Carpo vs. Chua

A usurious or unconscionable interest rate stipulation is void and separable from the principal obligation, such that the nullity of the interest does not invalidate the principal loan or the accessory mortgage contract.

On 18 July 1995, spouses David and Rechilda Carpo borrowed ₱175,000.00 from Eleanor Chua and Elma Dy Ng, payable in six months at 6% interest per month, secured by a real estate mortgage over their residential house and lot. Upon default, the mortgage was extrajudicially foreclosed and the property sold at public auction to respondents. After the redemption period lapsed and a new title was issued to respondents, petitioners refused to vacate, prompting respondents to seek a writ of possession, while petitioners filed a complaint for annulment of the mortgage based on vitiated consent and unconscionable interest.

• The Loan and Mortgage: On 18 July 1995, spouses David and Rechilda Carpo obtained a loan of ₱175,000.00 from Eleanor Chua and Elma Dy Ng, payable within six months at an interest rate of 6% per month. To secure payment, the spouses mortgaged their residential house and lot in Magarao, Camarines Sur, covered by TCT No. 23180.
• Default and Foreclosure: Petitioners failed to pay the loan upon demand. The real estate mortgage was extrajudicially foreclosed, and the property was sold at a public auction on 8 July 1996. Respondents, as the only bidders, were awarded the property for ₱367,457.80.
• Consolidation of Title: Petitioners failed to exercise their right of redemption. A certificate of sale was issued on 5 September 1997, TCT No. 23180 was cancelled, and TCT No. 29338 was issued in the name of respondents.
• Writ of Possession and Annulment Suit: Petitioners continued to occupy the property. Respondents filed a petition for a writ of possession (SP No. 98-1665), which the RTC granted on 23 March 1999. On 23 July 1999, petitioners filed a complaint for annulment of the mortgage and foreclosure proceedings (Civil Case No. 99-4376), consigning ₱257,197.26 with the court.
• Suspension of Writ: Upon motion in the writ of possession proceeding, the RTC issued a TRO on 3 August 1999 and an Order on 6 January 2000 suspending the writ of possession pending the final disposition of the annulment case.
• Lower Court Dispositions: The RTC dismissed the annulment complaint, ruling it was filed out of time and barred by laches, characterizing it as an action for annulment of a voidable contract subject to a four-year prescriptive period. The Court of Appeals annulled the RTC orders suspending the writ of possession, holding that the issuance of the writ was a ministerial duty once title consolidated in the mortgagee.

• Unconscionable Interest Rate: Petitioner argued that the 6% monthly interest rate is excessive, iniquitous, and unconscionable, rendering it void pursuant to Medel v. Court of Appeals, and that this nullity should invalidate the real estate mortgage or, at the very least, result in the reduction of the interest to 12% per annum.
• Vitiated Consent: Petitioner alleged that their consent to the loan and mortgage agreements was vitiated by undue influence due to their financial distress.
• Propriety of Certiorari: Petitioner maintained that the RTC orders suspending the writ of possession could not be assailed via certiorari, claiming the 3 August 1999 Order was already beyond the 60-day reglementary period and the 6 January 2000 Order was a final order reviewable only by appeal.
• Grave Abuse of Discretion: Petitioner asserted that the RTC committed no grave abuse of discretion in issuing the orders suspending the writ of possession.

• Separability of Obligations: Respondent countered that even if the interest rate was unconscionable, the principal loan obligation and the accessory mortgage contract remain valid and enforceable.
• Ministerial Duty of Writ of Possession: Respondent argued that the issuance of a writ of possession is a ministerial function once title is consolidated in the purchaser, mandating the issuance of the writ regardless of any pending annulment suit.
• Interlocutory Nature of Order: Respondent maintained that the 6 January 2000 Order was interlocutory and properly assailed via certiorari within the 60-day period, as it was not appealable.

• Validity of Mortgage: Whether the nullity of an unconscionable interest rate invalidates the principal loan obligation and the accessory mortgage contract.
• Vitiated Consent: Whether the petitioners' consent to the loan and mortgage was vitiated by undue influence.
• Laches and Prescription: Whether the action for annulment of the mortgage is barred by prescription and laches.
• Review of Interlocutory Order: Whether the RTC order suspending the writ of possession is interlocutory and reviewable via certiorari.
• Writ of Possession: Whether the issuance of a writ of possession can be enjoined by a pending suit for annulment of the mortgage.

