Ruiz vs. Court of Appeals

A stipulated interest rate of 36% per annum is unconscionable and must be reduced to the legal rate of 12% per annum, notwithstanding the suspension of the Usury Law by Central Bank Circular No. 905, as lenders are not granted carte blanche authority to impose interest rates that enslave borrowers or hemorrhage their assets.

Petitioner Corazon G. Ruiz, a jewelry businesswoman, obtained several loans from private respondent Consuelo Torres. The loans were consolidated under a single promissory note for P750,000.00, bearing a 3% monthly interest, a 10% compounded monthly interest on the remaining balance upon maturity, a 1% monthly surcharge on the principal for default, and a 25% attorney's fees clause. The consolidated loan was secured by a real estate mortgage over a 240-square meter lot registered in the name of "Corazon G. Ruiz, of legal age, married to Rogelio Ruiz." The mortgage was signed by Corazon for herself and as attorney-in-fact for her husband. Ruiz subsequently obtained three additional loans of P100,000.00 each, secured by pledged jewelry, under separate promissory notes containing similarly excessive interest and surcharge stipulations. After paying the 3% monthly interest for one year, Ruiz defaulted, prompting Torres to demand payment and initiate extrajudicial foreclosure proceedings.

• The Consolidated Loan: Petitioner obtained multiple loans from private respondent totaling P750,000.00, consolidated under a promissory note dated March 22, 1995. The note stipulated a 3% monthly interest, a 10% compounded monthly interest on the balance at maturity, a 1% monthly surcharge on the principal for default, and 25% attorney's fees.
• The Real Estate Mortgage: The P750,000.00 loan was secured by a real estate mortgage executed on March 20, 1995, over a lot covered by TCT No. RT-96686, registered in the name of "Corazon G. Ruiz, of legal age, married to Rogelio Ruiz." Petitioner signed for herself and as attorney-in-fact for her husband, although no Special Power of Attorney was presented in court.
• Subsequent Loans: Petitioner obtained three additional loans of P100,000.00 each on April 21, 1995, May 23, 1995, and December 21, 1995. These were secured by P571,000.00 worth of pledged jewelry. The corresponding promissory notes contained variations of the onerous interest, surcharge, and compounded interest clauses found in the consolidated note.
• Default and Foreclosure: Petitioner paid the 3% monthly interest on the P750,000.00 loan from April 1995 to March 1996, totaling P270,000.00. After March 1996, petitioner defaulted due to business difficulties. Private respondent demanded payment of both the P750,000.00 and P300,000.00 loans and initiated extrajudicial foreclosure.
• Injunction: One day before the scheduled auction, petitioner filed a complaint to enjoin the foreclosure and fix her total indebtedness at P706,000.00, offsetting the pledged jewelry value against the total loan and interest.

• Contract of Adhesion: Petitioner argued that the P750,000.00 promissory note is a contract of adhesion drafted by private respondent, weighing heavily in the latter's favor and failing to reflect their true intentions.
• Property Regime: Petitioner maintained that the Court of Appeals erred in declaring the mortgaged property as paraphernal, arguing that this issue was never raised, discussed, or argued before the trial court.
• Computation of Obligations: Petitioner argued that the appellate court gravely erred in disregarding the trial court's computation of her actual obligations, which was based on evidence submitted before the trial court.

• Validity of Mortgage: Respondent countered that the real estate mortgage is valid and enforceable despite the lack of spousal consent, because the subject property is paraphernal, belonging exclusively to the petitioner.
• Unconscionability of Rates: Respondent argued that the stipulated interest rates and surcharges were excessive, iniquitous, unconscionable, and contrary to morals, warranting their reduction by the appellate court.

• Contract of Adhesion: Whether the promissory note for P750,000.00 is a contract of adhesion.
• Property Regime: Whether the real property covered by the deed of mortgage is paraphernal property of the petitioner.
• Interest and Surcharges: Whether the rates of interest and surcharges on the obligation of petitioner to private respondent are valid.

