SECOND DIVISION

[G.R. No. 168782. October 10, 2008.]

SPOUSES JOVENAL TORING and CECILIA ESCALONA-TORING ,

petitioners, vs. SPOUSES ROSALIE GANZON-OLAN and
GILBERT OLAN, and ROWENA OLAN, respondents.

DECISION

QUISUMBING, J : p

This petition for review on certiorari assails the Decision 1 and

Resolution, 2 dated March 28, 2005 and June 30, 2005, respectively, of the
Court of Appeals in CA-G.R. CV No. 76831. The Court of Appeals affirmed the
Resolution 3 dated June 10, 2002 of the Regional Trial Court, Branch 276,
Muntinlupa City, in Civil Case No. 00-137 which had ordered petitioners to
pay respondents the sum of P20,000,000 representing the total amount of
petitioners' loan and interest due. IASEca

The facts are as follows:

On September 4, 1998, petitioner Jovenal Toring obtained from
respondents a loan amounting to P6,000,000 at 3% interest per month. The
loan was secured by a mortgage on a parcel of land covered by Transfer
Certificate of Title No. T-27418, 4 as evidenced by a Deed of Real Estate
Mortgage 5 dated September 8, 1998.
On September 23, 1998, the parties executed a Deed of Absolute Sale
6 conveying the mortgaged property in favor of respondents. Subsequently,
respondents gave petitioners an exclusive option to repurchase the land for
P10,000,000. This was embodied in a document denominated as an Option
to Buy 7 dated September 28, 1998. On this same document, respondents
acknowledged receipt of a total sum of P10,000,000 as consideration for the
purchase of the land. 8 The Option to Buy provided that if the option is
exercised after December 5, 1998, the purchase price shall increase at the
rate of P300,000 or 3% of the purchase price every month until September
5, 1999 and thereafter at the rate of P381,000 or 3.81% of the purchase
price every month, with the fifth of every month as the cut-off date for said
increases. 9
On July 28, 2000, petitioners filed a Complaint 10 docketed as Civil Case
No. 00-137 for reformation of instruments, abuse of rights and damages
against respondents. Petitioners prayed that the Deed of Absolute Sale
dated September 23, 1998 and Option to Buy dated September 28, 1998, be
treated as an equitable mortgage instead of a sale.
At the pre-trial, the parties made the following stipulations: (1) the
principal amount of P10,000,000 has long become overdue; (2) no payment
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 has been made; (3) the parties had agreed on an equitable mortgage and
not a sale. 11 The parties limited the issues on the amount of interest due
and the time of payment of the entire obligation. Thereafter, the court
ordered the parties to submit their respective position papers, but only
respondents complied. All other claims for damages were waived by the
parties. 12
On June 10, 2002, the trial court issued its Resolution, the pertinent
portion of which reads:
. . .the document of mortgage specified the interest at 3.81%
per month from the time it was obtained, and which was now
estimated to be P7,239,000.00. This sum should be added to the total
loan of TEN MILLION PESOS, . . .

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Therefore, judgment is rendered for defendants ROSALIE

GANZON OLAN and GILBERT OLAN [and] ROWENA GANZON since
the loan is not denied, directing spouses [p]laintiffs JOVENAL
TORING and CECILIA ESCALONA TORING, to pay the sum of
TWENTY MILLION PESOS within one month from receipt of this
decision. TSIDEa

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It [i]s SO ORDERED. 13 (Emphasis supplied.)

