Solangon vs. Salazar

While CB Circular No. 905 rendered the Usury Law legally inexistent and freed parties to stipulate on interest rates, stipulated interest rates that are iniquitous, unconscionable, and exorbitant — such as 6% per month or 72% per annum — are void and shall be equitably reduced by the courts, in this case to 12% per annum.

Spouses Danilo and Ursula Solangon were borrowers who mortgaged a parcel of land in Sta. Maria, Bulacan to respondent Jose Avelino Salazar as security for loans. The dispute arose from the parties' conflicting accounts of whether there were three separate loans or only one, and whether the stipulated interest rate of 6% per month on the first loan was valid. The legal backdrop includes Central Bank Circular No. 905, which suspended the effectivity of the Usury Law's interest ceilings, thereby allowing parties to freely agree on interest rates — a development that, as the Court clarified, did not grant lenders unlimited authority to impose exorbitant rates.

Spouses Danilo and Ursula Solangon executed three separate deeds of real estate mortgage over the same parcel of land in Sta. Maria, Bulacan in favor of Jose Avelino Salazar. The first mortgage, dated August 22, 1986, secured a loan of P60,000 payable within four months at 6% per month interest. The second, dated May 27, 1987, secured P136,512 payable within one year at the legal rate. The third, dated December 29, 1990, secured P230,000 payable within four months, also at the legal rate.

Petitioners filed the action for annulment of mortgage to prevent foreclosure. They alleged that they had obtained only one loan — the P60,000 — and that the subsequent mortgages were mere continuations of the first, which they claimed was null and void for stipulating an unconscionable interest rate. They further alleged that Salazar had assured them he would not foreclose as long as they paid the stipulated interest upon maturity or within a reasonable time thereafter. They asserted having paid P78,000 and tendered P47,000 more, but Salazar nonetheless initiated foreclosure for their alleged failure to pay the P230,000 loan plus interest.

Salazar countered that the three mortgages secured three separate loans, that the first two had been paid, and that only the third remained unpaid. He denied having represented that he would not foreclose so long as interest was paid. The trial court found petitioners' testimony that they signed the mortgage documents without knowing their contents improbable, noting that both spouses signed the real estate mortgage and the appended promissory note, and that signing a document without knowing its contents is contrary to common experience. The Court of Appeals affirmed the RTC's dismissal, sustaining the stipulated interest rate on the ground that the Usury Law had been rendered ineffective by CB Circular No. 905, leaving interest rates to the mutual agreement of the parties.

• Number of Mortgage Contracts: Petitioner argued that the Court of Appeals erred in holding that three separate mortgage contracts were executed instead of one, maintaining that they obtained only a single loan of P60,000 and that the subsequent mortgages were mere continuations of the first.
• Unconscionability of Interest Rate: Petitioner maintained that the stipulated interest rate of 72% per annum or 6% per month is unconscionable and that the Court of Appeals erred in ruling otherwise.
• Payment of Second Loan: Petitioner insisted that the P136,512 second loan had already been paid, citing that respondent Salazar himself confirmed such payment in his answer to the complaint.
• Resolution of Specific Issues: Petitioner argued that the Court of Appeals failed to resolve the specific issues they raised on appeal.

• Procedural Bar: Respondent countered that the petition should not be given due course because it raises questions of fact, which are not allowed in a petition for review on certiorari under Rule 45.
• Three Separate Loans: Respondent maintained that the three mortgages were executed to secure three separate loans of P60,000, P136,512, and P230,000, and that the first two were paid while the last was not.
• No Assurance Against Foreclosure: Respondent denied having assured petitioners that he would not foreclose the mortgage as long as they paid the stipulated interest.

• Questions of Fact vs. Law: Whether the petition, which raises questions of fact regarding the number of mortgage contracts executed and the payment of the second loan, may be entertained under Rule 45.
• Validity of Interest Rate: Whether the stipulated interest rate of 6% per month or 72% per annum, imposed on the first mortgage, is unconscionable notwithstanding the suspension of the Usury Law by CB Circular No. 905.

• Questions of Fact vs. Law: No. The petition raises questions of fact — whether three mortgages were executed and whether the second loan was paid — which are barred under Rule 45, and none of the recognized exceptions to the finality of lower courts' factual findings are present.
• Validity of Interest Rate: Yes, the rate is unconscionable. While CB Circular No. 905 removed interest ceilings, it does not authorize lenders to impose rates that enslave borrowers; the stipulated 72% per annum is iniquitous and exorbitant and is reduced equitably to 12% per annum.

• Questions of Fact vs. Law: In a petition for review under Rule 45, only questions of law may be raised and must be distinctly set forth. The settled rule is that findings of fact of the lower courts, including the Court of Appeals, are final and conclusive and will not be reviewed on appeal except in enumerated circumstances: when the conclusion is grounded on speculation, surmises, or conjectures; when the inference is manifestly mistaken, absurd, or impossible; when there is grave abuse of discretion; when the judgment is based on a misapprehension of facts; when findings of fact are conflicting; when the Court of Appeals went beyond the issues and its findings are contrary to the admissions of both parties; when the CA's findings are contrary to those of the trial court; and when findings of fact are conclusions without citation of specific evidence. None of these exceptions are present. Petitioners' contentions that only one loan was obtained and that the second loan was paid are factual issues already resolved by the trial court, which found petitioners' testimony improbable — both spouses having signed the mortgage and promissory note, and signing a document without knowing its contents being contrary to common experience.

