568 Phil. 552
TINGA, J,:
On September 13, 1995, as additional capital for their metal craft business, plaintiffs-appellants ENCINA obtained a P500,000.00 loan with defendant-appellee PNB, secured by a promissory note, a real estate mortgage, and a credit agreement, on parcels of land covered by Transfer Certificate of Title (TCT) Nos. T-6788 and T-6789 located at Occidental Mindoro.In its Order[3] dated 10 March 2003, the trial court dismissed the complaint.
Thereafter, or on September 6, 1996, plaintiffs-appellants obtained an additional P200,000.00 loan with defendant-appellee PNB as additional capital for palay production, embodied in a credit agreement and a promissory note, secured by the same parcels of land. The loan obligations of plaintiffs-appellants ENCINA were fully paid on February 4, 1997.
Another loan in the amount of P400,000.00 as capital for a common carrier business was obtained by plaintiffs-appellants ENCINA with defendant-appellee PNB, secured by a promissory note and a time loan commercial credit agreement, likewise secured by the parcels of land covered by TCT Nos. T-6788 and T-6789.
Defendant-appellee PNB subsequently granted a P1,250,000.00 all purpose credit facility to plaintiffs-appellants ENCINA to be used by plaintiffs-appellants ENCINA exclusively for their metal craft business. Plaintiffs-appellants ENCINA availed of the amount of P1,050,000.00 of the credit facility, evidenced by a promissory note dated February 13, 1998 secured by the same parcels of land as well. Plaintiffs-appellants ENCINA later on availed of the remaining P200,000.00 credit facility, secured by a promissory note dated May 22, 1998.
On the maturity date of the P1,250,000.00 loan obligation, plaintiffs-appellants ENCINA failed to pay, prompting defendant-appellee PNB to demand the same from plaintiffs-appellants ENCINA, in letters dated January 5, 1999, January 21, 1999, March 5, 1999, April 16, 1999, and May 27, 1999. Demands from defendant-appellee PNB were left unheeded, prompting defendant appellee PNB to file a petition for sale of the mortgaged properties with defendant-appellee Ex-Officio Sheriff of the Regional Trial Court of San Jose, Occidental Mindoro on September 20, 1999.
The extra-judicial sale of the mortgaged properties of plaintiff-appellant ENCINA was published in “The Island Observer,” a newspaper of general circulation in the province of Occidental Mindoro, on October 4, 11, and 18, 1999. A notice of extra-judicial sale was issued on October 4, 1999. The foreclosure sale was thereafter conducted on November 15, 1999 with defendant-appellee PNB as the highest bidder. A certificate of sale dated November 16, 1999 was then issued in favor of defendant-appellee PNB.
Thereafter, or on January 22, 2001, titles to the subject properties were consolidated in defendant-appellee PNB’s name, to which TCT Nos. 16919 and 16920 were issued.
On November 15, 2001, a contract of lease was executed between defendant-appellee PNB and plaintiffs-appellants ENCINA over the subject properties, pursuant to a request made by plaintiffs-appellants ENCINA that they be allowed by defendant-appellee PNB to lease the subject premises for a monthly rental of P7,500.00.
Finally, on July 18, 2002, plaintiffs-appellants ENCINA sued defendants-appellees in an action for the nullification of foreclosure sale and damages, with prayer for extension and/or grace period, with the RTC of San Jose, Occidental [Mindoro], Branch 46, docketed as Civil Case No. R-1304, alleging that their loan obligations, being agricultural, hence, with longer gestation periods, should have been restructured by defendant-appellee PNB for a longer period of at least seven years; that no penalties should have been imposed by defendant-appellee PNB; that the extra-judicial foreclosure sale of their properties was null and void; that for being in violation of the Usury Law, the loan contracts and all accessory contracts pertaining thereto were null and void; and that the foreclosure proceedings under RA 3135 were not complied with, hence, the entire foreclosure proceedings were null and void.
