CATALINA F. ISLA, ELIZABETH ISLA, AND GILBERT F. ISLA, PETITIONERS, V.

GENEVIRA[*] P. ESTORGA, RESPONDENT.

2018-07-02 | G.R. No. 233974

DECISION

PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari[1] filed by petitioners Catalina F. Isla (Catalina), Elizabeth
Isla, and Gilbert F. Isla (collectively, petitioners) assailing the Decision[2] dated May 31, 2017 and the
Resolution[3] dated August 24, 2017 of the Court of Appeals (CA) in CA-G.R. CV No. 101743, which affirmed
with modification the Decision[4] dated December 10, 2012 of the Regional Trial Court of Pasay City, Branch
112 (RTC) in Civil Case No. 07-0014, directing petitioners to pay respondent Genevira P. Estorga
(respondent) the following sums: (a) P100,000.00 representing the principal of the loan obligation; (b) an
amount equivalent to twelve percent (12%) of P100,000.00 computed from November 16, 2006 until full
payment, representing interest on the loan; (c) an amount equivalent to six percent (6%) of the sums due in (a)
and (b) per annum computed from the finality of the CA Decision until full payment, representing legal interest;
and (d) P20,000.00 as attorney's fees.

The Facts

On December 6, 2004, petitioners obtained a loan in the amount of P100,000.00 from respondent, payable
anytime from six (6) months to one (1) year and subject to interest at the rate of ten percent (10%) per month,
payable on or before the end of each month. As security, a real estate mortgage[5] was constituted over a
parcel of land located in Pasay City, covered by Transfer Certificate of Title (TCT) No. 132673 [6] and
registered under the name of Edilberto Isla (Edilberto), who is married to Catalina (subject property). When
petitioners failed to pay the said loan, respondent sought assistance from the barangay, and consequently, a
Kasulatan ng Pautang[7] dated December 8, 2005 was executed. Petitioners, however, failed to comply with its
terms, prompting respondent to send a demand letter[8] dated November 16, 2006. Once more, petitioners
failed to comply with the demand, causing respondent to file a Petition for Judicial Foreclosure[9] against them
before the RTC.[10]

For their part,[11]petitioners maintained that the subject mortgage was not a real estate mortgage but a mere
loan, and that the stipulated interest of ten percent (10%) per month was exorbitant and grossly
unconscionable.[12] They also insisted that since petitioners were not the absolute owners of the subject
property - as the same was allegedly owned by Edilberto – they could not have validly constituted the subject
mortgage thereon.[13]

The RTC Ruling

In a Decision[14] dated December 10, 2012, the RTC granted the Petition for Judicial Foreclosure, finding that
petitioners themselves admitted that: (a) they obtained a loan in the amount of P100,000.00 and that the said
loan was secured by a real estate mortgage over the subject property; and (b) the subject mortgage was
annotated on TCT No. 132673.[15] Further, the RTC observed that while it is true that the present action
pertains to a judicial foreclosure, the underlying principle is that a real estate mortgage is but a security and
not a satisfaction of indebtedness. Thus, it is only proper to render petitioners solidarily liable to pay
respondent and/or foreclose the subject mortgage should they fail to fulfill their obligation.[16]

Consequently, the RTC directed petitioners to pay respondent the amounts of P100,000.00 with twelve
percent (12%) interest per annum from December 2007 until fully paid and P20,000.00 as attorney's fees.
Alternatively, in the event that petitioners fail to pay or deposit with the Clerk of Court the said amounts within
a period of six (6) months from receipt of a copy of the RTC Decision, it held that the subject property will be
foreclosed and sold at public auction to satisfy the mortgage debt, and the surplus, if any, will be delivered to
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petitioners with reasonable interest under the law.[17]

Aggrieved, respondent appealed[18] to the CA.

The CA Ruling

In a Decision[19] dated May 31, 2017, the CA affirmed with modification the RTC Decision, and accordingly,
ordered petitioners to pay respondent the following sums: (a) P100,000.00 representing the principal of the
loan obligation; (b) an amount equivalent to twelve percent (12%) of P100,000.00 computed per year from
November 16, 2006 until full payment, representing interest on the loan; (c) an amount equivalent to six
percent (6%) of the sums due in (a) and (b) per annum computed from the finality of the CA Decision until full
payment, representing legal interest; and (d) P20,000.00 as attorney's fees.[20]

