FULL TITLE: DARIO NACAR VS.
GALLERY FRAMES AND/OR Supreme Court arguing that the computation of the backwages must be
FELIPE BORDEY, JR.,
STATEMENT OF FACTS Petitioner Dario Nacar filed a complaint before
the NLRC for constructive dismissal against respondents Gallery Frames
and/or Felipe Bordey, Jr. In 1998, the Labor Arbiter ruled in favor of Nacar
and ordered the respondents to pay backwages and separation pay in lieu of
reinstatement in the amount of P158,919.92. Upon appeal to the NLRC, the
decision of the Labor Arbiter was affirmed. Respondents thereafter filed a
petition for review on certiorari before the CA which dismissed the petition.
When the case was brought before the Supreme Court, the same was denied
and the decision became final and executory.
STATEMENT OF THE CASE In 2002, Nacar filed a motion for Correct
Computation praying that the award of backwages be computed from
January 24, 1997, when he was illegally dismissed, until the finality of the
judgment of the Supreme Court in May 27, 2002. The NLRC came up with
the amount of P471,320.31 but when a writ of execution was ISSUEd, the
respondents filed a Motion to Quash arguing that since the Labor Arbiter
awarded separation pay and backwages, and its decision has already attained
finality, it can no longer be amended or altered. The records of the case were
again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be
in the total amount of only P147,560.19. On January 14, 2003, the Labor
Arbiter ISSUEd an Alias Writ of Execution to satisfy the judgment award
that was due to petitioner in the amount of P147,560.19. Petitioner then filed
a Manifestation and Motion praying for the re-computation of the monetary
award to include the appropriate interests. On May 10, 2005, the Labor
Arbiter ISSUEd an Ordergranting the motion, but only up to the amount of
P11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998
decision that should be enforced considering that it was the one that became
final and executory. Petitioner then appealed before the NLRC,which appeal
was denied in its Resolutiondated September 27, 2006. Aggrieved, petitioner
then sought recourse before the CA but to no avail. It ruled that since
petitioner no longer appealed the October 15, 1998 Decision of the Labor
Arbiter, which already became final and executory, a belated correction
thereof is no longer allowed. Petitioner appealed the decision before the
reckoned from May 27, 2002, when the resolution of the Court was entered
into the Book of Entries, not when the decision of the Labor Arbiter was
promulgated. Petitioner further claims that respondents should pay interest
from the finality of the decision until full payment is made.
ISSUE/s Whether or not respondents are liable to pay interest.
RULING Yes. The respondents did not immediately pay or comply with the
decision of the Labor Arbiter and instead continued with the litigation until
the decision attained finality at the CA level. As a consequence, re-
computation became necessary in accordance with the Article 279 of the
Labor Code, by the very nature of an illegal dismissal case, the reliefs
continue to add up until finality of the decision. With regard to the payment
of interest, this shall now be governed by Circular No. 799, effective July 1,
2013, which provides that in the absence of stipulation of the parties
regarding the rate of interest for loans or forbearance of money, goods, and
credits the rate allowed shall now be 6% per annum – as opposed to the 12%
per annum which was provided for in previous circular ISSUEd by the BSP.
The following guidelines shall govern: “I. When an obligation, regardless of
its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages. “II. With regard particularly to an award of
interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows: “When the
obligation is breached, and it consists in the payment of a sum of money, i.e.,
a loan or forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code. “When an obligation, not
constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code),
but when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally
adjudged. “When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit. “And, in addition to the above,
judgments that have become final and executory prior to July 1, 2013, shall
not be disturbed and shall continue to be implemented applying the rate of
interest fixed therein.”
DISPOSITIVE PORTION WHEREFORE, premises considered, the
Decision dated September 23, 2008 of the Court of Appeals in CA-G.R. SP
No. 98591, and the Resolution dated October 9, 2009 are REVERSED and
SET ASIDE. Respondents are Ordered to Pay petitioner: (1) backwages
computed from the time petitioner was illegally dismissed on January 24,
1997 up to May 27, 2002, when the Resolution of this Court in G.R. No.
151332 became final and executory; (2) separation pay computed from
August 1990 up to May 27, 2002 at the rate of one month pay per year of
service; and (3) interest of twelve percent (12%) per annum of the total
monetary awards, computed from May 27, 2002 to June 30, 2013 and six
percent (6%) per annum from July 1, 2013 until their full satisfaction. The
Labor Arbiter is hereby ORDERED to make another recomputation of the
total monetary benefits awarded and due to petitioner in accordance with this
Decision.
