Asian Cathay Finance and Leasing Corporation vs. Spouses Gravador

Stipulations imposing unconscionable interest rates on a loan debt are inexistent and void from the beginning under Article 1409 of the Civil Code, and the lender is entitled to recover only the principal plus legal interest of 12% per annum; a waiver of the mortgagor's right of redemption embedded in fine print in a contract of adhesion is void for being subversive of public policy.

Asian Cathay Finance and Leasing Corporation (ACFLC) is a financing company engaged in extending loans secured by real estate mortgages. Respondents Cesario Gravador, Norma de Vera, and Emma Concepcion Dumigpi borrowed from ACFLC, executing a promissory note and a deed of real estate mortgage over property in Sta. Maria, Bulacan. The dispute arose from the terms of the loan documents—specifically the interest rate, penalty charges, and a waiver of the right of redemption—and from ACFLC's initiation of extrajudicial foreclosure proceedings when respondents defaulted on the monthly installments after paying only the first one.

On October 22, 1999, Asian Cathay Finance and Leasing Corporation (ACFLC) extended a loan of ₱800,000 to respondent Cesario Gravador, with respondents Norma de Vera and Emma Concepcion Dumigpi as co-makers. The loan was payable in sixty monthly installments of ₱24,400 each. To secure the loan, Cesario executed a real estate mortgage over his property in Sta. Maria, Bulacan, covered by Transfer Certificate of Title No. T-29234.

Respondents paid the initial installment due in November 1999 but were unable to pay the subsequent ones. On February 1, 2000, respondents received a letter from ACFLC demanding payment of ₱1,871,480 within five days from receipt. Respondents requested an additional period to settle their account, but ACFLC denied the request and filed a petition for extrajudicial foreclosure of mortgage with the Office of the Deputy Sheriff of Malolos, Bulacan.

On April 7, 2000, respondents filed a suit for annulment of real estate mortgage and promissory note with damages, praying for the issuance of a temporary restraining order and writ of preliminary injunction. They claimed the real estate mortgage was null and void because it made no reference to the promissory note, the promissory note did not specify the maturity date, interest rate, or mode of payment, and it illegally imposed liquidated damages. They also pointed out that the mortgage contained a provision waiving the mortgagor's right of redemption, contrary to law and public policy, and that ACFLC violated Republic Act No. 3765, the Truth in Lending Act, in the disclosure statement. The RTC denied the application for a TRO on April 12, 2000, the acts sought to be enjoined being already fait accompli.

After trial, the RTC dismissed the complaint for lack of cause of action, sustaining the validity of the promissory note and the real estate mortgage. It held that respondents were well-educated individuals who could not feign naiveté in executing the loan documents, and that the alleged defects were too insubstantial to warrant nullification. The RTC also upheld the interest rate, penalty charge, and the waiver of the right of redemption. On appeal, the CA reversed the RTC, finding the amount of ₱1,871,480 unconscionable and excessive, fixing the principal at ₱800,000 with 12% per annum interest and 1% per month penalty, and invalidating the waiver of the right of redemption for reasons of public policy. ACFLC's motion for reconsideration was denied, prompting the present petition.

• Deception Claim Rebuttal: Petitioner argued that respondents are well-educated persons familiar with the execution of loan documents and thus cannot claim they were deceived into signing documents containing provisions they did not agree to.
• Validity of Interest Rates: Petitioner ascribed error to the CA for invalidating the interest rates imposed on respondents' loan, contending that parties to a loan agreement have wide latitude to stipulate on interest rates pursuant to Central Bank Circular No. 905.
• Validity of Waiver of Redemption: Petitioner argued that the right of redemption is a privilege that respondents were at liberty to waive, as they did in the real estate mortgage.
• Collateral Attack on Title: Petitioner claimed that respondents' complaint for annulment of mortgage constituted a collateral attack on its certificate of title.

• Nullity of Mortgage and Promissory Note: Respondents claimed the real estate mortgage was null and void because it did not reference the promissory note, the promissory note lacked a maturity date, interest rate, and mode of payment, and it illegally imposed liquidated damages.
• Waiver of Redemption Contrary to Law: Respondents argued that the provision in the mortgage waiving the mortgagor's right of redemption was contrary to law and public policy.
• Violation of Truth in Lending Act: Respondents asserted that ACFLC violated Republic Act No. 3765 by failing to provide the disclosure statement prior to the consummation of the loan transaction.
• Alternative Prayer for Recomputation: In the alternative, respondents prayed that the court fix their obligation at ₱800,000 if the mortgage could not be annulled, and declare null and void the provisions on the waiver of redemption and liquidated damages.

