Goldwell Properties Tagaytay, Inc. vs. Metropolitan Bank and Trust Company

A floating interest rate scheme is valid only if the market-based reference rate is stated in writing and agreed upon by the parties; otherwise, the unilateral repricing of the interest rate is void for violating the principle of mutuality of contracts. The Court also held that the imposition of VAT on top of the monetary interest is iniquitous and unlawful, and that a penalty interest rate of 18% per annum, coupled with a void repricing mechanism, should be reduced to 6% per annum.

Petitioners Goldwell Properties Tagaytay, Inc. (Goldwell) and Nova Northstar Realty Corporation (Nova) are corporate borrowers that obtained loans from respondent Metropolitan Bank and Trust Company (Metrobank) in 2001, secured by real estate mortgages and continuing surety agreements. The loans were covered by several promissory notes with stipulated interest rates and penalty charges. When the debtor companies experienced financial difficulties, they requested a modification of their interest payment scheme and subsequently entered into Debt Settlement Agreements (DSAs) with Metrobank to restructure their outstanding obligations. The DSAs provided for a waiver of 75% of penalty charges, a recomputation of past due interest at a reduced rate, and a new payment scheme with a monetary interest rate of 10% per annum for the first year, repriceable quarterly thereafter based on the prevailing market rate, plus 10% VAT.

Petitioner Goldwell Properties Tagaytay, Inc. (Goldwell) and Nova Northstar Realty Corporation (Nova) obtained loans from respondent Metropolitan Bank and Trust Company (Metrobank) in 2001, covered by several promissory notes and secured by real estate mortgages and continuing surety agreements. When the debtor companies experienced financial difficulties, they requested Metrobank to modify their interest payment scheme from monthly to quarterly. Metrobank's executive committee approved the request on December 11, 2001. The petitioners, however, alleged in a letter dated April 24, 2002, that the bank took four months to reduce the approval to writing, resulting in the accumulation of interest and their failure to pay. They then requested a restructuring of their outstanding loans.

The parties executed two Debt Settlement Agreements (DSAs) both dated August 15, 2003. In Nova's DSA, Nova and the spouses Hernandez acknowledged a total outstanding obligation of P19,539,999.33 to Metrobank as of July 31, 2003. In Goldwell's DSA, Goldwell and the spouses Hernandez acknowledged a total outstanding obligation of P55,477,836.22. The DSAs provided for a 75% waiver of outstanding penalty charges, a recomputation of past due interest at 12% per annum, a two-year moratorium on principal payments, and quarterly payments of principal and interest at 10% per annum for the first year, repriceable every quarter thereafter based on the prevailing market rate plus 10% VAT. The DSAs also stipulated that upon default, Metrobank could revert to the original obligation amounts, enforce the original loan terms, impose an 18% per annum penalty on defaulted amortizations, and foreclose the mortgages.

Pursuant to the DSAs, the debtor companies' total restructured balance amounted to P62,447,492.33, and they executed new promissory notes in favor of Metrobank. The petitioners paid their dues until August 2004, although Metrobank clarified that they only paid interest amortizations and/or penalty charges. In a letter dated October 12, 2004, the petitioners requested Metrobank to allow them to pay the equivalent loan value of their collaterals as full payment of the loan. Metrobank sent demand letters dated November 25, 2004 for the payment of past due accounts. The parties engaged in extensive negotiations over the following years, with the petitioners making various settlement proposals, including offers to pay P20 Million, P35 Million, P40 Million, and P55 Million in exchange for the release of some collaterals. Metrobank made counter-proposals and eventually agreed to reduce the total amount to P67,373,247.22, conditioned on a partial payment of P55 Million and reimbursement of realty taxes and appraisal costs. The petitioners did not accept these terms.

Around August 2006, the debtor companies referred their concerns to the Bangko Sentral ng Pilipinas (BSP) for mediation, but no settlement was reached. The petitioners filed a Complaint for Specific Performance, Accounting and Damages on February 1, 2007 before the RTC of Makati, Branch 59, seeking to compel Metrobank to make an accounting, accept the independent appraisers' valuations, allow partial release of mortgaged properties, and remove allegedly shocking penalty charges. The RTC dismissed the Complaint, finding that the petitioners defaulted on the DSAs and that the interest and penalty charges were not unconscionable. The CA affirmed the RTC's decision in toto. The petitioners then filed the instant Petition for Review on Certiorari before the Supreme Court.

