[G.R. No. 131622.

November 27, 1998]

LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners,

vs. COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G.
GONZALES, JR., doing lending business under the trade name and style "GONZALES
CREDIT ENTERPRISES", respondents.\

Petitioner Respondent
o On November 7, 1985, P obtained a o On February 20, 1990, Veronica R.
loan from R, who was engaged in the Gonzales, joined by her husband
money lending business under the Danilo G. Gonzales, filed with the
name "Gonzales Credit Enterprises", in Regional Trial Court of Bulacan, Branch
the amount of P50,000.00, payable in 16, at Malolos, Bulacan, a complaint
two months. Veronica gave only the for collection of the full amount of the
amount of P47,000.00, to the loan including interests and other
borrowers, as she retained P3,000.00,
charges.
as advance interest for one month at
o
6% per month. Servado and Leticia
executed a promissory note for
P50,000.00, to evidence the loan,
payable on January 7, 1986.

o On November 19, 1985, Servando and

Leticia obtained from Veronica another
loan in the amount of P90,000.00,
payable in two months, at 6% interest
per month. They executed a promissory
note to evidence the loan, maturing on
January 19, 1986. They received only
P84,000.00, out of the proceeds of the
loan.

o On maturity of the two promissory

notes, the borrowers failed to pay the
indebtedness.

o On June 11, 1986, Servando and

Leticia secured from Veronica still
another loan in the amount of
P300,000.00, maturing in one month,
secured by a real estate mortgage over
a property belonging to Leticia
Makalintal Yaptinchay, who issued a
special power of attorney in favor of
Leticia Medel, authorizing her to
execute the mortgage. Servando and
 Leticia executed a promissory note in
favor of Veronica to pay the sum of
P300,000.00, after a month, or on July
11, 1986. However, only the sum of
P275,000.00, was given to them out of
the proceeds of the loan.

o Like the previous loans, Servando and

Medel failed to pay the third loan on
maturity.

o On July 23, 1986, Servando and Leticia

with the latter's husband, Dr. Rafael
Medel, consolidated all their previous
unpaid loans totaling P440,000.00, and
sought from Veronica another loan in
the amount of P60,000.00, bringing
their indebtedness to a total of
P500,000.00, payable on August 23,
1986. The executed a promissory note.

o On maturity of the loan, the borrowers

failed to pay the indebtedness
of P500,000.00, plus interests and
penalties, evidenced by the above-
quoted promissory note.

o In his answer to the complaint filed

with the trial court on April 5, 1990,
defendant Servando alleged that he did
not obtain any loan from the plaintiffs;
that it was defendants Leticia and Dr.
Rafael Medel who borrowed from the
plaintiffs the sum of P500,000.00, and
actually received the amount and
benefited therefrom; that the loan was
secured by a real estate mortgage
executed in favor of the plaintiffs, and
that he (Servando Franco) signed the
promissory note only as a witness.
o In their separate answer filed on April
10,1990, defendants Leticia and Rafael
Medel alleged that the loan was the
transaction of Leticia Yaptinchay, who
executed a mortgage in favor of the
 plaintiffs over a parcel of real estate
situated in San Juan, Batangas; that the
interest rate is excessive at 5.5% per
month with additional service charge
of 2% per annum, and penalty charge
of 1% per month; that the stipulation
for attorney's fees of 25% ofthe amount
due is unconscionable, illegal and
excessive, and that
substantial payments made were
applied to interest, penalties and other
charges.
o

Regional Trial Court

After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been
repealed, the interest charged by the plaintiffs on the loans was unconscionable and "revolting
to the conscience".Hence, the trial court applied "the provision of the New [Civil] Code" that
the "legal rate of interest for loan or forbearance of money, goods or credit is 12% per annum."

"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay
plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and
1% per month as penalty, until the entire amount is paid in full.

