Spouses Bautista vs Pilar Devt Corp 312 SCRA 611

Fact:

In 1978, Petitioner spouses Bautista purchased a house and lot in Pilar Village, Las Pinas, Metro Manila. To partially finance the purchase, they obtained from the Apex Mortgage and Loan Corp a loan in the amout of 100,180.00php. They executed a promissory note obligating themselves, jointly and severally to pay the principal sum with interest rate of 12% for 240 months or 2years. In the same promissory note, petitioners authorized Apex to "increase the rate of interest and/or service charge" without notice to them in the event a law, Presidential Decree or any Central Bank regulation should be enacted increasing the lawful rate of interest.

Petitioner spouses failed to pay several installments. On September 20, 1982, they executed another promissory note in favor of Apex. This time there was an increased interest rate of 21% per annum with penalty of 11/2 for late payment payable for 196 months. Petitioners retained the authorization to increase/decrease the rate of interest.

In November 1983, petitioners again failed to pay installments. On June 06, 1984, Apex assigned the second promissory note to respondent Pilar Development Corporation, a successor-in-interest. The latter then instituted against petitioner spouses before the RTC collection for the unpaid balance as of November 23, 1983 including the internal rate of 21%. RTC rendered judgment ordering petitioners to pay balance with interest of 12%. CA reversed the trial court by applying 21% per annum amounting to 142,346.42php. However, it was reversed to 140,515.11, initial decision of RTC, after the denial for motion to reconsider.

Issue:

Whether it be 12% under the promissory note of December 22, 1978 or 21% under the promissory note of September 20, 1982.

Ruling:

The court ruled that at the time the parties executed the first promissory note in 1978, the interest of 12% was the maximum rate fixed by the Usury Law for loans secured by a mortgage upon registered estate.

On December 1, 1979, the Monetary Board of the Central Bank of the Philippines issued Circular No 705 which fixed the effective rate of interest on loan transactions with maturities of more than 730 days to 21% per annum for both secured and unsecured loans. On January 28, 1980, the Monetary Board issued Circular           No 712 reiterating the effective rate of 21% on said transactions. On January 1, 1983, CB Circular No 905 series of 1982, took effect. The circular declared that the rate of interest on any loan or forbearance of any money, goods or credit, regardless of maturity and whether secured or unsecured, "shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended." In short, Circular No 905 removed the ceiling on interest rate for secured and unsecured loans, regardless of majority.

When the second promissory note was executed on September 20, 1982, Central Bank Circulars Nos 705 and 712 were already in effect. These circulars fixed the effective interest rate for secured loans transactions with maturities of more than 730 days, i.e., 2years at 21% per annum. The interest rate of 21% provided in the second promissory note was therefore authorized under these Circulars.