Advocates for Truth in Lending vs BSP
Facts: Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non-
profit, non-stock corporation organized to engage in pro bono concerns and
activities relating to money lending issues. It was incorporated on July 9,
2010,2 and a month later, it filed this petition, joined by its founder and
president, Eduardo B. Olaguer, suing as a taxpayer and a citizen. - R.A. No.
265, created the Central Bank on June 15, 1948, it empowers the CB-MB to
set the maximum interest rates which banks may charge for all types of loans
and other credit operations. - The Usury Law was amended by P.D.1684, it
gave the CB-MB authority to prescribe different maximum rates of interest
which may be imposed for a loan or renewal thereof or the forbearance of
any money, goods or credits, provided that the changes are effected gradually
and announced in advance. Section 1-a of Act No. 2655 now reads: - In its
Resolution No. 2224 dated December 3, 1982, the CB-MB issued CB
Circular No. 905, Series of 1982, effective on January 1, 1983. It removed
the ceilings on interest rates on loans or forbearance of any money, goods or
credits V. Statement of case Petitioner skipped the hierarchy of courts in
claim of transcendental importance · Petitioners contend that under Section
1-a of Act No. 2655, as amended by P.D. No. 1684, the CB-MB was
authorized only to prescribe or set the maximum rates of interest for a loan or
renewal thereof or for the forbearance of any money, goods or credits, and to
change such rates whenever warranted by prevailing economic and social
conditions, the changes to be effected gradually and on scheduled dates; that
nothing in P.D. No. 1684 authorized the CB-MB to lift or suspend the limits
of interest on all credit transactions, when it issued CB Circular No. 905.
They further insist that under Section 109 of R.A. No. 265, the authority of
the CB-MB was clearly only to fix the banks’ maximum rates of interest, but
always within the limits prescribed by the Usury Law. · CB Circular No.
905, which was promulgated without the benefit of any prior public hearing,
is void because it violated NCC 5 which provides that "Acts executed against
the provisions of mandatory or prohibitory laws shall be void, except when
the law itself authorizes their validity." · weeks after the issuance of CB
Circular No. 905, the benchmark 91-day Treasury bills shot up to 40% PA,
as a result. The banks followed suit and re-priced their loans to rates which
were even higher than those of the "Jobo" bills. · CB Circular No. 905 is also
unconstitutional in light of the Bill of Rights, which commands that "no
person shall be deprived of life, liberty or property without due process of
law, nor shall any person be denied the equal protection of the laws." · R.A.
No. 7653 did not re-enact a provision similar to Section 109 of RA 265, and
therefore, in view of the repealing clause in Section 135 of R.A. No. 7653,
the BSP-MB has been stripped of the power either to prescribe the maximum
rates of interest which banks may charge for different kinds of loans and
credit transactions, or to suspend Act No. 2655 and continue enforcing CB
Circular No. 905.
VI. Issues: - Does CB-MB has the appropriate statutory or constitutional
authority to prescribe the maximum rates of interest for all kinds of credit
transactions and forbearance of money, goods or credit beyond the limits
prescribed in the Usury Law; - If they do, whether the CB-MB exceeded its
authority when it issued CB Circular No. 905, which removed all interest
ceilings thus suspended Act No. 2655 as regards usurious interest rates; -
Whether under R.A. No. 7653, the new BSP-MB may continue to enforce
CB Circular No. 905.
Vll. Ruling CB-MB merely suspended the effectivity of the Usury Law when
it issued CB Circular No. 905.A Circular cannot repeal a law; that by virtue
of CB the Usury Law has been rendered ineffective; that the Usury has been
legally non-existent in our jurisdiction and interest can now be charged as
lender and borrow may agree upon. Circular upheld the parties’ freedom of
contract to agree freely on the rate of interest citing Art. 1306 under which
the contracting parties may establish such stipulations, clauses terms and
conditions as they may deem convenient provided they are not contrary to
law, morals, good customs, public order or public policy. BSP-MB has
authority to enforce CB Circular No. 905. RA 265 covered only banks while
Section 1-a of the Usury Law, empowers the Monetary Board, BSP for that
matter, to prescribe the maximum rate or rates of interest for all loans or
renewals thereof or the forbearance of any money, good or credits … The
Usury Law is broader in scope than RA 265, now RA 7653, the later merely
supplemented the former as it provided regulation for loans by banks and
other financial institutions. RA 7653 was not unequivocally repealed by RA
765. CB Circular 905 is essentially based on Section 1-a of the Usury Law
and the Usury Law being broader in scope than the law that created the
Central Bank was not deemed repealed when the law replacing CB with the
Bangko Sentral was enacted despite the non-reenactment in the BSP Law of
a provision in the CB Law which the petitioners purports to be the basis of
Circular 905.The lifting of the ceilings for interest rates does not authorize
stipulations charging excessive, unconscionable, and iniquitous interest.