• Unconscionable Interest and Penalty: Whether the interest rate and penalty charges imposed by ACFLC on respondents' loan were unconscionable and thus subject to equitable reduction or invalidation.
• Waiver of Right of Redemption: Whether the waiver of the mortgagor's right of redemption contained in paragraph 14 of the real estate mortgage was valid and effective.
• Collateral Attack on Title: Whether respondents' complaint for annulment of mortgage constituted a collateral attack on ACFLC's certificate of title.

• Unconscionable Interest and Penalty: Yes. The amount of ₱1,871,480 demanded within three months on a ₱800,000 loan was unconscionable, ACFLC having failed to show any computation of the interest and penalties imposed; the CA's reduction to 12% per annum interest and 1% per month penalty was proper.
• Waiver of Right of Redemption: No. The waiver was contained in fine print in a contract of adhesion prepared by ACFLC, with no clear and convincing evidence that respondents voluntarily waived their right; it was void as subversive of public policy.
• Collateral Attack on Title: No. The annulment suit was filed on April 7, 2000, before consolidation of ACFLC's title, while the property was still titled in respondent Cesario's name; ACFLC's title was subject to the final outcome of the case.

• Unconscionable Interest and Penalty: While Central Bank Circular No. 905 suspended the Usury Law ceiling on interest rates effective January 1, 1983, giving parties wide latitude to stipulate interest rates, unconscionable interest rates may still be equitably reduced or invalidated. The records showed that respondents obtained ₱800,000 on October 22, 1999, paid only the November 1999 installment, and by February 1, 2000 were demanded to pay ₱1,871,480—an increase of over ₱1,000,000 in three months. ACFLC failed to present any computation showing how the interest and penalties were imposed. Stipulations authorizing iniquitous or unconscionable interest are contrary to morals, if not against the law, and are inexistent and void from the beginning under Article 1409 of the Civil Code. The nullity of the usurious stipulation does not affect the lender's right to recover the principal, nor the terms of the real estate mortgage; legal interest of 12% per annum replaces the excessive interest. The CA's reduction was therefore not reversible error.

• Waiver of Right of Redemption: For a waiver to be valid, it must be couched in clear and unequivocal terms leaving no doubt as to the intention to give up a right, and the intention to waive must be shown clearly and convincingly. The supposed waiver was contained in a statement made in fine print in the real estate mortgage, prepared by ACFLC, to which respondents merely affixed their signatures. It partook of the nature of a contract of adhesion, and doubts in interpreting such stipulations must be resolved against the party that prepared them. ACFLC presented no evidence showing the efficacy of the waiver. Allowing the right of redemption to be waived through fine print would render the right practically nugatory and place the foreclosed property at the mortgagee's absolute disposal, contrary to public policy. The law's policy is to aid rather than defeat the redemptioner's right.

• Collateral Attack on Title: The complaint for annulment of mortgage was filed on April 7, 2000, long before the consolidation of ACFLC's title. At the time the suit was filed, the title was still in the name of respondent Cesario. The case was pending with the RTC when ACFLC filed its foreclosure petition and even when a writ of possession was issued. ACFLC's title was therefore subject to the final outcome of the present case, and the argument that the suit constituted a collateral attack was specious.

• Unconscionable Interest Doctrine — Stipulations imposing unconscionable, excessive, or iniquitous interest rates on a money debt are contrary to morals, if not against the law, and are inexistent and void from the beginning under Article 1409 of the Civil Code. They cannot be ratified, nor can the right to set up their illegality be waived. The nullity of the usurious stipulation does not affect the lender's right to recover the principal, nor the terms of the real estate mortgage; the right to foreclose remains, and legal interest of 12% per annum replaces the excessive interest. The Court applied this doctrine by sustaining the CA's reduction of the interest to 12% per annum and penalty to 1% per month, given that ACFLC demanded over ₱1,000,000 in interest and penalties on a ₱800,000 loan within three months without any supporting computation.

