Philippine Supreme Court Jurisprudence > Year 1999 > August 1999 Decisions > G.R. No. 135046 August 17, 1999 - LAARNI BAUTISTA, ET AL. v. PILAR DEV’T. CORP.:

This petition for review seeks to reverse and set aside the Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 51363 1 which reversed the Decision of the Regional Trial Court, Makati, Branch 138 in Civil Case No. 17702. 2

The following facts are uncontroverted.chanrobles virtual lawlibrary

In 1978, petitioner spouses Florante and Laarni Bautista purchased a house and lot in Pilar Village, Las Piñas, Metro Manila. To partially finance the purchase, they obtained from the Apex Mortgage & Loan Corporation (Apex) a loan in the amount of P100,180.00. They executed a promissory note on December 22, 1978 obligating themselves, jointly and severally, to pay the "principal sum of P100,180.00 with interest rate of 12% and service charge of 3%" for a period of 240 months, or twenty years, from date, in monthly installments of P1,378.83. 3 Late payments were to be charged a penalty of one and one-half per cent (1 1/2%) of the amount due. In the same promissory note, petitioners authorized Apex to "increase the rate of interest and/or service charges" without notice to them in the event that a law, Presidential Decree or any Central Bank regulation should be enacted increasing the lawful rate of interest and service charges on the loan. 4 Payment of the promissory note was secured by a second mortgage on the house and lot purchased by petitioners. 5

Petitioner spouses failed to pay several installments. On September 20, 1982, they executed another promissory note in favor of Apex. This note was in the amount of P142,326.43 at the increased interest rate of twenty-one per cent (21%) per annum with no provision for service charge but with penalty charge of 1 1/2% for late payments. Payment was to be made for a period of 196 months or 16.33 years in monthly installments of P2,576.68, inclusive of principal and interest. Petitioner spouses also authorized Apex to "increase/decrease the rate of interest and/or service charges" on the note in the event any law or Central Bank regulation shall be passed increasing or decreasing the same. 6

In November 1983, petitioner spouses again failed to pay the installments. On June 6, 1984, Apex assigned the second promissory note to respondent Pilar Development Corporation without notice to petitioners.

On August 31, 1987, respondent corporation, as successor-in-interest of Apex, instituted against petitioner spouses Civil Case No. 17702 before the Regional Trial Court, Makati, Branch 138. Respondent corporation sought to collect from petitioners the amount of P140,515.11 representing the unpaid balance of the principal debt from November 23, 1983, including interest at the rate of twenty-one per cent (21%) under the second promissory note, and 25% and 36% per annum in accordance with Central Bank Circular No. 905, series of 1982. Respondent also sought payment of ten per cent (10%) of the amount due as attorney’s fees. 7

In their answer, petitioner spouses mainly contended that the terms of the second promissory note increasing the interest rate to 21% and the escalation clauses authorizing Apex to increase interest rates pursuant to any law or Central Bank regulation are null and void in the absence of a de-escalation clause in the same note. 8

After pre-trial, both parties submitted the case for decision on the sole issue of the interest rate.

The trial court rendered judgment on September 22, 1995. It ordered petitioner spouses to pay respondent corporation the sum of P140,515.11, with interest at the rate of 12% per annum, plus service charge, viz:jgc:chanrobles.com.ph

"WHEREFORE, judgment is hereby rendered as follows:chanrob1es virtual 1aw library

(a) Plaintiff is entitled to collect from the defendants the amount of P140,515.11 with interest at the rate of 12% per annum from November 23, 1983 until the amount is fully paid plus the stipulated service charge;

(b) Ordering defendants as joint and several obligors to pay plaintiff the amount stated in paragraph (a) hereof;

(c) Counterclaim is hereby dismissed.

No pronouncement as to costs.

SO ORDERED." 9

Both parties appealed to the Court of Appeals. In a Decision dated May 14, 1998, the appellate court reversed the trial court by applying the interest rate of 21% per annum, and adding attorney’s fees of 10%. Thus:jgc:chanrobles.com.ph

"IN VIEW OF ALL THE FOREGOING, the appealed judgment is hereby REVERSED and SET ASIDE and a new one entered ordering the defendants to pay the plaintiffs the amount of P142,326.43, as principal with interest at the rate of 21% from November 23, 1983 until the amount is fully paid; the sum equivalent to 10% of the amount due as attorney’s fees and the costs of this suit.