SPOUSES ANDAL vs PNB
FACTS:
Sept. 7, 1995, petitioners obtained a loan from respondent bank (P21.8M) for
which 12 promissory notes were executed, with varying interest rates (17.5-
27%). It was agreed that the rate of interest may be increased or decreased
with prior notice to the petitioners in the event of changes in interest rates
prescribed by law or the Monetary Board.
Petitioners also executed a real estate mortgage in favor of the respondent
bank over 5 parcels of lands, including all improvements thereon, covered by
Transfer of Certificate Titles of the Registry of Deeds.
Respondent bank advised petitioners to pay their loan, otherwise they would
declare it due and demandable. Petitioners paid P14.8M to avoid foreclosure.
Respondent bank executed a release of real estate mortgage over two of the
parcels of land. Despite payment, respondent foreclosed the remaining real
estate mortgage over the remaining three parcels of land.
A public auction sale resulted in respondent bank as the winning bidder. A
Certificate of sale of the properties was issued.
Petitioners filed a complaint for annulment of mortgage, sheriff’s certificate
of sale, declaration of nullity of the increased interest rates and penalty
charges plus damages.
CONTENTION OF THE PETITIONERS:
1. They tried to pay their loan obligation but the exorbitant rate
of interest unilaterally determined and imposed by the
respondent bank.
2. They signed the promissory notes in blank, relying on the
representation that they were bank requirements
3. The exobrbitant and unilateral interest rates are a form of
unjust enrichment, giving respondent
4. bank no right to foreclose the mortgages
RTC Ruling: In favor of petitioners, ordering that the rate of interest be
reduced to 6% in accordance with Art. 2209, NCC and declaring the
foreclosure sales as void.
CA Ruling: Affirmed the RTC decision with the modification that the
interest be 12% per annum instead of 6%. Stipulations in a contract have the
force of law between the parties so long as they are not contrary to law,
morals, etc. Since parties expressly stipulated in the promissory notes that a
rate of interest would be applied, the petitioners are bound thereby.
The CA finds it more credible that the petitioners had signed blank
promissory notes which respondent bank had filled with high interest rates.
This violates the principle of mutuality of contracts. Since the interest rates in
the promissory notes are void, the rate of interest should be 12% (since what
is involved is a loan or forebearance of money).
Petitioners-spouses insist that "if the application of the doctrine of operative
facts is upheld, as applied in Caraig vs. Alday, interest in the instant case
would be computed only from the finality of judgment declaring the
foreclosure sale null and void. If Mercado vs. China Banking Corporation,
applying by analogy the rule on void usurious interest to void potestative
interest rate, is further sustained, no interest is due when the potestative
interest rate stipulation is declared null and void, as in the instant case.
ISSUES: Whether interest should be imposed on the loan.
RULING: Yes. The petitioners had agreed to payment of interest on
their loan obligation. The subsequent declaration that the rate of interest was
illegal does not entitle them to stop payment of interest. Only the rate was
declared void, but the stipulation requiring them to pay interest remains valid
and binding. They are liable to pay interest from the time they defaulted until
the obligation is fully paid.
Petition is DENIED and the CA decision is AFFIRMED with the
MODIFICATION that the 12% interest per annum shall be applied from the
date of default until June 30, 2013, after which date and until fully paid, the
obligation shall earn interest at 6% per annum.
