Rey vs. Anson

Stipulated interest of 7.5% and 7% per month, or 90% and 84% per annum, is excessive, iniquitous, unconscionable, contrary to morals, and void ab initio under Article 1306 of the Civil Code, even if knowingly and voluntarily assumed; the legal rate of 12% per annum applies in its place, unwritten interest is void under Article 1956, and excess payments are recoverable as solutio indebiti.

Rosemarie Rey is the President and one of the owners of Southern Luzon Technological College Foundation Incorporated, a computer school in Legazpi City. Cesar Anson is a private lender to whom Rey was introduced through a mutual friend, Ben Del Castillo, when she needed a quick cash infusion for the school. By Central Bank Circular No. 905, series of 1982, the Usury Law ceiling on interest was suspended, leaving parties free to stipulate rates subject to the limits of law, morals, good customs, public order, and public policy.

On August 23, 2002, Rosemarie Rey borrowed P200,000.00 from Cesar Anson, payable in one year with 7.5% interest per month or P15,000.00 monthly, payable bi-monthly through postdated checks. The loan was secured by a real estate mortgage on the Spouses Teodoro and Rosemarie Rey's Lot 1271-C-4 covered by Transfer Certificate of Title No. 50872, with a 10% penalty and 12% attorney's fees in case of default. Rey issued 24 postdated checks for P7,500.00 each for interest and another postdated check for the P200,000.00 principal. Three days later, on August 26, 2002, Rey borrowed another P350,000.00 payable in four months with 7% monthly interest, secured by a mortgage over land covered by TCT No. 2776 registered in the name of her mother, Isabel B. Quinto.

Rey paid interest on the first loan for twelve months but failed to pay the P200,000.00 principal when it fell due on August 24, 2003. Upon her plea against foreclosure and penalties, Anson extended the term, and Rey signed a promissory note dated April 23, 2004 and a Deed of Real Estate Mortgage dated May 3, 2004 making the principal payable in four months with 7.5% monthly interest, cancelling and replacing the original agreement. She issued new postdated checks for interest, the latest dated August 23, 2004, plus a principal check, paid the interest, but again failed to pay the principal. On the second loan, she failed to pay monthly interest and the principal due December 26, 2002; after extensions, she executed a Deed dated January 19, 2003 acknowledging indebtedness of P611,340.00 payable in four months at 7% per month, and then a Deed dated June 19, 2003 acknowledging P761,450.00 payable in six months at the same rate. Thereafter, on February 24, 2004, Rey obtained a third loan of P100,000.00 with a verbal 3% monthly interest, and on March 2, 2004, a fourth loan of P100,000.00 with a verbal 4% monthly interest, neither put in writing.

On February 25, 2005, Anson sent a Statement of Account demanding P2,214,587.50 for all four loans. Instead of paying, Rey through counsel sent a letter dated August 8, 2005 asserting that the 7.5% and 7% monthly rates were excessive and unconscionable and should be reduced to the legal rate, that no interest was due on the unwritten third and fourth loans, and that recomputed at the legal rate the loans were fully paid with an overpayment of P283,434.19. On August 16, 2005, the Spouses Rey and Isabel Quinto sued for recomputation, recovery of alleged overpayment of P269,700.68, cancellation of mortgages and checks, plus P75,000.00 attorney's fees and P25,000.00 litigation expenses. The RTC found total interest payments of P1,089,908.00, applied compensation, and ordered Anson to pay P143,688.00 and cancelled the mortgages, while the Court of Appeals sustained the stipulated rates on the first two loans, found overpayment of only P59,320.00 on the last two loans, applied compensation, and ordered Rey to pay P902,847.87.

• Unconscionable Interest: Petitioner argued that the Court of Appeals erred in sustaining the 7.5% and 7% monthly interest on Loan 1 and Loan 2, as stipulated rates of 3% per month or higher have been settled by jurisprudence as excessive, unconscionable, and contrary to morals and should have been reduced to 12% per annum.
• Erroneous Recomputation: Petitioner maintained that the RTC erred in merely adding principal and 12% legal interest and deducting total payments, without crediting each payment at the precise time made, first to interest then to principal, pursuant to Article 1253 of the Civil Code.
• Cross-Application of Excess: Petitioner argued that excess payments on Loan 1 should have been credited to Loan 2 at the time made, yielding full payment of Loan 1 by November 8, 2003 and of Loan 2 by May 26, 2004, leaving total excess of P269,700.68 for all four loans recoverable as solutio indebiti.
• Interest on Overpayment: Petitioner maintained that legal interest should have been imposed on the excess payments from written demand until fully paid.
• Attorney's Fees: Petitioner argued that attorney's fees and litigation expenses should have been awarded in her favor.

