482 SUPREME COURT REPORTS ANNOTATED

Banco Filipino Savings and Mortgage Bank vs. Ybañez

*
G.R. No. 148163. December 6, 2004.

BANCO FILIPINO SAVINGS AND MORTGAGE BANK,

petitioner, vs. JUANITA B. YBAÑEZ, CHARLES B.
YBAÑEZ, JOSEPH B. YBAÑEZ and JEROME B.
YBAÑEZ, respondents.

Commercial Law; Banks; Receivership; Pendency of the case

did not diminish the authority of the designated liquidator to
administer and continue the bank’s transactions.—In Banco
Filipino Savings and Mortgage Bank v. Monetary Board, the
validity of the closure and receivership of Banco Filipino was put
in issue. But the pendency of the case did not diminish the
authority of the designated liquidator to administer and continue
the bank’s transactions. The Court allowed the bank’s liquidator
to continue receiving collectibles and receivables or paying off
creditor’s claims and other transactions pertaining to normal
operations of a bank. Among these transactions were the
prosecution of suits against debtors for collection and for
foreclosure of mortgages. The bank was allowed to collect
interests on its loans while under liquidation, provided that the
interests were legal.
Civil Law; Contracts; It is an elementary rule of contracts that
the contracting parties are free to stipulate the terms of their
contracts for as long as the terms are not contrary to law, morals,
good customs, public policy, public order and national interests.—
It is an elementary rule of contracts that the contracting parties
are free to stipulate the terms of their contract for as long as the
terms are not contrary to law, morals, good customs, public policy,
public order, and national interests. Laws in force at the time the
contract was made generally govern its interpretation and
application. The loan agreement between petitioner and
respondents specifies the obligation of the debtor to pay interest.
In principle said stipulation is binding between the parties.
Same; Same; Interests; Court agree that the 21% interest is not
violative of the Usury Law as it stood at the time of the loan
transaction.—We note that at the time the parties entered into
the said loan

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* FIRST DIVISION.

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VOL. 445, DECEMBER 6, 2004 483

Banco Filipino Savings and Mortgage Bank vs. Ybañez

agreement, the pertinent law, Act No. 2655, already provided that
the rate of interest for the forbearance of money when secured by
a mortgage upon real estate should not be more than 12% per
annum or the maximum rate prescribed by the Monetary Board
and in force at the time the loan was granted. On December 1,
1979, the Monetary Board of the Central Bank of the Philippines
had issued CBP Circular No. 705-79. On loan transactions with
maturities of more than 730 days, it fixed the effective rate of
interest at 21% per annum for both secured and unsecured loans.
Since the loan in question has fixed 15 years for its maturity, it
fell within the coverage of said CBP Circular. Thus, we agree that
the 21% interest is not violative of the Usury Law as it stood at
the time of the loan transaction.
Same; Same; Same; Usury Law; CBP Circular No. 905-82
simply suspended the effectivity of the Usury Law.—CBP Circular
No. 905-82, which was effective January 1, 1983, did not repeal
nor in any way amend the Usury Law. The Circular simply
suspended the effectivity of the Usury Law. A Central Bank
Circular cannot repeal a law. Only a law can repeal another law.
Thus, the retroactive application of a CBP Circular cannot, and
should not, be presumed. The loan was entered into on December
24, 1982, but CBP Circular No. 905-82 was given force and effect
only on January 1, 1983. Thus, CBP Circular No. 905-82 could not
be made applicable to the loan agreement in this case, and
petitioner could not rely on this Circular for its imposition of 3%
monthly surcharge.
Same; Same; Same; Same; A penal clause is an accessory
undertaking to assume greater liability in case of breach and is
attached to an obligation in order to secure its performance; If
such stipulation is found contrary to law for being usurious, it can
be nullified by the courts without affecting the principal
obligation.—Petitioner also argues that the 3% monthly
surcharge partakes of the nature of a penalty clause. A penal
clause is an accessory undertaking to assume greater liability in
case of breach and is attached to an obligation in order to secure
its performance. The penalty shall substitute the indemnity for
damages and the payment of interests in case of non-compliance.
But if such stipulation is found contrary to law for being usurious,
it can be nullified by the courts without affecting the principal
obligation.