State Investment vs CA
On March 9, 1978, Lomuyon Timber Industries, Inc. (hereafter, Lomuyon) agreed to
sell to plaintiff its receivables at a discount on a with recourse basis (Exh. A). It was
agreed in that sale that should areceivable remain unpaid, plaintiff, at its discretion,
may impose a penalty fee of 3% per month. To secure the payment of the
receivables, the Malonjaos also executed in favor of plaintiff, a real estate mortgage
over their real property covered by Transfer Certificates of Title Nos. (445856) S-
65586 and No. (162775) S-65585 (Exh. B).
Pursuant to their agreement, on March 9, 10 and 15, 1978 and July 19, 1978,
Lomuyon sold to plaintiff for a total consideration of P2,558,073.75 (Exhs. C, D, E
and F), various receivables consisting of checks as follows:
TCBTC (The Consolidated Bank and Trust Corporation) checks were all drawn by
Amanda Malonjao to the order of payee Lomuyon which in turn, indorsed the checks
to plaintiff. The MBTC (Metropolitan Bank and Trust Company) check was drawn
by one Antonietta Malonjao-Roque to the order of payee Amanda Malonjao who in
turn, indorsed said check to plaintiff.
When plaintiff presented the checks for payment to the drawee banks, the same were
dishonored for having been drawn against insufficient funds (Exhs. H to H-7) except
for TCBTC 618821.
Plaintiff made repeated written demands on defendants to make good the checks they
indorsed and to pay the penalty charges it has imposed thereon, (Exhs. I, J, K, L, L-1,
M and N).
Defendants failed to pay the value of the checks. Plaintiff thus decided to undertake
foreclosure of the real estate mortgage.
On October 6, 1982, plaintiff filed with the Provincial Sheriff of Rizal a petition for
extrajudicial foreclosure of real estate mortgage dated September 28, 1981. In said
petition, plaintiff alleged among others, that as of said date, September 28, 1981,
defendants outstanding obligation, inclusive of interest and charges, is P4,809,187.12
(Exh. O).
On February 14, 1983, the Provincial Sheriff sold at public auction, defendants
mortgaged properties to plaintiff who was the highest bidder for P4,233,874.00. The
following day, the Provincial Sheriff issued a Certificate of Sale (Exh. P).
On June 27, 1983, plaintiff filed the complaint alleging that after deducting the price
of the mortgaged properties from defendants outstanding obligation, there remains a
deficiency of P2,601,147.62 as of February 14, 1983, which as of May 31, 1983
amounted to P2,876,929.27 inclusive of interest and charges. As an alternative cause
of action, plaintiff alleged that it is entitled to recover from the defendant the total
value of the checks amounting to P2,239,237.10. Plaintiff further prayed that it be
awarded exemplary damages, attorneys fees and litigation expenses (Records, pp. 1-
38).
In their answer, defendants admitted having incurred the obligation with the plaintiff
brought about by the dishonor of the checks. However, defendants contended that
plaintiffs computation of their outstanding obligation is erroneous. Thus, by way of
special affirmative defenses, defendants alleged that:
12. x x x.
13. The complaint states no cause of action;
14. The value of the mortgaged properties sold at public auction is more than
sufficient to cover the obligation of the defendants;
15. The alleged purchase price of the mortgaged properties sold at public auction is
unconscionably very very low;
16. Assuming for the sake of argument, that the outstanding obligation of the
defendants as of September 26, 1981 (sic) was P4,809,187.12 per statement of
account as alleged in the complaint and the alleged purchase price at public auction
was P4,233,874.00, the deficiency would only be P575,313.12 and
not P2,601,147.62 as erroneously alleged in the complaint.
17. No demand was ever made upon the defendant;
18. The interest and charges made by plaintiff is usurious and unconscionable (id.,
pp. 91-92).[1]
On January 11, 1981, the trial court rendered its decision with the following
dispositive portion:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
1. Declaring that the plaintiff is not entitled to any deficiency amount
from the defendants;
2. Dismissing defendants counterclaim; and
3. Ordering the plaintiff and defendants to pay the costs of suit.
SO ORDERED.[2]
On appeal, petitioner assigned the following errors committed by the trial court:
I. THE LOWER COURT ERRED IN NOT FINDING THAT DEFENDANTS-
APPELLEES OBLIGATION TO SIHI AS OF THE TIME OF FORECLOSURE
AUCTION SALE AMOUNTED TO P6,835,021.62 THUS, AFTER DEDUCTING
THE AUCTION PRICE OF THE MORTGAGED PROPERTIES IN THE
AMOUNT OF P4,233,874.00, THE BALANCE WOULD BE P2,601,141.62.