• Valid Waiver of Rights — For a waiver to be valid and effective, it must be couched in clear and unequivocal terms leaving no doubt as to the intention to give up a right or benefit, and the intention to waive must be shown clearly and convincingly. Waivers are not presumed. The Court applied this doctrine by holding that the waiver of the right of redemption in fine print within a contract of adhesion did not meet the requisite clarity and voluntariness, and was therefore void.

• Contract of Adhesion — A contract of adhesion is one prepared by one party and merely acceded to by the other. Doubts in the interpretation of stipulations in contracts of adhesion should be resolved against the party that prepared them. This principle is especially applicable to waivers, which are not presumed. A contract of adhesion may be struck down as void and unenforceable for being subversive of public policy when the weaker party is completely deprived of the opportunity to bargain on equal footing. The Court applied this by nullifying the waiver of the right of redemption embedded in fine print in the mortgage prepared by ACFLC.

• Right of Redemption as Matter of Public Policy — The mortgagor's right of redemption is provided by law for reasons of public policy. When the redemptioner chooses to exercise the right, it is the policy of the law to aid rather than to defeat the right. Allowing the right to be waived through fine print would render it practically nugatory and place the foreclosed property at the mortgagee's absolute disposal.

• "The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man." — This passage articulates the ratio decidendi for invalidating unconscionable interest rates, establishing that even voluntary assumption does not sanitize an iniquitous rate.

• "Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived." — This defines the legal consequence of unconscionable interest stipulations as inexistent and void ab initio, a formulation frequently cited in subsequent lending jurisprudence.

• "Moreover, to say that the mortgagor's right of redemption may be waived through a fine print in a mortgage contract is, in the last analysis, tantamount to placing at the mortgagee's absolute disposal the property foreclosed. It would render practically nugatory this right that is provided by law for the mortgagor for reasons of public policy." — This passage establishes the public policy rationale for invalidating waivers of the right of redemption embedded in fine print in contracts of adhesion.

• Spouses Isagani and Diosdada Castro vs. Angelina de Leon Tan, G.R. No. 168940, November 24, 2009 — Controlling authority cited for the proposition that unconscionable interest rates are immoral, unjust, and void ab initio under Article 1409 of the Civil Code, and that the lender retains the right to recover the principal plus legal interest of 12% per annum in place of the excessive interest.

• Heirs of Zoilo Espiritu vs. Landrito, G.R. No. 169617, April 3, 2007 — Followed as precedent declaring null and void stipulations on interest and charges found excessive, iniquitous, and unconscionable.

• Thomson vs. Court of Appeals, G.R. No. 116631, October 28, 1998 — Cited for the doctrine that a valid waiver must be couched in clear and unequivocal terms, with the intention to waive shown clearly and convincingly.

• Iligan Bay Manufacturing Corporation vs. Dy, G.R. Nos. 140836 & 140907, June 8, 2007 — Cited for the principle that the policy of the law is to aid rather than defeat the redemptioner's right of redemption.

• Article 1409, Civil Code — Provides that contracts whose object or cause is contrary to law or morals are inexistent and void from the beginning, cannot be ratified, and the right to set up their illegality as a defense cannot be waived. Applied to hold that stipulations imposing unconscionable interest are inexistent and void ab initio.

• Central Bank Circular No. 905, series of 1982 — Suspended the Usury Law ceiling on interest rates effective January 1, 1983, giving parties wide latitude to stipulate interest rates. The Court acknowledged this but held it does not preclude judicial reduction of unconscionable rates.

• Section 28, Rule 39, 1997 Rules on Civil Procedure — Governs the right of redemption, granting mortgagors a period of one year from finality within which to redeem the property by paying the redemption price plus 1% interest from foreclosure to actual redemption. The CA invoked this in granting respondents a one-year redemption period.

• Republic Act No. 3765 (Truth in Lending Act) — Requires disclosure of the true cost of credit to the borrower. Respondents alleged ACFLC violated this by failing to provide the disclosure statement prior to consummation of the loan, which the CA cited as a basis for not allowing ACFLC to insist on the interest rate in the note.

Justice Antonio T. Carpio (Chairperson), Justice Diosdado M. Peralta, Justice Roberto A. Abad, and Justice Jose Catral Mendoza concurred in the decision.