484

484 SUPREME COURT REPORTS ANNOTATED

Banco Filipino Savings and Mortgage Bank vs. Ybañez

PETITION for review on certiorari of a decision of the

Court of Appeals.

The facts are stated in the opinion of the Court.

     Alex L. Monteclar for petitioner.
     Jose C. Palma, Jr. for respondents.

QUISUMBING, J.:

In this petition for review, Banco Filipino Savings

1
and
Mortgage Bank seeks the reversal of the Decision dated
April 17, 2001 of the Court of2 Appeals in CA-G.R. CV No.
57927 affirming the Decision dated July 16, 1997 of the
Regional Trial Court, Branch 13 of Cebu City in Civil Case
No. CEB-16548.
The facts of this case are as follows:
On March 7, 1978, respondents obtained a loan secured
by a Deed of Real Estate Mortgage over Transfer Certificate
of Title (TCT) No. 69836 from petitioner bank. The loan
was used for the construction of a commercial building in
Cebu City. On October 25, 1978, respondents obtained an
additional loan from the petitioner thus increasing their
obligation to one million pesos. A corresponding
Amendment of Real Estate Mortgage was thereafter
executed.
On December 24, 1982, the loan was again re-
structured, increasing the loan obligation to P1,225,000
and the Real Estate Mortgage was again amended.
Respondents executed a Promissory Note for the sum of
P1,225,000 payable in fifteen years, with a stipulated
interest of 21% per annum, and stipulating monthly
payments of P22,426. The first payment was payable on
January 24, 1983, and the succeeding payments

_______________

1 Rollo, pp. 30-39. Penned by Associate Justice Portia Aliño-

Hormachuelos, with Associate Justices Fermin A. Martin, Jr., and
Mercedes Gozo-Dadole concurring.
2 Id., at pp. 40-49.

485

VOL. 445, DECEMBER 6, 2004 485

Banco Filipino Savings and Mortgage Bank vs. Ybañez

3
were due every 24th of each month thereafter. The note
also stipulated that in case of default in the payment of any
of the monthly amortization and interest, respondents shall
pay a penalty
4
equivalent to 3% of the amount due each
month.
 Respondents’
5
total payment from 1983 to 1988
amounted to P1,455,385.07, broken down as follows:

1983 247,631.54
1984 81,797.24
1985 173,875.77
1986 284,364.82
1987 380,000.00
6
1988 287,715.70

From 1989 onwards, respondents did not pay a single

centavo. They aver that Banco Filipino had ceased
operations and/or was not allowed to continue business,
having been placed under liquidation by the Central Bank.
On January 15, 1990, respondents’ lawyer wrote Special
Acting Liquidator, Renan Santos, and requested that
plaintiff return the mortgaged property of the respondents
since it had sufficiently profited from the loan and that the
interest and penalty charges
7
were excessive. Petitioner
bank denied the request.
Banco Filipino was closed on January 1, 1985 and
reopened for business on July 1, 1994. From its closure to
its reopening, petitioner
8
bank did not transact any business
with its customers.

_______________

3 Id., at p. 14.
4 Ibid.
5 Erroneously stated as P1,456,385.70 in some parts of the records.
6 Id., at p. 32.
7 Id., at p. 33.
8 Id., at p. 94.

486

486 SUPREME COURT REPORTS ANNOTATED

Banco Filipino Savings and Mortgage Bank vs. Ybañez
On August 24, 1994, respondents were served a Notice of
Extra Judicial Sale of their property covered by TCT No.
69836 to satisfy their indebtedness allegedly of
P6,174,337.46 which includes the principal, interest,
surcharges and 10% attorney’s fees. The public auction was
scheduled on September 22, 1994 at 2:00 in the afternoon.
On September 19, 1994, respondents filed a suit for
Injunction, Accounting and Damages, alleging that there
was no legal and factual basis for the foreclosure
proceedings since the loan had already been fully paid. A
restraining order was issued the following day by the lower
court enjoining petitioner to cease
9
and desist from selling
the property at a public auction.
On July 16, 1997, the lower court rendered a Decision,
disposing as follows:

