Antonio Tan defaulted on two loans totaling PHP 4 million that he obtained from the Cultural Center of the Philippines (CCP) in 1978. The loans were restructured into a single PHP 3.4 million loan in 1979, which Tan also defaulted on. CCP filed a collection case against Tan in 1984. The trial court and appellate court both ruled in favor of CCP, ordering Tan to pay outstanding balances, interest, penalties, and legal fees. Tan appealed, arguing penalties should not earn interest. The Supreme Court ruled that the promissory note allowed penalties and interest, so both were valid and could accrue. The Court affirmed the lower courts' decisions requiring Tan to pay all amounts owed to CCP
Antonio Tan defaulted on two loans totaling PHP 4 million that he obtained from the Cultural Center of the Philippines (CCP) in 1978. The loans were restructured into a single PHP 3.4 million loan in 1979, which Tan also defaulted on. CCP filed a collection case against Tan in 1984. The trial court and appellate court both ruled in favor of CCP, ordering Tan to pay outstanding balances, interest, penalties, and legal fees. Tan appealed, arguing penalties should not earn interest. The Supreme Court ruled that the promissory note allowed penalties and interest, so both were valid and could accrue. The Court affirmed the lower courts' decisions requiring Tan to pay all amounts owed to CCP
Antonio Tan defaulted on two loans totaling PHP 4 million that he obtained from the Cultural Center of the Philippines (CCP) in 1978. The loans were restructured into a single PHP 3.4 million loan in 1979, which Tan also defaulted on. CCP filed a collection case against Tan in 1984. The trial court and appellate court both ruled in favor of CCP, ordering Tan to pay outstanding balances, interest, penalties, and legal fees. Tan appealed, arguing penalties should not earn interest. The Supreme Court ruled that the promissory note allowed penalties and interest, so both were valid and could accrue. The Court affirmed the lower courts' decisions requiring Tan to pay all amounts owed to CCP
Antonio Tan defaulted on two loans totaling PHP 4 million that he obtained from the Cultural Center of the Philippines (CCP) in 1978. The loans were restructured into a single PHP 3.4 million loan in 1979, which Tan also defaulted on. CCP filed a collection case against Tan in 1984. The trial court and appellate court both ruled in favor of CCP, ordering Tan to pay outstanding balances, interest, penalties, and legal fees. Tan appealed, arguing penalties should not earn interest. The Supreme Court ruled that the promissory note allowed penalties and interest, so both were valid and could accrue. The Court affirmed the lower courts' decisions requiring Tan to pay all amounts owed to CCP
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ANTONIO TAN vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE
PHILIPPINES
GR No. 116385, October 19, 2001
FACTS:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two loans each in the principal amount of Two Million Pesos or in the total principal amount of Four Million Pesos from respondent Cultural Center of the Philippines evidenced by two promissory notes with maturity dates on May 14, 1979 and July 6, 1979, respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by respondent CCP, and petitioner accordingly executed a promissory note on August 31, 1979 in the amount of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments. Petitioner Tan failed to pay any installment on the said restructured loan of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment falling due on December 31, 1980. Respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner demanding full payment, within ten (10) days from receipt of said letter, of the petitioners restructured loan which as of April 30, 1984 amounted to Six Million Eighty- Eight Thousand Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a
complaint for collection of a sum of money against the petitioner after the latter failed to settle his said restructured loan obligation. The petitioner interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan from respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen.
On May 8, 1991, the trial court rendered a decision in favor of CCP,
ordering defendant to pay plaintiff the amount of P7,996,314.67, representing defendants outstanding account as of August 28, 1986, with the corresponding stipulated interest and charges thereof, until fully paid, plus attorneys fees in an amount equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary damages, plus costs.
On August 31, 1993, the appellate court rendered a decision affirming
with modification the judgment of the trial court. In his petition, Tan contends that there is no legal basis for the imposition of interest on the penalty charge for the reason that the law only allows imposition of interest on monetary interest but not the charging of interest on penalty. He claims that since there is no law that allows imposition of interest on penalties, the penalties should not earn interest.
ISSUE:
1. Whether there are contractual and legal bases for the imposition of the penalty, interest on the penalty and attorneys fees.
2. Whether interest may accrue on the penalty or compensatory interest
without violating the provisions of Article 1959 of the New Civil Code
RULING:
1. Yes. Article 1226 of the New Civil Code provides that :
In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of non- compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
In the case at bar, the promissory note expressly provides for the imposition of both interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil Code. On the other hand, the stipulated two percent (2%) per month penalty is in the form of penalty charge which is separate and distinct from the monetary interest on the principal of the loan. Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals, this Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary interest, and as such the two are different and distinct from each other and may be demanded separately. Quoting Equitable Banking Corp. v. Liwanag, the GSIS case went on to state that such a stipulation about payment of an additional interest rate partakes of the nature of a penalty clause which is sanctioned by law, more particularly under Article 2209 of the New Civil Code.
2. Yes. Without prejudice to the provisions of Article 2212, interest due
and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. But as the Court have already explained, penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory interest is sanctioned by and allowed pursuant to the provision of Article 1959 of the New Civil Code considering that there is an express stipulation in the promissory note permitting the compounding of interest, and Article 2212 of the New Civil Code provides that Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. In the instant case, interest likewise began to run on the penalty interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in ruling that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and the penalty interest.
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