In the motion to dismiss filed by defendant-appellee PNB on October 11, 2002, it averred that plaintiffs-appellants ENCINA could no longer seek for (sic) longer gestation periods for their agricultural loans, since plaintiffs-appellants ENCINA’s agricultural loans dated September 13, 1995 and February 13, 1998 have already been fully paid by them on February 4, 1997; that plaintiffs-appellants ENCINA failed to settle their loan for metal craft business and not their agricultural loans; that the Usury Law was inapplicable being legally non-existent; that defendant-appellee PNB complied with the requirements of posting and publication set forth in RA 3135; and that plaintiffs-appellants ENCINA had already waived their right to question PNB’s title to the properties, considering that plaintiffs-appellants [ENCINA] requested from PNB that they be allowed to lease the subject premises from PNB.[2]
PNB should be deemed to have admitted the foregoing averments, at least hypothetically, when it filed a motion to dismiss the complaint. Its motion, however, assails the veracity of these allegations, claiming that the foreclosure of the mortgaged properties was due to the non-payment by the Encina spouses of their metal craft business loan and not their agricultural loan.FIRST CAUSE OF ACTION:
5. The loan is an agricultural loan to be used as operating capital in palay production as evidenced by the Credit Agreement (hereto attached as Annex “H”);
6. Being an agricultural loan with long gestation period, the loan should have been restructured for a longer period of at least seven (7) years and no penalties should have been imposed pursuant to Central Bank Circulars and the Agricultural Modernization Act of 1997;
7. Inspite of the request of the Plaintiffs to restructure the loan or for a grace period, the Defendant Bank failed and refused to do so. Furthermore, penalty charges should not have been imposed;
8. The Plaintiffs requested for a detailed computation of the amount due considering the payments that were made but the Defendant Bank failed and refused to do so;
9. That in view of the violation of the Central Bank Circulars and the Agricultural Modernization Act of 1997, the Extra-judicial Foreclosure Sale of the subject properties issued in favor of the Defendant Bank is null and void, including all proceedings thereto.SECOND CAUSE OF ACTION
10. Considering that all the loan covered by the said Promissory Notes are secured with a mortgage upon registered real estate, all those contracts of loan are null and void because they are in violation of or contrary to the provisions of the Usury Law (Act No. 2655, as amended) particularly Section 2 thereof which is photocopied hereunder from Philippine Permanent and General Statutes, to wit:
x x x
11. In view of the violation of the Usury Law, the contracts of loan, and its accessory contracts are likewise null and void, namely: a) Real Estate Mortgage Contract, as well as Promissory Notes executed therewith are also null and void.
12. That in view of the nullity of the contracts of loan and the real estate mortgage contracts, the Extra-judicial Foreclosure Sale of subject property issued in favor of the Defendant Bank is also null and void, including all proceedings thereto, the minutes and the subsequent Certificate of Sale is also void;THIRD CAUSE OF ACTION
13. The Extra-judicial foreclosure proceedings and public auction sale of the properties of the Plaintiffs failed to comply with the provisions of Section 3, of Act No. 3135, as amended, which provides:Section 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.14. The failure of the Defendants to comply with the foreclosure proceedings under Section 3 of Act 3135, as amended, would render the foreclosure proceedings null and void;[9]
The promissory notes and the real estate mortgages however remain valid even assuming arguendo that there was no stipulated interest rate that was agreed upon. The obligation of plaintiffs-appellants ENCINA to pay the principal loan is nevertheless valid even if the interest is void. This is so because a contract of loan should be divided into two parts: (1) the principal and (2) the accessory stipulations – the principal one is to pay the debt and the accessory stipulation is to pay interest thereon. The two stipulations are divisible and the principal can still stand without the stipulation on the interest. The prestation of the debtor to pay the principal debt, which is the cause of the contract, is not illegal. The illegality lies only in the failure to stipulate or agree on the interest – leaving it to only one of the parties to fix or determine. Being separable, only the interest unilaterally fixed by one party should be deemed void, which cannot be interpreted to mean forfeiture even of the principal, for this would unjustly enrich the borrower at the expense of the lender.Curiously, even as they assert that the principle of mutuality was violated by the failure to stipulate an interest rate, the Encina spouses concurred with the appellate court and even reproduced verbatim the latter’s discussion on the validity of the promissory notes and real estate mortgages,[14] effectively admitting that these contracts are binding on them.
Plaintiffs-appellants ENCINA freely and voluntarily agreed to the provisions in regard to repayment of the principal when they affixed their signatures thereto. Thus, the said mortgage contract binds them because Article 1159 of the New Civil Code provides that obligations arising from contracts have the force of law between the contracting parties.
Since the promissory notes and the real estate mortgage are valid and only the unilaterally imposed interest rates are wholly void, plaintiffs-appellants ENCINA have still to be directed to pay defendant-appellee PNB the principal amount of the loan which remains valid with interest at the legal rate of 12% per annum from the date the loan was granted up to full payment, less payments already made, within ninety (90) days from the finality of the decision, otherwise, the defendant-appellee PNB shall be entitled to foreclose the mortgaged property and sell the same at public auction to satisfy the loan.(Emphasis not ours)[13]