Chua vs. Timan

Stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable, and exorbitant, and are void for being contrary to morals, if not against the law, even though CB Circular No. 905-82 removed the interest ceilings prescribed by the Usury Law; courts may equitably reduce such rates to 1% per month or 12% per annum and order refund of excess interest payments.

Petitioners Salvador and Violeta Chua were lenders who extended a series of loans to respondents Rodrigo, Ma. Lynn, and Lydia Timan in February and March 1999. The loans were evidenced by promissory notes bearing stipulated interest of 7% per month, later reduced to 5% per month, and were secured by postdated checks. The dispute arose from the legality and enforceability of these stipulated interest rates, tested through a action for consignation and damages filed by the borrowers after the lenders refused to accept tender of the principal alone.

In February and March 1999, petitioners Salvador and Violeta Chua granted respondents Rodrigo, Ma. Lynn, and Lydia Timan six loans in the amounts of ₱100,000; ₱200,000; ₱150,000; ₱107,000; ₱200,000; and ₱107,000. These loans were evidenced by promissory notes stipulating interest at 7% per month, which was later reduced to 5% per month. Rodrigo and Ma. Lynn issued five postdated checks to secure the loans, while Lydia issued a postdated check to secure the ₱150,000 loan.

Respondents paid the loans initially at the 7% monthly interest rate until September 1999, and thereafter at the reduced 5% monthly rate from October to December 1999. Sometime in March 2000, respondents offered to pay the principal amount of the loans through a Philippine National Bank manager's check worth ₱764,000, but petitioners refused to accept it, insisting that the principal totalled ₱864,000.

On May 3, 2000, respondents deposited ₱864,000 with the Clerk of Court of the RTC of Quezon City and filed a case for consignation and damages. Petitioners moved to dismiss, but the RTC denied the motion and the subsequent motion for reconsideration. By virtue of an order of Partial Judgment dated October 16, 2002, the Clerk of Court released the ₱864,000 to petitioners. Trial then proceeded on the validity of the stipulated interest rates and the issue of damages.

The RTC, in its decision dated May 14, 2004, found the original stipulated interest rates of 7% and 5% per month excessive and ordered petitioners to refund all interest payments in excess of the legal rate of 1% per month or 12% per annum, but denied petitioners' claim for damages. The Court of Appeals affirmed this ruling, declaring the rates illegal for being excessive, iniquitous, unconscionable, and exorbitant, and reducing them to 1% per month or 12% per annum with corresponding refund of excess interest payments.

• Non-usurious character of stipulated rates: Petitioners averred that the stipulated interest of 5% monthly and higher cannot be considered unconscionable because these rates are not usurious by virtue of Central Bank Circular No. 905-82, which expressly removed the interest ceilings prescribed by the Usury Law.
• In pari delicto: Petitioners argued that respondents were in pari delicto since they had agreed to the stipulated interest rates of 7% and 5% per month.
• Good faith: Petitioners averred that they honestly believed the interest rates imposed on respondents' loans were not usurious.

• Unconscionability of stipulated rates: Respondents, invoking Medel vs. Court of Appeals, countered that the stipulated interest rates of 7% and 5% per month are iniquitous, unconscionable, and exorbitant, entitling them to the return of excessive interest paid.
• Procedural bar on in pari delicto: Respondents contended that petitioners cannot raise the defense of in pari delicto for the first time on appeal.
• Good faith as a factual issue: Respondents further contended that the defense of good faith is a factual issue which cannot be raised by petitioners in a petition for review under Rule 45 of the Rules of Civil Procedure.

• Unconscionability of Stipulated Interest: Whether the Court of Appeals erred in ruling that the original stipulated interest rates of 7% and 5% per month (equivalent to 84% and 60% per annum, respectively) are unconscionable, and in ordering petitioners to refund respondents all interest payments in excess of 12% per annum.

• Unconscionability of Stipulated Interest: No. The stipulated interest rates of 7% and 5% per month are excessive, iniquitous, unconscionable, and exorbitant, and were properly reduced to 1% per month or 12% per annum, with refund of excess interest payments ordered. The defenses of in pari delicto and good faith were correctly rejected as procedurally barred.

• Unconscionability of Stipulated Interest: The Court reaffirmed the principle, established in a plethora of cases, that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable, and exorbitant, rendering such stipulations void for being contrary to morals, if not against the law. While CB Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans regardless of maturity, nothing in the circular grants carte blanche authority to lenders to raise interest rates to levels which would either enslave borrowers or lead to a hemorrhaging of their assets. The defense of in pari delicto was not raised before the RTC and thus could not be raised for the first time on appeal, as questions on appeal are confined to the issues framed by the parties in the lower court. The defense of good faith was also rejected because it is a question of fact that may not be properly raised in a petition for review under Rule 45, which allows only questions of law. The Court cited Medel vs. Court of Appeals for the proposition that while the Usury Law has been rendered legally inexistent by CB Circular No. 905, stipulated interest rates may still be struck down as void for being contrary to morals (contra bonos mores) when they are iniquitous or unconscionable.