II. THE LOWER COURT ERRED IN FINDING THAT SIHI HAD ALREADY
FULLY RECOVERED ITS RECEIVABLES FROM THE DEFENDANTS.
III. THE LOWER COURT ERRED IN FINDING THAT SIHI IS NOT ENTITLED
TO ANY DEFICIENCY AMOUNT FROM THE DEFENDANTS.[3]
On August 27, 1992, the respondent court rendered the assailed decision
disallowing the claim for deficiency on the finding that the penalty charges imposed
by petitioner on the principal obligation were highly iniquitous and
unconscionable. The subsequent motion for reconsideration was, likewise,
denied. Hence, petitioner filed the instant petition raising the sole issue that:
THE COURT OF APPEALS GROSSLY MISAPPRECIATED THE FACTS
AND APPLICABLE LAW BY NOT DECLARING THAT SIHI IS STILL
ENTITLED TO THE DEFICIENCY AFTER THE FORECLOSURE
AUCTION SALE.[4]
In disallowing the claim for deficiency, the respondent court found that the
proceeds of the auction sale was sufficient to cover the principal obligation of the
private respondent including interest, penalty and other charges. Both the respondent
court and the trial court took particular attention on the penalty charge of 3% a
month which was imposed on the principal obligation as a result of their default in
payments. Undaunted by the disallowance of its claim in the August 27, 1992
decision, petitioner reiterated its position in a motion for reconsideration, averring
that the respondent court and the trial court failed to reconcile the figures due it.
Petitioner asserts that as of September 26, 1981, private respondents
obligation amounted to P4,809,187.12. At that time of the foreclosure sale
on February 14, 1983, the obligation to SIHI was computed to be P6,833,021.62
inclusive of interest and penalty charges. Considering that the bid price of the
foreclosed properties was only P4,233,874.00, petitioner was still entitled to a
deficiency of about P2,601,147.62. Petitioner further added that until the original
obligation is fully paid, private respondents outstanding obligation continue to earn
interest and penalty charges from day to day. Thus, from the time of the foreclosure
sale on February 14, 1983 (P2,601,147.62) up to the filing of the complaint for the
deficiency claim on May 31, 1983 (P2,876,929.27), and up to the trial on June 3,
1988 in the RTC, private respondents outstanding obligation to SIHI rose
to P7,651,969.41.
There is no dispute that the payment of penalty is sanctioned by the law,
although the penalty may be reduced by the courts if it is iniquitous or
unconscionable.[5] Petitioner argues that while it recognizes the authority of the court
to reduce the penalty if it is iniquitous or unconscionable, the court, however, does
not have the authority to delete the payment of the penalty charges altogether for this
is in clear contravention of Article 1229 and the law of contracts between the parties.
This contention is not well-taken.
 The Court does not find any reversible error committed by the respondent court
in ruling that the petitioner was no longer entitled to recover any deficiency amount
after the foreclosure sale on February 14, 1983. Per Statement of Account dated
September 21, 1981, the obligation of the private respondent was computed to
be P4,809,187.12 inclusive of interest and penalty charges. Since the private
respondent failed to fulfill its obligation, petitioner then decided to foreclose the real
estate mortgage on two properties of the private respondent. At the time of the
auction sale on February 14, 1983, the properties were sold in the amount of
P4,223,874.00 with the petitioner as the highest bidder. Deducting this amount from
the outstanding obligation of P4,809,187.12 as stipulated in the Statement of
Account, there would therefore be a balance of only about P575,313.12.
Whether or not the alleged deficiency from the foreclosure sale was
P575,313.12 or P2,601,147.62 as claimed by petitioner was of no moment. The
respondent court disallowed the payment of the deficiency altogether because it
found that the principal obligation of the private respondent would not have
ballooned to such a horrendous amount of P4.8M as of September 21, 1991 if not for
the penalty charge of 3% per month or 36% per annum. The trial court justified, to
wit:
x x x [F]rom the various checks the defendants had sold originally to the plaintiff at
the beginning of their transactions, it is shown that the amount including interests
and other charges, is P2,970,556.64. For a two year period from June 9, 1978 to
March 9, 1980 and up to September 26, 1981 the amount grew to P4,809.187.12. In
other words, the money of the plaintiff has already earned interests and other charges
to more or less P1,638,630.48. As alleged in plaintiffs complaint, the total amount
purchased by plaintiff was only for P2,500,000.00. There is reason to believe that the
P2,970,566.64 represented by the various checks include therein, the interest and
other charges upon their maturity dates. Deducting the amount of P2,500,000.00
from P2,970,556.64 is P420,556.64. In brief, the interests and charges that plaintiff
has already earned from the time it has foreclosed defendants' properties has passed
the P2,000,000.00.[6]
Contrary to petitioners contention, the respondent court acted in accordance to
Article 1229 when it declared that petitioner was no longer entitled to the payment of
the deficiency amount. The disallowance of the payment of deficiency was in effect
merely a reduction of the penalty charges and not as a deletion of the penalties as
contended by the petitioner.