SO ORDERED." 10

Petitioner spouses moved for reconsideration. In a Resolution dated August 18, 1998, the Court of Appeals denied the motion but reduced the principal amount of the obligation from P142,326.42 to P140,515.11. 11

Hence this recourse.chanrobles virtual lawlibrary

Petitioner spouses claim that the Court of Appeals erred:chanrob1es virtual 1aw library



IN RULING THAT THE TWO (2) PROMISSORY NOTES EXECUTED BY THE PARTIES ARE INDEPENDENT OF EACH OTHER.

CONVERSELY, IN NOT RULING THAT THE SAID PROMISSORY NOTES CONSTITUTE A SINGLE-LOAN TRANSACTION.



IN RULING THAT THE APPLICABLE RATE OF INTEREST IS 21% PER ANNUM AS STIPULATED IN THE SECOND PROMISSORY NOTE.

CONVERSELY, IN NOT RULING THAT THE ESCALATION OF INTEREST RATE FROM 12% PER ANNUM (1ST PROMISSORY NOTE) TO 21% PER ANNUM (2ND PROMISSORY NOTE) IS UNLAWFUL.



IN RULING THAT 10% OF THE AMOUNT DUE IS AWARDABLE AS ATTORNEY’S FEES.

CONVERSELY, IN NOT RULING THAT THE AWARD OF 10% ATTORNEY’S FEES IS NOT PROPER UNDER THE CIRCUMSTANCES.



IN RULING THAT NOTICE OF ASSIGNMENT OF CREDIT IS "POINTLESS AND UNSUSTAINABLE."cralaw virtua1aw library

CONVERSELY, IN NOT RULING THAT NOTICE TO THE DEBTOR IS REQUIRED WHEN CREDIT IS ASSIGNED.



IN NOT RULING THAT UNDER THE CIRCUMSTANCES PETITIONERS ARE ENTITLED TO MORAL AND EXEMPLARY DAMAGES. 12

The controversy in this petition involves the rate of interest respondent creditor is entitled to collect on petitioners’ loan: whether it be 12% under the promissory note of December 22, 1978, or 21% under the promissory note of September 20, 1982.

Petitioners claim that the interest rate of 12% per annum should be adjudged inasmuch as the two promissory notes constitute one transaction. Allegedly, the first note defined the terms and conditions of the loan while the second note is merely an extension of and derives its existence from the former. Hence, the second note is governed by the stipulations in the first note. 13

The two promissory notes are identically entitled "Promissory Note with Authority to Assign Credit." The notes were prepared by Apex in standard form and consist of two (2) pages each. Except for one or two stipulations, they contain the same provisions and the same blanks for the amount of the loan and other pertinent data subject of each note. However, on the upper right portion of the second note, there appears a typewritten entry which reads:jgc:chanrobles.com.ph

"This cancels PN # A-387-78 dated December 22, 1978." 14

Correspondingly, on the face of each page of the first promissory note, i.e., PN No. A-387-78 dated December 22, 1978, the word "Cancelled" is boldly stamped twice with the date "September 16, 1982" and a signature written in a space inside the letters of the word. 15

The first promissory note was cancelled by the express terms of the second promissory note. To cancel is to strike out, to revoke, rescind or abandon, to terminate. 16 In fine, the first note was revoked and terminated. Simply put, it was novated. The extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first is a novation. 17 Novation is made either by changing the object or principal conditions, referred to as an objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, which is known as subjective or personal novation. 18 In both objective and subjective novation, a dual purpose is achieved — an obligation is extinguished and a new one is created in lieu thereof. 19 Novation may either be express, when the new obligation declares in unequivocal terms that the old obligation is extinguished; or implied, when the new obligation is on every point incompatible with the old one. 20 Express novation takes place when the contracting parties expressly disclose that their object in making the new contract is to extinguish the old contract, otherwise the old contract remains in force and the new contract is merely added to it, and each gives rise to an obligation still in force. 21

Novation has four (4) essential requisites: (1) the existence of a previous valid obligation; (2) the agreement of all parties to the new contract; (3) the extinguishment of the old contract; and (4) the validity of the new one. 22 In the instant case, all four requisites have been complied with. The first promissory note was a valid and subsisting contract when petitioner spouses and Apex executed the second promissory note. The second promissory note absorbed the unpaid principal and interest of P142,326.43 in the first note which amount became the principal debt therein, payable at a higher interest rate of 21% per annum. Thus, the terms of the second promissory note provided for a higher principal, a higher interest rate, and a higher monthly amortization, all to be paid within a shorter period of 16.33 years. These changes are substantial and constitute the principal conditions of the obligation. 23 Both parties voluntarily accepted the terms of the second note; and also in the same note, they unequivocally stipulated to extinguish the first note. Clearly, there was animus novandi, an express intention to novate. 24 The first promissory note was cancelled and replaced by the second note. This second note became the new contract governing the parties’ obligations.

