Louh vs. Bank of the Philippine Islands

Stipulated interest rates of 3% per month (36% per annum) or higher are excessive, iniquitous, unconscionable, and exorbitant, and are void for being contrary to morals; consequently, courts may equitably reduce such rates to 12% per annum, and attorney's fees contractually stipulated as a percentage of the debt are subject to equitable reduction under Article 2227 of the Civil Code if found iniquitous or unconscionable.

BPI issued credit cards to William C. Louh, Jr. as the primary cardholder and Irene L. Louh as extension cardholder, subject to terms imposing 3.5% monthly finance charges and 6% monthly late payment charges on unpaid balances. The Spouses Louh utilized the credit accommodations and initially paid based on Statement of Account (SOA) amounts, but became remiss in obligations starting October 14, 2009. Despite written demands dated August 7, 2010, January 25, 2011, and May 19, 2011, they failed to settle their account, which BPI claimed had ballooned to ₱533,836.27 by September 14, 2010.

• The Credit Card Agreement: BPI issued credit cards to William C. Louh, Jr. as primary cardholder and Irene L. Louh as extension cardholder. The terms and conditions stipulated a 3.5% monthly finance charge and 6% monthly late payment charge on unpaid credit availments.
• Default: The Spouses Louh made purchases and paid regularly based on Statement of Account (SOA) amounts until they became remiss in obligations starting October 14, 2009. By September 14, 2010, BPI claimed the outstanding balance reached ₱533,836.27.
• Demand: BPI sent written demand letters dated August 7, 2010, January 25, 2011, and May 19, 2011, which the Spouses Louh received but failed to act upon.
• Procedural Default: After BPI filed its complaint, the RTC granted an extension for the Spouses Louh to file an Answer until March 4, 2012. They failed to comply within this period. BPI moved to declare them in default on June 11, 2012. The Spouses Louh filed their Answer on July 20, 2012, more than three months after the deadline, without seeking relief from the order of default under Rule 9, Section 3.
• Evidence Presented: During the ex-parte proceedings, BPI presented the testimony of Account Specialist Carlito M. Igos through judicial affidavit, delivery receipts of credit cards with signed terms and conditions, computer-generated authentic copies of SOAs, and demand letters received by the Spouses Louh. The Branch Clerk of Court submitted a Commissioner's Report dated September 7, 2012.
• Lower Courts' Rulings: The RTC found the 3.5% and 6% monthly charges iniquitous and unconscionable, reducing both to 1% monthly (12% annually), but upheld the 25% attorney's fees. The CA affirmed this decision in toto.

• Relaxation of Procedural Rules: The Spouses Louh maintained that their failure to file a timely Answer was due to William's medical condition requiring heart bypass surgery, entitling them to a relaxation of procedural rules under the principle that litigation is not a game of technicalities.
• Insufficient Evidence: Petitioner argued that BPI failed to establish its case by preponderance of evidence, alleging that BPI did not prove the Spouses Louh actually received and accepted the SOAs, which were unilaterally prepared by the bank. They claimed the computations failed to specify the amounts pertaining to principal, interest, and penalties.
• Unconscionable Charges: They pointed out that since their credit limit was only ₱326,000.00, the demanded amount of ₱533,836.27 evidently included unconscionable charges, warranting dismissal of the suit.

• N/A (BPI failed to file a comment within the prescribed period).

• Procedural Default: Whether the Court of Appeals erred in sustaining the RTC's declaration of default against the Spouses Louh despite their claim of excusable negligence due to medical emergency.
• Sufficiency of Evidence: Whether BPI failed to prove the actual amount of indebtedness by preponderance of evidence.
• Unconscionable Interest and Penalty Rates: Whether the 3.5% monthly finance charge and 6% monthly late payment charge, totaling 114% annually, were valid and enforceable.
• Attorney's Fees: Whether the award of 25% of the total amount due as attorney's fees was valid and enforceable.