“WHEREFORE, judgment is hereby rendered directing defendant

Banco Filipino Savings and Mortgage Bank to render a correct
accounting of the obligations of plaintiffs with it after eliminating
interest from January 1, 1985 to July 1, 1994 when it was closed,
and reducing interest from 21% to 17% per annum, at the time it
was in operation, and totally eliminating [the] surcharge of 1%
per month, within a period of fifteen (15) days from the time the
judgment shall have become final and executory.
Plaintiffs are directed to pay the bank within a period of thirty
(30) days from the time they will receive defendant bank’s true
and correct accounting, otherwise the order of injunction will be
lifted/dissolved.
Defendants are enjoined from foreclosing the real estate
mortgage on the property of plaintiffs, unless the latter fail to pay
in accordance with the [preceding] paragraph.
Without special pronouncement
10
as to costs.
SO ORDERED.”

_______________

9Id., at p. 33.
10 Id., at p. 49.

487
 VOL. 445, DECEMBER 6, 2004 487
Banco Filipino Savings and Mortgage Bank vs. Ybañez

Not satisfied with the decision, both parties appealed the

case to the Court of Appeals. Petitioner filed its Notice of
Appeal on August 19, 1997, while respondents filed theirs
on August 22, 1997. On April 17, 2001, the Court of
Appeals rendered a Decision affirming the decision of the
trial court stating:

“WHEREFORE, for lack of merit, both appeals are DISMISSED

and the Decision appealed
11
from is AFFIRMED.
SO ORDERED.”

Petitioner now alleges the following errors:

I. THE COURT OF APPEALS ERRED IN

CONCURRING WITH THE TRIAL COURT’S
DECISION ORDERING THE DEFENDANT BANK
(HEREIN PETITIONER) TO RENDER A
CORRECT ACCOUNTING OF PLAINTIFFS’
LOAN BECAUSE THE STATEMENT OF
ACCOUNT (EXH. 5 and 6—Defendant)
SUBMITTED BY DEFENDANT BANK DOES NOT
REFLECT THE TRUE AND CORRECT AMOUNT
AS IT IMPOSES A 21% PER ANNUM INTEREST
WHICH THE COURT OF APPEALS
CONSIDERED AS EXCESSIVE AND THAT IT
HAS NO PROBATIVE VALUE AS ITS
SIGNATORIES WERE NOT PRESENTED AS
WITNESSES.
II. THE COURT OF APPEALS ERRED IN
ORDERING THE DELETION OF THE 3% PER
MONTH SURCHARGE SIMPLY BECAUSE THE
PLAINTIFF-BORROWER HAD MADE
SUBSTANTIAL PAYMENTS FROM 1983 TO 1988.
III. THE COURT OF APPEALS COMMITTED AN
ERROR IN RULING THAT THE PLAINTIFFS-
BORROWERS (HEREIN RESPONDENTS)
CANNOT BE CONSIDERED TO HAVE
 DEFAULTED IN THEIR PAYMENT SINCE
DEFENDANT BANK 12
CEASED OPERATION
FROM 1985 TO 1991.