• Validity of Interest Rate: The Court of Appeals sustained the 72% per annum rate on the ground that CB Circular No. 905 rendered the Usury Law legally inexistent, leaving interest rates to the parties' mutual agreement, in consonance with Liam Law vs. Olympic Sawmill Co. The Court found this reasoning insufficient. While the Usury Law ceiling was lifted, nothing in CB Circular No. 905 grants lenders carte blanche authority to raise interest rates to levels that enslave borrowers or lead to a hemorrhaging of their assets. In Medel vs. Court of Appeals, the Court held that a stipulated rate of 5.5% per month or 66% per annum, while not usurious because the Usury Law is legally inexistent, was nevertheless iniquitous, unconscionable, and exorbitant — contrary to morals (contra bonos mores) — and therefore void, warranting equitable reduction. Petitioners in the present case stand on a worse footing, being required to pay 6% per month or 72% per annum, which is definitely outrageous and inordinate. An interest rate of 12% per annum was deemed fair and reasonable.

• Finality of Factual Findings in Rule 45 Petitions — Findings of fact of the Court of Appeals (and the trial court) are final and conclusive and will not be reviewed on appeal in a Rule 45 petition, except in seven enumerated circumstances: (1) conclusion grounded on speculation, surmises, or conjectures; (2) inference manifestly mistaken, absurd, or impossible; (3) grave abuse of discretion; (4) judgment based on misapprehension of facts; (5) conflicting findings of fact; (6) CA went beyond the issues and findings are contrary to admissions of both parties; (6) CA findings contrary to trial court findings; and (7) findings of fact are conclusions without citation of specific evidence. None of these exceptions were found present in this case.

• Unconscionable Interest Rates Despite Repeal of Usury Law — CB Circular No. 905 rendered the Usury Law legally inexistent and allowed parties to freely stipulate on interest rates. However, this does not grant lenders carte blanche authority to impose interest rates that enslave borrowers or drain their assets. Stipulated interest rates that are iniquitous, unconscionable, and exorbitant are void as contrary to morals (contra bonos mores), and courts shall equitably reduce them. A rate of 6% per month or 72% per annum was held unconscionable and reduced to 12% per annum.

• "While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, 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." — This passage articulates the ratio decidendi: the suspension of usury ceilings does not license unconscionable interest rates, establishing the doctrinal boundary between freedom to stipulate and the courts' power to reduce iniquitous rates.

• "In the case at bench, petitioners stand on a worse situation. They are required to pay the stipulated interest rate of 6% per month or 72% per annum which is definitely outrageous and inordinate. Surely, it is more consonant with justice that the said interest rate be reduced equitably. An interest of 12% per annum is deemed fair and reasonable." — This passage applies the unconscionability doctrine to the specific facts, fixing 12% per annum as the equitable rate and providing the dispositive modification.

• "Nevertheless, we find the interest at 5.5 % per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and hence, contrary to morals ('contra bonos mores'), if not against the law. The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable." — This quotation from Medel vs. Court of Appeals, as adopted by the Court, provides the canonical formulation linking unconscionable interest to void stipulations contrary to morals and the courts' equitable power of reduction.

• Liam Law vs. Olympic Sawmill Co., 129 SCRA 439 (1984) — Cited for the proposition that usury is legally non-existent and interest may be charged as lender and borrower agree. The Court distinguished this ruling, finding that it did not address the issue of unconscionability and that the factual circumstances of the present case required a different jurisprudential instruction.

• Medel vs. Court of Appeals, 299 SCRA 481 (1998) — Controlling precedent followed. The Court adopted its reasoning that while the Usury Law is legally inexistent by virtue of CB Circular No. 905, stipulated interest rates that are iniquitous, unconscionable, and exorbitant are void as contrary to morals and must be equitably reduced. The 5.5% per month rate in Medel was found unconscionable; the higher 6% per month rate in the present case was likewise reduced.

• Almeda vs. Court of Appeals, 256 SCRA 292 (1996) — Cited for the principle that CB Circular No. 905 does not grant lenders carte blanche authority to impose interest rates that enslave borrowers or lead to a hemorrhaging of their assets.

• Republic vs. Court of Appeals, 258 SCRA 712 (1996) — Cited for the enumeration of exceptions to the finality of factual findings of lower courts in Rule 45 petitions.

• Rule 45, 1997 Rules of Civil Procedure, as amended — Governs petitions for review on certiorari before the Supreme Court, limiting review to questions of law. Applied to bar petitioners' factual contentions regarding the number of mortgages and payment of the second loan.
• Central Bank Circular No. 905 — Adopted December 22, 1982, expressly removed the interest ceilings prescribed by the Usury Law, rendering the Usury Law "legally inexistent" and allowing parties to freely agree on interest rates. Applied to confirm that the stipulated rate was not usurious, but the Court held the circular did not authorize unconscionable rates.
• Civil Code provisions on liquidated damages — Referenced through the Medel quotation providing that courts shall reduce equitably liquidated damages, whether intended as indemnity or penalty, if iniquitous or unconscionable. Applied as the basis for equitably reducing the 72% per annum stipulated interest to 12% per annum.

Melo, Vitug, Panganiban, and Gonzaga-Reyes, JJ., concurred.