• Unilateral Imposition of Penalty Charges: Petitioners asserted that Metrobank unilaterally and unjustifiably imposed penalty charges on scheduled principal amortization and on past due interest, and questioned how Metrobank computed their liability in the sum of P85,490,410.00.
• Iniquitous Interest Rates: Petitioners argued that the 18% per annum penalty on the defaulted amortization, coupled with the repriced interest rate of 14.25% per annum, crossed the threshold of reasonableness and is iniquitous.
• Lack of Agreement on Capitalization: Petitioners contended that in the DSAs, the past due interest was capitalized and charged interest at 10% per annum without prior agreement, and that the rate of 16% per annum was double the bank's advertised rate of 8% per annum.
• Delay Caused Default: Petitioners maintained that they had been religiously paying their accountabilities and that Metrobank's delay in approving their request for a modification in the payment schedule caused their default.
• Refusal to Accept Payment: Petitioners argued that had Metrobank accepted the offer of P55 Million as partial payment and agreed to release the Pasay properties, there would have been a complete and final settlement already.
• Contract of Adhesion and Mutuality of Contracts: Petitioners alleged that the DSAs were contracts of adhesion and violated the principle of mutuality of contracts under Article 1308 of the Civil Code, and that the non-allowance of partial release of collaterals violates Article 2130.
• Estoppel on Indivisibility of Mortgage: Petitioners opined that Metrobank is estopped from raising the defense of indivisibility of mortgage as the partial cancellation of mortgage relates to the partial release of the mortgaged property, as can be seen in a notation after paragraph 6 of Goldwell's DSA.
• Difficulty of Implementation: Petitioners posited that the contracting parties are allowed by law to modify and adjust the terms of their mortgage when implementation has become so difficult as to be manifestly beyond the contemplation of the parties, pursuant to Article 1267 of the Civil Code.
• Bad Faith and Scheme to Acquire Properties: Petitioners alleged that Metrobank prevented them from selling their properties and schemed to be the highest bidder in the foreclosure sale so that it could acquire the properties at a relatively low price, and that Metrobank set the bid price at P47,500,000.00 in 2013, which was lower than the buyback price they offered in 2010.

• Admitted Indebtedness: Metrobank argued that the petitioners never contested the fact that they are indebted to the bank, and that they never disputed their total outstanding obligation and only questioned the interests and penalties when the bank eventually refused to further reduce their liabilities.
• Afterthought Issue: Metrobank pointed out that the debtor companies never alleged in their Complaint that the interest and penalty charges had no contractual basis, and that the petitioners raised the issue of unconscionable interests and penalties as an afterthought.
• Reasonable Rates: Metrobank insisted that the interest rates and penalty charges are reasonable and that the petitioners assented to the provisions of the DSAs, noting that the interest rate prior to the execution of the DSAs was 14.25% per annum, which was very competitive, and that the 18% per annum penalty charge was a standard rate.
• No Obligation to Accept Appraisals: Metrobank contended that it is not obliged to accept the appraisal reports submitted by the petitioners and that the latter already agreed to the bank's valuation of the real properties as collateral when they applied for the loans.
• Indivisibility of Mortgage: Metrobank argued that its refusal to partially release the mortgaged properties did not amount to a prohibition against alienating the real properties sought to be released, and that agreeing to the release would have been contrary to law in view of the indivisibility of mortgage pursuant to Article 2089 of the Civil Code.
• No Contracts of Adhesion: Metrobank denied that the petitioners entered into contracts of adhesion as they willingly and voluntarily executed the DSAs, and their operations are run by educated and seasoned business people who knew what they were doing.
• No Violation of Mutuality: Metrobank argued that there was no violation of the mutuality of contracts as the petitioners knowingly accepted the provisions of the DSAs without coercion.
• No Entitlement to Damages: Metrobank argued that the petitioners are not entitled to damages, especially when the parties did not stipulate such to be an issue for resolution before the RTC.

