UNITED COCONUT PLANTERS BANK [UCPB] v. SPS.

SAMUEL AND ODETTE BELUSO 2007 / Chico-Nazario On 16 Apr 1996, UCPB granted Sps. Beluso a promissory notes line under a credit agreement, whereby the spouses could avail credit up to 1.2M maximum until 30 Apr 1997. The spouses constituted a real estate mortgage over parcels of land in Roxas City as additional security. The credit agreement was amended to increase the amount to a maximum of 2.35M and to extend the term until 28 Feb 1998. The spouses availed of the credit line under 3 promissory notes (700k, 500k, 800k). These promissory notes were renewed several times. On 30 Apr 1997, the payment of the principal and interest of the latter 2 promissory notes were debited from the spouses UCPB account; yet, a consolidated loan for 1.3M was again released to the spouses under a promissory note with a 28 Feb 1998 due date. To completely avail of the 2.35M credit line, the spouses executed two more promissory notes (200k, 150k). However, the spouses alleged that the amounts covered by these last two notes were never released, so they are claiming that the principal indebtedness was only 2M (see 700k + 500k + 800k above). UCPB applied interest rates ranging from 18-34%. Until Feb 1998, the spouses were able to pay a total of 763k~. From 28 Feb 10 Jun 1998, UCPB continued to charge interest and penalty on the spouses obligations, but that latter failed to make any payment. On 2 Sep 1998, UCPB demanded that they pay the total of 2.9M~ + 25% attorneys fees, but the spouses still failed to do so. UCPB foreclosed the mortgaged properties on 28 Dec 1998 to secure the spouses credit line (which already went up to 3.7M~). Sps. Beluso filed a petition for annulment, accounting and damages against UCPB. RTC ruled in favor of the spousesinterest rate used, foreclosure, sheriffs certificate of sale void. CA affirmed RTC, saying that the imposition of interest is void, as the interest rates and the bases therefore were determined solely by UCPB. RATIO 1. ON THE ILLEGALITY OF THE INTEREST RATE PROVISIONS UCPBs defenses While the interest rate was not numerically quantified in the face of the promissory notes, it was categorically fixed at the time of execution at the rate indicative of the DBD retail rate. It pointed out to another provision, which stated that the interest rate may be increased or decreased by the lender, considering the following: 1. Prevailing financial and monetary conditions 2. Rate of interest and charges of other banks or financial institutions 3. Resulting profitability to the lender after due consideration of all dealings with borrower o UCPB says that these are valid reference rates (similar to prevailing rate or prime rate allowed in Polotan v. CA). The imposition of interest rates did not infringe on the principle of mutuality of contracts because the spouses were free to choose WON to renew their credit line with the new interest rates. o Assuming there was any defect, it was cured by the spouses availing themselves of credit line from Apr 1996 to Feb 1998 without protesting re: interest. On mutuality of contracts NCC 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. The provision stating that the interest shall be at the rate indicative of DBD retail rate or as determined by the Branch Head is dependent solely on UCPBs will. As regards the rate indicative of DBD retail rate, this is not akin to the prevailing rate or prime rate in Polotan. In said case, the interest rate reads: The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and Trust Company. In Polotan, there is a fixed margin over the reference rate. In the case at hand, the provision does not specify any margin above or below the DBD retail rate, so UCPB is given unfettered discretion in determining the interest rate. In addition, the Separability Clause cannot save either of the two options of UCPB as to the interest to be imposed, as both options violate the principle of mutuality of contracts. While the spouses agreed to renew the credit line, the offending provisions are found in the promissory notes themselves and not in the credit line. On Truth in Lending Act Not disclosing the true finance charges in connection with the extensions of credit is a form of deception.

Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy. 2. ON COMPUTATIONAL ERRORS SCS RULING Default commences upon judicial or extrajudicial demand. The excess amount in such demand does not nullify the demand itself, as such demand is valid with respect to the proper amount. There being a valid demand on the part of UCPB, the spouses are considered in default; therefore, the interests and penalties began to run at that point. There is sufficient basis to impose a 12% legal interest. What was voided was merely the stipulated rate of interest and NOT the stipulation that the loan shall earn interest.

UCPBS AVERMENTS

12% per annum legal interest rate not included in the computation by the lower courts

Another computational error is the negation of the compounding of interest as agreed upon

SC upheld the stipulations providing for compounding of interest, as RTC and CA did not nullify it. This was declared as legal by the Court in Tan v. CA: The contracting parties may, by stipulation, capitalize the interest due and unpaid, which added as principal, shall earn new interest. The spouses are liable for a compounded legal interest of 12% per annum.

Penalty charges also deleted

The penalty stipulated in the contract may be reduced by the courts if it is iniquitous or unconscionable. Penalty ranging from 30.41-36% was found to be iniquitous, considering that this penalty is over and above the imposed compounded interest. The spouses are liable for a penalty charge of 12% per annum.

