Heirs of Zoilo Espiritu Vs Sps. Landrito Case Digest

HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, petitioners, vs.
SPOUSES MAXIMO
LANDRITO AND PAZ LANDRITO, Represented by ZOILO LANDRITO, as their Attorneyin-Fact, respondents.
Facts:
On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the amount of P350,000.00 payable in
three months. To secure the loan, the Spouses Landrito executed a real estate mortgage over a five hundred forty
(540) square meter lot in favor of the Spouses Espiritu. From the P350,000.00 that the Landritos were supposed to
receive, P17,500.00 was deducted as interest for the first month which was equivalent to five percent of the
principal debt, and P7,500.00 was further deducted as service fee. Thus, they actually received a net amount of
P325,000.00. The agreement, however, provided that the principal indebtedness earns "interest at the legal rate."
After three months, when the debt became due and demandable, the Spouses Landrito were unable to pay the
principal, and the interest. The loan was restructured in such a way that the unpaid interest became part of the
principal, thus increasing the principal to P385,000. The new loan agreement adopted all other terms and conditions
contained in first agreement.
Due to the continued inability of the Spouses Landrito to settle their obligations with the Spouses Espiritu, the loan
agreement was renewed three more times until the principal was increased to P874,125.00. The debt remained
unpaid. So, the Spouses Espiritu foreclosed the mortgaged property in an auction sale and became the lone bidder.
Hence, the Sheriff's Certificate of Sale was annotated on the title of the mortgaged property, giving the Spouses
Landrito until 8 January 1992 to redeem the property. However, the Spouses Landrito failed to redeem the subject
property although they alleged that they negotiated for the redemption of the property as early as 30 October
1991.
Spouses Landrito allegedly tendered two manager's checks and some cash, totaling P1,800,000.00 to the Spouses
Espiritu but the latter refused to accept the same. However, upon inquiry, they found out that the Spouses Espiritu
had already executed an Affidavit of Consolidation of Ownership and registered the mortgaged property in their
name, and that the Register of Deeds of Makati had already issued Transfer Certificate of Title in the name of the
Spouses Espiritu.
On 9 October 1992, the Spouses Landrito, represented by their son Zoilo Landrito, filed an action for annulment or
reconveyance of title, with damages against the Spouses Espiritu before the Regional Trial Court of Makati.
Among the allegations in their Complaint, they stated that the Spouses Espiritu, as creditors and mortgagees,
"imposed interest rates that are shocking to one's moral senses."
RTC:
The trial court dismissed the complaint and upheld the validity of the foreclosure sale.
CA:
On appeal, the Court of Appeals reversed the trial court's decision, decreeing that the five percent (5%) interest
imposed by the Spouses Espiritu on the first month and the varying interest rates imposed for the succeeding
months contravened the provisions of the Real Estate Mortgage contract which provided that interest at the legal
rate, i.e., 12% per annum, would be imposed. It also ruled that although the Usury Law had been rendered
ineffective by Central Bank Circular No. 905, which, in effect, removed the ceiling rates prescribed for interests,
thus, allowing parties to freely stipulate thereon, the courts may render void any stipulation of interest rates which
are found iniquitous or unconscionable. As a result, the Court of Appeals set the interest rate of the loan at the legal
rate, or 12% per annum.
Furthermore, the Court of Appeals held that the action for reconveyance, filed by the Spouses Landrito, is still a
proper remedy. Even if the Spouses Landrito failed to redeem the property within the one-year redemption period
provided by law, the action for reconveyance remained as a remedy available to a landowner whose property was
wrongfully registered in another's name since the subject property has not yet passed to an innocent purchaser for
value.
Hence, the present petition.
Issue:
WON the CA erred in finding that herein petitioners unilaterally imposed on herein respondents the allegedly
unreasonable interests on the mortgage loans.
Held:
The petition is without merit.
Interest rates and service charges are excessive