• Accounting and Appraisal Values: Whether Metrobank should be ordered to make an accounting of petitioners' obligations and consider the appraisal values submitted by the two independent appraisal companies in determining the value of the mortgaged properties.
• Partial Release of Mortgages: Whether Metrobank should be ordered to allow and make a partial release of the mortgages over TCT Nos. 132278 and 143411.
• Penalty Charges: Whether the penalty charges on both the past due interest and principal amount of obligation imposed by Metrobank are excessive, iniquitous, and unconscionable.
• Damages: Whether petitioners' claims for damages should be granted.

• Accounting and Appraisal Values: No. Metrobank could not be compelled to adopt the valuation of the independent appraisers after the loans have already been obtained, as the petitioners had the option to question Metrobank's appraised values before they obtained the loans, and courts cannot dictate how banks should set the values of mortgaged properties for purposes of loan acquisition.
• Partial Release of Mortgages: No. Partial release of the collaterals cannot be allowed pursuant to the doctrine of indivisibility of mortgage under Article 2089 of the Civil Code, as the debtor cannot ask for the release of any portion of the mortgaged property unless and until the loan thus secured has been fully paid.
• Penalty Charges: Partly. The monetary interest rate, penalty interest rate, and imposition of VAT are iniquitous. The repriced monetary interest of 14.25% per annum was declared void for violating the principle of mutuality of contracts, the 10% VAT imposition was struck down as iniquitous and unlawful, and the penalty interest rate of 18% per annum was reduced to 6% per annum.
• Damages: No. The parties are not entitled to damages and attorney's fees since they did not substantiate their entitlement to damages, and the bank did not present the attorney's fees provision as an issue during trial.

• Accounting and Appraisal Values: The Court agreed with the RTC and the CA that the petitioners had the option to question Metrobank's appraised values of the mortgaged properties before they obtained the loans. If they were not agreeable with Metrobank's valuations, they could have obtained loans from other banking institutions. The Court cited the principle that when the law does not provide for the determination of the property's valuation, neither should the courts so require, and that courts cannot dictate how banks should set the values of mortgaged properties for purposes of loan acquisition. The petitioners only raised this valuation issue after they have already obtained the loans.
• Partial Release of Mortgages: The Court applied Article 2089 of the Civil Code, which states that a pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. The fact that petitioners paid for the loan value of the Pasay properties is immaterial; the mortgage would still be in effect since the loans have not been fully settled. Although Metrobank allowed the release of some properties from mortgage in the past, such would not bind the bank to grant the same concession every single time, particularly when it is evident that the petitioners were having difficulties settling their total obligation. The bank's previous practice of releasing the collaterals without full payment of the loan could not develop into an iron-clad rule, as a mere practice could not supersede what the law mandates.
• Penalty Charges: The Court distinguished between monetary interest and compensatory/penalty interest. While the interest rate of 14.25% per annum upon the principal obligation should, in theory, be considered a fair rate, the fact that these specific rates fall below the 3% per month threshold should not be the only factor in determining if the monetary interest rate is valid. The basis of the party tasked to impose the interest rate and, more importantly, the agreement of the other party, should also be considered. The DSAs stated that the interest would be "repriceable every quarter thereafter based on the prevailing market rate plus 10% [VAT]," but the provision did not state which market-based reference would be used by the parties for the repricing, nor did it indicate that the petitioners would be given a written notice as regards the application of the repriced interest rate and the opportunity to consent to the repricing. Citing Vasquez vs. Philippine National Bank and Security Bank Corp. vs. Spouses Mercado, the Court held that in order for the concept of a floating rate of interest to apply, it presupposes that a market-based reference rate is indicated in writing and agreed upon by the parties. Since Metrobank had the authority to unilaterally apply the "prevailing market rate" without specifying the market-based reference and securing the written assent of the petitioners, the repriced monetary interest of 14.25% per annum was declared void. The Court also found the addition of the phrase "plus 10% [VAT]" on top of the repriced monetary interest as unnecessary and misleading, if not illegal, as the borrower should not bear the burden of paying taxes in behalf of the bank. With regard to the penal/compensatory interest, considering the nullification of the repriced monetary interest and given that the Court is allowed to temper unconscionable interest rates, the penalty interest rate of 18% per annum stipulated in the DSAs was reduced to 6% per annum in line with recent jurisprudence.
• Damages: The Court affirmed the denial of the parties' claims for damages since they did not substantiate their entitlement. Although the promissory notes contained a provision addressing attorney's fees, the same cannot be granted since the bank did not present this as an issue during the trial, throughout the appellate level, or before the Court.