• Unconscionable Interest Rates Doctrine — Stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable, and exorbitant, and the stipulation is void for being contrary to morals (contra bonos mores), if not against the law. Courts may equitably reduce such rates to 1% per month or 12% per annum and order the lender to refund excess interest payments. This doctrine persists notwithstanding the suspension of the Usury Law by CB Circular No. 905-82, which removed interest ceilings but did not authorize lenders to impose rates that would enslave borrowers or lead to a hemorrhaging of their assets.
• Effect of CB Circular No. 905-82 on the Usury Law — CB Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans regardless of maturity. The Usury Law has been rendered "legally inexistent" or "ineffective." However, a Central Bank Circular cannot repeal a law; only a law can repeal another law. The circular did not repeal nor amend the Usury Law but simply suspended its effectivity. Interest may now be charged as lender and borrower may agree upon, but courts retain the power to invalidate rates that are contrary to morals.
• Procedural Bar on New Issues on Appeal — Questions raised on appeal are confined only within the issues framed by the parties in the lower court. A defense such as in pari delicto not raised before the trial court cannot be raised for the first time on appeal.
• Rule 45 Limited to Questions of Law — A petition for review under Rule 45 of the Rules of Civil Procedure allows only questions of law. The defense of good faith, being a question of fact, may not be properly raised in such a petition.

• "While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets." — This passage articulates the ratio decidendi: that the removal of interest ceilings does not license unconscionable rates, and courts retain the power to strike down stipulations contrary to morals.

• "We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law." — This is the canonical formulation of the threshold rule for unconscionable interest, frequently cited in subsequent jurisprudence on loan interest.

• "Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals (contra bonos mores), if not against the law. The stipulation is void." — This quotation from Medel vs. Court of Appeals, adopted by the Court in this decision, establishes the doctrinal link between unconscionability and voidness under the civil law concept of contra bonos mores.

• Medel vs. Court of Appeals, G.R. No. 131622, November 27, 1998, 299 SCRA 481 — Controlling precedent directly relied upon. The Court quoted Medel for the proposition that while the Usury Law has been rendered legally inexistent by CB Circular No. 905, stipulated interest rates that are iniquitous or unconscionable are void as contrary to morals (contra bonos mores). Medel struck down a rate of 5.5% per month (66% per annum); the present case applied the same reasoning to rates of 7% and 5% per month.
• Ruiz vs. Court of Appeals, G.R. No. 146942, April 22, 2003, 401 SCRA 410 — Followed for the proposition that stipulated interest rates should be equitably reduced to 1% per month or 12% per annum.
• Solangon vs. Salazar, G.R. No. 125944, June 29, 2001, 360 SCRA 379 — Cited as supporting authority for the rule that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable, and exorbitant.
• Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 — Cited for the principle that CB Circular No. 905 did not repeal nor amend the Usury Law but simply suspended its effectivity, and that a Central Bank Circular cannot repeal a law.
• Florendo vs. Court of Appeals — Cited for the reiteration that by virtue of CB Circular 905, the Usury Law has been rendered ineffective and usury has been legally non-existent in the jurisdiction.
• Almeda vs. Court of Appeals, G.R. No. 113412, April 17, 1996, 256 SCRA 292 — Cited for the principle that CB Circular No. 905-82 does not grant carte blanche authority to lenders to impose rates that would enslave borrowers.
• Lim vs. Queensland Tokyo Commodities, Inc., G.R. No. 136031, January 4, 2002, 373 SCRA 31 — Cited for the rule that questions raised on appeal are confined within the issues framed by the parties in the lower court.
• Kay Products, Inc. vs. Court of Appeals, G.R. No. 162472, July 28, 2005, 464 SCRA 544 — Cited for the rule that Rule 45 allows only questions of law, not questions of fact.

• Section 1, CB Circular No. 905-82 — Provides that the rate of interest, including commissions, premiums, fees and other charges, on a 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. The Court applied this provision by acknowledging that the Usury Law's interest ceilings were removed, but held that this did not preclude judicial intervention against unconscionable rates contrary to morals.
• Rule 45, Rules of Civil Procedure — Governs petitions for review on certiorari to the Supreme Court, allowing only questions of law. The Court applied this rule to reject petitioners' defense of good faith, which is a question of fact.

Renato C. Corona, Conchita Carpio Morales, Presbitero J. Velasco, Jr., and Arturo D. Brion concurred. No separate concurring opinions were issued.