ASIAN CATHAY FINANCE AND LEASING CORPORATION v.

SPOUSES CESARIO GRAVADOR and NORMA

G.R. No. 186550 July 5, 2010 NACHURA, J.

Recit Ready Summary

On appeal is the June 10, 2008 Decision of the Court of Appeals (CA) in CA-G.R. CV No. 83197, setting
aside the April 5, 2004 decision of the Regional Trial Court (RTC), Branch 9, Bulacan, as well as its
subsequent Resolution dated February 11, 2009, denying petitioner’s motion for reconsideration.

Aggrieved, respondents appealed to the CA. On June 10, 2008, the CA rendered the assailed Decision,
reversing the RTC. It held that the amount of ₱1,871,480.00 demanded by ACFLC from respondents is
unconscionable and excessive. Thus, it declared respondents’ principal loan to be ₱800,000.00, and
fixed the interest rate at 12% per annum and reduced the penalty charge to 1% per month. It explained
that ACFLC could not insist on the interest rate provided on the note because it failed to provide
respondents with the disclosure statement prior to the consummation of the loan transaction. Finally,
the CA invalidated the waiver of respondents’ right of redemption for reasons of public policy.

Facts of the Case

On October 22, 1999, petitioner Asian Cathay Finance and Leasing Corporation (ACFLC) extended a loan
of Eight Hundred Thousand Pesos (₱800,000.00) to respondent Cesario Gravador, with respondents
Norma de Vera and Emma Concepcion Dumigpi as co-makers. The loan was payable in sixty (60)
monthly installments of ₱24,400.00 each. To secure the loan, respondent Cesario executed a real estate
mortgage over his property in Sta. Maria, Bulacan, covered by Transfer Certificate of Title No. T-29234.

Respondents paid the initial installment due in November 1999. However, they were unable to pay the
subsequent ones. Consequently, on February 1, 2000, respondents received a letter demanding
payment of ₱1,871,480.00 within five (5) days from receipt thereof. Respondents requested for an
additional period to settle their account, but ACFLC denied the request. Petitioner filed a petition for
extrajudicial foreclosure of mortgage with the Office of the Deputy Sheriff of Malolos, Bulacan.

On April 7, 2000, respondents filed a suit for annulment of real estate mortgage and promissory note
with damages and prayer for issuance of a temporary restraining order (TRO) and writ of preliminary
injunction. Respondents claimed that the real estate mortgage is null and void. They pointed out that
the mortgage does not make reference to the promissory note dated October 22, 1999. The promissory
note does not specify the maturity date of the loan, the interest rate, and the mode of payment; and it
illegally imposed liquidated damages. The real estate mortgage, on the other hand, contains a provision
on the waiver of the mortgagor’s right of redemption, a provision that is contrary to law and public
policy. Respondents added that ACFLC violated Republic Act No. 3765, or the Truth in Lending Act, in the
disclosure statement that should be issued to the borrower. Respondents, thus, claimed that ACFLC’s
petition for foreclosure lacked factual and legal basis, and prayed that the promissory note, real estate
mortgage, and any certificate of sale that might be issued in connection with ACFLC’s petition for
extrajudicial foreclosure be declared null and void. In the alternative, respondents prayed that the court
fix their obligation at ₱800,000.00 if the mortgage could not be annulled, and declare as null and void
the provisions on the waiver of mortgagor’s right of redemption and imposition of the liquidated
damages. Respondents further prayed for moral and exemplary damages, as well as attorney’s fees, and
for the issuance of a TRO to enjoin ACFLC from foreclosing their property.

On April 12, 2000, the RTC issued an Order, denying respondents’ application for TRO, as the acts sought
to be enjoined were already fait accompli.

On May 12, 2000, ACFLC filed its Answer, denying the material allegations in the complaint and averring
failure to state a cause of action and lack of cause of action, as defenses. ACFLC claimed that it was
merely exercising its right as mortgagor; hence, it prayed for the dismissal of the complaint.