• Procedural Default: The declaration of default was properly sustained. Procedural rules may be relaxed only in exceptional cases with justifiable causes and upon a showing of at least a reasonable attempt at compliance. The Spouses Louh filed their Answer more than three months after the deadline and failed to file a motion to set aside the order of default under Rule 9, Section 3, demonstrating no due diligence that would warrant liberality.
• Sufficiency of Evidence: BPI established its cause of action through preponderant evidence, including judicial affidavit of its Account Specialist, signed delivery receipts, computer-generated SOAs, and demand letters received by the Spouses Louh. The latter's failure to file a timely Answer and their consequent default precluded them from refuting this evidence.
• Unconscionable Interest and Penalty Rates: The 3.5% monthly finance charge (42% annually) and 6% monthly late payment charge (72% annually) were excessive, iniquitous, unconscionable, and exorbitant, rendering them void for being contrary to morals. Following Macalinao v. BPI, both rates were equitably reduced to 12% per annum each. The principal amount was fixed at ₱113,756.83, the actual balance as of October 14, 2009, rather than the inflated ₱533,836.27 which incorporated the void charges.
• Attorney's Fees: The 25% attorney's fees were iniquitous and unconscionable. As liquidated damages under Article 2227 of the Civil Code, attorney's fees are subject to equitable reduction; pursuant to MCMP Construction Corp. v. Monark Equipment Corp., these were reduced to 5% of the total amount due.

• Relaxation of Procedural Rules: Procedural rules are tools designed to facilitate adjudication and must be strictly complied with; liberality is permitted only in exceptional cases upon a showing of justifiable reasons and at least a reasonable attempt at compliance, never to shield erring litigants from the consequences of their negligence.
• Unconscionable Interest Rates: Stipulated interest rates of 3% per month (36% per annum) or higher are deemed excessive, iniquitous, unconscionable, and exorbitant, and are void ab initio for being contrary to morals. While CB Circular No. 905-82 removed the ceiling on interest rates, it did not grant lenders carte blanche authority to impose rates that would enslave borrowers; courts may equitably reduce such rates to 12% per annum.
• Attorney's Fees as Liquidated Damages: Attorney's fees stipulated in a contract as a percentage of the amount due are in the nature of liquidated damages subject to equitable reduction under Article 2227 of the Civil Code if they are iniquitous or unconscionable, regardless of contractual stipulation.
• Relief from Order of Default: A party declared in default may file a motion under oath to set aside the order upon proper showing that failure to answer was due to fraud, accident, mistake, or excusable negligence and that a meritorious defense exists; failure to avail of this remedy weighs heavily against claims for procedural liberality.

• "Procedural rules are tools designed to facilitate the adjudication of cases. Courts and litigants alike are thus enjoined to abide strictly by the rules. And while the Court, in some instances, allows a relaxation in the application of the rules, this, we stress, was never intended to forge a bastion for erring litigants to violate the rules with impunity. The liberality in the interpretation and application of the rules applies only in proper cases and under justifiable causes and circumstances."
• "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. 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."
• "Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence, courts may reduce the interest rate as reason and equity demand."

• Macalinao v. Bank of the Philippine Islands, 616 Phil. 60 (2009) — Controlling precedent establishing that interest rates of 3% per month or higher are unconscionable and void; applied to reduce the finance and penalty charges from 3.5% and 6% monthly to 12% annually each.
• MCMP Construction Corp. v. Monark Equipment Corp., G.R. No. 201001, November 10, 2014, 739 SCRA 432 — Followed for the principle that attorney's fees are liquidated damages subject to equitable reduction under Article 2227 of the Civil Code; applied to reduce attorney's fees from 25% to 5%.
• Magsino v. De Ocampo, G.R. No. 166944, August 18, 2014, 733 SCRA 202 — Cited for the doctrine on strict compliance with procedural rules and the limited grounds for relaxation thereof.
• Chua v. Timan — Cited in Macalinao for the principle that interest rates of 7% and 5% per month must be equitably reduced to 1% per month or 12% per annum.

• Rule 9, Section 3 of the Rules of Civil Procedure — Governs the declaration of default and the remedy of filing a motion under oath to set aside an order of default upon showing of fraud, accident, mistake, or excusable negligence and the existence of a meritorious defense.
• Article 1229 of the Civil Code — Provides that judges shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with, or even if there has been no performance, if the penalty is iniquitous or unconscionable; applied to the penalty charges.
• Article 2227 of the Civil Code — Provides that liquidated damages shall be equitably reduced if they are iniquitous or unconscionable; applied to the attorney's fees.
• Central Bank Circular No. 905-82 — Removed the ceiling on interest rates for secured and unsecured loans; distinguished as not granting unlimited authority to impose excessive rates.

• Presbitero J. Velasco, Jr. (Chairperson)
• Diosdado M. Peralta
• Lucas P. Bersamin
• Alfredo Benjamin S. Caguioa