The court‘s course correction on unconscionable interest, foreclosure

The court‘s course correction on unconscionable interest, foreclosure | Daily Tribune

The Supreme Court has recently taken a remarkable step back to re-examine its own ruling in United Coconut Planters Bank, substituted by Land Bank of the Philippines, v. Editha Ang and Violeta Fernandez (G.R. No. 222448). The Court, speaking through Justice Ricardo Rosario, granted the motion for reconsideration and vacated its 2021 decision that had upheld the bank’s right to foreclose on the borrowers’ property.

This reversal is more than a technical correction. It is a reaffirmation that equity, good faith and fair dealing must temper the cold logic of contracts.

The controversy arose from a P16-million loan extended by the bank to the respondents. The lower courts had found that the interest rates were unilaterally imposed by the bank, rendering the loan contracts potestative and void under Articles 1308 and 1309 of the Civil Code, which require mutuality in contractual obligations. Despite this, the Supreme Court’s earlier ruling sustained the foreclosure, citing Advocates for Truth in Lending v. BSP (2013) to hold that even if the interest was void, the lender could still recover the principal and foreclose on the mortgage.

Upon reconsideration, the Court conceded that its reliance on Advocates was misplaced. That case merely tackled the Bangko Sentral’s authority to lift usury ceilings; its reference to foreclosure was an obiter dictum. The controlling precedents, as respondents correctly argued, were Spouses Andal v. PNB (2013) and Spouses Albos v. Embisan (2017) — both of which declared that no valid default exists when the debtor’s non-payment stems from illegal or unconscionable interest rates. Without a default, foreclosure is premature and void.

The Court quoted extensively from Andal, Albos and Heirs of Espiritu v. Landrito (2004), reiterating that before foreclosure can proceed, the debtor must first be given an opportunity to settle the correct amount of the debt. To foreclose based on an overstated or inflated obligation would be to punish the borrower for resisting injustice.

As the Court observed, “The mortgagor should be given a chance to pay their indebtedness at an interest rate clearly agreed upon by the parties; otherwise, they shall be at the mercy of their creditor.”

In a noteworthy shift, the resolution adopted the dissenting opinion of Justice Rodil Zalameda in the earlier decision. Justice Zalameda had warned that it would be “the height of injustice” to allow a foreclosure grounded on a loan laden with usurious and unilateral interest. By embracing his view, the Court has harmonized its jurisprudence with the civil law principle that contracts must bind both parties — not empower one to dictate terms at will.

The decision also cited Vazquez v. PNB (2019), where the Court held that when interest provisions are void, the debtor is not in default and foreclosure is invalid. In such cases, registration of the sale cannot transfer ownership, for “the Torrens system does not create or vest title where one does not have a rightful claim.”

The reversal highlights the Court’s willingness to listen, to revisit its own reasoning and to align doctrine with moral equilibrium.

Law, after all, is not only about the enforcement of rights but also the prevention of wrong. This ruling reminds lenders and borrowers that while obligations must be paid, equity must not be sacrificed.

In the words of Scripture: “A false balance is an abomination to the Lord, but a just weight is His delight” (Proverbs 11:1). And in the language of the law, summum jus, summa injuria — extreme right may become extreme wrong.

By correcting itself, the Court has vindicated not just the borrowers, but the principle that justice, like faith, is best proven when it humbly reconsiders.

For more of Dean Nilo Divina’s legal tidbits, please visit www.divinalaw.com. For comments and questions, please send an email to cad@divinalaw.com.