• Validity of Mortgage: The nullity of the unconscionable interest rate does not invalidate the principal loan or the accessory mortgage. A contract of loan with usurious interest consists of principal and accessory stipulations that are divisible. Pursuant to Articles 1273 and 1420 of the Civil Code, the legal prestation to pay the principal debt subsists independently of the illegal prestation to pay usurious interest. Because the principal obligation remains valid, the accessory mortgage contract, which derives its vitality from the principal, also subsists.
• Vitiated Consent: Undue influence was not established. Financial distress alone does not equate to deprivation of free agency; it must be proven that the influence exerted so overpowered the mind of the contracting party as to destroy their free agency.
• Laches and Prescription: Even assuming vitiated consent, the action would be barred by the four-year prescriptive period for voidable contracts under Article 1391 of the Civil Code. Moreover, petitioners are barred by laches, having slept on their rights by failing to challenge the mortgage's validity during the foreclosure proceedings and raising the issue only upon the issuance of the writ of possession.
• Review of Interlocutory Order: The 6 January 2000 Order is interlocutory, as its effectivity hinged on the outcome of the pending annulment suit. Interlocutory orders cannot be challenged by appeal but are susceptible to review via certiorari. The 3 August 1999 TRO was functus officio after 20 days, rendering an attack on its validity moot. The petition for certiorari was timely filed within the 60-day reglementary period.
• Writ of Possession: The issuance of a writ of possession to a purchaser in an extrajudicial foreclosure sale is a ministerial function. The purchaser is entitled to the writ as a matter of right, regardless of whether there is a pending suit for annulment of the mortgage or foreclosure proceedings. An injunction to prohibit the issuance or enforcement of the writ is improper.

• Separability of Usurious Interest from Principal Obligation — In a contract of loan with usurious interest, the principal stipulation (to pay the debt) and the accessory stipulation (to pay interest) are divisible. The illegality of the interest does not render the entire contract void; only the usurious interest stipulation is void, while the principal obligation remains valid and enforceable. The accessory mortgage contract, being dependent on the principal obligation, likewise remains valid.
• Ministerial Duty to Issue Writ of Possession — The issuance of a writ of possession to a purchaser in an extrajudicial foreclosure sale is a ministerial duty of the court once the title has been consolidated in the purchaser's name. The right to the writ is absolute and cannot be stayed by a pending action for annulment of the mortgage or foreclosure proceedings.

• "In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal."
• "The purchaser in a foreclosure sale is entitled as a matter of right to a writ of possession, regardless of whether or not there is a pending suit for annulment of the mortgage or the foreclosure proceedings. An injunction to prohibit the issuance or enforcement of the writ is entirely out of place."

• Medel v. Court of Appeals, 359 Phil. 820 (1998) — Followed. Established that unconscionable interest rates (e.g., 5.5% per month) are void for being contrary to morals, but the principal loan obligation subsists and the interest rate is merely reduced equitably.
• Briones v. Cammayo, 148-B Phil. 881 (1971) — Followed. Comprehensively established that a usurious loan transaction is not a complete nullity but is defective only with respect to the agreed interest, citing the divisibility of principal and accessory stipulations.
• Solangon v. Salazar, 412 Phil. 816 (2001) — Followed. Annulled a 6% per month interest stipulation as unconscionable.
• Ruiz v. Court of Appeals, G.R. No. 146942, 22 April 2003 — Followed. Reduced a 3% per month interest rate to 1% per month.

• Article 1306, Civil Code — Cited as the freedom of contract principle, allowing parties to establish stipulations provided they are not contrary to law, morals, good customs, public order, or public policy, which serves as the basis for annulling excessive interest.
• Article 1273, Civil Code — Cited to support the divisibility of obligations, providing that the renunciation of the principal debt extinguishes accessory obligations, but the waiver of the latter leaves the former in force.
• Article 1420, Civil Code — Applied to establish the separability of illegal terms from legal ones in a divisible contract, allowing the legal terms (principal debt) to be enforced despite the void terms (usurious interest).
• Article 1337, Civil Code — Cited to define undue influence as taking improper advantage of power over the will of another, depriving the latter of reasonable freedom of choice.
• Article 1391, in relation to Article 1390, Civil Code — Discussed regarding the four-year prescriptive period for actions for annulment of voidable contracts based on vitiated consent.
• Article 1410, Civil Code — Noted to emphasize that actions to annul void contracts do not prescribe, a benefit unavailable to petitioners since the loan and mortgage were not entirely void.
• Article 2209, Civil Code — Applied to justify the imposition of legal interest as damages from the date of demand or filing of the complaint when a debtor incurs delay, replacing the void stipulated interest.
• Section 4, Rule 65, Rules of Court — Applied to determine the timeliness of the petition for certiorari, requiring filing within sixty (60) days from notice of the judgment or order.

Reynato S. Puno (Chairman), Ma. Alicia Austria-Martinez, Romeo J. Callejo, Sr., Minita V. Chico-Nazario