UCPB is entitled to attorneys fees

The spouses can be made liable even if there has been no demand. Filing a case in court is the judicial demand referred to in NCC 1169, which would put the obligor in delay. HOWEVER, since UCPB was also held liable for attorneys fees (as the spouses were forced to litigate), practical reasons dictate that there be a settingoff or compensation of the liabilities for attorney's fees.

3.

ANNULMENT OF THE FORECLOSURE SALE VALID

CONCEPT: Grounds for the annulment of a foreclosure sale 1. There was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser 2. The sale was not fairly and regularly conducted 3. The price was inadequate and the inadequacy was so great so as to shock the conscience of the court Sps. Belusos allegations Since they had the right to refuse payment of an excessive demand on their account, they cannot be said to be in default for refusing to pay. The enforcement of such illegal demand through foreclosure of mortgage should be voided. UCPBs allegations None of the grounds for annulment of a foreclosure sale is present in this case. The annulment of the foreclosure proceedings and the certificates of sale were mooted by the subsequent issuance of new certificates of title in UCPBs name. The spouses action for annulment of foreclosure constitutes a collateral attack on the banks certificates of title, which is proscribed by the Property Registration Decree (PD 1529, Section 48).

SCs holding UCPB IS CORRECT. PROCEEDINGS VALID. It was already found by the SC that there was a valid demand upon the spouses. Despite the demand being excessive, the spouses are considered in default with respect to the proper amount of their obligation to UCPB; hence, the mortgaged property may be foreclosed. The proceeds of such foreclosure sale should be applied to the extent of the amounts to which UCPB is rightfully entitled. 4. LIABILITY FOR VIOLATION OF TRUTH IN LENDING ACT [RA 3765]

RTC imposed a 26k fine for the alleged violation of RA 3765. UCPBS ALLEGATIONS CAS FINDING (WHICH SC UPHELD) The allegations in the complaint, much more than the title thereof, are controlling. The Acts infringement may be inferred from allegations that when the spouses executed the promissory notes, the interest rate chargeable was left blank. UCPB failed to discharge its duty to disclose in full to the spouses the charges applicable on their loans. UCPB relied on the provision of their promissory note granting it the power to unilaterally fix the interest rates, which rate was left solely to the will of the Branch Head. UCPBS ALLEGATION IS WITHOUT MERIT. The penalty depends on the finance charge required of the borrower, so the borrowers cause of action would only accrue when such finance charge is required. In this case, the date of the demand for payment of the finance charge is 2 Sep 1998, while the foreclosure was made on 28 Dec 1998. The filing of the case on 9 Feb 1999 is within the one-year prescriptive period.

The original complaint did not explicitly allege a violation of the Truth in Lending Act, and no action to formally admit the amended petition [which expressly alleges violation of the Truth in Lending Act] was made either by the spouses and the lower court.

The action to recover the penalty for the violation of the Truth in Lending Act had been barred by the one-year prescriptive period provided for in the Act. The latest of the promissory notes was executed on 2 Jan 1998, but the original petition of the spouses was filed on 9 Feb 1999.

A violation of the Truth in Lending Act, being a criminal offense, cannot be inferred nor implied from the allegations made in the complaint.

As can be gleaned from Section 6(a) and (c), the violation of the said Act gives rise to both criminal and civil liabilities. In this case, the civil action to recover the penalty under Section 6(a) had been jointly instituted with the action to declare the interests in the promissory notes void, and the action to declare the foreclosure void. This joinder is allowed under RoC Rule 2, Section 5.

It is the MeTC that has jurisdiction to try the alleged violation of the Act, considering that the action allegedly involved a single credit transaction as there was only one Promissory Note Line.

Where the causes of action are between the same parties but pertain to different venues or jurisdictions, the joinder may be allowed in the RTC provided one of the causes of action falls within the jurisdiction of said court and the venue lies therein. [RoC] Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since the former is merely a preparatory contract to the contract of loan or mutuum.

Since the spouses were given copies of the promissory notes after their execution, they were duly notified of the terms, in substantial compliance with the Act.

Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be furnished prior to the consummation of the transaction. The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof , proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like.

FINALLY: SUMMARY OF LIABILITIES OF SPS. BELUSO 1. 2.35M as determined by the lower courts 2. PENALTY of 12% per annum on the amount due from the date of demand 3. COMPOUNDED LEGAL INTEREST of 12% per annum on the amount due from date of demand The following amounts shall be deducted from the spouses liability: 1. Payments in the amount of 763k~ Applied to the date of actual payment of the following in the order that they are listed: i. Penalty charges due and demandable as of the time of payment ii. Interest due and demandable as of the time of payment iii. Principal amortization / payment in arrears as of the time of payment iv. Outstanding balance 2. Penalty under Truth in Lending Act in the amount of 26k Deducted from the spouses liability on 9 Feb 1999 to the following in the order that they are listed: i. Penalty charges due and demandable as of the time of payment ii. Interest due and demandable as of the time of payment iii. Principal amortization / payment in arrears as of the time of payment iv. Outstanding balance The amounts that the spouses are ordered to pay shall be deducted from the foreclosure sale proceeds. #