The CA held that in light of the registry return receipt bearing the signature of Catalina, it was established that
petitioners indeed received the demand letter dated November 16, 2006.[21] Meanwhile, it did not agree with
the RTC's order providing petitioners alternative remedies, which remedies are, by law, mutually exclusive.
Thus, since respondent's Petition for Judicial Foreclosure was essentially an action to collect a sum of money,
she is then barred from causing the foreclosure of the subject mortgage.[22]

Moreover, the CA ruled that the RTC erred in imposing the interest rate of twelve percent (12%) per annum
from December 2007 until full payment. It likewise held that the stipulated interest of ten percent (10%) per
month on the real estate mortgage is exorbitant. And finally, it declared that respondent is entitled to the
award of attorney's fees based on equity and in the exercise of its discretion.[23]

Undaunted, petitioners sought partial reconsideration,[24] claiming that the award of attorney's fees was without
factual, legal, and equitable justification and should therefore be deleted.[25] The same, however, was denied
in a Resolution[26] dated August 24, 2017; hence, the instant petition, claiming that the CA gravely erred not
only in awarding attorney's fees despite the absence of factual justification in the body of its Decision but also
in imposing interest of twelve percent (12%) per annum interest until full payment.[27]

In her Comment,[28] respondent retorted that the CA's award of attorney's fees was proper and within the
discretion of the court. Likewise, the CA correctly imposed interest at the rate of twelve percent (12%) per
annum to the principal loan obligation of petitioners.[29]

The Issues Before the Court

The issue for the Court's resolution is whether or not the CA erred in awarding: (a) twelve percent (12%)
interest on the principal obligation until full payment; and (b) attorney's fees.

The Court's Ruling

The petition is partly meritorious.

I.

In their petition, petitioners contest the interest imposed on the principal amount of the loan at the rate of
twelve percent (12%) per annum from the date of extrajudicial demand until full payment, as stated in
paragraph 2 of the CA ruling. In this regard, they argue that pursuant to ECE Realty and Development, Inc. v.
Hernandez (ECE Realty),[30]the applicable interest rate should only be six percent (6%).[31]

The argument is untenable.

Case law states that there are two (2) types of interest, namely, monetary interest and compensatory interest.
Monetary interest is the compensation fixed by the parties for the use or forbearance of money. On the other
hand, compensatory interest is that imposed by law or by the courts as penalty or indemnity for damages.

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Accordingly, the right to recover interest arises only either by virtue of a contract (monetary interest) or as
damages for delay or failure to pay the principal loan on which the interest is demanded (compensatory
interest).[32]

Anent monetary interest, the parties are free to stipulate their preferred rate. However, courts are allowed to
equitably temper interest rates that are found to be excessive, iniquitous, unconscionable, and/or exorbitant,[33]
such as stipulated interest rates of three percent (3%) per month or higher.[34] In such instances, it is well to
clarify that only the unconscionable interest rate is nullified and deemed not written in the contract; whereas
the parties' agreement on the payment of interest on the principal loan obligation subsists.[35] It is as if the
parties failed to specify the interest rate to be imposed on the principal amount, in which case the legal rate
of interest prevailing at the time the agreement was entered into is applied by the Court.[36] This is
because, according to jurisprudence, the legal rate of interest is the presumptive reasonable compensation
for borrowed money.[37]

In this case, petitioners and respondent entered into a loan obligation and clearly stipulated for the payment of
monetary interest. However, the stipulated interest of ten percent (10%) per month was found to be
unconscionable, and thus, the courts a quo struck down the same and pegged a new monetary interest of
twelve percent (12%) per annum, which was the prevailing legal rate of interest for loans and forbearances of
money at the time the loan was contracted on December 6, 2004.

In Spouses Abella v. Spouses Abella,[38] the Court was also faced with a situation where the parties entered
into a loan with an agreement to pay monetary interest. Since the stipulated rate of interest by the parties was
found to be unconscionable, the Court struck down the same and substituted it with the prevailing legal
interest rate at the time the loan was perfected, i.e., twelve percent (12%) per annum. In holding that such
rate shall persist in spite of supervening events, the Court held:

Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate. In
Spouses Toring v. Spouses Olan [(589 Phil. 362 [2008])], this court clarified the effect of Article 1956 of
the Civil Code and noted that the legal rate of interest (then at 12%) is to apply: "In a loan or
forbearance of money, according to the Civil Code, the interest due should be that stipulated in writing,
and in the absence thereof, the rate shall be 12% per annum."
Spouses Toring cites and restates (practically verbatim) what this court settled in Security Bank and
Trust Company v. Regional Trial Court of Makati, Branch 61 [(331 Phil. 787 [1996])]: "In a loan or
forbearance of money, the interest due should be that stipulated in writing, and in the absence thereof,
the rate shall be 12% per annum."
xxxx
The rule is not only definite; it is cast in mandatory language. From Eastern Shipping [Lines, Inc. v. CA]
[(G.R. No. 97412, July 12, 1994, 234 SCRA 78)] to Security Bank to Spouses Toring, jurisprudence
has repeatedly used the word "shall," a term that has long been settled to denote something imperative
or operating to impose a duty. Thus, the rule leaves no room for alternatives or otherwise does not
allow for discretion. It requires the application of the legal rate of interest.
Our intervening Decision in Nacar v. Gallery Frames [(716 Phil. 267 [2013])] recognized that the legal
rate of interest has been reduced to 6% per annum[.]
xxxx
Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013 and Nacar retain the
definite and mandatory framing of the rule articulated in Eastern Shipping, Security Bank, and Spouses
Toring. Nacar even restates Eastern Shipping:
xxxx
Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a simple loan
or mutuum, but no exact interest rate was mentioned, the legal rate of interest shall apply. At present,
this is 6% per annum, subject to Nacar 's qualification on prospective application.
Applying this, the loan obtained by respondents from petitioners is deemed subjected to conventional
interest at the rate of 12% per annum, the legal rate of interest at the time the parties executed their
agreement. Moreover, should conventional interest still be due as of July 1, 2013, the rate of 12% per
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 annum shall persist as the rate of conventional interest.
This is so because interest in this respect is used as a surrogate for the parties' intent, as expressed as
of the time of the execution of their contract. In this sense, the legal rate of interest is an affirmation
of the contracting parties' intent; that is, by their contract's silence on a specific rate, the then
prevailing legal rate of interest shall be the cost of borrowing money. This rate, which by their
contract the parties have settled on, is deemed to persist regardless of shifts in the legal rate of
interest. Stated otherwise, the legal rate of interest, whenapplied as conventional interest, shall
always be the legal rate at the time the agreement was executed and shall not be susceptible to
shifts in rate.[39] (Emphases and underscoring supplied)

Following this pronouncement, the Court rules that the CA correctly imposed a straight monetary interest rate
of twelve percent (12%) per annum on the principal loan obligation of petitioners to respondent, reckoned
from the date of extrajudicial demand until finality of this ruling. At this point, suffice it to say that petitioner's
reliance on ECE Realty is misplaced primarily because unlike in this case, the amount due therein does not
partake of a loan obligation or forbearance of money.

In addition, not only the principal amount but also the monetary interest due to respondent as discussed
above shall itself earn compensatory interest at the legal rate, pursuant to Article 2212 of the Civil Code,
which states that "[i]nterest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point."[40] To be sure, Article 2212 contemplates the presence of stipulated
or conventional interest, i.e., monetary interest, which has accrued when demand was judicially made. In
cases where no monetary interest had been stipulated by the parties, no accrued monetary interest could
further earn compensatory .interest upon judicial demand.[41] Thus, the principal amount and monetary interest
due to respondent shall earn compensatory interest of twelve percent (12%) per annum from judicial demand,
i.e., the date of the filing of the complaint on July 24, 2007,[42] to June 30, 2013, and thereafter, at the rate of
six percent (6%) per annum from July 1, 2013 until fully paid.

II.

On the issue of attorney's fees, the general rule is that the same cannot be recovered as part of damages
because of the policy that no premium should be placed on the right to litigate. They are not to be awarded
every time a party wins a suit.[43] The power of the court to award attorney's fees under Article 2208[44] of the
Civil Code demands factual, legal, and equitable justification.[45] It must clearly state the reasons for awarding
attorney's fees in the body of its decision, and not merely in its dispositive portion.[46]

In this case, the CA awarded the amount of P20,000.00 as attorney's fees premised merely on the general
statement "upon equity and in the exercise of [its] discretion."[47] Hence, since the CA failed to "clearly state
the reasons for awarding attorney's fees in the body of its decision", the Court finds it proper to delete the
same.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated May 31, 2017 and the Resolution
dated August 24, 2017 of the Court of Appeals in CA-G.R. CV No. 101743 are hereby MODIFIED as follows:

1. Petitioners Catalina F. Isla, Elizabeth Isla, and Gilbert F. Isla are ORDERED to pay respondent Genevira P.
Estorga:

(a) P100,000.00 representing the principal loan obligation;