In their second assigned error, petitioners contend that in the second promissory note, the escalation of the interest rate from 12% to 21% per annum is unlawful and cannot be imposed for failure of the escalation provisions to include valid de-escalation clauses. In the absence of de-escalation clauses, the Court of Appeals allegedly erred in applying Central Bank Circulars Nos. 705, 712 and 905 issued by the Monetary Board of the Central Bank of the Philippines.25cralaw:red

At the time the parties executed the first promissory note in 1978, the interest of 12% was the maximum rate fixed by the Usury Law for loans secured by a mortgage upon registered real estate. 26 On December 1, 1979, the Monetary Board of the Central Bank of the Philippines 27 issued Circular No. 705 which fixed the effective rate of interest on loan transactions with maturities of more than 730 days to twenty-one per cent (21%) per annum for both secured and unsecured loans. 28 On January 28, 1980, The Monetary Board issued Circular No. 712 reiterating the effective interest rate of 21% on said loan transactions. 29 On January 1, 1983, CB Circular No. 905, series of 1982, took effect. This Circular declared that the rate of interest on any loan or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured, "shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended." 30 In short, Circular No. 905 removed the ceiling on interest rates for secured and unsecured loans, regardless of maturity. 31

When the second promissory note was executed on September 20, 1982, Central Bank Circulars Nos. 705 and 712 were already in effect. These Circulars fixed the effective interest rate for secured loan transactions with maturities of more than 730 days, i.e, two (2) years, at 21% per annum. The interest rate of 21% provided in the second promissory note was therefore authorized under these Circulars.chanroblesvirtuallawlibrary:red

The question of whether the escalation clauses in the second promissory note are valid is irrelevant. Respondent corporation has signified that it is collecting petitioners’ debt only at the fixed interest rate of 21% per annum, as expressly agreed upon in the second promissory note, not at the escalated rates authorized under the escalation clauses. 32 The Court of Appeals therefore did not err in applying the interest rate of 21% to petitioner’s loan under the second promissory note.

Neither did the Court of Appeals err in imposing attorney’s fees of ten per cent (10%) on the amount due. The award of attorney’s fees is expressly stipulated in the fourth paragraph of the promissory note itself, viz:jgc:chanrobles.com.ph

"In case of non-payment of the amount of this note or any portion of it on demand when given due, or any other amount/s due on account of this note, the entire obligation shall become due and demandable, and if for the enforcement of the payment thereof, APEX MORTGAGE AND LOANS CORP. is constrained to entrust the case to its attorneys, I/We, jointly and severally, bind myself/ourselves to pay TEN (10%) per cent on the amount due on the note as attorney’s fees, such amount in no case to be less than FIVE HUNDRED (P500.00) PESOS in addition to the legal fees and other incidental expenses." 33

Petitioners’ lack of bad faith in resisting imposition of the increased interest rate cannot serve to mitigate their liability for liquidated damages. Petitioner Florante Bautista is a lawyer and he should have been aware of the effects of the stipulations in the second promissory note and the pertinent CB Circulars on his obligation. At the same time, there is no showing that the amount of liquidated damages is iniquitous and unconscionable for this court to equitably reduce the same. 34

Finally, the fact that petitioners were not notified of the assignment of their credit by Apex to herein respondent corporation is not material. In the eight paragraph of the second promissory note, petitioners expressly waived notice to any assignment of credit, viz:jgc:chanrobles.com.ph

"It is understood that APEX MORTGAGE AND LOANS CORPORATION has the right to assign this promissory note, or make use of it as collateral in favor of any third person whomsoever and this will constitute as an authority therefore waiver of notice of such action taken [sic]." 35

The purpose of the notice is only to inform the debtor that from the date of the assignment, payment should be made to the assignee and not to the original creditor. 36

IN VIEW WHEREOF, the petition is denied and the Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 51363 are affirmed.

