Tumon vs. Radiowealth Finance Company

To obtain a writ of preliminary injunction restraining extrajudicial foreclosure on the allegation that the interest on the loan is unconscionable, the debtor must pay the mortgagee at least the legal rate of interest (six percent per annum) on the principal obligation as stated in the application for foreclosure sale, which payment must be made upon filing the application for injunction and updated monthly while the case is pending. Previous payments made by the debtor do not satisfy this requirement, and the trial court has no duty to inquire into the debtor's willingness to pay; compliance must be positively shown by the applicant.

Sps. Lito and Lydia Tumon operated a tokwa business and sought financing from Radiowealth Finance Company, Inc. in 2014. They executed loan documents securing an obligation with a real estate mortgage over their family home covered by Transfer Certificate of Title No. 009-2010000083. After making eleven monthly payments, they defaulted in October 2015 due to business losses. In March 2016, Radiowealth initiated extrajudicial foreclosure proceedings, scheduling a public auction for April 2016. The petitioners filed a civil action for nullification of the mortgage documents and promissory note, simultaneously seeking provisional remedies to arrest the foreclosure.

• The Loan Transaction: Sometime in or before September 2014, petitioners applied for a loan from Radiowealth to finance their tokwa business. Radiowealth granted a loan in the total amount of P2,811,456.00, purportedly to be paid within four years. Petitioners claimed they received only P1,500,000.00 after deductions for a P100,000.00 processing fee/documentation expense and P1,311,456.00 in pre-computed interest. The loan was secured by a real estate mortgage constituted upon petitioners' property covered by Transfer Certificate of Title (TCT) No. 009-2010000083.

• Payment History and Default: Petitioners paid monthly amortizations of P58,572.00 starting November 30, 2014. They alleged that P27,322.00 (or 87%) of each payment went to interest. After making eleven monthly payments totaling P644,292.00 from November 2014 to September 2015, petitioners ceased payments in October 2015 due to business losses from intense market competition.

• Foreclosure Proceedings: On March 11, 2016, Radiowealth filed an Application for Extrajudicial Foreclosure of Real Estate Mortgage with the Executive Judge of the RTC, stating an outstanding balance of P2,044,338.10 as of April 2015, exclusive of penalties. A Notice of Extrajudicial Foreclosure was issued on March 16, 2016, setting the public auction for April 26, 2016.

• Allegations of Fraud and Unconscionable Interest: Petitioners alleged that Radiowealth representatives threatened them with immediate loss of their home if they failed to pay two consecutive amortizations, contrary to the four-year payment agreement. They further alleged that in December 2015, Radiowealth fraudulently induced them to sign a Deed of Sale under Pacto de Retro instead of a promised restructuring agreement. They claimed the 87% annual interest rate was unconscionable, unreasonable, and immoral, and that Radiowealth failed to furnish them with a finance statement in violation of the Truth in Lending Act, depriving them of immediate realization of the interest burden.

• Procedural Posture Before the RTC: On April 11, 2016, petitioners filed an Application for TRO and/or WPI to restrain the foreclosure. The RTC initially granted a TRO but denied the WPI on May 3, 2016, noting that petitioners did not deny their indebtedness and had initially accepted the loan terms without question, only raising the unconscionability defense when they lost the ability to pay. The RTC held that the unconscionable nature of the interest could only be determined after the main case was decided.

• Compliance with A.M. No. 99-10-05-0: Petitioners maintained that they satisfied the three requisites for issuance of a WPI under Rule 2 of A.M. No. 99-10-05-0: (1) allegation of unconscionable interest; (2) documentary evidence supporting the allegation; and (3) willingness and capacity to pay 12% per annum interest on the principal obligation. They argued that the RTC erred by failing to proceed with the determination of their willingness and capacity to pay the required interest after acknowledging the existence of allegations and evidence.

• Due Process Violation: Petitioners argued that the RTC's failure to determine their willingness and capacity to pay the requisite interest constituted a violation of their due process rights under the Constitution, effectively short-circuiting the procedural safeguards intended by A.M. No. 99-10-05-0.

• Prejudgment Error: Petitioners contended that the RTC and CA erred in ruling that determining the unconscionability of interest for WPI purposes would result in prejudgment of the main case, arguing that such a preliminary finding is interlocutory and does not finally dispose of the merits.

• Non-Participation: Radiowealth Finance Company, Inc. did not file a Comment before the Supreme Court despite being required to do so, having failed to comply even after obtaining an extension of time. The Court granted petitioners' Motion to Waive the filing of the Comment.

• Grave Abuse of Discretion: Whether the Court of Appeals committed reversible error in ruling that the Regional Trial Court did not commit grave abuse of discretion in denying petitioners' application for a writ of preliminary injunction.

• Requirements for WPI Under A.M. No. 99-10-05-0: Whether compliance with the payment requirement under Rule 2 of A.M. No. 99-10-05-0 is mandatory for the issuance of a writ of preliminary injunction based on allegations of unconscionable interest in extrajudicial foreclosure proceedings.

• Grave Abuse of Discretion: The Court of Appeals did not commit reversible error. The RTC's denial of the WPI application was not tainted with grave abuse of discretion. A perusal of the record revealed that petitioners failed to comply with the strict requirements for issuance of a WPI under A.M. No. 99-10-05-0, as amended.

