Macalinao vs. Bank of the Philippine Islands

Stipulated interest rates of 3% per month and penalty charges of 3% per month in credit card agreements are unconscionable and void for being contrary to morals, warranting equitable reduction to 1% per month each under Article 1229 of the Civil Code.

Petitioner Ileana Macalinao obtained a BPI Mastercard and made purchases, subsequently defaulting on payments. BPI demanded payment of PhP 141,518.34, reflecting compounded interest and penalties under the card's Terms and Conditions, which stipulated a 3% monthly interest and an additional 3% monthly penalty charge on unpaid balances.

• Credit Card Facility: Petitioner Ileana Macalinao was an approved cardholder of a BPI Mastercard. She made purchases using the credit card and subsequently defaulted on payments.
• Stipulated Rates: Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, unpaid balances after the payment due date bore interest at 3% per month, plus an additional penalty fee equivalent to 3% per month or a fraction thereof.
• Demand and Complaint: BPI sent a demand letter dated January 5, 2004, requiring payment of PhP 141,518.34. For failure to settle the obligation, BPI filed a complaint for sum of money in the MeTC of Makati City against petitioner and her husband, praying for PhP 154,608.78 plus 3.25% finance charges, 6% late payment charges, and 25% attorney's fees.
• Default in Answer: Upon service of summons and a copy of the complaint, the spouses failed to file an answer. BPI moved for judgment under the Rule on Summary Procedure, which the MeTC granted.
• Lower Court Rulings: The MeTC rendered judgment based on BPI's evidence, reducing the total interest and penalty charges to 2% per month from the PhP 141,518.34 demanded. The RTC affirmed the MeTC decision in toto. On appeal, the CA modified the decision, increasing the interest and penalty charges to 3% per month, while adjusting the base amount for recomputation to PhP 94,843.70—the beginning balance on the oldest Statement of Account presented. The CA held that contracts of adhesion are not invalid per se and that the MeTC erred in modifying the stipulated rate.

• Unconscionable Interest Rate: Petitioner argued that the 3% monthly interest rate imposed by the CA, translating to 36% per annum, is iniquitous, unconscionable, and illegal, warranting the reduction to 2% per month applied by the MeTC.
• Arbitrary Modification: Petitioner maintained that the CA arbitrarily modified the reduced rate from 2% to 3% per month, contrary to the tenor of its own decision recognizing that the previous balance already incorporated higher interest rates.
• Failure to Prove Correct Amount: Petitioner contended that the case should be dismissed or remanded to the lower court, because BPI failed to prove the correct amount of the principal obligation; the PhP 94,843.70 used as the basis for recomputation was not the principal but already included prior interest charges.

• Contractual Stipulation: Respondent countered that the 3% monthly interest rate and penalty charge are reasonable and based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, which petitioner freely availed herself of.

• Unconscionability of Interest and Penalty Rates: Whether the stipulated interest rate and penalty charge of 3% per month are unconscionable and should be reduced.
• Dismissal or Remand of the Case: Whether the case should be dismissed or remanded for failure of respondent to prove the correct amount of the principal obligation.

• Unconscionability of Interest and Penalty Rates: The 3% monthly interest and 3% monthly penalty charge are unconscionable and exorbitant, thus void for being contrary to morals. Pursuant to Article 1229 of the Civil Code and prevailing jurisprudence, they were equitably reduced to 1% monthly interest and 1% monthly penalty charge, totaling 2% per month or 24% per annum. CB Circular No. 905-82, which removed the ceiling on interest rates, did not grant lenders carte blanche to impose enslaving rates. Because the stipulation on the interest rate is void, courts may reduce the interest rate as reason and equity demand.
• Dismissal or Remand of the Case: Dismissal or remand is unwarranted. Petitioner defaulted in filing an answer, so judgment was properly rendered based on BPI's evidence under Section 6 of the Revised Rule on Summary Procedure. Petitioner admitted the existence of her obligation, making dismissal an injustice to BPI. Remand would unduly prolong the proceedings. The CA correctly used the PhP 94,843.70 beginning balance as the basis for recomputation, as it was the first amount appearing on the Statement of Account on record, and factual findings of lower courts must stand absent a showing of grave abuse of discretion.

• Unconscionable Interest Rates — Stipulated interest rates of 3% per month or higher are excessive, iniquitous, unconscionable, and exorbitant, rendering them void for being contrary to morals, if not against the law. CB Circular No. 905-82, which removed the ceiling on interest rates, does not authorize lenders to impose rates that enslave borrowers or lead to a hemorrhaging of their assets.
• Equitable Reduction of Penalties — Under Article 1229 of the Civil Code, courts may equitably reduce penalty charges if they are iniquitous or unconscionable, even if there has been no performance. In exercising this power, courts must consider the circumstances of each case, including partial payments made by the debtor.

• "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."

• Chua vs. Timan, G.R. No. 170452, August 13, 2008 — Followed. Stipulated interest rates of 3% per month or higher are unconscionable and void; CB Circular No. 905-82 does not grant lenders carte blanche to impose excessive rates.
• Imperial v. Jaucian, G.R. No. 149004, April 14, 2004 — Followed. Cited for the principle that when a stipulation on interest rate is void, courts may reduce the interest rate as reason and equity demand.
• Tongoy v. Court of Appeals, No. L-45645, June 28, 1983 — Followed. Cited in relation to the reduction of unconscionable interest rates.
• Atlantic Gulf and Pacific Company of Manila v. Court of Appeals, G.R. Nos. 114841-43, August 23, 1995 — Followed. Factual findings of lower courts must stand barring a showing that they are totally devoid of support in the record or glaringly erroneous.

• Article 1229, Civil Code — The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with, or if it is iniquitous or unconscionable. Applied to reduce the 3% monthly penalty charge to 1%.
• Section 6, Revised Rule on Summary Procedure — Effect of failure to answer; the court shall render judgment based on the facts alleged in the complaint and evidence presented. Applied to justify denying the remand or dismissal, since petitioner failed to file an answer.
• C.B. Circular No. 905-82 — Removed the ceiling on interest rates for loans. Interpreted as not granting lenders carte blanche authority to impose unconscionable rates.

Consuelo Ynares-Santiago, Minita V. Chico-Nazario, Antonio Eduardo B. Nachura, Diosdado M. Peralta