45 ISLA Vs ESTORGA

Advanced Decisions July 2018 4/1/20, 4:28 AM
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SECOND DIVISION
CATALINA F.
ELIZABETH ISLA,
ISLA,
and
GILBERT F. ISLA,
Petitioners,
- versus -
GENEVIRA* P. ESTORGA,
Respondent.
G.R. No. 233974
Present:
CARPIO, J., Chairperson,
PERALTA,
PERLAS-BERNABE,
CAGUIOA, and
REYES, JR., JJ.
Promulgated:
x-----------------------------------------------------------------------~-------
DECISION
PERLAS-BERNABE, J.:
Before the Court is a petition for review on certiorari 1 filed by
petitioners Catalina F. Isla (Catalina), Elizabeth Isla, and Gilbert
F. Isla
(collectively, petitioners) assailing the Decision2 dated May 31,
2017 and the
Resolution3 dated August 24, 2017 of the Court of Appeals (CA) in
CA-G.R.
CV No. 101743, which affirmed with modification the Decision 4
dated
December 10, 2012 of the Regional Trial Court of Pasay City,
Branch 112
(RTC) in Civil Case No. 07-0014, directing petitioners to pay
respondent
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Genevira P. Estorga (respondent) the following sums: (a)

Pl00,000.00
representing the principal of the loan obligation; ( b) an amount
equivalent to
twelve percent (12%) of Pl00,000.00 computed from November 16,
2006
until full payment, representing interest on the loan; ( c) an
amount
equivalent to six percent (6o/o) of the sums due in (a) and (b) per
annum
Also spelled as "Genevera" in some parts of the rollo.
1 Rollo, pp. 25-41.
2 Id. at 46-55. Penned by Associate Justice Nina G. Antonio-
Valenzuela with Associate Justices Jose C.
Reyes, Jr. and Stephen C. Cruz concurring.
Id. at 57-58.
4 Id. at 82-84. Penned by Presiding Judge Jesus B. Mupas.
f/ID
I
Decision 2 G.R. No. 233974
computed from the finality of the CA Decision until full payment,
representing legal interest; and (d) P20,000.00 as attorney's fees.
The Facts
On December 6, 2004, petitioners obtained a loan in the amount of
Pl00,000.00 from respondent, payable anytime from six (6) months
to one
( 1) year and subject to interest at the rate of ten percent ( 1 Oo/o)
per month,
payable on or before the end of each month. As security, a real
estate
mortgage 5 was constituted over a parcel of land located in Pasay
City,
covered by Transfer Certificate of Title (TCT) No. 1326736 and
registered
under the name of Edilberto Isla (Edilberto ), who is married to
Catalina
(subject property). When petitioners failed to pay _the said loan,
respondent
sought assistance from the barangay, and consequently, a
Kasulatan ng
Pautang7 dated December 8, 2005 was executed. Petitioners,
however, failed
to comply with its terms, prompting respondent to send a demand

letter8
dated November 16, 2006. Once more, petitioners failed to comply
with the
demand, causing respondent to file a Petition for Judicial
Foreclosure 9
against them before the RTC. 10
For their part, 11 petitioners maintained that the subject
mortgage was
not a real estate mortgage but a mere loan, and that the
stipulated interest of
ten percent (10%) per month was exorbitant and grossly
unconscionable. 12
They also insisted that since petitioners were not the absolute
owners of the
subject property - as the same was allegedly owned by Edilberto -
they
could not have validly constituted the subject mortgage thereon.
13
The RTC Ruling
In a Decision 14 dated December 10, 2012, the RTC granted the
Petition for Judicial Foreclosure, finding that petitioners
themselves
admitted that: (a) they obtained a loan in the amount of
Pl00,000.00 and that
the said loan was secured by a real estate mortgage over the
subject
property; and (b) the subject mortgage was annotated on TCT No.
132673.15
Further, the RTC observed that while it is true that the present
action
pertains to a judicial foreclosure, the underlying principle is that a
real estate
mortgage is but a security and not a satisfaction of indebtedness.
Thus, it is
See the Deed of Real Estate Mortgage dated December 6, 2004; id.
at 80-81.
6 Id. at 69.
Id. at. 70.
Id. at 72
Dated July 19, 2007. Id. at 61-65.
10 See id. at 47.
11 See Opposition dated October 9, 2007; id. at 73-79.