• Indivisibility of Mortgage — Under Article 2089 of the Civil Code, a pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. The debtor cannot ask for the release of any portion of the mortgaged property or of one or some of the several lots mortgaged unless and until the loan thus secured has been fully paid, notwithstanding the fact that there has been a partial fulfillment of the obligation. The Court applied this doctrine to hold that the petitioners could not compel Metrobank to partially release the Pasay properties upon payment of their loan values, as the loans have not been fully settled.
• Floating Interest Rate System — A floating rate of interest refers to the variable interest stated on a market-based reference rate agreed upon by the parties. The BSP allows banks and borrowers to agree on a floating rate of interest, provided that it must be based on market-based reference rates such as Manila Reference Rates (MRRs), T-Bill Rates, or other market-based reference rates plus a margin as may be agreed upon by the parties. The reference rate must be stated in writing and must be agreed upon by the parties. The Court applied this doctrine to declare void the unilateral quarterly repricing of the monetary interest rate in the DSAs, as the provision did not state which market-based reference would be used and did not require the written assent of the petitioners.
• Mutuality of Contracts — Under Article 1308 of the Civil Code, a contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. The Court applied this principle to strike down the repricing mechanism in the DSAs, as Metrobank had the authority to unilaterally apply the "prevailing market rate" without specifying the market-based reference and securing the written assent of the petitioners.
• Monetary Interest vs. Compensatory/Penalty Interest — Interest as a compensation fixed by the parties for the use or forbearance of money is referred to as monetary interest, while interest that may be imposed by law or by courts as penalty for damages is referred to as compensatory interest. The right to recover interest arises only either by virtue of a contract (monetary interest) or as damages for delay or failure to pay the principal loan on which the interest is demanded (compensatory interest). The Court applied this distinction to separately assess the validity of the monetary interest rate and the penalty interest rate in the DSAs.
• Contracts of Adhesion — A contract of adhesion is so-called because its terms are prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto. Such contract is just as binding as ordinary contracts. Contracts of adhesion are not invalid per se and they are not entirely prohibited. The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his consent. The Court applied this doctrine to hold that the DSAs, which referred to the restructuring of the petitioners' loans, can hardly be considered as contracts of adhesion, as the petitioners sought the restructuring to eventually settle their admitted accountabilities.

• "In order for the concept of a floating rate of interest to apply, it presupposes that a market-based reference rate is indicated in writing and agreed upon by the parties." — This passage articulates the controlling doctrine on floating interest rates, which the Court applied to declare void the unilateral repricing mechanism in the DSAs.
• "Based on the DSAs, Metrobank had the authority to unilaterally apply the 'prevailing market rate' without specifying the market-based reference and securing the written assent of the petitioners, which is in violation of the principle of mutuality of contracts." — This passage states the ratio decidendi for declaring the repriced monetary interest of 14.25% per annum void.
• "If the intent of Metrobank was to include the VAT in the breakdown of costs for purposes of computation in relation to its obligation to pay a tax, it should not have placed the said phrase in the same provision as that pertaining to monetary interest. By doing so, Metrobank caused confusion. Worse, it actually included the VAT in the computation for petitioners' liabilities. It unduly imposed an additional obligation upon the petitioners, which should be struck down as iniquitous and unlawful, since the borrower should not bear the burden of paying taxes in behalf of the bank." — This passage explains the Court's reasoning for striking down the 10% VAT imposition as iniquitous and unlawful.
• "It would be unjust to require a penalty charge upon them prior to the finality of this Decision, since the monetary interest rate scheme previously imposed by Metrobank on the DSAs was null and void." — This passage supports the Court's ruling that the petitioners cannot be deemed to have defaulted from their obligation prior to the finality of the Decision.