After trial, the RTC rendered a decision, dismissing the complaint for lack of cause of action. Sustaining
the validity of the promissory note and the real estate mortgage, the RTC held that respondents are
well-educated individuals who could not feign naiveté in the execution of the loan documents. It,
therefore, rejected respondents’ claim that ACFLC deceived them into signing the promissory note,
disclosure statement, and deed of real estate mortgage. The RTC further held that the alleged defects in
the promissory note and in the deed of real estate mortgage are too insubstantial to warrant the
nullification of the mortgage. It added that a promissory note is not one of the essential elements of a
mortgage; thus, reference to a promissory note is neither indispensable nor imperative for the validity
of the mortgage. The RTC also upheld the interest rate and the penalty charge imposed by ACFLC, and
the waiver of respondents’ right of redemption provided in the deed of real estate mortgage.

The RTC disposed thus:

WHEREFORE, on the basis of the evidence on record and the laws/jurisprudence applicable thereto,
judgment is hereby rendered DISMISSING the complaint in the above-entitled case for want of cause of
action as well as the counterclaim of [petitioner] Asian Cathay Finance & Leasing Corporation for moral
and exemplary damages and attorney’s fees for abject lack of proof to justify the same.

Issue/s

(1) Whether or not the interest imposed by ACFLC was unconscionable and excessive; (2) Whether or
not the provision in the real estate mortgage on the mortgagor’s waiver of right of redemption should
be voided for being against public policy; and (3) Whether or not the action for annulment of mortgage
was a collateral attack on ACFLC’s certificate of title.
Rationale/Analysis/Legal Basis

The CA ordered:
WHEREFORE, premises considered, the appealed decision is REVERSED AND SET ASIDE. Judgment is
hereby rendered as follows:

1) Affirming the amount of the principal loan under the REM and Disclosure Statement both dated
October 22, 1999 to be ₱800,000.00, subject to:
a. 1% interest per month (12% per annum) on the principal from November 23, 1999 until the date of
the foreclosure sale, less ₱24,000.00 paid by [respondents] as first month amortization[;]
b. 1% penalty charge per month on the principal from December 23, 1999 until the date of the
foreclosure sale.

2) Declaring par. 14 of the REM as null and void by reason of public policy, and granting mortgagors a
period of one year from the finality of this Decision within which to redeem the subject property by
paying the redemption price as computed under paragraph 1 hereof, plus one percent (1%) interest
thereon from the time of foreclosure up to the time of the actual redemption pursuant to Section 28,
Rule 39 of the 1997 Rules on Civil Procedure.

The claim of the [respondents] for moral and exemplary damages and attorney’s fees is dismissed for
lack of merit.

ACFLC filed a motion for reconsideration, but the CA denied it on February 11, 2009.

ACFLC is now before us, faulting the CA for reversing the dismissal of respondents’ complaint. It points
out that respondents are well-educated persons who are familiar with the execution of loan documents.
Thus, they cannot be deceived into signing a document containing provisions that they are not
amenable to. ACFLC ascribes error on the part of the CA for invalidating the interest rates imposed on
respondents’ loan, and the waiver of the right of redemption.

The appeal lacks merit.

It is true that parties to a loan agreement have a wide latitude to stipulate on any interest rate in view of
Central Bank Circular No. 905, series of 1982, which suspended the Usury Law ceiling on interest rate
effective January 1, 1983. However, interest rates, whenever unconscionable, may be equitably reduced
or even invalidated. In several cases, this Court had declared as null and void stipulations on interest and
charges that were found excessive, iniquitous and unconscionable.