12 See id. at 73-76.
13 See id. at 77
14 Id. at 82-84.
15 See id. at 83.
~
only proper to render petitioners solidarily liable to pay
respondent and/or
foreclose the subject mortgage should they fail to fulfill their
obligation. 16
Consequently, the RTC directed petitioners to pay respondent the
amounts of Pl00,000.00 with twelve percent (12%.) interest per
annum from
December 2007 until fully paid and P20,000.00 as attorney's fees.
Alternatively, in the event that petitioners fail to pay or deposit
with the
Clerk of Court the said amounts within a period of six ( 6) months
from
receipt of a copy of the RTC Decision, it held that the subject
property will
be foreclosed and sold at public auction to satisfy the mortgage
debt, and the
surplus, if any, will be delivered to petitioners with reasonable
interest under
the law. 17
Aggrieved, respondent appealed18 to the CA.
The CA Ruling
In a Decision 19 dated May 31, 2017, the CA affirmed with
modification the RTC Decision, and accordingly, ordered
petitioners to pay
respondent the following sums: (a) Pl00,000.00 representing the
principal of
the loan obligation; ( b) an amount equivalent to twelve percent
(12%) of
Pl 00,000.00 computed per year from November 16, 2006 until full
payment,
representing interest on the loan; ( c) an amount equivalent to six
percent
(6%) of the sums due in (a) and (b) per annum computed from the
finality of
the CA Decision until full payment, representing legal interest;
and ( d)
P20,000.00 as attorney's fees. 20
The CA held that in light of the registry return receipt bearing the
signature of Catalina, it was established that petitioners indeed
received the
demand letter dated November 16, 2006.21 Meanwhile, it did not
agree with
the RTC's order providing petitioners alternative remedies, which
remedies
are, by law, mutually exclusive. Thus, since respondent's Petition
for
Judicial Foreclosure was essentially an action to collect a sum of
money, she
is then barred from causing the foreclosure of the subject
mortgage.22
Moreover, the CA ruled that the RTC erred in imposing the
interest
rate of twelve percent (12%) per annum from December 2007 until
full
payment. It likewise held that the stipulated interest often
percent (10%) per
16 See id. at 84.
17 See id.
18 See Notice of Appeal dated October 21, 2013 (id. at 85-86) and
Brief for the Defendants-Appellants
dated October 27, 2014 (id. at 91-101).
19 Id. at 46-55.
20 Id. at 54.
21 See id. at 52-53.
22 Id. at 53.
j
month on the real estate mortgage is exorbitant. And finally, it
declared that
respondent is entitled to the award of attorney's fees based on
equity and in
the exercise of its discretion.23
Undaunted, petitioners sought partial reconsideration,24 claiming
that
the award of attorney's fees was without factual, legal, and
equitable
justification and should therefore be deleted. 25 The same,
however, was
denied in a Resolution26 dated August 24, 2017; hence, the
instant petition,
claiming that the CA gravely erred not only in awarding
attorney's fees
despite the absence of factual justification in the body of its
Decision but
also in imposing interest of twelve percent (12%) per annum
interest until
full payment. 27
In her Comment, 28 respondent retorted that the CA's award of
attorney's fees was proper and within the discretion of the court.
Likewise,
the CA correctly imposed interest at the rate of twelve percent
(12%) per
annum to the principal loan obligation of petitioners.29
The Issues Before the Court
The issue for the Court's resolution is whether or not the CA erred
in
awarding: (a) twelve percent (12o/o) interest on the principal
obligation until
full payment; and (b) attorney's fees.
The Court's Ruling
The petition is partly meritorious.
I.
In their petition, petitioners contest the interest imposed on the
principal amount of the loan at the rate of twelve percent (12%)
per annum
from the date of extrajudicial demand until full payment, as
stated in
paragraph 2 of the CA ruling. In this regard, they argue that
pursuant to ECE
Realty and Development, Inc. v. Hernandez (ECE Realty),30 the
applicable
interest rate should only be six percent ( 6% ). 31
23 See id. at 54.
24 See Motion for Partial Reconsideration dated June 23, 2017; id.
at 117-120.
25 See id. at 119.
26 Id. at 57-58.
27 See id. at 31-36.
28 Dated April 23, 2018. Id. at 128-134.
29 See id. at 130-133.

