1. Commercial Credit vs CA G.R. No.

78315, January 2, 1989

Facts: CDO Company executed a note – secured by mortgage – to

pay CC Creditors, to which the former defaulted. However, five
minority stockholders of CDO instituted a court action on such
forfeiture as the note executed was made without their consent.
Eventually, A COMPROMISE AGREEMENT BEFORE THE
COURT was made between CC and CDO, calling for another
terms of payment (PROVIDES FOR INTEREST AND PENALTY
IN CASE OF NONCOMPLIANCE), to which CDO defaulted
(again) AFTER PARTIALLY COMPLYING payments. After
multiple legal motions, Sheriff moved to auction the security, to
which CC alleged that they have already paid the debt. The
auction being postponed, THE COURT then DECIDED TO
DECREASE THE PENALTY should CDO pay its overdue debts
by virtue of ART. 1229, to which CDO question. In addition,
CDO question the consequence of noncompliance as it asks for
NOT ONLY ITS INTEREST, BUT ALSO A PENALTY, a violation
of Usury Law.

Issue: Whether or not the Court (CA) may modify the

compromise agreement.

Held: Hell, no.

Art. 1229 provides that the JUDGE MAY REDUCE
PENALTY WHEN OBLIGATION HAS BEEN PARTLY
COMPLIED WITH. In addition, Art. 1226 provides that
PENALTY SHALL SUBSTITUTE for damages and interests,
UNLESS OTHERWISE STIPULATED.

In this case, the Court (SC) held that Art. 1229 applies only
to OBLIGATIONS STILL SUBJECT TO LITIGATION which was
partly complied and CANNOT APPLY to FINAL AND
EXECUTORY JUDGMENT. Finally, (insert self-explaining 1226).
2. IBAA vs Spouses Salazar G.R. No. 82082, March 25, 1988

Facts: SS obtained loan from I Bank with these express stipulations:

1) AN INITIAL 19% INTEREST and to INCREASE SUCH
WITHOUT NOTICE ALLOWABLE BY LAW; 2) a PENALTY OF 2%
of AMOUNT DUE SHOULD THEY DEFAULT; and 3) IF collection
was REFERRED TO AN ATTY., an ADDITIONAL 25% of any
AMOUNT DUE AS ATTY’S FEES. Though they MADE PARTIAL
PAYMENTS, SS eventually defaulted. I Bank made these claims: 1)
rate INCREASED TO 21%, 2) THE 2% PENALTY for defaulting,
and 3) 25% of the total debt as ATTY’S FEES. Trial court held that
no 1) no rate increase, 2) no 2% penalty, and 3) atty. fees not equal
to 25% of total debt, to which I Bank deemed are erroneous.

Issue: Whether or not the Trial court erred in judgment.

Held: No.
Banco Filipino vs Navarro provides that interest rates MAY
BE ADJUSTED PROVIDED that maturity date of loans are
BEYOND 730 DAYS (2 years?) from the date of allowing
adjustment of interest rates by Monetary Board. Second, Art. 1229
provides that THE JUDGE MAY REDUCE THE PENALTY UPON
PARTIAL COMPLIANCE of debtor. Furthermore, PENALTY
MAY BE REDUCED IF IT IS INIQUITOUS OR
UNCONSCIONABLE.
In this case, the maturity date of the remaining loan WAS
LESS THAN 730 DAYS; therefore the 21% interest cannot stand.
Second, though it is true that THE INTEREST AND PENALTY
MAY BOTH BE CLAIMED, as the parties have stipulated (ART.
1226), the Court observed that 1) SS made PARTIAL PAYMENTS
before eventually defaulting; and 2) EFFORTS WERE MADE by SS
TO MAKE GOOD OF THEIR PROMISE; alas, they did so in vain.
As such, the Court REDUCED THE PENALTY FOR BEING
INIQUITOUS (unfair, immoral); the atty’s fees REDUCED FOR
BEING UNCONSCIONABLE (unreasonable).
3. Ligutan vs CA G.R. No. 138677, February 12, 2002