Records show that the amount of loan obtained by respondents on October 22, 1999 was ₱800,000.00.
Respondents paid the installment for November 1999, but failed to pay the subsequent ones. On
February 1, 2000, ACFLC demanded payment of ₱1,871,480.00. In a span of three months, respondents’
obligation ballooned by more than ₱1,000,000.00. ACFLC failed to show any computation on how much
interest was imposed and, on the penalties, charged. Thus, we fully agree with the CA that the amount
claimed by ACFLC is unconscionable.

In Spouses Isagani and Diosdada Castro v. Angelina de Leon Tan, Sps. Concepcion T. Clemente and
Alexander C. Clemente, Sps. Elizabeth T. Carpio and Alvin Carpio, Sps. Marie Rose T. Soliman and Arvin
Soliman and Julius Amiel Tan, this Court held:

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily
assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation
of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or
in the human conscience nor is there any reason whatsoever which may justify such imposition as
righteous and as one that may be sustained within the sphere of public or private morals.

Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if
not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from
the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived. The
nullity of the stipulation on the usurious interest does not, however, affect the lender’s right to recover
the principal of the loan. Nor would it affect the terms of the real estate mortgage. The right to foreclose
the mortgage remains with the creditors, and said right can be exercised upon the failure of the debtors
to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A
legal interest of 12% per annum will be added in place of the excessive interest formerly imposed. The
nullification by the CA of the interest rate and the penalty charge and the consequent imposition of an
interest rate of 12% and penalty charge of 1% per month cannot, therefore, be considered a reversible
error.

ACFLC next faults the CA for invalidating paragraph 14 of the real estate mortgage which provides for
the waiver of the mortgagor’s right of redemption. It argues that the right of redemption is a privilege;
hence, respondents are at liberty to waive their right of redemption, as they did in this case.

Settled is the rule that for a waiver to be valid and effective, it must, in the first place, be couched in
clear and unequivocal terms which will leave no doubt as to the intention of a party to give up a right or
benefit which legally pertains to him. Additionally, the intention to waive a right or an advantage must
be shown clearly and convincingly. Unfortunately, ACFLC failed to convince us that respondents waived
their right of redemption voluntarily.

As the CA had taken pains to demonstrate:

The supposed waiver by the mortgagors was contained in a statement made in fine print in the REM. It
was made in the form and language prepared by [petitioner]ACFLC while the [respondents] merely
affixed their signatures or adhesion thereto. It thus partakes of the nature of a contract of adhesion. It is
settled that doubts in the interpretation of stipulations in contracts of adhesion should be resolved
against the party that prepared them. This principle especially holds true with regard to waivers, which
are not presumed, but which must be clearly and convincingly shown. [Petitioner] ACFLC presented no
evidence hence it failed to show the efficacy of this waiver.
Moreover, to say that the mortgagor’s right of redemption may be waived through a fine print in a
mortgage contract is, in the last analysis, tantamount to placing at the mortgagee’s absolute disposal
the property foreclosed. It would render practically nugatory this right that is provided by law for the
mortgagor for reasons of public policy. A contract of adhesion may be struck down as void and
unenforceable for being subversive to public policy, when the weaker party is completely deprived of
the opportunity to bargain on equal footing.

In fine, when the redemptioner chooses to exercise his right of redemption, it is the policy of the law to
aid rather than to defeat his right. Thus, we affirm the CA in nullifying the waiver of the right of
redemption provided in the real estate mortgage.

Finally, ACFLC claims that respondents’ complaint for annulment of mortgage is a collateral attack on its
certificate of title. The argument is specious.

Disposition / Ruling

The instant complaint for annulment of mortgage was filed on April 7, 2000, long before the
consolidation of ACFLC’s title over the property. In fact, when respondents filed this suit at the first
instance, the title to the property was still in the name of respondent Cesario. The instant case was
pending with the RTC when ACFLC filed a petition for foreclosure of mortgage and even when a writ of
possession was issued. Clearly, ACFLC’s title is subject to the final outcome of the present case.

WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-
G.R. CV No. 83197 are AFFIRMED. Costs against petitioner.