• Mandatory Payment Requirement: The petition was denied for lack of merit. Under Rule 2 of A.M. No. 99-10-05-0, as amended, no TRO or WPI shall be issued against extrajudicial foreclosure on the allegation of unconscionable interest unless the debtor pays the mortgagee at least the legal rate of interest (six percent per annum, pursuant to Circular No. 799, Series of 2013) on the principal obligation as stated in the application for foreclosure sale, updated monthly while the case is pending. This requirement is mandatory and strict. The obligation to pay is reckoned from the time the applicant seeks injunctive relief, and previous payments made by the debtor do not satisfy this condition. The trial court has no affirmative duty to inquire into the debtor's willingness to pay; rather, the applicant must positively demonstrate compliance. Petitioners failed to show they had deposited or paid the required interest upon filing their application.

• Prejudgment Concern Clarified: While agreeing with the dismissal, the Supreme Court clarified that the RTC and CA erred in reasoning that determining unconscionability of interest for WPI purposes would prejudice the main case. A preliminary finding of unconscionability requires only prima facie evidence and does not constitute a final determination of the merits; it merely establishes the applicant's clear and unmistakable right to provisional relief under the exception in Rule 2. However, this clarification did not alter the outcome given petitioners' failure to satisfy the payment prerequisite.

• Prima Facie Evidence Standard for Preliminary Injunction: For a writ of preliminary injunction to issue, the applicant must show a clear legal right to be protected based on prima facie evidence. The evidence submitted during the hearing on the application need only be a "sampling" sufficient to give the trial court an idea of the justification for its issuance pending decision on the merits. Such findings are interlocutory and do not constitute prejudgment of the main case.

• Strict Compliance with A.M. No. 99-10-05-0, Rule 2: The guidelines speak of strict exceptions and conditions. To obtain a TRO or WPI against extrajudicial foreclosure on the ground of unconscionable interest, the debtor must: (i) allege the interest is unconscionable; (ii) support the allegation with prima facie evidence; and (iii) prove that upon filing the application, he or she has paid the mortgagee at least the legal rate of interest (currently six percent per annum) on the principal obligation as stated in the foreclosure application, which shall be updated monthly while the case is pending. Prior payments do not satisfy this requirement.

• Legal Rate of Interest: Pursuant to Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013, effective July 1, 2013, the legal rate of interest is six percent per annum (6% p.a.) in the absence of stipulation, replacing the previous twelve percent per annum rate.

• "To justify the issuance of WPI in their favor, it is incumbent upon petitioners to positively show their clear and unmistakable right to be protected."

• "Contrary to petitioners' interpretation, however, a plain reading of the rule reveals that it is not the trial court's duty to prod petitioners if they are willing to fall under the exceptional situation where a WPI may be ordered based on the allegation that interest on the loan is unconscionable. To be sure, petitioners' willingness should have resulted in them, at the very least, depositing with the Court the required interest on the principal obligation."

• "The exceptional circumstance contemplated in Rule 2 of A.M. No. 99-10-05-0, as amended, merely contemplates an 'allegation that the interest on the loan is unconscionable,' not a trial court's conclusive determination that the interest rate is unconscionable based on comprehensive evidence."

• "Thus, to clarify and summarize the requirements in establishing a clear and unmistakable right to have a TRO/WPI under Rule 2 of A.M. No. 99-10-05-0, as amended, be issued, the applicant must: (i) allege in the application for TRO/WPI that the interest rate on the loan is unconscionable; (ii) support this allegation with prima facie evidence; and (iii) prove that, upon filing the application, he or she has paid to the mortgagee at least the legal rate of interest on the principal obligation as stated in the application for foreclosure sale, which shall be updated monthly while the case is pending."

• Borlongan v. Banco de Oro (formerly Equitable PCI Bank), G.R. Nos. 217617 & 218540, April 5, 2017, 822 SCRA 418 — Cited for the principle that a writ of preliminary injunction is warranted where there is a showing of a clear and unmistakable right to be protected and an urgent necessity to prevent serious damage. Distinguished regarding the effect of a WPI on the main case.

• Icon Development Corp. v. National Life Insurance Company of the Philippines, G.R. No. 220686, March 9, 2020 — Followed as controlling precedent establishing that a trial court commits grave abuse of discretion when it issues a TRO/WPI despite the debtor's non-payment of the required interest under A.M. No. 99-10-05-0, and emphasizing the mandatory nature of posting a bond equal to the outstanding debt.

• Lerias v. Court of Appeals, G.R. No. 193548, April 8, 2019 — Cited for the proposition that for a writ of preliminary injunction to issue, the applicant must show a clear legal right to be protected, and in the absence thereof, the issuance constitutes grave abuse of discretion.

• Philippine National Bank v. Castalloy Technology Corp., G.R. No. 178367, March 19, 2012, 668 SCRA 415 — Cited for the principle that the guidelines in A.M. No. 99-10-05-0 speak of strict exceptions and conditions.

• Rule 58, Section 3, Rules of Civil Procedure — Provides the general grounds for issuance of a preliminary injunction, requiring either entitlement to the relief demanded, probability of injustice during litigation, or violation of rights tending to render judgment ineffectual.

• A.M. No. 99-10-05-0 (Procedure in Extrajudicial or Judicial Foreclosure of Real Estate Mortgages), February 20, 2007, as amended by OCA Circular No. 25-07, Rule 2 — Strictly prohibits the issuance of TROs or WPIs against extrajudicial foreclosure on the allegation of unconscionable interest unless the debtor pays at least twelve percent per annum (now six percent per annum) interest on the principal obligation as stated in the foreclosure application, updated monthly while the case is pending.

• Circular No. 799, Series of 2013, Bangko Sentral ng Pilipinas — Reduced the legal rate of interest from twelve percent to six percent per annum in the absence of stipulation, effective July 1, 2013.

Peralta, C.J., Carandang, Zalameda, and Gaerlan, JJ.