Isla vs. Estorga GR. No. 233974 July 2 2018

7. a.
Doctrine: Interest Rates

Case law states that there are two (2) types of interest, namely, monetary interest and
compensatory interest. Monetary interest is the compensation fixed by the parties for the use or
forbearance of money. On the other hand, compensatory interest is that imposed by law or by
the courts as penalty or indemnity for damages.
b. Case Title: CATALINA F. ISLA, ELIZABETH ISLA, AND GILBERT F. ISLA,
PETITIONERS, V. GENEVIRA[*] P. ESTORGA, RESPONDENT. G.R. No. 233974, July 02,
2018, PERLAS-BERNABE, J.
c. Facts: The facts of the are as follows: Petitioners obtained a loan in the amount of
P100,000.00 from respondent, payable anytime from six months to one year and subject to
interest at the rate of 10% per month, payable on or before the end of each month. As security,
a real estate mortgage was constituted over a parcel of land located in Pasay City, covered by
TCT No. 132673 and registered under the name of Edilberto Isla, who is married to Catalina.
When petitioners failed to pay the said loan, respondent sought assistance from the barangay,
and consequently, a Kasulatan ng Pautang dated December 8, 2005 was executed. Petitioners,
however, failed to comply with its terms, prompting respondent to send a demand letter. Once
more, petitioners failed to comply with the demand, causing respondent to file a Petition for
Judicial Foreclosure against them before the RTC.
For their part, petitioners maintained that the subject mortgage was not a real estate mortgage
but a mere loan, and that the stipulated interest of 10% per month was exorbitant and grossly
unconscionable. They also insisted that since petitioners were not the absolute owners of the
subject property - as the same was allegedly owned by Edilberto they could not have validly
constituted the subject mortgage thereon.
RTC granted the Petition for Judicial Foreclosure, finding that petitioners themselves admitted
that: (a) they obtained a loan in the amount of P100,000.00 and that the said loan was secured
by a real estate mortgage over the subject property; and (b) the subject mortgage was
annotated on TCT No. 132673. Further, the RTC observed that while it is true that the present
action pertains to a judicial foreclosure, the underlying principle is that a real estate mortgage is
but a security and not a satisfaction of indebtedness. Thus, it is only proper to render petitioners
solidarily liable to pay respondent and/or foreclose the subject mortgage should they fail to fulfill
their obligation.
Aggrieved respondent appealed to CA, then CA affirmed with modification the RTC Decision.
The CA held that in light of the registry return receipt bearing the signature of Catalina, it was
established that petitioners indeed received the demand letter dated November 16,
2006. Meanwhile, it did not agree with the RTC's order providing petitioners alternative
remedies, which remedies are, by law, mutually exclusive. Thus, since respondent's Petition for
Judicial Foreclosure was essentially an action to collect a sum of money, she is then barred
from causing the foreclosure of the subject mortgage. Moreover, the CA ruled that the RTC
erred in imposing the interest rate of 12% per annum from December 2007 until full payment. It
likewise held that the stipulated interest of 10% per month on the real estate mortgage is
exorbitant.
d. Issue/s: Whether or not the CA erred in awarding 12% interest on the principal obligation
until full payment.
e. Held: Yes, CA correctly imposed a straight monetary interest rate of 12% per annum on the
principal loan obligation of petitioners to respondent. Case law states that there are two types of
interest, namely, monetary interest and compensatory interest. Monetary interest is the
compensation fixed by the parties for the use or forbearance of money. On the other hand,
compensatory interest is that imposed by law or by the courts as penalty or indemnity for
damages. Accordingly, the right to recover interest arises only either by virtue of a contract
(monetary interest) or as damages for delay or failure to pay the principal loan on which the
interest is demanded (compensatory interest).
Anent monetary interest, the parties are free to stipulate their preferred rate. However, courts
are allowed to equitably temper interest rates that are found to be excessive, iniquitous,
unconscionable, and/or exorbitant, such as stipulated interest rates of 3% per month or
higher. In such instances, it is well to clarify that only the unconscionable interest rate is nullified
and deemed not written in the contract; whereas the parties' agreement on the payment of
interest on the principal loan obligation subsists. It is as if the parties failed to specify the interest
rate to be imposed on the principal amount, in which case the legal rate of interest prevailing at
the time the agreement was entered into is applied by the Court. This is because, according to
jurisprudence, the legal rate of interest is the presumptive reasonable compensation for
borrowed money.
In this case, petitioners and respondent entered into a loan obligation and clearly stipulated for
the payment of monetary interest. However, the stipulated interest of 10% per month was found
to be unconscionable, and thus, the courts a quo struck down the same and pegged a new
monetary interest of 12% per annum, which was the prevailing legal rate of interest for loans
and forbearances of money at the time the loan was contracted on December 6, 2004.
In the case of Spouses Abella v. Spouses Abella, the Court was also faced with a situation
where the parties entered into a loan with an agreement to pay monetary interest. Since the
stipulated rate of interest by the parties was found to be unconscionable, the Court struck down
the same and substituted it with the prevailing legal interest rate at the time the loan was
perfected12% per annum. The Court held that is clear about the applicable interest rate if a
written instrument fails to specify a rate. The court clarified the effect of Article 1956 of the Civil
Code and noted that the legal rate of interest (then at 12%) is to apply: "In a loan or forbearance
of money, according to the Civil Code, the interest due should be that stipulated in writing,
and in the absence thereof, the rate shall be 12% per annum."
Thus, the Court ruled that the CA correctly imposed a straight monetary interest rate of 12% per
annum on the principal loan obligation of petitioners to respondent, reckoned from the date of
extrajudicial demand until finality of this ruling. At this point, suffice it to say that petitioner's
reliance on ECE Realty is misplaced primarily because unlike in this case, the amount due
therein does not partake of a loan obligation or forbearance of money.
In addition, not only the principal amount but also the monetary interest due to respondent as
discussed above shall itself earn compensatory interest at the legal rate, pursuant to Article
2212 of the Civil Code, which states that interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this point. To be sure, Article
2212 contemplates the presence of stipulated or conventional interest monetary interest, which
has accrued when demand was judicially made. In cases where no monetary interest had been
stipulated by the parties, no accrued monetary interest could further earn compensatory
.interest upon judicial demand. Thus, the principal amount and monetary interest due to
respondent shall earn compensatory interest of 12% per annum from judicial demand, the date
of the filing of the complaint on July 24, 2007, to June 30, 2013, and thereafter, at the rate of 6%
per annum from July 1, 2013 until fully paid.

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7. a.

Doctrine: Interest Rates

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