To resolve the controversy we shall address the following

pertinent questions: (1) What is the effect of the temporary

_______________

11 Id., at p. 38.
12 Id., at p. 17.

488

488 SUPREME COURT REPORTS ANNOTATED

Banco Filipino Savings and Mortgage Bank vs. Ybañez

closure of Banco Filipino from January 1, 1985 to July 1,

1994 on the loan? (2) Is the rate of interest set at 21% per
annum legal? and (3) Is the 3% monthly surcharge valid?
In Banco Filipino13
Savings and Mortgage Bank v.
Monetary Board, the validity of the closure and
receivership of Banco Filipino was put in issue. But the
pendency of the case did not diminish the authority of the
designated liquidator to administer and continue the
bank’s transactions. The Court allowed the bank’s
liquidator to continue receiving collectibles and receivables
or paying off creditor’s claims and other transactions
pertaining to normal operations of a bank. Among these
transactions were the prosecution of suits against debtors
for collection and for foreclosure of mortgages. The bank
was allowed to collect interests on its loans while under
liquidation, provided that the interests were legal.
Petitioner contends that the 21% annual interest was
freely and voluntarily agreed upon by the parties, and that 14
it was neither excessive nor violative of the Usury Law.
On the other hand, respondents state that the rate of 21%
was usurious because the loan was incurred on December
24, 1982, before 15the de facto repeal of the Usury Law on
January 1, 1983. Respondents add that the normal rate by
which petitioner charges its borrowers at that time was
only 17%, or 4% lower than the rate it gave to respondents.
It is an elementary rule of contracts that the contracting
parties are free to stipulate the terms of their contract for
as long as the terms are not contrary to law, morals, good
customs, 16 public policy, public order, and national
interests. Laws in force at the time the contract was made
generally govern its interpretation and application. The
loan agreement

_______________

13 G.R. No. 70054, 11 December 1991, 204 SCRA 767, 789.

14 Rollo, p. 18.
15 Id., at p. 90.
16 Pascual v. Ramos, G.R. No. 144712, 4 July 2002, 384 SCRA 105, 113-
114; Article 1306, Civil Code.

489

VOL. 445, DECEMBER 6, 2004 489

Banco Filipino Savings and Mortgage Bank vs. Ybañez

between petitioner and respondents specifies the obligation

of the debtor to pay interest.17In principle said stipulation is
binding between the parties.
We note that at the time the parties entered into the
said loan agreement, the pertinent law, Act No. 2655,
already provided that the rate of interest for the
forbearance of money when secured by a mortgage upon
real estate should not be more than 12% per annum or the
maximum rate prescribed by the Monetary Board and in
force at the time the loan was granted. On December 1,
1979, the Monetary
18
Board of the Central Bank 19
of the
Philippines had issued CBP Circular No. 705-79. On loan
transactions with maturities of more

_______________
 17 See U.S. v. Diaz, Conde and R. de Conde, No. 18208, 14 February
1922, 42 Phil. 766, 769.
18 The Monetary Board of the Central Bank of the Philippines was
authorized by P.D. No. 116 effective in 1973 to “prescribe the maximum
rate or rates of interest for the loan or renewal thereof or the forbearance
of any money, goods or credits, and to change such rate or rates whenever
warranted by prevailing economic and social conditions” (Sec. 1-a, Act No.
2655 as amended by P.D. No. 116).
19 CBP Circular No. 705-79, SUPERSEDING CIRCULAR NO. 586,
PRESCRIBING CEILINGS ON THE RATES OF INTEREST ON LOANS
AND YIELDS ON PURCHASES OF INSTRUMENTS BY BANKS AND
NON-BANK FINANCIAL INTERMEDIARIES. (Effective December 1,
1979.)

...

4. The effective rate of interest, including commissions, premiums, fees and

other charges, on loan transactions with maturities of more than seven
hundred thirty (730) days, that may be charged or received by all banks or
by non-bank financial intermediaries authorized to engage in quasi-
banking functions shall not exceed twenty one per cent (21%) per annum,
for both unsecured and secured loans as defined by the Usury Law, as
amended.
5. For purposes of this Circular, effective rate shall mean the price paid for
the use of money expressed as a percentage, on annual basis, of the
amount actually received. In case the principal is amortized, the rate shall
be computed on

490

490 SUPREME COURT REPORTS ANNOTATED

Banco Filipino Savings and Mortgage Bank vs. Ybañez

than 730 days, it fixed the effective rate of interest at 21%

per annum for both secured and unsecured loans. Since the
loan in question has fixed 15 years for its maturity, it fell
within the coverage of said CBP Circular. Thus, we agree
that the 21% interest is not violative of the Usury Law as it
stood at the time of the loan transaction.
 As to the monthly surcharge,
20
petitioner relies on CBP
Circular No. 905-82. The ceiling on interest rates
prescribed by the Usury Law, according to petitioner, were
expressly removed. Petitioner argues that the said circular
had retroactive effect since it is merely procedural in
nature. Hence according to petitioner, the imposition of 3%
monthly surcharge by the bank against the borrower is
legal.
On this matter, we disagree with petitioner. CBP
Circular No. 905-82, which was effective January 1, 1983,
did not repeal nor in any way amend the Usury Law. The
Circular simply suspended the effectivity of the Usury Law.
A Central Bank Circular cannot repeal a law. Only a law
can repeal another law. Thus, the retroactive application
21
of
a CBP Circular cannot, and should not, be presumed. The
loan was entered into on December 24, 1982, but CBP
Circular No. 905-82 was given force and effect only on
January 1, 1983. Thus, CBP Circular No. 905-82 could not
be made applicable to the

