLD. If it were a genuine IPP transaction then petitioner would not
have designated the money to be released as loan proceeds and BARRETTO would have been the end
recipient of such proceeds with no obligation to turn them over to AUTOWORLD.

Fourth, after the interest rate ceilings were lifted on 21 July 1981 petitioner extended on 18 June 1982 a
direct loan of P3,000,000.00 to AUTOWORLD. This time however, with no more ceiling rates to hinder it,
petitioner imposed a 28% effective interest rate on the loan. Had there been no interest rate ceilings in
1981, petitioner would not have resorted to the fictitious IPP transaction

Indeed, the Usury Law recognizes the legitimate purchase of negotiable mercantile paper by innocent
purchasers. But even the law has anticipated the potential abuse of such transactions to conceal usurious
loans. Thus, the law itself made a qualification. It would recognize legitimate purchase of negotiable
mercantile paper, whether usurious or otherwise, only if the purchaser had no intention of
evading the provisions of the Usury Law and that the purchase was not a part of the original usurious
transaction. Otherwise, the law would not hesitate to annul such contracts. Thus, Art. 1957 of the Civil
Code provides Contracts and stipulations, under any cloak or device whatever, intended to circumvent
the laws on usury shall be void. The borrower may recover in accordance with the laws on usury. These
contracts should therefore be declared void.
In usurious loans, the creditor can always recover the principal debt. However, the stipulation on the
interest is considered void thus allowing the debtor to claim the whole interest paid. In a loan of P1,000.00
with interest at 20% per annum or P200.00 per year, if the borrower pays P200.00, the whole P200.00
would be considered usurious interest, not just the portion thereof in excess of the interest allowed by
law.

Applying the 12% interest ceiling rate mandated by the Usury Law, AUTOWORLD should have only paid
a total of P1,605,400.00 in interests. Hence, AUTOWORLD is entitled to recover the whole usurious
interest amounting to P3, 921,217.78.

Under Sec. 6 of the Usury Law, AUTOWORLD is also entitled to reasonable attorneys fees and costs -

SEC. 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall have
paid or delivered a higher rate or greater sum or value than is hereinbefore allowed, to be taken or
received, may recover the whole interest, commission, premiums, penalties and surcharges paid or
delivered with costs and attorneys fees in such sum as may be allowed by the court in an action
against a person or corporation who took or received them if such action is brought within two years after
such payment or delivery.

Although the Court has discretion to fix the amount of attorney's fees, it has no discretion to deny
it altogether.

Quite obviously, Anthony Que, the President of AUTOWORLD, actively and knowingly participated in the
execution of the usurious loan transaction. As a seasoned businessman he must have been aware of the
consequences of his business dealings. But, although we find his actions

extremely reprehensible, we must abide by the principle laid down in Go Chioco v. Martinez where we
held that the pari delicto rule does not apply to usury cases which entitle the borrower to recover
the whole interest paid; otherwise, the avowed policy of discouraging usurious transactions would not
be served, for the mere invocation of the pari delicto rule would allow the usurer to reap the benefits of his
unlawful act.