In Spouses Joven Sy and Corazon Que Sy vs. China Banking Corporation, the Supreme Court addressed the issue of deficiency balances after a foreclosure sale and the imposition of penalties and interest on loan obligations. The Court affirmed the right of the bank to recover the deficiency but reduced the stipulated penalty charges for being unconscionable. This ruling serves as a reminder that while parties are free to contract, courts have the power to equitably reduce penalties that are deemed excessive or contrary to public policy, ensuring fairness and preventing unjust enrichment in financial transactions.

When is a Penalty Excessive? Examining Loan Deficiencies and Equitable Relief

This case arose from a complaint filed by China Banking Corporation (China Bank) against Spouses Joven Sy and Corazon Que Sy (the Syses) to recover a deficiency balance after the foreclosure of a real estate mortgage. The Syses had executed three promissory notes (PNs) in favor of China Bank, secured by a real estate mortgage over their property. When the Syses failed to comply with their obligations, China Bank foreclosed the property, but the proceeds of the sale were insufficient to cover the total amount due. China Bank then filed a complaint for sum of money before the Regional Trial Court (RTC), seeking to recover the deficiency, along with stipulated interest, penalties, and attorney’s fees.

The RTC ruled in favor of China Bank, recognizing its right to the deficiency balance. However, the RTC found the stipulated penalty charges of 1/10 of 1% per day (or 3% per month compounded) to be unconscionable and reduced them to 1% per month on the principal loan for every month of default. The RTC also sustained the payment of attorney’s fees but reduced the amount to P100,000.00. The Court of Appeals (CA) affirmed the RTC’s ruling, prompting the Syses to file a petition for review on certiorari before the Supreme Court. The central issue was whether the CA erred in affirming the RTC’s decision regarding the computation of the penalty charges and the amount of the deficiency balance.

The Supreme Court partly granted the petition, finding that the lower courts had misappreciated the facts and committed errors in the computation of the amounts due. The Court acknowledged that while mathematical computations are generally considered factual determinations beyond its purview as it is not a trier of facts, it has the authority to review such issues when the lower court committed palpable error or gravely misappreciated facts. The Court noted that China Bank was seeking to collect the deficiency balance based on the PNs, but the RTC and CA had erred in applying the stipulated penalty charges and interest rates without considering the reduction made by the RTC.

The Court first addressed the issue of penalty charges, reiterating the RTC’s finding that the stipulated rate of 1/10 of 1% per day was unconscionable. Citing Article 1229 of the Civil Code, the Court emphasized that a judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor, or even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.

“Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.”

The Court thus held that in holding the Syses liable for the deficiency balance, the RTC committed a palpable error and contradicted its own ruling. The total penalty charges should have only amounted to P1,849,541.26 and not P5,548,623.78. The Supreme Court then turned to the interest charges, noting that the RTC based the deficiency balance on the prevailing market rates, but the divisor used to arrive at the daily basis of the interest rates per annum was 360 days. The Court noted that according to Article 13 of the Civil Code, when the law speaks of years, it shall be understood that years are of 365 days each and not 360 days. There being no agreement between the parties, this Court adopts the 365 day rule as the proper reckoning point to determine the daily basis of the interest rates charged per annum.

The Court then noted that the attorney’s fees to be paid by the Syses should then be added to the total outstanding balance computed above. The RTC, however, in adopting the computation of China Bank in toto, did not notice that it included attorney’s fees in the amount of P2,585,344.70 representing 10% of the total amount as stated in the PNs. This was clearly improper and contrary to its pronouncement reducing the attorney’s fees to only P100,000.00. To recall, the RTC itself declared that the 10% of the total amount due for attorney’s fees was unreasonable and immoderate. Unfortunately, the CA also failed to take note of this plain oversight by the RTC.

After a thorough recomputation, the Court determined that the outstanding balance should only be P7,734,132.93. Despite all these errors, however, China Bank argues that what the petitioners are doing is introducing new issues only on appeal, which is not allowed. As correctly stated by petitioners, their theory indeed never changed, and there was neither new evidence presented nor an attempt to prove that no liability existed. Petitioners were merely asking the Court to look into the mathematical correctness of the computations of the RTC, pointing out obvious inconsistencies and, in the process, for this Court to correct them.

Building on this principle, the Court held that an interest of twelve (12) percent per annum on the deficiency balance to be computed from April 19, 2004 until June 30, 2013, and six (6) percent per annum thereafter, until fully satisfied, should be paid by the petitioners following Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796, dated May 16, 2013, and its Circular No. 799, Series of 2013, together with the Court’s ruling in Nacar vs. Gallery Frames. An interest of 1% per month is no longer imposed as the terms of the PNs no longer govern. As explained earlier, China Bank’s claims are based now solely on the deficiency amount after failing to recover everything from the foreclosure sale on February 26, 2004.

FAQs

What was the key issue in this case?	The primary issue was whether the Court of Appeals erred in affirming the lower court’s decision regarding the computation of penalty charges, interest, and the deficiency balance after the foreclosure of a real estate mortgage.
What is an unconscionable penalty under Philippine law?	An unconscionable penalty is a stipulated amount of indemnity for breach of contract that is deemed excessive and unjust by the courts, warranting equitable reduction under Article 1229 of the Civil Code.
How did the Supreme Court recompute the deficiency balance?	The Supreme Court recomputed the balance by reducing the penalty charges to 1% per month, using a 365-day divisor for annual interest, and adjusting the attorney’s fees to the reduced amount of P100,000.00.
What interest rates apply to the deficiency balance?	A legal interest of 12% per annum applied from April 19, 2004, until June 30, 2013, and 6% per annum thereafter until fully satisfied, in accordance with Bangko Sentral ng Pilipinas regulations.
Can courts reduce stipulated attorney’s fees?	Yes, even with an agreement between the parties, courts may reduce attorney’s fees fixed in the contract when the amount appears unconscionable or unreasonable, without needing to prove it is contrary to morals or public policy.
What is the significance of Article 13 of the Civil Code in this case?	Article 13 provides that a year consists of 365 days, which the Court used to correct the bank’s computation of daily interest rates based on a 360-day year.
What does this case tell us about imposing penalties?	The case underscores the court’s power to review and reduce penalties to ensure fairness, preventing unjust enrichment and upholding the principle of equity in contractual obligations.
Why didn’t the Supreme Court send it back to the Lower Courts for a new computation?	The Court decided to make the corrections in order to address the issues and make the necessary corrections in the interest of the speedy disposition of cases. If these errors were left unchecked, justice would not have been served.

This case demonstrates the Supreme Court’s commitment to ensuring fairness and equity in financial transactions. The ruling serves as a reminder that while parties are free to contract, courts have the power to equitably reduce penalties that are deemed excessive or contrary to public policy. This decision provides valuable guidance for lenders and borrowers alike, highlighting the importance of reasonable penalty clauses and the potential for judicial intervention to prevent unjust enrichment.

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: Spouses Joven Sy and Corazon Que Sy, G.R. No. 215954, August 01, 2016