"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and
severally the amount of P84,000.00 with 12% interest per annum and 1% per cent per month
as penalty from November 19,1985 until the whole amount is fully paid;

"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount
of P285,000.00 plus 12% interest per annum and 1% per month as penalty from July 11, 1986,
until the whole amount is fully paid;

"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00
as attorney's fees;

"5. All counterclaims are hereby dismissed.

"With costs against the defendants

Plaintiffs-appellants Defendants
o In their appeal, plaintiffs-appellants
o On April 15, 1997, defendants-
argued that the promissory note, which
consolidated all the unpaid loans of the appellants filed a motion for
reconsideration of the said decision by
 defendants, is the law that governs the CA.By resolution dated November 25,
parties. They further argued that Circular 1997, the Court of Appeals denied the
No. 416 of the Central Bank prescribing motion.
the rate of interest for loans or
forbearance of money, goods or credit at o Hence, defendants interposed the
12% per annum, applies only in the present recourse via petition for review
absence of a stipulation on interest rate, on certiorari.
but not when the parties agreed thereon.

Court of Appeals
o The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury
Law having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of
Circular No. 905, the lender and borrower could agree on any interest that may be charged on
the loan".[9] The Court of Appeals further held that "the imposition of 'an additional amount
equivalent to 1% per month of the amount due and demandable as penalty charges in the form
of liquidated damages until fully paid' was allowed by law"
o Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing
that of the Regional Trial Court, disposing as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED
such that defendants are hereby ordered to pay the plaintiffs the sum
of P500,000.00, plus 5.5% per month interest and 2% service charge
per annum effective July 23, 1986, plus 1% per month of the total
amount due and demandable as penalty charges effective August 24,
1986, until the entire amount is fully paid.
"The award to the plaintiffs of P50,000.00 as attorney's fees is
affirmed. And so is the imposition of costs against the defendants.
"SO OREDERED."

Court’s Ruling
o Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the
question presented is whether or not the stipulated rate of interest at 5.5% per month on
the loan in the sum of P500,000.00, that plaintiffs extended to the defendants is
usurious. In other words, is the Usury Law still effective, or has it been repealed by
Central Bank Circular No. 905, adopted on December 22, 1982, pursuant to its powers
under P.D. No. 116, as amended by P.D. No. 1684?
o We agree with petitioners that the stipulated rate of interest at 5.5% per month on
the P500,000.00 loan is excessive, iniquitous, unconscionable and
exorbitant. However, we can not consider the rate "usurious" because this Court has
13

consistently held that Circulr No. 905 of the Central Bank, adopted on December 22,
1982, has expressly removed the interest ceilings prescribed by the Usury Law[14] and
that the Usury Law is now "legally inexistent".[15]
 o In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch
61[16] the Court held that CB Circular No. 905 "did not repeal nor in anyway amend the
Usury Law but simply suspended the latter's effectivity." Indeed, we have held that "a
Central Bank Circular can not repeal a law. Only a law can repeal another law."[17] In the
recent case of Florendo vs. Court of Appeals[18], the Court reiterated the ruling that "by
virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury has
been legally non-existent in our jurisdiction. Interest can now be charged as lender and
borrower may agree upon."[19]
o Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon
by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary
to morals ("contra bonos mores"), if not against the law.[20] The stipulation is void.[21] The
courts shall reduce equitably liquidated damages, whether intended as an indemnity or a
penalty if they are iniquitous or unconscionable.[22]
o Consequently, the Court of Appeals erred in upholding the stipulation of the
parties. Rather, we agree with the trial court that, under the circumstances, interest at
12% per annum, and an additional 1% a month penalty charge as liquidated damages
may be more reasonable.
o WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the
Court of Appeals promulgated on March 21, 1997, and its resolution dated November
25, 1997. Instead, we render judgment REVIVING and AFFIRMING the decision dated
December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan,
in Civil Case No. 134-M-90, involving the same parties.
No pronouncement as to costs in this instance
SO ORDERED.
PARDO, J.