• Vasquez vs. Philippine National Bank, G.R. Nos. 228355 & 228397, August 28, 2019 — Controlling precedent on floating interest rates, cited for the rule that a market-based reference rate must be stated in writing and agreed upon by the parties, and that the determination of interest rates cannot be left solely to the will of one party.
• Security Bank Corp. vs. Spouses Mercado, G.R. Nos. 192934 & 197010, June 27, 2018 — Followed, cited for the distinction between "prevailing lending rate" and "prevailing market rate," and for the rule that floating rates of interest must be based on a market-based reference rate agreed upon by the parties.
• Buenaventura vs. Metropolitan Bank and Trust Co., 792 Phil. 237 (2016) — Followed, cited for the doctrine on contracts of adhesion and the principle that contracts duly executed are the law between the parties.
• Spouses Silos vs. Philippine National Bank, 738 Phil. 156 (2014) — Cited for the exceptions to the rule that the Court need not re-assess evidence, and for the principle that the applicable legal rate of interest refers to the prevailing rate at the time when the agreement was entered into.
• Nacar vs. Gallery Frames, 716 Phil. 267 (2013) — Followed, cited for the applicable legal interest rates: 12% per annum from the date of execution until June 30, 2013, and 6% per annum from July 1, 2013 until full payment.
• Spouses Andal vs. Philippine National Bank, 722 Phil. 273 (2013) — Followed, cited for the rule that the stipulation requiring the petitioners to pay interest on their loan remains valid and binding even if the interest rate is declared void, and that the petitioners can be considered in default only upon failure to pay the obligation upon finality of the Decision.
• Metropolitan Bank & Trust Co. vs. Chuy Lu Tan, 792 Phil. 70 (2016) — Cited for the rule that a 24% per annum (or 2% per month) rate is not unconscionable, and for the application of legal interest on judicial debts.

• Article 2089, Civil Code — Provides that a pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. The Court applied this provision to deny the petitioners' demand for partial release of the mortgaged properties.
• Article 1308, Civil Code — Provides that a contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. The Court applied this provision to declare void the unilateral repricing mechanism in the DSAs.
• Article 1956, Civil Code — Provides that no interest shall be due unless it has been expressly stipulated in writing. The Court cited this provision in affirming that the parties entered into contracts that expressly stipulated the interest rates.
• Article 1959, Civil Code — Provides that interest due and unpaid shall not earn interest, but the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal shall earn new interest. The Court cited this provision in affirming the validity of the capitalization of past due interest in the DSAs.
• Article 1226, Civil Code — Provides that in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interest in case of noncompliance, if there is no stipulation to the contrary. The Court cited this provision in discussing the nature of penalty interest.
• Article 2227, Civil Code — Provides that liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. The Court applied this provision in reducing the penalty interest rate from 18% to 6% per annum.
• Article 1159, Civil Code — Provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. The Court cited this provision in affirming the binding nature of the DSAs.
• Article 1267, Civil Code — Provides that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. The petitioners invoked this provision, but the Court did not apply it to release them from their obligations.
• Article 2130, Civil Code — Provides that a stipulation forbidding the owner from alienating the immovable mortgaged shall be void. The petitioners invoked this provision, but the Court did not find a violation.
• Section X305.3, Manual of Regulations for Banks (MORB) of the Bangko Sentral ng Pilipinas — Provides that the rate of interest on a floating rate loan during each interest period shall be stated on the basis of Manila Reference Rates (MRRs), T-Bill Rates, or other market-based reference rates plus a margin as may be agreed upon by the parties. The Court cited this provision to emphasize that the reference rate must be stated in writing and must be agreed upon by the parties.

• Leonen (Chairperson)
• Inting
• Delos Santos
• J. Lopez