Petitioners appealed, contending that the trial court erred in awarding
interest. Petitioners stress that Article 1602 14 of the Civil Code governing
equitable mortgages provides that any money, fruits or other benefit to be
received by the vendee as rent or otherwise shall be considered as interest
which shall be subject to the usury laws. Thus, there should have been no
award of interest.
On March 28, 2005, the Court of Appeals affirmed the trial court's
ruling, as follows:
WHEREFORE, the June 10, 2002 Resolution of the Regional Trial
Court, Branch 276, Muntinlupa City, is hereby AFFIRMED.
SO ORDERED. 15

Their motion for reconsideration having been denied, petitioners now

come before us raising the sole issue:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
A REVERSIBLE ERROR IN DENYING PETITIONERS' APPEAL AND IN
AFFIRMING THE DECISION OF [THE] TRIAL COURT DATED JUNE 10,
2002. 16
Simply put, the issue is: Did the Court of Appeals err in sustaining the
trial court's ruling upholding the 3% and 3.81% stipulated monthly interest?
Petitioners contend that they are not liable to pay interest as the
stipulated monthly rates of 3% and 3.81% 17 are unconscionable. Petitioners
further contend that the reformed instrument, i.e., the Option to Buy dated
September 28, 1998, did not mention any rate of interest chargeable to the
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 loan but rather, an escalation 18 of the purchase price.
On the other hand, respondents maintain that petitioners are liable to
pay interest based on the Deed of Absolute Sale and Option to Buy executed
by the parties. Respondents assert that the P300,000 and P381,000
differences per month as stated in the Option to Buy represents the 3% or
3.81% interest to be charged on the loan. Respondents further assert that
the 3% or 3.81% interest is not usurious since Central Bank Circular No. 905-
82 19 removed the ceiling on interest rates on secured and unsecured loans.
cSTHAC

In resolving the issue in this controversy, we have agreed to focus our

attention on the basic provisions of statutes as well as the prior decisions of
this Court bearing on rates of interest on monetary obligations.
In a loan or forbearance of money, according to the Civil Code, the
interest due should be that stipulated in writing, 20 and in the absence
thereof, the rate shall be 12% per annum. 21
The first time that the parties in this case entered into a loan
transaction was on September 4, 1998 when petitioners obtained the
P6,000,000 loan from respondents. Based on the Deed of Real Estate
Mortgage dated September 8, 1998 embodying the promissory note dated
September 4, 1998, the parties agreed on an interest rate of 3% per month.
The second and third times that the parties transacted were on
September 23 and 28, 1998 when they executed the Deed of Absolute Sale
and the Option to Buy, respectively. These two documents were the
instruments reformed in Civil Case No. 00-137, where both parties agreed
that the transactions embodied therein were really that of an equitable
mortgage. The stipulation in a contract sharply escalating the repurchase
price every month is for the purpose of securing the return of money
invested with substantial profit or interest. 22 Undoubtedly, the P300,000 and
P381,000 successive increases stated in the Option to Buy represent the
monthly interest which respondents sought to recover from petitioners. AaHTIE

While the parties are free to stipulate on the interest to be imposed on

monetary obligations, the Court will temper interest rates if they are
unconscionable. 23 Even if the Usury Law has been suspended by Central
Bank Circular No. 905-82, and parties to a loan agreement have been given
wide latitude to agree on any interest rate, we have held that stipulated
interest rates are illegal if they are unconscionable. 24 Consequently, in our
view, the Court of Appeals erred in sustaining the trial court's decision
upholding the stipulated interest of 3% and 3.81%. Thus, we are unanimous
now in our ruling to reduce the above stipulated interest rates to 1% per
month, in conformity with our ruling in Ruiz v. Court of Appeals. 25 For as
well stressed in that case:
. . . Nothing in the said circular [CB Circular No. 905, s. 1982]
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.
Undeniably, in the present case, petitioners failed to pay the principal
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 loan on its maturity and upon demand by respondents, as well as the
interest payments thereafter. Indeed, petitioners cannot turn their backs on
their obligation; they have to comply with what is incumbent upon them. All
other claims for damages having been waived by the parties, petitioners are
bound to pay respondents the principal loan of P10,000,000, plus what we
have repeatedly held as the appropriate rate of interest of 1% per month,
from December 6, 1998 26 until fully paid.
WHEREFORE, the assailed Decision and Resolution dated March 28,
2005 and June 30, 2005, respectively, of the Court of Appeals in CA-G.R. CV
No. 76831 are MODIFIED to the effect that the stipulated interest rate of 3%
or 3.81% per month on the subject equitable mortgage is hereby ordered
REDUCED to 1% per month only. No pronouncement as to costs.
SO ORDERED.
Carpio-Morales, Tinga, Velasco, Jr. and Brion, JJ., concur.