_______________

the basis of the outstanding balance. The computation assumes that interest is
paid at maturity, or at the end of one (1) year, if the maturity of the loan exceeds
one (1) year.
...

20 Section 1. The rate of interest, including commissions, premiums,

fees and other charges, on a loan or forbearance of any money, goods or
credits, regardless of maturity and whether secured or unsecured, that
may be charged or collected by any person, whether natural or juridical,
shall not be subject to any ceiling prescribed under or pursuant to the
Usury Law, as amended. (Effective January 1, 1983.)
21 First Metro Investment Corporation v. Este Del Sol Mountain Reserve,
Inc., G.R. No. 141811, 15 November 2001, 369 SCRA 99, 111.

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Banco Filipino Savings and Mortgage Bank vs. Ybañez
loan agreement in this case, and petitioner could not rely
on this Circular for its imposition of 3% monthly surcharge.
Petitioner also argues that the 3% monthly22
surcharge
partakes of the nature of a penalty clause. A penal clause
is an accessory undertaking to assume greater liability in
case of breach and is attached
23
to an obligation in order to
secure its performance. The penalty shall substitute the
indemnity for damages24and the payment of interests in
case of non-compliance. But if such stipulation is found
contrary to law for being usurious, it can be nullified
25
by the
courts without affecting the principal obligation.
In the loan agreement between the parties in this case,
the total interest and other charges exceed the prescribed
21% ceiling. Hence, the imposition of the 3% monthly
surcharge, as the penal clause to the obligation, violated
the limit imposed by the Usury Law. Said surcharge of 3%
monthly must be declared null and void.
To recapitulate: the respondents’ principal obligation to
pay the monthly amortization of P22,426, validly subsists.
Only the 3% monthly surcharge is void. The monthly
amortization of P22,426, for 15 years, would amount to
P4,036,680. To date, respondents already paid the amount
of P1,455,385.07. Thus, only the outstanding balance of
P2,581,294.93 remains due.

_______________

22 Rollo, p. 76.
23 8 Manresa 245.
24 Art. 1226. In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests in case
of noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code.
25 Article 1230. The nullity of the penal clause does not carry with it
that of the principal obligation.

492
492 SUPREME COURT REPORTS ANNOTATED
Banco Filipino Savings and Mortgage Bank vs. Ybañez

Respondents were given by the RTC 30 days from receipt of

decision, within which to pay their outstanding obligation.
We now reiterate that period of 30 days, from receipt of this
Decision, for respondents to pay the amount of
P2,581,294.93 to the bank as full payment of the
outstanding balance on their loan obligation. Otherwise,
the order of injunction restraining petitioner from
foreclosing the property shall be lifted.
WHEREFORE, the Decision of the Regional Trial Court,
which was sustained by the Court of Appeals, is hereby
MODIFIED as follows: (1) the interest rate at 21% per
annum is hereby declared VALID; (2) the 3% monthly
surcharge is NULLIFIED for being violative of the Usury
Law at the time; and (3) respondents are ORDERED to pay
petitioner the amount of P2,581,294.93 within 30 days from
receipt of this Decision. No pronouncement as to costs.
SO ORDERED.

          Davide, Jr. (C.J., Chairman), Ynares-Santiago,

Carpio and Azcuna, JJ., concur.

Judgment modified.

Note.—Absent any stipulation the legal rate of interest

in obligation which consists in the payment of a sum of
money is 12% per annum. (C.F. Sharp and Co., Inc. vs.
Northwest Airlines, Inc., 381 SCRA 314 [2002])

——o0o——

493
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