Facts: D and L obtained loan from S Bank with these express

stipulations: 1) AN INITIAL 15.189% INTEREST, 2) a
PENALTY OF 5%/MONTH of AMOUNT DUE SHOULD
THEY DEFAULT; and 3) IF collection was REFERRED TO
AN ATTY., an ADDITIONAL 10% of any AMOUNT DUE AS
ATTY’S FEES. DESPITE SEVERAL DEMANDS and
GRANTING AN EXTENSION, D and L still failed to settle the
debt. S Bank made these claims: 1) THE 15.189% INTEREST,
2) THE 5% PENALTY for defaulting, and 3) 10% of the total
debt as ATTY’S FEES. CA held that no 1) THE INTEREST
CLAIMABLE, 2) 5% reduced to 3%, and 3) atty. fees EQUAL
TO 10% of debt, to which D and L deemed are still exorbitant,
iniquitous, and unconscionable.

Issue: Whether or not the Court of Appeals erred in judgment.

Held: No.

ART. 1229 provides that THE JUDGE MAY REDUCE

THE PENALTY UPON PARTIAL COMPLIANCE of debtor.
Furthermore, PENALTY MAY BE REDUCED IF IT IS
INIQUITOUS OR UNCONSCIONABLE. The Court also
opined that RESOLUTION OF MODIFICATION may be
DEPENDENT ON SEVERAL FACTORS.

In this case, CA, exercising good judgment, has

REDUCED THE PENALTY, NOTWITHSTANDING THE
several ACTS OF BREACH by petitioners of their contractual
obligation as such D and L cannot contend such (ART. 1229,
Ligutan vs CA).
4. RCBC vs CA G.R. No. 128833, April 20, 1998

Facts: G Company (G) obtained a loan from R Bank (R) on the

following premises, 1) PROVIDE SECURITIES on debt; and 2)
INSURE THOSE SECURITIES, to R’S FAVOR. Unfortunately,
ONE of the SECURITY WAS BURNED DOWN. Subsequently,
G Company ASKED FOR INSURANCE claims on the building,
only to be DENIED by its insurance provider, M Insurance
(M), as IT AVERS that its CREDITORS (some of it actually
have already been claimed, but eventually deposited) HAVE
BETTER RIGHTS TO THE PROCEEDS than G itself. Oddly,
M ALSO REFUSED CLAIMS OF R. After an intertwining
legal standoff among the parties, CA, affirming the decision of
the lower court, held that 1) M to PAY the INSURANCE
claims TO G, 2) R and B to pay damages and fees; and 3) G to
pay R his debt WITHOUT INTEREST AND PENALTIES.

Issue: Whether or not the Court of Appeals erred in judgment.

Held: Partially.

Couch on Insurance (commentary cited) provides that

mortgagor and mortgagee have separate insurable interests on
a mortgaged property. In conjunction, Art. 1371 provides that
the contemporaneous and subsequent acts shall be considered
to judge their intention to their contract.
The Court opined that charging of INTEREST for loans
forms a very ESSENTIAL element of banking business. Second,
ART. 1229 provides that JUDGE SHALL REDUCE THE
PENALTY when 1) THE PRINCIPAL OBLIGATION has been
PARTLY COMPLIED or 2) IF IT IS INIQUITOUS OR
UNCONSCIONABLE.
 In this case, although G was the one who insured the
securities, it is settled that the intention was to endorse the
insurance to R (ART. 1371). As such, the insurance must be
given in favor of R.
Onto G’s penalty, the Court DISMISSED CA’s
pronouncement to relieve G from paying interest as 1)
interest was expressly stipulated; and 2) it is
INCONCEIVABLE that a bank TO GRANT LOAN
WITHOUT INTEREST (RCBC vs CA).

Also, the Court agrees insofar as to ONLY REDUCE the

PENALTY given G’ PITIFUL SITUATION (the fire). Mere
assurance of assistance by the officers of R Bank does not
equate to waiving of penalty (RCBC vs CA).
5. Lo vs CA G.R. No. 141434, September 23, 2003

Facts: A ACQUIRED PARCELS of land from an auction

organized by L Bank (L). N Cooperative (N), the occupant of
the lands, WAS still UNDER A CONTRACT OF LEASE
WITH L. Upon expiration, A DEMANDED FROM N TO
VACATE the premises. N however, REFUSED because it was
still contending the auction of the said lands. A NOW
CLAIMS PENALTY of Php 5,000 for every day that they do
not vacate, derived from the penalty in case N delays in
paying the monthly rent. (A subrogates the rights of L,
including L’s right in the lease contract?). CA deemed the
penalty reduced to Php 1,000.