30 740 Phil. 784 (2014).
31 Seero/lo,pp.31-33.
l
The argument is untenable.
Case law states that there are two (2) types of interest, namely,
monetary interest and compensatory interest. Monetary interest
is the
compensation fixed by the parties for the use or forbearance of
money. On
the other hand, compensatory interest is that imposed by law or
by the courts
as penalty or indemnity for damages. Accordingly, the right to
recover
interest arises only either by virtue of a contract (monetary
interest) or as
damages for delay or failure to pay the principal loan on which the
interest is
demanded (compensatory interest).32
Anent monetary interest, the parties are free to stipulate their
preferred
rate. However, courts are allowed to equitably temper interest
rates that are
found to be excessive, iniquitous, unconscionable, and/or
exorbitant,33 such
as stipulated interest rates of three percent (3%) per month or
higher.34 In
such instances, it is well to clarify that only the unconscionable
interest rate
is nullified and deemed not written in the contract; whereas the
parties'
agreement on the payment of interest on the principal loan
obligation
subsists. 35 It is as if the parties failed to specify the interest rate
to be
imposed on the principal amount, in which case the legal rate of
interest
prevailing at the time the agreement was entered into is
applied by the
Court.36 This is because, according to jurisprudence, the legal
rate of interest
is the presumptive reasonable compensation for borrowed money.

37
In this case, petitioners and respondent entered into a loan
obligation
and clearly stipulated for the payment of monetary interest.
However, the
stipulated interest of ten percent (10%) per month was found to be
unconscionable, and thus, the courts a quo struck down the same
and pegged
a new monetary interest of twelve percent ( 12%) per annum,
which was the
prevailing legal rate of interest for loans and forbearances of
money at the
time the loan was contracted on December 6, 2004.
In Spouses Abella v. Spouses Abella,38 the Court was also faced
with a
situation where the parties entered into a loan with an agreement
to pay
monetary interest. Since the stipulated rate of interest by the
parties was
found to be unconscionable, the Court struck down the same and
substituted
it with the prevailing legal interest rate at the time the loan was
perfected,
i.e., twelve percent (12%) per annum. In holding that such rate
shall persist
in spite of supervening events, the Court held:
32 See Pen v. Santos, G.R. No. 160408, January 11, 2016, 778
SCRA 56, 68.
33 See Trade & Investment Development Corporation of the
Philippines v. Roblett Industrial
Construction Corporation, 523 Phil. 360, 366 (2006).
34 Chua v. Timan, 584 Phil. 144, 148 (2008).
35 Limso v. Philippine National Bank, G.R. No. 158622, January
27, 2016, 782 SCRA 137, 229 ..
36 Id. at 230, citing Spouses Abella v. Spouses Abella, 763 Phil.
372, 385-386 (2015).
37 See id. at 386.
3s Id.
~
Jurisprudence is clear about the applicable interest rate if a
written
instrument fails to specify a rate. In Spouses Taring v. Spouses
Olan [(589
Phil. 362 [2008])], this court clarified the effect of Article 1956 of
the Civil Code and noted that the legal rate of interest (then at
12%) is to
apply: "In a loan or forbearance of money, according to the Civil
Code,
the interest due should be that stipulated in writing, and in the
absence
thereof, the rate shall be 12% per annum."
Spouses Taring cites and restates (practically verbatim) what this
court settled in Security Bank and Trust Company v. Regional
Trial Court
of Makati, Branch 61 [(331 Phil. 787 [1996])]: "In a loan or
forbearance
of money, the interest due should be that stipulated in writing,
and in the
absence thereof, the rate shall be 12% per annum.".
xx xx
The rule is not only definite; it is cast in mandatory language.
From Eastern Shipping [Lines, Inc. v. CA] [(G.R. No. 97412, July
12,
1994, 234 SCRA 78)] to Security Bank to Spouses Taring,
jurisprudence
has repeatedly used the word "shall," a term that has long been
settled to
denote something imperative or operating to impose a duty. Thus,
the rule
leaves no room for alternatives or otherwise does not allow for
discretion.
It requires the application of the legal rate of interest.
Our intervening Decision in Nacar v. Gallery Frames [(716 Phil.
267 [2013])] recognized that the legal rate of interest has been
reduced to
6% per annum[.]
xx xx
Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799,
Series of 2013 and Nacar retain the definite and mandatory
framing of the
rule articulated in Eastern Shipping, Security Bank, and Spouses
Taring.
Nacar even restates Eastern Shipping:

xx xx
Thus, it remains that where interest was stipulated in writing by
the
debtor and creditor in a simple loan or mutuum, but no exact
interest rate
was mentioned, the legal rate of interest shall apply. At present,
this is 6%
per annum, subject to Nacar 's qualification on prospective
application.
Applying this, the loan obtained by respondents from petitioners is
deemed subjected to conventional interest at the rate of 12% per
annum,
the legal rate of interest at the time the parties executed their
agreement.
Moreover, should conventional interest still be due as of July 1,
2013, the
rate of 12% per annum shall persist as the rate of conventional
interest.
This is so because interest in this respect is used as a surrogate
for
the parties' intent, as expressed as of the time of the execution of
their
contract. In this sense, the legal rate of interest is an
affirmation of the
contracting parties' intent; that is, by their contract's
silence on a
specific rate, the then prevailing legal rate of interest shall
be the cost
of borrowing money. This rate, which by their contract the
parties
have settled on, is deemed to persist regardless of shifts in
the legal
rate of interest. Stated otherwise, the legal rate of interest,
when
~
applied as conventional interest, shall always be the legal rate at
the
time the agreement was executed and shall not be susceptible to
shifts
in rate.39 (Emphases and underscoring supplied)
Following this pronouncement, the Court rules that the CA

correctly
imposed a straight monetary interest rate of twelve percent (12%)
per annum
on the principal loan obligation of petitioners to respondent,
reckoned from
the date of extrajudicial demand until finality of this ruling. At
this point,
suffice it to say that petitioner's reliance on ECE Realty is
misplaced
primarily because unlike in this case, the amount due therein
does not
partake of a loan obligation or forbearance of money.
In addition, not only the principal amount but also the monetary
interest due to respondent as discussed above shall itself earn
compensatory
interest at the legal rate, pursuant to Article 2212 of the Civil
Code, which
states that "(i]nterest due shall earn legal interest from the time it
is
judicially demanded, although the obligation may be silent upon
this
point."40 To be sure, Article 2212 contemplates the presence of
stipulated or
conventional interest, i.e., monetary interest, which has accrued
when
demand was judicially made. In cases where no monetary interest
had been
stipulated by the parties, no accrued monetary iriterest could
further earn
compensatory .interest upon judicial demand.41 Thus, the
principal amount
and monetary interest due to respondent shall earn compensatory
interest of
twelve percent (12o/o) per annum from judicial demand, i.e., the
date of the
filing of the complaint on July 24, 2007,42 to June 30, 2013, and
thereafter,
at the rate of six percent (6%) per annum from July 1, 2013 until
fully paid.
II.
On the issue of attorney's fees, the general rule is that the same
cannot
be recovered as part of damages because of the policy that no
premium
should be placed on the right to litigate. They are not to be
awarded every
time a party wins a suit. 43 The power of the court to award
attorney's fees
under Article 220844 of the Civil Code demands factual, legal, and
equitable
39 Id. at 382-386.
40 See also Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412,
July 12, 1994, 234 SCRA 78, 95 and
Nacar v. Gallery Frames, 716 Phil. 267, 282 (2013).
41 See David v. CA, 375 Phil. 177, 185 (1999), citing The
Philippine American Accident Insurance
Company, Inc. vs. Flores, 186 Phil. 563, 566 (1980).
42 See rollo, p. 61.
43 See Delos Santos v. Abejon, G.R. No. 215820, March 20, 2017,
citing Spouses Vergara v. Sonkin, 759
Phil. 402, 414 (2015).
44 Article 2208 of the Civil Code reads:
Article 2208. In the absence of stipulation, attorney's fees and
expenses of litigation,
other than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
(2) When the defendant's act or omission has compelled the
plaintiff to litigate with third
persons or to incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
( 4) In case of a clearly unfounded civil action or proceeding
against the plaintiff;
~
justification.45 It must clearly state the reasons for awarding
attorney's fees
in the body of its decision, and not merely in its dispositive
portion.46
In this case, the CA awarded the amount of P20,000.00 as
attorney's
fees premised merely on the general statement "upon equity and
in the
exercise of [its] discretion."47 Hence, since the CA failed to
"clearly state the·