The Real Estate Mortgage executed between the parties specified that "the principal indebtedness shall earn
interest at the legal rate." The agreement contained no other provision on interest or any fees or charges incident
to the debt. In at least three contracts, all designated as Amendment of Real Estate Mortgage, the interest rate
imposed was, likewise, unspecified.
The total interest and charges amounting to P559,125.00 on the original principal of P350,000 was accumulated
over only two years and one month. These charges are not found in any written agreement between the parties.
The records fail to show any computation on how much interest was charged and what other fees were imposed.
Not only did lack of transparency characterize the aforementioned agreements, the interest rates and the service
charge imposed, at an average of 6.39% per month, are excessive.
Transparency of Credit Transactions
In enacting Republic Act No. 3765, known as the "Truth in Lending Act," the State seeks to protect its citizens from a
lack of awareness of the true cost of credit by assuring the full disclosure of such costs. Section 4, in connection
with Section 3(3) of the said law, gives a detailed enumeration of the specific information required to be disclosed,
among which are the interest and other charges incident to the extension of credit. Section 6 of the same law
imposes on anyone who willfully violates these provisions, sanctions which include civil liability, and a fine and/or
imprisonment.
Although any action seeking to impose either civil or criminal liability had already prescribed, this Court frowns
upon the underhanded manner in which the Spouses Espiritu imposed interest and charges, in connection with the
loan. This is aggravated by the fact that one of the creditors, Zoilo Espiritu, a lawyer, is hardly in a position to plead
ignorance of the requirements of the law in connection with the transparency of credit transactions. In addition, the
Civil Code clearly provides that:
Article 1956. No interest shall be due unless it has been stipulated in writing.
The omission of the Spouses Espiritu in specifying in the contract the interest rate which was actually imposed, in
contravention of the law, manifested bad faith.
Interest and charges found to be excessive, iniquitous and unconscionable are void
In several cases, this Court has been known to declare null and void stipulations on interest and charges that were
found excessive, iniquitous, and unconscionable.
Medel v. Court of Appeals: the Court declared an interest rate of 5.5% per month on a P500,000.00 loan to be
excessive, iniquitous, unconscionable and exorbitant. Even if the parties themselves agreed on the interest rate and
stipulated the same in a written agreement, it nevertheless declared such stipulation as void and ordered the
imposition of a 12% yearly interest rate.
Spouses Solangon v. Salazar: 6% monthly interest on a P60,000.00 loan was likewise equitably reduced to a 1%
monthly interest or 12% per annum.
Ruiz v. Court of Appeals: the Court found a 3% monthly interest imposed on four separate loans with a total of
P1,050,000.00 to be excessive and reduced the interest to a 1% monthly interest or 12% per annum. IETCAS
In declaring void the stipulations authorizing excessive interest and charges, the Court declared that although the
Usury Law was suspended by Central Bank Circular No. 905, s. 1982, effective on 1 January 1983, and consequently
parties are given a wide latitude to agree on any interest rate, 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.
Under Article 1409 of the Civil Code, stipulations authorizing iniquitous or unconscionable interests are inexistent
and void from the beginning. The nullity of the stipulation on the usurious interest does not, however, affect the
lender's right to recover the principal of the loan. Nor would it affect the terms of the real estate mortgage. The
right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the failure of the
debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A
legal interest of 12% per annum will be added in place of the excessive interest formerly imposed.
The foreclosure sale is a nullity
Since the Spouses Landrito, the debtors in this case, were not given an opportunity to settle their debt, at the
correct amount and without the iniquitous interest imposed, no foreclosure proceedings may be instituted. A
judgment ordering a foreclosure sale is conditioned upon a finding on the correct amount of the unpaid obligation
and the failure of the debtor to pay the said amount.
In this case, it has not yet been shown that the Spouses Landrito had already failed to pay the correct amount of
the debt and, therefore, a foreclosure sale cannot be conducted in order to answer for the unpaid debt. The
foreclosure sale conducted upon their failure to pay P874,125 in 1990 should be nullified since the amount
demanded as the outstanding loan was overstated; consequently it has not been shown that the mortgagors the
Spouses Landrito, have failed to pay their outstanding obligation. Moreover, if the proceeds of the sale together
with its reasonable rates of interest were applied to the obligation, only a small part of its original loans would
actually remain outstanding, but because of the unconscionable interest rates, the larger part corresponded to said
excessive and iniquitous interest.
As a result, the subsequent registration of the foreclosure sale cannot transfer any rights over the mortgaged
property to the Spouses Espiritu. The registration of the foreclosure sale, herein declared invalid, cannot vest title
over the mortgaged property. The Torrens system does not create or vest title where one does not have a rightful
claim over a real property. It only confirms and records title already existing and vested.
Action for reconveyance may still be availed of (Ako nalang giapil ni sya just in case mangutana si judge)
Significantly, the records show that the property mortgaged was purchased by the Spouses Espiritu and had not
been transferred to an innocent purchaser for value. This means that an action for reconveyance may still be
availed of in this case.
Registration of property by one person in his or her name, whether by mistake or fraud, the real owner being
another person, impresses upon the title so acquired the character of a constructive trust for the real owner, which
would justify an action for reconveyance. This is based on Article 1465 of the Civil Code which states that:
Art. 1465. If property acquired through mistakes or fraud, the person obtaining it is, by force of
law, considered a trustee of an implied trust for benefit of the person from whom the property
comes. DTSIEc
The action for reconveyance does not prescribe until after a period of ten years from the date of the registration of
the certificate of sale since the action would be based on implied trust. Thus, the action for reconveyance filed on
31 October 1992, more than one year after the Sheriff's Certificate of Sale was registered on 9 January 1991, was
filed within the prescription period.
It should, however, be reiterated that the provisions of the Real Estate Mortgage are not annulled and the principal
obligation stands. In addition, the interest is not completely removed; rather, it is set by this Court at 12% per
annum. Should the Spouses Landrito fail to pay the principal, with its recomputed interest which runs from the time
the loan agreement was entered into on 5 September 1986 until the present, there is nothing in this Decision which
prevents the Spouses Espiritu from foreclosing the mortgaged property.

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HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, petitioners, vs.

Interest rates and service charges are excessive

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