Security Bank and Trust Company vs. Eusebio

Under Central Bank Circular No. 905, the rate of interest on loans or forbearances of money, goods, or credits is no longer subject to any ceiling prescribed under the Usury Law, and courts cannot arbitrarily reduce stipulated interest rates to 12% per annum when the parties have freely agreed upon a higher rate in their contract, provided such stipulation is not contrary to law, morals, good customs, public order, or public policy.

The case arose from three promissory notes executed by private respondent Magtanggol Eusebio in 1983 in favor of petitioner Security Bank and Trust Company, with respondent Leila Ventura as co-maker, involving total loans of P265,000.00 with a stipulated interest rate of 23% per annum. When Eusebio defaulted on the payments, SBTC filed a collection case. The trial court ruled in favor of SBTC but unilaterally reduced the interest rate from the stipulated 23% to 12% per annum pursuant to Section 2 of Central Bank Circular No. 905, prompting this appeal.

• On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note No. TL/74/178/83 in favor of petitioner Security Bank and Trust Company (SBTC) for P100,000.00, payable in six monthly installments with a stipulated interest of 23% per annum.
• On July 28, 1983, respondent Eusebio executed Promissory Note No. TL/74/1296/83 in favor of petitioner SBTC for P100,000.00, payable in six monthly installments with a stipulated interest of 23% per annum.
• On August 31, 1983, respondent Eusebio executed Promissory Note No. TL74/1491/83 in favor of petitioner SBTC for P65,000.00, payable in six monthly installments with a stipulated interest of 23% per annum.
• Private respondent Leila Ventura signed as co-maker on all three promissory notes.
• Upon maturity, the principal balances remaining unpaid were: (1) P16,665.00 for PN No. TL/74/748/83 as of September 1983; (2) P83,333.00 for PN No. TL/74/1296/83 as of August 1983; and (3) P65,000.00 for PN No. TL/74/1991/83 as of August 1983.
• Upon Eusebio's failure to pay the outstanding balances, petitioner SBTC filed a collection case before the Regional Trial Court of Makati.
• The promissory notes were executed in 1983, after the effectivity of Central Bank Circular No. 905 on December 22, 1982.
• Respondent Eusebio did not question the stipulated interest rate of 23% in his Comment to the Supreme Court, and instead expressed willingness to negotiate terms for settling his obligation.

• The interest rate agreed upon by the parties during the signing of the promissory notes was 23% per annum, and the trial court erred in reducing this to 12% per annum.
• The interests awarded should be compounded quarterly from the due date as explicitly provided in the three promissory notes.
• Defendant Leila Ventura should be held liable to pay the balance on the promissory notes since she signed as co-maker and is therefore liable jointly and severally with defendant Eusebio without need for demand upon her.
• Central Bank Circular No. 905 removed the ceilings on interest rates prescribed by the Usury Law, allowing parties to stipulate freely on interest rates.

• Respondent Eusebio, in his Comment to the Supreme Court, chose not to question the decision of the trial court and instead expressed his desire to negotiate with petitioner bank for terms within which to settle his obligation.
• No specific legal arguments were raised by the respondents in the reported decision to justify the reduction of the interest rate or to contest the validity of the 23% stipulation.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the 23% rate of interest per annum agreed upon by petitioner bank and respondents is allowable and not against the Usury Law.
  • Whether courts have the discretion to arbitrarily override stipulated interest rates of promissory notes and impose a 12% interest rate on loans in the absence of evidence justifying the imposition of a higher rate.

• Procedural: N/A
• Substantive:
  • The Supreme Court granted the petition and modified the RTC decision, holding that the stipulated interest rate of 23% per annum should be applied instead of the reduced 12% rate.
  • The Court ruled that Central Bank Circular No. 905, which took effect on December 22, 1982, specifically Section 1 thereof, removed the interest rate ceilings prescribed under the Usury Law, allowing parties to stipulate freely on interest rates for loans or forbearances of money, goods, or credits.
  • Section 2 of CB Circular No. 905, which prescribes a 12% interest rate, applies only in the absence of an express contract as to the rate of interest; where there is a valid stipulation, the agreed rate shall prevail.
  • The Court held that CB Circular No. 905 did not repeal but merely suspended the effectivity of the Usury Law.
  • Applying Article 1306 of the New Civil Code, the Court emphasized that contracting parties may establish such stipulations as they deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy, and that the trial court had no authority to change the contractual stipulations where they were not illegal.
  • The Court noted that the promissory notes were signed voluntarily by both parties and respondent Eusebio did not question the stipulations therein.

• Freedom of Contract in Interest Rate Stipulations — Under Central Bank Circular No. 905 and Presidential Decree No. 1684, contracting parties are free to stipulate any interest rate on loans or forbearances of money, goods, or credits, and courts cannot arbitrarily reduce such stipulated rates to 12% per annum where the parties have freely agreed upon a higher rate. The Court applied this doctrine to hold that the 23% interest rate stipulated in the promissory notes was valid and enforceable.
• Plain Meaning Rule in Statutory Construction — When the law is clear and unambiguous, courts must apply it according to its express terms without interpretation or construction, and no discretion is left to the judiciary to modify the legislative mandate. The Court invoked this doctrine to reject the trial court's reduction of the interest rate, emphasizing that CB Circular No. 905 clearly removed interest rate ceilings.
• Applicability of the 12% Default Interest Rate — The 12% per annum interest rate prescribed under Section 2 of CB Circular No. 905 applies only in the absence of an express contract stipulating the interest rate; where a valid stipulation exists, the agreed rate shall govern.

• "P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated."
• "Basic is the rule of statutory construction that when the law is clear and unambiguous, the court is left with no alternative but to apply the same according to its clear language. This Court had steadfastly adhered to the doctrine that its first and fundamental duty is the application of the law according to its express terms, interpretation being called for only when such literal application is impossible."
• "It is not for respondent court a quo to change the stipulations in the contract where it is not illegal."
• "In a loan or forbearance of money, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum. Hence, only in the absence of a stipulation can the court impose the 12% rate of interest."

• Philippine National Bank v. Court of Appeals (238 SCRA 20) — Cited for the proposition that P.D. No. 1684 and C.B. Circular No. 905 allow contracting parties to stipulate freely regarding adjustments in interest rates on loans or forbearances.
• Quijano v. Development Bank of the Philippines (35 SCRA 270) — Cited for the rule of statutory construction that when the law is clear and unambiguous, courts must apply it according to its express terms without interpretation.
• Eastern Shipping Lines, Inc. v. Court of Appeals (234 SCRA 78) — Cited for the rule that in a loan or forbearance of money, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum.

• Central Bank Circular No. 905, Sections 1 and 2 — Section 1 removes the ceiling on interest rates prescribed under the Usury Law, while Section 2 establishes the default rate of 12% per annum in the absence of an express contract. These provisions formed the legal basis for allowing the stipulated 23% interest rate.
• Presidential Decree No. 1684 — Amended Section 1-a of Act No. 2655 (the Usury Law) to authorize the Monetary Board to prescribe maximum rates of interest and change such rates based on prevailing economic conditions. The Court cited this to establish the legal authority for CB Circular No. 905.
• Article 1306 of the New Civil Code — Provides that 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. The Court applied this to affirm the validity of the 23% interest rate stipulation.
• Act No. 2655 (The Usury Law), as amended by P.D. 1684 — The original law prescribing ceilings on interest rates, which was suspended by CB Circular No. 905.