Loan Function – Interest on Loan

289 SCRA 292 - RCBC v. CA (1998)

Melo, J.

Goyu & Sons Inc applied for credit facilities with RCBC which was secured by 4 mortgage contracts. The mortgaged properties were insured with
Malayan Insurance as approved by RCBC, and the insurance policies where delivered to RCBC. When one of Goyu’s properties were gutted by
fire, it filed an insurance claim with Malayan which was denied as the policies were attached or being claimed by other creditors of Goyu. Goyu
filed an action for specific performance and damages while RCBC filed a counterclaim for payment of the loan obligations. RTC ordered Goyu to
pay RCBC its loan obligations with interest and surcharges but such payment of interest was deleted by CA without explanation. SC held that
there was no justification for CA’s deletion and that the charging of interest for loans is an essential element of the banking business. It also
tempered the surcharges and penalties to be paid by Goyu after taking into account its pitiful situation and offer to pay the obligation

DOCTRINE
The charging of interest for loans forms a very essential and fundamental element of the banking business, which may truly be considered to be
at the very core of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any interest at all.

FACTS
1. Goyu & Sons, Inc. applied for credit facilities and accommodations with Rizal Commercial Banking Corporation (RCBC) - Binondo. Through
the recommendation of RCBC’s key officers petitioners Uy Chun Bing and Eli D. Lao, a credit facility was granted initially for 30M, which was
increased to 50, 90 then 117 M.
2. As security for its credit facilities, GOYU executed two real estate mortgages and two chattel mortgages in favor of RCBC. Under each of
these four mortgage contracts, GOYU committed itself to insure the mortgaged property with an insurance company approved by RCBC and
to subsequently endorse and deliver the policies to RCBC.
3. GOYU obtained in its name a total of ten insurance policies from Malayan Insurance Company, Inc. (MICO). In Feb. 1992, Alchester
Insurance Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies, issued nine endorsements in favor of
RCBC seemingly upon instructions of GOYU.
4. April 27, 1992 -- one of GOYUs factory buildings in Valenzuela was gutted by fire. GOYU submitted its claim for indemnity but MICO denied
the claim on the ground that the insurance policies were either attached pursuant to writs of attachments/garnishments or that the insurance
proceeds were also claimed by other creditors of GOYU.
5. GOYU filed a complaint for specific performance and damages with RTC.
6. RCBC, one of GOYUs creditors, also filed with MICO its formal claim over the proceeds of the insurance policies, but said claims were also
denied for the same reasons.
7. RTC, in an interlocutory order, confirmed that Goyu’s other creditors obtained their respective writs of attachments from various courts, and
ordered the deposit of the 10 insurance policies with the court. MICO deposited the amount of P50M with RTC.
8. RTC rendered judgment in favor of Goyu, ordering MICO to pay Goyu its fire loss claim of P74M less the 50M deposited in court. It also
ordered RCBC and MICO to pay damages. As for RCBC’s counterclaim, it ordered Goyu to pay its loan obligations of P68.7M as of
Apr. 27, 1992, with interest at the rate stipulated in the Promissory Notes.
9. Upon appeal, CA sustained the TC findings but as to RCBC’s counterclaim, it ordered Goyu to pay its loan obligation “without any interest,
surcharge and penalties.”

ISSUE with HOLDING (as to the issue on interest on loans)