reasons for awarding attorney's fees in the body of its decision",
the Court
finds it proper to delete the same.
WHEREFORE, the petition is PARTIALLY GRANTED. The
Decision dated May 31, 201 7 and the Resolution dated August 24,
201 7 of
the Court of Appeals in CA-G.R. CV No. 101743 are hereby
MODIFIED as
follows:
1. Petitioners Catalina F. Isla, Elizabeth Isla, and Gilbert F. Isla
are
ORDERED to pay respondent Genevira P. Estorga:
(a) Pl00,000.00 representing the principal loan obligation;
( b) Monetary interest on the principal loan obligation at the rate
of twelve percent (12%) per annum from the date of default,
i.e., extrajudicial demand on November 16, 2006, until
finality of this ruling;
( c) Compensatory interest on the monetary interest as stated in
letter (b) at the rate of twelve percent (12%) per annum
from judicial demand, i.e., July 24, 2007, to June 30, 2013,
and thereafter, at the rate of six percent ( 6%) per annum
from July 1, 2013 until finality of this ruling; and
( d) Legal interest at the rate of six percent ( 6%) per annum
imposed on the sums due in letters (a), (b), and (c) from
finality of this ruling until full payment; and
2. The award of attorney's fees in favor of respondent is
DELETED.
(5) Where the defendant acted in gross and evident bad faith in
refusing to satisfy the
plaintiffs plainly valid, just and demandabie claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers,
laborers and skilled workers;
(8) In actions for indemnity under workmen's compensation and
employer's liability laws;
(9) In a separate civil action to recover civil liability arising from a
crime;
( l 0) When at least double judicial costs are awarded;
( l l) In any other case where the court deems it just and equitable
that attorney's fees and
expenses of litigation should be recovered.
In all cases, the attorney's fees and expenses oflitigation must be

reasonable.
45 See Delos Santos v. Abejon, supra note 43.
46 See Marilag v. Martinez, 764 Phil. 576, 593 (2015).
47 Rollo, p. 54.
~
Decision
SO ORDERED.
WE CONCUR:
9 G.R. No. 233974
AJ{}_ WJv
ESTELA Ni.lPERLAS-BERNABE
Associate Justice
NS. CAGUIOA
ANDRE f!e YES, JR.
As so ustice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify
that
the conclusions in the above Decision had been reached in
consultation
before the case was assigned to the writer of the opinion of the
Court's
Division.
Senior Associate Justice
(Per Section 12, Republic Act No. 296,
The Judiciary Act of 1948, As Amended)
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Advanced Decisions July 2018 4/1/20, 4:28 AM

~epublic of tbe ~bilippine~

Genevira P. Estorga (respondent) the following sums: (a)

to comply with its terms, prompting respondent to send a demand

11 See Opposition dated October 9, 2007; id. at 73-79.

29 See id. at 130-133.

is the presumptive reasonable compensation for borrowed money.

Nacar even restates Eastern Shipping:

Following this pronouncement, the Court rules that the CA

"clearly state the·

In all cases, the attorney's fees and expenses oflitigation must be

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