United Coconut Planters Bank vs. Ang

The nullity of interest-fixing provisions in a credit agreement does not invalidate the entire loan contract or the extrajudicial foreclosure proceedings, as the principal obligation remains enforceable and the mortgage security continues to secure the lawful debt.

United Coconut Planters Bank (UCPB) is a banking institution that extended credit facilities to borrowers Editha F. Ang and Violeta M. Fernandez. The loan relationship was governed by a Credit Agreement incorporating Terms & Conditions that tied interest rates to prevailing market references (MRR, T-bill, or other market-based rates) and expressly allowed quarterly review and resetting "at the option of the bank." The loans were secured by real estate mortgages over various titled lots. The dispute centers on the validity of the interest-fixing mechanism, the dollar-denominated promissory notes, and the extrajudicial foreclosure that followed default.

On April 30, 1997, United Coconut Planters Bank (UCPB) granted Editha F. Ang and Violeta M. Fernandez a term loan aggregating approximately ₱16 million in principal, evidenced by five promissory notes, some of which were denominated in US dollars. The loan was secured by several real estate mortgages over various titled lots. The Credit Agreement and its incorporated Terms & Conditions provided that interest would be based on prevailing market references (MRR, T-bill, or other market-based rates) and expressly allowed quarterly review and resetting "at the option of the bank."

The borrowers made payments for about a year but ceased amortizations after April 30, 1998. Total partial payments amounted to approximately ₱2,349,514.95. After demand, UCPB initiated extrajudicial foreclosure proceedings under Act No. 3135 before Notary Public Immanuel L. Sodusta. A Notice of Sale was issued in June 1999, and the mortgaged properties were sold at public auction to UCPB on August 2, 1999 for ₱21,985,000.00. A Final Deed of Sale followed, and tax declarations were subsequently issued in UCPB's name. UCPB later sold some of the foreclosed lots to Eddie Po on August 1, 2013.

On July 10, 2000, Ang and Fernandez filed in the Regional Trial Court a Petition for Declaration of Nullity of Foreclosure, Auction Sale and Promissory Note & Fixing of True Account. They sought, among other reliefs, annulment of the sale, nullity of the dollar-denominated notes insofar as payment was required in pesos at an allegedly inflated rate, nullity of the interest-fixing provisions, and damages and attorney's fees. The RTC initially declared the interest provisions and the five promissory notes null and void for violating Articles 1308–1309 of the Civil Code and R.A. No. 3765 (Truth in Lending Act), and nullified the auction sale while directing recomputation of indebtedness. After motions for reconsideration, the RTC reversed itself and declared the August 2, 1999 auction sale valid, holding petitioners liable for the principal plus compounded legal interest of 12% and penalties, and directing the application of auction proceeds against the indebtedness with deduction of payments already made.

The Court of Appeals reversed the RTC in part: it held the promissory notes valid, declared the interest-fixing provisions null and void under Article 1308, ruled the auction sale null and void, and remanded for recomputation of indebtedness with legal interest of 12% until June 30, 2013 and 6% thereafter. UCPB filed a Rule 45 petition for review on certiorari to the Supreme Court, which initially denied the petition for procedural defects.

• Rule 45 Procedural Bar: Whether the petition should be dismissed for raising questions of fact in violation of Rule 45 of the Rules of Court.
• Validity of Interest Stipulations: Whether the stipulations on the payment of interest in the Credit Agreement, promissory notes, and disclosure statements are valid.
• Validity of Foreclosure: Whether the extrajudicial foreclosure and auction sale are valid despite the nullity of the provisions imposing interest and any resulting erroneous computation of the obligation.

• Articles 1308–1309, Civil Code — Cited by the RTC in its initial decision declaring the interest provisions and promissory notes null and void; the CA likewise relied on Article 1308 in declaring the interest-fixing provisions null and void. These articles govern the relativity and object of contracts.
• Republic Act No. 3765 (Truth in Lending Act) — Cited by the RTC in its initial decision as a basis for nullifying the interest provisions and promissory notes, relating to the disclosure of true finance charges in credit transactions.
• Act No. 3135 — Governs the extrajudicial foreclosure proceedings initiated by UCPB against the mortgaged properties.