SO ORDERED.chanrobles.com.ph : virtual law library

Davide, Jr., C.J., Kapunan, Pardo and Ynares-Santiago, JJ., concur.

Endnotes:

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1. Penned by Justice Conrado M. Vasquez, Jr. and concurred in by Justices Fermin A. Martin, Jr. and Teodoro P. Regino.

2. Penned by Judge Sixto Marella, Jr.

3. Promissory Note with Authority to Assign Credit, paragraph 1, Rollo, p. 67.

4. Id., par. 3.

5. Id., par. 10, Rollo, p. 68.

6. Id., pars. 3 and 9; see also Comment, p. 4, Rollo, p. 154.

7. Complaint, pp. 102, Annex "D" to the Petition, Rollo, pp. 54-55.

8. Answer, pp. 2-3, Annex "E" to the Petition, Rollo, pp. 62-63.

9. RTC Decision, p. 5, Annex "C" to the Petition, Rollo, p. 53.

10. CA Decision, p. 7, Annex "A" to the Petition, Rollo, p. 46.

11. CA Resolution, Annex "B" to the Petition, Rollo, p. 48.

12. Petition, pp. 11-12, Rollo, pp. 21-22.

13. Petition, pp. 12-14, Rollo, pp. 22-24; Reply, pp. 1-3, Rollo, pp. 159-161.

14. Rollo, p. 56.

15. Rollo, pp. 67-68.

16. "Cancel," Black’s Law Dictionary, 4th ed. (1951).

17. Articles 1291 and 1292, Civil Code; Tolentino, Civil Code, vol. 4, p. 381 (1991); Aquino, Civil Code, vol. 2, p. 344 (1990).

18. Article 1291, Civil Code; Tolentino, supra, at 381-383; Aquino, supra, at 344-349.

19. Cochingyan, Jr. v. R & B Surety Ins. Co., 151 SCRA 339, 349 (1987); De Cortes v. Venturanza, 79 SCRA 709, 722-723 (1977).

20. Article 1292, Civil Code; Fortune Motors (Phils.) Corporation v. Court of Appeals, 267 SCRA 653, 668 (1997); Cochingyan, Jr. v. R & B Surety and Insurance Co., Inc., supra, at 349; Board of Liquidators v. Floro, 110 Phil. 482, 488 (1960); Zapanta v. de Rotaeche, 21 Phil. 154, 159 (1912).

21. Tolentino, Civil Code, vol. 4, p. 384 (1991) citing Philippine National Bank v. Granada, CA-G.R. No. 13919-R, July 20, 1955.

22. Reyes v. Court of Appeals, 264 SCRA 35, 43 (1996); Tiu Siuco v. Habana, 45 Phil. 707, 712 (1924); Zapanta v. Rotaeche, supra; see also Tolentino, supra, at 382.

23. See Tolentino, supra, at 386.

24. Tiu Siuco v. Habana, supra, at 713.

25. Petition, pp. 15-20; Rollo, pp. 25-30.

26. Section 2, Act No. 2655 (The Usury Law).

27. The Monetary Board of the Central Bank of the Philippines was authorized by P.D. No. 116 effective in 1973 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 rates whenever warranted by prevailing economic and social conditions (Section 1-a, Act No. 2655, as amended by P.D. 116).

28. Paragraph 4; CB Circular No. 705 is entitled "Superseding Circular No. 586, Prescribing Ceilings on the Rates of Interest on Loans and Yields on Purchases of Instruments by Banks and Non-Bank Financial Intermediaries." This Circular amended Circular No. 586 promulgated on January 1, 1978 fixing the effective rate of interest by banks and non-bank financial intermediaries at nineteen per cent (19%).

29. Circular No. 712 amended Circular No. 705 to include non-stock savings and loan associations in the coverage of paragraphs 3 and 4 of Circular No. 705.

30. Section 1, Circular No. 905, series of 1982. This Circular, by Sec. 33 thereof, took effect on January 1, 1983.

31. Republic Planters Bank v. Court of Appeals, 216 SCRA 738, 748 (1992); Philippine National Bank v. Court of Appeals, 196 SCRA 536, 544 (1991).

32. Comment, pp. 3-4, Rollo, pp. 153-154.

33. Rollo, p. 56.

34. Article 2227, Civil Code.

35. Rollo, p. 56.

36. Rodriguez v. Court of Appeals, 207 SCRA 553, 559 (1992).