• Freedom to Stipulate Interest: Respondent countered that with the suspension of the Usury Law, parties could freely stipulate imposable interest, and dismissal was warranted for lack of cause of action.
• Voluntariness and Estoppel: Respondent argued that the Spouses Rey freely agreed to and even proposed the interest rates on Loan 1 and Loan 2, benefited from the proceeds, and could not now assail their illegality.
• Counterclaim: Respondent sought P100,000.00 as moral damages and P50,000.00 as attorney's fees.

• Unconscionable Interest: Whether the stipulated 7.5% and 7% monthly interest rates on the first and second loans are excessive, unconscionable, and contrary to morals and should be reduced to 12% per annum.
• Recomputation and Solutio Indebiti: Whether payments should be credited at the time made under Article 1253 of the Civil Code, whether excess payments on one loan may be applied to another, what the correct overpayment is, and whether interest is imposable thereon under solutio indebiti.
• Attorney's Fees: Whether petitioner is entitled to attorney's fees and litigation expenses.

• Unconscionable Interest: Yes. The 7.5% and 7% monthly rates, equivalent to 90% and 84% per annum, are void ab initio as excessive, iniquitous, and contrary to morals under Article 1306, with 12% per annum substituted; verbal interest on the third and fourth loans is void under Article 1956.
• Recomputation and Solutio Indebiti: Yes in part. Article 1253 applies so each payment covers interest first, yielding total excess of P269,700.68 recoverable under Article 2154, but no interest accrues thereon before finality, only 6% per annum from finality until satisfaction pursuant to Nacar vs. Gallery Frames.
• Attorney's Fees: No. Attorney's fees and litigation expenses are not automatically recoverable and none of the Article 2208 grounds was established.

• Unconscionable Interest: Freedom of contract under Article 1306 is limited by law, morals, good customs, public order, and public policy. Even knowing and voluntary assumption does not validate an iniquitous rate, which amounts to spoliation repulsive to conscience. The 90% and 84% per annum rates far exceed the 3% monthly rate voided in Ruiz vs. Court of Appeals and the 5% monthly rate voided in Sps. Albos vs. Sps. Embisan, et al., and the 5.5% and 6% monthly rates voided in Medel vs. Court of Appeals. Accordingly, the rates were declared void ab initio and replaced with 12% per annum, while the Court of Appeals was correct that no interest was due on the P100,000.00 third and fourth loans for lack of written stipulation, leaving overpayments of P41,360.00 and P17,960.00 thereon.
• Recomputation and Solutio Indebiti: Under Article 1253, payment on interest-bearing debt covers interest before principal. Petitioner's detailed amortization was verified as correct: Loan 1 was fully paid November 8, 2003 with further payments to August 23, 2004 producing P144,259.64 excess, of which P84,259.64 was properly applied to Loan 2 leaving P60,000.00 excess on Loan 1; Loan 2 was fully paid May 26, 2004 with later payments producing P150,380.68 excess. Together with P41,360.00 and P17,960.00 excess on Loans 3 and 4, the total undue payment was P269,700.68. Having paid through mistake that further sums were due when principal and lawful interest were already satisfied, petitioner may recover under Article 2154. Following Sps. Abella vs. Sps. Abella, where overpayment stemmed from mere mistake, equity precludes interest on the quasi-contractual obligation before judgment; under Nacar vs. Gallery Frames, the money judgment bears 6% per annum only from finality until satisfaction.
• Attorney's Fees: Recovery of attorney's fees as damages is exceptional, allowed only upon stipulation or under Article 2208. Absent proof of any enumerated ground, including bad faith or compulsion to litigate within its meaning, denial of fees and litigation expenses was correct.