• Contract of Adhesion: The promissory note was ruled not to be a contract of adhesion. Unlike standard contracts of adhesion where terms are hidden in fine print and presented on a "take it or leave it" basis without opportunity for examination, the promissory note contained no fine print. Petitioner, an experienced businesswoman, had ample time to study the stipulations and executed multiple similar promissory notes on different occasions, negating any claim of compulsion.
• Property Regime: The mortgaged property was declared paraphernal. The phrase "married to Rogelio Ruiz" in the title is merely descriptive of civil status and does not confer co-ownership. The presumption of conjugal ownership under Article 116 of the Family Code applies only if it is first established that the property was acquired during the marriage. Absent proof of acquisition during the marriage, registration of the property in the wife's name alone is determinative of its paraphernal nature.
• Interest and Surcharges: The stipulated interest rates of 3% per month (36% per annum) were reduced to 1% per month (12% per annum) for being unconscionable. The 10% compounded monthly interest and 10% monthly surcharge were invalidated, while the 1% monthly surcharge (without compounding) was upheld as a valid penalty clause partaking of the nature of liquidated damages. Central Bank Circular No. 905 did not grant lenders unlimited authority to impose interest rates that enslave borrowers.

• Unconscionable Interest Rates — While the suspension of the Usury Law by Central Bank Circular No. 905 grants parties wide latitude to agree on interest rates, stipulated rates are illegal and unenforceable if they are excessive, iniquitous, unconscionable, or exorbitant. The circular does not grant lenders carte blanche authority to raise interest rates to levels that will enslave borrowers or hemorrhage their assets.
• Presumption of Conjugal Ownership — Before the presumption under Article 116 of the Family Code (that properties acquired during the marriage are presumed conjugal) can apply, it must first be established that the property was in fact acquired during the marriage. Proof of acquisition during the marriage is a condition sine qua non for the operation of the presumption.
• Nature of Penalty Clauses — A surcharge or penalty stipulated in a loan agreement in case of default partakes of the nature of liquidated damages under Article 2227 of the Civil Code. It is an accessory undertaking to assume greater liability in case of breach, separate and distinct from interest payment, and may be equitably reduced by courts if iniquitous or unconscionable.

• "Nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets."
• "To be required is certainly different from being compelled."
• "Acquisition of title and registration thereof are two different acts."
• "Proof of acquisition during the marriage is a condition sine qua non for the operation of the presumption in favor of conjugal ownership."

• Sweet Lines, Inc. vs. Teves, 83 SCRA 361 — Cited to define the nature of contracts of adhesion. Distinguished because the promissory note in the present case contained no fine print and the petitioner had the opportunity to examine the terms.
• Medel vs. Court of Appeals, 299 SCRA 481 — Followed. Invalidated a 5.5% per month (66% per annum) interest rate as unconscionable, establishing that excessive interest rates remain illegal despite the suspension of the Usury Law.
• Spouses Solangon vs. Salazar, G.R. No. 125944 — Followed. Invalidated a 6% per month (72% per annum) interest rate as unconscionable.
• Garcia vs. Court of Appeals, 167 SCRA 815 — Followed. Sustained a 24% per annum interest rate, serving as a benchmark for reasonable interest.
• Bautista vs. Pilar Development Corporation, 312 SCRA 611 — Followed. Sustained a 21% per annum interest rate, serving as a benchmark for reasonable interest.
• Jocson vs. Court of Appeals, 170 SCRA 333 — Followed. Held that registration of property in the name of the wife alone is determinative of its paraphernal nature absent proof of acquisition during marriage.

• Article 116, Family Code — Presumption that property acquired during the marriage is conjugal. Applied negatively; the presumption was held inapplicable because no proof of acquisition during the marriage was presented.
• Article 2227, Civil Code — Defines liquidated damages. Applied to classify the 1% monthly surcharge as a valid penalty clause separate from interest.
• Article 1226, Civil Code — Recognizes penalty clauses as accessory undertakings to assume greater liability in case of breach.
• Article 1229, Civil Code — Authorizes courts to equitably reduce stipulated penalties if iniquitous or unconscionable. Applied to reduce the 10% monthly surcharge and the compounded interest.
• Central Bank Circular No. 905 — Suspended the Usury Law. Interpreted not as granting unlimited freedom to stipulate interest rates, but as subject to the limitation against unconscionable rates.

Panganiban, Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ.