THE Special Third Division of the Supreme Court (SC) has ruled that the foreclosure of properties based on improper and unfair interest rates on a bank loan is considered invalid.
In a resolution penned by Associate Justice Ricardo R. Rosario, the Court granted the motion for reconsideration filed by Editha Ang and Violeta Fernandez (borrowers) seeking the reversal of its decision dated November 24, 2021, which favored the United Coconut Planters Bank (UCPB) in the present case.
Their properties had been foreclosed by the UCPB after they failed to pay back a P16 million loan. The loan agreement allowed the UCPB to adjust the interest rate every quarter based on market conditions.
When the borrowers failed to pay the total loan when it fell due, the UCPB began extrajudicial foreclosure proceedings-a legal process where properties are auctioned off to recover unpaid debts.
This prompted the borrowers to file a petition with the Regional Trial Court (RTC) to nullify the foreclosure sale. They questioned the bank’s sole power to set and increase the interest rate, which they argued was unfair and invalid. While the RTC agreed that the interest rate provisions were invalid because they were left to the bank’s discretion, it did not nullify the foreclosure sale of the properties.
However, the trial court’s decision was reversed by the Court of Appeals (CA) in a ruling issued on May 11, 2015. The CA held that both the interest rate imposed by UCPB and the subsequent foreclosure sale of the properties were void.
The UCPB then brought the case before the SC. While the High Tribunal declared the interest rate imposed by the UCPB as invalid, the SC upheld the validity of the foreclosure sale of the respondents’ properties. The High Court issued its ruling on November 24, 2021,
Acting on the respondents’ motion for reconsideration, the SC ruled that if the interest rate was unconscionable or imposed unilaterally by the lender, then any foreclosure that follows is also invalid.
‘In the instant case, not only was there a finding, both by this Court and also by the courts below, that the interest rates being imposed were unilaterally imposed by petitioner, thus making it potestative or entirely dependent on petitioner’s will,’ the SC noted.
‘Being potestative, the principle of mutuality of contracts, found in Articles 1308 and 1309 of the Civil Code, could not have been present, making the provisions on interest void. Being void, the subsequent foreclosure proceedings could not have been held validly,’ it added.
The SC’s ruling comes two years after the UCPB was acquired by the Land Bank of the Philippines in 2023.
A statement issued on May 9 of that year ‘announced the successful conclusion of the merger’ of the UCPB with the LandBank, ‘following the conversion of all UCPB branches and accounts into its system.’