In the case of Rizal Commercial Banking Corporation vs. Court of
Appeals,[7] we held that:
xxx
On the issue of payment of surcharges and penalties, we partly agree that GOYUs
pitiful situation must be taken into account. We do not agree, however, that payment
of any amount as surcharges and penalties should altogether be deleted. x x x
Surcharges and penalties agreed to be paid by the debtor in case of default partake of
the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the
Civil Code. Article 2227 thereof provides:
ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall
be equitably reduced if they are iniquitous and unconscionable.
In exercising this vested power to determine what is iniquitous and unconscionable,
the Court must consider the circumstances of each case. It should be stressed that the
Court will not make any sweeping ruling that surcharges and penalties imposed by
banks for non-payment of the loans extended by them are generally iniquitous and
unconscionable. What may be iniquitous and unconscionable in one case, may be
totally just and equitable in another. This provision of law will have to be applied to
the established facts of any given case. Given the circumstances under which GOYU
found itself after the occurrence of the fire, the Court rules the surcharges rates
ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely
iniquitous and unconscionable. x x x
Likewise, in the case at bar, the two courts below found the penalty charge of
3% a month or 36% per annum iniquitous and unconscionable. Petitioner
computed the amount of P4,809,187.12 as the outstanding obligation of the
petitioner as of September 21, 1981 after imposing the 3% penalty charge when
petitioner defaulted in their payments. This amount was no longer questioned and
was particularly taken into consideration when the mortgaged properties were
foreclosed and sold at the auction sale in 1983, obtaining a sum of about
P4,223,874.00. These foreclosed properties located in Makati[8] are undoubtedly
valuable properties whose market value has greatly appreciated to substantially
satisfy the payment of the outstanding obligation. Notwithstanding the balance
of P575,313.12, petitioner has clearly recouped its investment and earned more than
enough profit in two years (1978-1981) by way of penalty charges. Although
petitioner claims that the penalty charge was well within the banking and business
practice, no proof was adduced thereof. To allow the petitioner to recover the amount
of P6,835,021.21 at the time of the foreclosure sale in 1983, or P7,651,969.41 at the
time of the trial of the case in 1988 which amounts are almost three times
more than the original investment of about P2,558,073.75 is rather unwarranted. We
quote with favor the respondent courts ratiocination:
The lower court did not err in its ruling under its statement that since plaintiff had
already recovered fully the receivables from the defendants, the court, considering
that the plaintiff for the two properties foreclosed by it bidded the amount of
P4,233,874.00, far and above the amount it had originally given to the defendants
which was only over P2,000,000.00, it is rather most shocking and unconscionable
for plaintiff to still collect from the defendants the alleged collectibles of
P2,601,147.62 with 3% penalty charges. The plaintiff should have stopped imposing
the 3% penalty charges and other burdens when it had consolidated finally the two
titles of the properties it had foreclosed (Decision, p. 8). After due consideration and
reflection on all the factual circumstances obtaining in the case at bar, it is Our
opinion that the lower court properly exercised its discretion under Article 1229 of
the Civil Code to reduce the penalty charges for being highly and grossly
unconscionable. x x x[9]

While the Court recognizes the right of the parties to enter into contracts and
are expected ro comply with the terms and obligations, this rule is not absolute. The
Court allowed to temper interest rates when necessary. Article 1229 of the New Civil
Code clearly provides:

ART. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there
has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.

Likewise, Article 2227 provides:

ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall

be equitably reduced if they are iniquitous and unconscionable.

ACCORDINGLY, the judgment appealed from is hereby AFFIRMED.

SO ORDERED.