Monetary interest on the principal loan obligation at the rate of twelve percent (12%) per annum from the
(b)
date of default, i.e., extrajudicial demand on November 16, 2006, until finality of this ruling;

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 Compensatory interest on the monetary interest as stated in letter (b) at the rate of twelve percent (12%)
(c) per annum from judicial demand, i.e., July 24, 2007, to June 30, 2013, and thereafter, at the rate of six
percent (6%) per annum from July 1, 2013 until finality of this ruling; and

Legal interest at the rate of six percent (6%) per annum imposed on the sums due in letters (a), (b), and (
(d)
c) from finality of this ruling until full payment; and

2. The award of attorney's fees in favor of respondent is DELETED.

SO ORDERED.
Carpio (Chairperson),[**] Peralta, Caguioa, and Reyes, Jr., JJ., concur.
_____________________

[*]
Also spelled as "Genevera" in some parts of the rollo.

[**]
Senior Associate Justice (Per Section 12, Republic Act No. 296, The Judiciary Act of 1948, As Amended)

[1]
Rollo, pp. 25-41.

Id. at 46-55. Penned by Associate Justice Nina G. Antonio-Valenzuela with Associate Justices Jose C.
[2]

Reyes, Jr. and Stephen C. Cruz concurring.

[3]
Id. at 57-58.

[4]
Id. at 82-84. Penned by Presiding Judge Jesus B. Mupas.

[5]
See the Deed of Real Estate Mortgage dated December 6, 2004; id. at 80-81.

[6]
Id. at 69.

[7]
Id. at. 70.

[8]
Id. at 72

[9]
Dated July 19, 2007. Id. at 61-65.

[10]
See id. at 47.

[11]
See Opposition dated October 9, 2007; id. at 73-79.

[12]
See id. at 73-76.

[13]
See id. at 77

[14]
Id. at 82-84.

[15]
See id. at 83.

[16]
See id. at 84.

[17]
See id.

See Notice of Appeal dated October 21, 2013 (id. at 85-86) and Brief for the Defendants-Appellants dated
[18]

October 27, 2014 (id. at 91-101).

[19]
Id. at 46-55.
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[20]
Id. at 54.

[21]
See id. at 52-53.

[22]
Id. at 53.

[23]
See id. at 54.

[24]
See Motion for Partial Reconsideration dated June 23, 2017; id. at 117-120.

[25]
See id. at 119.

[26]
Id. at 57-58.

[27]
See id. at 31-36.

[28]
Dated April 2018. Id. at 128-134.

[29]
See id. at 130-133.

[30]
740 Phil. 784 (2014).

[31]
See rollo, pp. 31-33.

[32]
See Pen v. Santos, G.R. No. 160408, January 11, 2016, 778 SCRA 56, 68.

See Trade & Investment Development Corporation of the Philippines v. Roblett Industrial Construction
[33]

Corporation, 523 Phil. 360, 366 (2006).

[34]
Chua v. Timan, 584 Phil. 144, 148 (2008).

[35]
Limso v. Philippine National Bank, G.R. No. 158622, January 27, 2016, 782 SCRA 137, 229.

[36]
Id. at 230, citing Spouses Abella v. Spouses Abella, 763 Phil. 372, 385-386 (2015).

[37]
See id. at 386.

[38]
Id.

[39]
Id. at 382-386.

See also Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, July 12, 1994, 234 SCRA 78, 95 and Nacar v.
[40]

Gallery Frames, 716 Phil. 267, 282 (2013).

See David v. CA, 375 Phil. 177, 185 (1999), citing The Philippine American Accident Insurance Company,
[41]

Inc. vs. Flores, 186 Phil. 563, 566 (1980).

[42]
See rollo, p. 61.

See Delos Santos v. Abejon, G.R. No. 215820, March 20, 2017, citing Spouses Vergara v. Sonkin, 759
[43]

Phil. 402, 414 (2015).

[44]
Article 2208 of the Civil Code reads:

Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
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 (2) When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff’s plainly
valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;
(8) In actions for indemnity under workmen's compensation and employer's liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that attorney's fees and expenses of
litigation should be recovered.
In all cases, the attorney's fees and expenses of litigation must be reasonable.

[45]
See Delos Santos v. Abejon, supra note 43.

[46]
See Marilag v. Martinez, 764 Phil. 576, 593 (2015).

[47]
Rollo, p. 54.

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