The Supreme Court ruled that while parties can agree on interest rates, excessively high rates are illegal and unconscionable. This decision clarifies the extent to which courts can intervene in private loan agreements to protect borrowers from predatory lending practices. The case emphasizes the importance of fair and reasonable terms in financial transactions, balancing contractual freedom with the need to prevent unjust enrichment.

Loan Default and Stock Offers: How Valid is Dation en Pago?

This case revolves around a loan obtained by Honorio C. Bulos, Jr., Dr. Ramon R. Lim, and Atty. Bede S. Tabalingcos from Koji Yasuma, a Japanese national. The initial loan of P2,500,000.00 was evidenced by a promissory note signed by Dr. Lim. As security, Bulos and Dr. Lim executed real estate mortgages over their properties. When the borrowers defaulted, Yasuma sought to recover the debt, leading to legal disputes over partial payments, offers of stock as settlement, and the imposition of interest.

The central legal question is whether Bulos’s obligation to Yasuma was extinguished by offering shares of stock in Rural Bank of Parañaque and whether the imposed interest rates were unconscionable. The trial court ruled in favor of Yasuma, ordering Bulos, Dr. Lim, and Atty. Tabalingcos to jointly and severally pay P2,240,000.00 plus interest and attorney’s fees. The Court of Appeals affirmed this decision. Dissatisfied, Bulos appealed to the Supreme Court, arguing that his obligation had been extinguished and the interest rates lacked legal basis.

The Supreme Court examined the facts established by the lower courts. The original loan of P2,500,000.00 carried a 4% interest rate for three months, extending to 5% per month for any extensions. Bulos made a partial payment of P1,630,750.00 through a dacion en pago, an arrangement where property is given as payment for debt. Despite this, a balance of P2,240,000.00 remained, which Atty. Tabalingcos attempted to settle with a dishonored check. Given these circumstances, the Supreme Court needed to determine the validity of the offered shares of stock and the fairness of the imposed interest.

Regarding the shares of stock, Bulos argued that his offer to transfer shares in Rural Bank of Parañaque, valued at P1,250,000.00, extinguished his remaining debt. However, the Court cited Republic Act No. 7353, also known as “The Rural Banks Act of 1992.” Specifically, Section 4 states that the capital stock of any rural bank must be fully owned and held directly or indirectly by citizens of the Philippines. The Court reasoned that since Yasuma is a Japanese national, he is not qualified to own capital stock in a rural bank.

Section. 4. x x x. With the exception of shareholdings of corporations organized primarily to hold equities in rural banks as provided for under Section 12-C of Republic Act No. 337, as amended, and of Filipino-controlled domestic banks, the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines or corporations, associations or cooperatives qualified under Philippine laws to own and hold such capital stock: x x x.

Moreover, the Court noted Bulos’s testimony that the bank’s shares were already fully subscribed, requiring an increase in authorized capital stock approved by the SEC for additional shares to be issued. This technicality further invalidated the attempt to settle the debt with the shares, as the shares were not readily transferable. Consequently, the Supreme Court affirmed that Bulos’s obligation to pay the remaining balance subsisted because the offer of shares could not be legally executed.

The Court then addressed the interest rate imposed on the outstanding loan. The promissory note stipulated a 4% monthly interest. The Court found that this rate was unconscionable and inordinate. Quoting Ruiz v. Court of Appeals, the Supreme Court reiterated that while the Usury Law has been suspended, stipulated interest rates are still illegal if they are unconscionable. The Court referred to prior cases such as Medel v. Court of Appeals and Garcia v. Court of Appeals, where interest rates of 3% per month (36% per annum) were deemed excessive.

Nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.

Therefore, the Supreme Court reduced the interest rate to 12% per annum from the date of judicial demand, aligning with the guidelines set in Eastern Shipping Lines, Inc. v. Court of Appeals. This adjustment aimed to strike a balance between compensating the lender and preventing the borrower from being subjected to oppressive financial burdens.

However, the Supreme Court affirmed the award of attorney’s fees equivalent to 20% of P2,240,000.00. The Court reasoned that Yasuma had to secure legal services due to Bulos’s refusal to settle the obligation, incurring significant expenses in a prolonged legal battle. While there was a discrepancy between the dispositive portion and the body of the RTC decision (10% versus 20%), the Court applied the general rule that the dispositive portion controls. Given that Yasuma originally prayed for 20% in his complaint and the trial court awarded this amount, the Court upheld the higher percentage as reasonable compensation for legal expenses.

FAQs

What was the key issue in this case?	The key issue was whether Honorio Bulos’s obligation to Koji Yasuma was extinguished by his offer to transfer shares of stock in a rural bank and whether the imposed interest rate was unconscionable.
Why was the offer of shares of stock deemed invalid?	The offer was invalid because Yasuma, being a Japanese national, was legally prohibited from owning capital stock in a rural bank under Republic Act No. 7353.
What is a dacion en pago?	A dacion en pago is an arrangement where a debtor transfers ownership of property to a creditor to satisfy a debt. In this case, Bulos made a partial payment through a dacion en pago involving parcels of land.
What interest rate was initially imposed on the loan?	The initial interest rate was 4% per month, which the Supreme Court later deemed unconscionable and reduced to 12% per annum.
Why did the Supreme Court reduce the interest rate?	The Court reduced the rate because it considered the original 4% monthly interest (48% per annum) excessively high and contrary to public policy, even with the suspension of the Usury Law.
What is the significance of Eastern Shipping Lines, Inc. v. Court of Appeals?	This case provides guidelines for imposing the proper interest on amounts due, which the Supreme Court referenced in determining the appropriate interest rate.
What amount of attorney’s fees was awarded, and why?	Attorney’s fees of 20% of the outstanding loan balance (P2,240,000.00) were awarded because Yasuma had to engage legal counsel to recover the debt due to Bulos’s refusal to settle.
What was the final ruling of the Supreme Court?	The Supreme Court affirmed the Court of Appeals’ decision with the modification that the interest rate be reduced to 12% per annum from the date of judicial demand and 12% per annum from the finality of the decision until fully paid.

In conclusion, the Supreme Court’s decision clarifies the limits of contractual freedom in loan agreements. While parties can stipulate interest rates, courts will intervene when those rates are unconscionable. The case also underscores the importance of complying with legal requirements when settling debts through alternative means, such as offering shares of stock. The ruling provides a balanced approach, protecting borrowers from predatory lending while ensuring lenders receive fair compensation.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Honorio C. Bulos, Jr. vs. Koji Yasuma, G.R. NO. 164159, July 17, 2007