Issue: Whether or not the Court of Appeals erred in judgment.

Held: No.
ART. 1229 provides that THE JUDGE MAY REDUCE
THE PENALTY UPON PARTIAL COMPLIANCE of debtor.
Furthermore, PENALTY MAY BE REDUCED IF IT IS
INIQUITOUS OR UNCONSCIONABLE. The Court also
opined that RESOLUTION OF MODIFICATION may be
DEPENDENT ON SEVERAL FACTORS.
In this case, the Court observed that 1) the penalty, when
compared to the monthly rent, was five times pricier than the
latter, 2) N refused to leave because of its well-founded belief
that that it had the right of preemption (right to be the
priority when buying an asset), 3) N, being collectively owned
by farmers, would seriously deplete its income and might go
bankrupt with such penalty. As such, the Court deemed the
penalty unconscionable and iniquitous and upholds CA’s
judgment.
6. Garcia vs CA G.R. No. 82282-83, November 24, 1988

Facts: C Company (C) obtained loans from S Bank (S). To

SECURE A LOAN, C SOUGHT GDM, which EXECUTED
AN INDEMNITY AGREEMENT that bound themselves
jointly and severally LIABLE TO C’S DEBT. C did default
on his loan; thus, S claim for the obligation, along with its
stipulated interest and penalties. GDM AVERS S CANNOT
CLAIM for it is in violation of laws and jurisprudence of
interest, penalties and fees. CA ruled in favor of S.

Issue: Whether or not the Court of Appeals erred in judgment.

Held: Partly

ART. 1229 provides that THE JUDGE MAY REDUCE THE

PENALTY UPON PARTIAL COMPLIANCE of debtor.
Furthermore, PENALTY MAY BE REDUCED IF IT IS
INIQUITOUS OR UNCONSCIONABLE. Also, in CUMAGUN
VS PHIL-AM INSURANCE provides that PENALTY
INTERESTS are LIQUIDATED DAMAGES by nature. In
conjunction, by ART. 2227, provides that LIQUIDATED
DAMAGES MAY BE REDUCED if they are iniquitous and
unconscionable

In this case, the Court observed that the penalty charges

are 1) if computed, WOULD AMOUNT TO SEVERAL TIMES
THE PRINCIPAL LOANS, and 2) earned AT A SHORT
AMOUNT OF TIME ONLY (Arts. 1229, 2227). However, the
attorney fees were retained, for in fact, the stipulated was
actually lower than what was agreed. As such the Court agreed
to reduce the penalty.
7. Ibarra vs Aveyro G.R. No. L-11306, December 6, 1917

Facts: A SOLD TO I a piece of land for P300, with a RIGHT OF

REPURCHASE. Subsequently, A ASKED I TO BORROW
THE TITLE of the land TO FIND A BUYER AT A BETTER
PRICE. As security, I requested A to execute a promissory
note worth P465 with a penal clause, should he be able to
resell it. Unable to resell the land, A returned the title
while he requested the return of the promissory note.
However I refused to accept the deed and to return the
promissory note and in fact requires A to pay P465 with a
5-peso penalty for every day A fails to pay.

Issue: Whether or not A is liable for the entire 465 pesos along
with its penalty.

Held: Partly

The Court opined that what is expressly stated be enforced

(Art. 1370?). Also, ART. 1306 provides that PARTIES MAY
ESTABLISH TERMS PROVIDED THEY ARE NOT
CONTRARY TO MORALS.

In this case, the promissory note expressly provides only

for 465 pesos SHOULD HE BE ABLE TO SELL THE LAND,
with a 5-peso penalty for delay. As such, I is obliged to pay the
P465 as principal obligation, notwithstanding the price of P300
which was the purchase price of I to A.
Second, the penal clause applies ONLY WHEN HE IS
ABLE TO SELL THE LAND, which A unfortunately was not
able to do. As such, the Court cannot enforce the penal clause
as it is deemed immoral (ART. 1306).