• Unconscionable interest as contrary to morals — A stipulation authorizing iniquitous or unconscionable interest is void for being contrary to morals, if not against the law, notwithstanding Central Bank Circular No. 905 suspending the Usury Law ceiling. Voluntariness does not cure the defect, since knowing and voluntary assumption of an unconscionable rate remains immoral, unjust, and tantamount to spoliation. Applied here to void 7.5% and 7% monthly interest and substitute the 12% per annum legal rate, consistent with Medel vs. Court of Appeals, Ruiz vs. Court of Appeals, and Sps. Albos vs. Sps. Embisan.
• Requirement of written stipulation for interest — No interest shall be due unless expressly stipulated in writing pursuant to Article 1956 of the Civil Code. Applied to invalidate the verbal 3% and 4% monthly interest on the third and fourth P100,000.00 loans, so all amounts paid beyond principal constituted overpayment.
• Application of payments under Article 1253 — If the debt produces interest, payment of principal shall not be deemed made until interests have been covered. Applied to require crediting each payment at the time made, first to accrued 1% monthly legal interest then to principal, proving early extinguishment of Loans 1 and 2.
• Solutio indebiti — If something is received when there is no right to demand it and was unduly delivered through mistake, the obligation to return it arises under Article 2154. The quasi-contract rests on the principle against unjust enrichment and requires (1) no binding relation imposing duty to pay and (2) payment through mistake, not liberality. Applied to order return of P269,700.68 total excess, with no pre-finality interest because the mistake was in good faith, following Sps. Abella vs. Sps. Abella.
• Legal interest on judgments and attorney's fees — When a money judgment becomes final and executory, it bears legal interest at 6% per annum until satisfaction under Nacar vs. Gallery Frames, this interim period being deemed forbearance of credit. Attorney's fees, other than judicial costs, are recoverable only upon stipulation or under Article 2208. Applied to impose 6% from finality and deny fees for lack of statutory ground.

• "The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy." — States the Article 1306 limit on freedom of contract used to void the stipulated monthly rates.
• "As case law instructs, the imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust." — Defines the controlling doctrine that voluntariness does not validate an iniquitous rate.
• "No interest shall be due unless it has been expressly stipulated in writing." — States the Article 1956 rule applied to void verbal interest on the third and fourth loans.
• "Article 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises." — States the solutio indebiti basis for ordering refund of the P269,700.68 overpayment.

• Sps. Albos vs. Sps. Embisan, 748 Phil. 907 (2014) — Controlling authority for voiding unconscionable interest; followed to hold 5% monthly interest void and to reduce to 12% per annum, applied a fortiori to 7.5% and 7% monthly rates.
• Ruiz vs. Court of Appeals, 449 Phil. 419 (2003) — Precedent voiding 3% monthly interest as excessive and reducing to 12% per annum; cited as benchmark exceeded by the rates here.
• Medel vs. Court of Appeals — Precedent annulling 5.5% and 6% monthly interest as excessive and exorbitant; cited to show the trend toward striking down iniquitous rates.
• Sps. Abella vs. Sps. Abella, 763 Phil. 372 (2015) — Controlling on solutio indebiti overpayments and equitable denial of interest where excess stemmed from mere mistake; followed to deny pre-finality interest.
• Nacar vs. Gallery Frames, 716 Phil. 267 (2013) — Authority for 6% per annum legal interest from finality of money judgment until satisfaction; applied to the P269,700.68 award.
• Eastern Shipping Lines, Inc. vs. Court of Appeals, 304 Phil. 236 (1994) — Interest framework invoked by the Court of Appeals for 6% and 12% rates; superseded in the final award by Nacar vs. Gallery Frames.
• New Sampaguita Builders Construction, Inc. vs. PNB, 479 Phil. 483 (2004) — Authority relied upon by the RTC to void combined interest and surcharges of 62% to 71% per annum; supports reduction to legal rate.

• Article 1306, Civil Code — Allows parties to establish stipulations not contrary to law, morals, good customs, public order, or public policy; applied to void the 7.5% and 7% monthly interest as contrary to morals.
• Article 1956, Civil Code — Provides no interest is due unless expressly stipulated in writing; applied to disallow verbal 3% and 4% monthly interest on the third and fourth loans.
• Article 1253, Civil Code — Provides payment on interest-bearing debt covers interest before principal; applied to recompute Loans 1 and 2 by crediting each payment when made.
• Article 2154, Civil Code — Creates obligation to return what was unduly delivered through mistake; applied to order refund of P269,700.68 total overpayment.
• Article 2159, Civil Code — Imposes legal interest on one who in bad faith accepts undue payment; not applied to impose pre-finality interest because overpayment arose from mere mistake.
• Articles 1169 and 2209, Civil Code — Govern delay upon demand and indemnity for delay in money obligations; invoked by the Court of Appeals to impose legal interest from extrajudicial demand.
• Articles 1278 and 1279, Civil Code — Govern legal compensation when parties are creditors and debtors of each other for liquidated, due, and demandable sums; applied by lower courts to set off mutual obligations.
• Article 2208, Civil Code — Enumerates exclusive grounds for recovering attorney's fees absent stipulation; applied to deny fees for lack of factual justification.

Leonen, J. and Hernando, J., concur. Gesmundo, J. and J. Reyes, Jr., J., on wellness leave.