Footnotes

1. Rollo, pp. 34-45. Penned by Associate Justice Jose Catral Mendoza, with
Associate Justices Romeo A. Brawner and Edgardo P. Cruz concurring.
2. Id. at 47. cdphil

3. Id. at 48-50. Penned by Presiding Judge N.C. Perello.

4. Records, Vol. I, pp. 20-23.

5. Id. at 24-26.
6. Id. at 27.
7. Id. at 28-30.
8. Id. at 28.
9. Id. at 28-29.
10. Id. at 1-19.
11. Records, Vol. II, p. 274.

12. Id. at 290.

13. Rollo, pp. 49-50.
14. ART. 1602. The contract shall be presumed to be an equitable mortgage, in
any of the following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period is
executed;

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 (4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of
the parties is that the transaction shall secure the payment of a debt or the
performance of any other obligation.

In any of the foregoing cases, any money, fruits or other benefit to be

received by the vendee as rent or otherwise shall be considered as interest
which shall be subject to the usury laws. cSTHaE

15. Rollo, p. 45.

16. Id. at 113.
17. See Records, Vol. I, p. 29. Represents the rate increase beginning October
5, 1999.

18. Id. at 28-29.

xxx xxx xxx

b. That if the OPTION is exercised by the "grantee/buyer" on a date after

December 5, 1998 with a cut-off date of every fifth day of the month the
following shall be (sic) purchase price, to wit:

January 5, 1999 - P10,300,000.00

February 5, 1999 - 10,600,000.00
March 5, 1999 - 10,900,000.00
April 5, 1999 - 11,200,000.00
May 5, 1999 - 11,500,000.00
June 5, 1999 - 11,800,000.00
July 5, 1999 - 12,100,000.00
August 5, 1999 - 12,400,000.00
September 5, 1999 - 12,700,000.00
October 5, 1999 - 13,081,000.00
November 5, 1999 - 13,462,000.00
December 5, 1999 - 13,843,000.00
January 5, 2000 - 14,224,000.00
February 5, 2000 - 14,605,000.00
March 5, 2000 - 14,986,000.00
April 5, 2000 - 14,986,000.00
May 5, 2000 - 15,367,000.00
June 5, 2000 - 15,748,000.00
July 5, 2000 - 16,129,000.00
August 5, 2000 - 16,510,000.00
September 5, 2000 - 16,891,000.00

xxx xxx xxx

19. SEC. 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 on January 1, 1983.
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 20. ART. 1956. No interest shall be due unless it has been expressly stipulated
in writing.
21. Security Bank and Trust Company v. RTC of Makati, Br. 61, G.R. No.
113926, October 23, 1996, 263 SCRA 483, 489.

22. Bundalian v. Court of Appeals, No. L-55739, June 22, 1984, 129 SCRA 645,
654.

23. Trade & Investment Development Corporation of the Phils. v. Roblett

Industrial Construction Corporation, G.R. No. 139290, May 19, 2006, 490
SCRA 1, 6. HcSaTI

24. Ruiz v. Court of Appeals, G.R. No. 146942, April 22, 2003, 401 SCRA 410,
421.
25. Id., citing Spouses Solangon v. Salazar, G.R. No. 125944, 29 June 2001, 360
SCRA 379, invalidating stipulated rates of interest that are "excessive,
iniquitous, unconscionable and exorbitant".

26. See Records, Vol. I, p. 28.

It is evident from the Option to Buy that the parties intended to charge
interest only after December 5, 1998, to wit:
a. That if the OPTION is exercised on or before December 5, 1998, the
"Grantee/Buyer" shall pay the "Grantor/Seller" the sum of P10,000,000.00;

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