1. W/N CA erred in deleting the interest imposed upon Goyu’s payment of loan obligations to RCBC—YES.
 The need for the payment of interest due upon the principal amount of the obligation, which is the cost of money to RCBC, the primary
end and the ultimate reason for RCBCs existence and being, was duly recognized by the trial court when it ruled favorably on RCBCs
counterclaim, ordering GOYU to pay its loan obligation with RCBC in the amount of P68,785,069.04, as of April 27,1992, with interest
thereon at the rate stipulated in the respective promissory notes (without surcharges and penalties) per computation.
o Inexplicably, the Court of Appeals, without even laying down the factual or legal justification for its ruling, modified the trial
court’s ruling and ordered GOYU to pay the principal amount of P68,785,069.04 without any interest, surcharges and penalties
o It is to be noted that even the trial court hedgingly deleted the payment of additional interest, penalties, and charges saying
that “it would still be unjust and inequitable for defendant RCBC to charge the plaintiff with surcharges and penalties
considering the latter’s pitiful situation”.
 The essence or rationale for the payment of interest or cost of money is separate and distinct from that of surcharges and penalties.
What may justify a court in not allowing the creditor to charge surcharges and penalties despite express stipulation therefor in a valid
agreement, may not equally justify non-payment of interest.
o The charging of interest for loans forms a very essential and fundamental element of the banking business, which may truly
be considered to be at the very core of its existence or being. It is inconceivable for a bank to grant loans for which it will not
charge any interest at all.
o There is no justification for the CA’s outright deletion of the payment of interest as agreed upon in the respective promissory
notes.
 For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down by this Court in Eastern Shipping
Lines, Inc. vs. Court of Appeals shall apply:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor
can be held liable for damages. The provisions under Title XVIII on Damages of the Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as
the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the

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 time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date of the judgment of the court is made (at which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.

 There being written stipulations as to the rate of interest owing on each specific promissory note as summarized and tabulated by the
trial court in its decision, such agreed interest rates must be followed.

On Payment of Surcharges and Penalties

 Goyu’s pitiful situation must be taken into account but the payment of surcharges and penalties should not altogether be deleted.
 Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages as stated in Art.
2227 of the civil code.
 In determining what is iniquitous and unconscionable, the Court must consider the circumstances of each case. It will not mak e any
sweeping ruling that surcharges and penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous
and unconscionable.
o Given the circumstances under which GOYU found itself after the occurrence of the fire, the Court rules the surcharges rates
ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous and unconscionable. The Court
tempers these rates to 2% and 3%, respectively.
o Furthermore, in the light of GOYU’s offer to pay the amount of P116,301,992.60 to RCBC as of March 1993, which RCBC refused,
it is more in keeping with justice and equity for RCBC not to charge additional interest, surcharges, and penalties from that time
onward.

DISPOSITIVE PORTION
WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December 16, 1996 and April 3, 1997 in CA-G.R. CV No.
46162 are hereby REVERSED and SET ASIDE, and a new one entered:
1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before Branch 3 of the Manila Regional Trial Court for lack
of merit;
2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking Corporation the proceeds of the insurance policies in the
amount of P51,862,390.94 (per report of adjuster Toplis & Harding (Far East), Inc., Exhibits 2 and 2-1), less the amount of P50,505,594.60 (per
O.R. No. 3649285);
3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests earned to Rizal Commercial Banking Corporation;
4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking Corporation in the principal amount of P107,246,887.90,
with interest at the respective rates stipulated in each promissory note from January 21, 1993 until finality of this judgment, and
surcharges at 2% and penalties at 3% from January 21, 1993 to March 9, 1993, minus payments made by Malayan Insurance Company, Inc.
and the proceeds of the amount deposited with the trial court and its earned interest. The total amount due RCBC at the time of the finality of this
judgment shall earn interest at the legal rate of 12% in lieu of all other stipulated interests and charges until fully paid.

OTHER NOTES/ISSUES
W/N RCBC has a right over the insurance proceeds—Yes.
 It is settled that a mortgagor and a mortgagee have separate and distinct insurable interests in the same mortgaged property, such that
each one of them may insure the same property for his own sole benefit.
 On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in favor of mortgagor RCBC.
o RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the stipulation in the mortgage
contracts.
o GOYU failed to seasonably repudiate the authority of the person or persons who prepared such endorsements. Over and above
this, GOYU continued, in the meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After the occurrence of
the loss insured against, it was too late for GOYU to disown the endorsements for any imagined or contrived lack of authority of
Alchester to prepare and issue said endorsements.
o If there had not been actually an implied ratification of said endorsements by virtue of GOYU's inaction in this case, GOYU is at the
very least estopped from assailing their operative effects.
o Just as plain too is the intention of the parties to constitute RCBC as the beneficiary of the various insurance policies obtained by
GOYU. The intention of the parties will have to be given full force and effect in this particular case. The insurance proceeds may,
therefore, be exclusively applied to RCBC, which under the factual circumstances of the case, is truly the person or entity for whose
benefit the policies were clearly intended.