GSIS vs. COURT OF APPEALS GR. No.

L-52478, October 20, 1986 FACTS: In 1961, herein private respondents spouses Nemencio R. Medina and Josefina G. Medina applied with the herein petitioner Government Service Insurance System for a loan of P600,000.00. The approved loan amount was only P350,000.00 at the rate of interest of 9% per annum compounded monthly and the rate of 9%/12% per month for any installment or amortiz ation that remains due and unpaid. The approved loan amount was further reduced toP295,000.00. The Medinas accepted the reduced amount and executed a promissory note and a real estate mortgage in favor of GSIS. Subsequently, upon application by the Medinas, the GSIS approved an additional loan of P230,000.00 on the security of the same mortgaged properties to bear interest at 9% per annum compounded monthly and repayable in ten years. However, in1965, the Medinas defaulted in the payment of the monthly amortization on their loan despite several demands from petitioner. Hence, the GSIS imposed 9%/12% interest on installments that are due and unpaid. The Medinas opposed to this contending that the interest rates on the loan accounts are usurious. After trial of the case, the trial court ordered the Medinas full payment of their obligation to the GSIS plus interest at 9% per annum. Aggrieved, the Medinas appealed before the Court of Appeals but the latter affirmed the lower courts decision. ISSUE: Whether or not the interest rates on the loan accounts of respondent-appellee Medina spouses are usurious. HELD: It has already been settled that the Usury Law applies only to interest by way of compensation for the use or forbearance of money. Interest by way of damages is governed by Article 2209 of the Civil Code of the Philippines which provides that if the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon. The Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreement, the penalty does not include the interest, and as such the two are different and distinct things which may be demanded separately. The stipulation about payment of such additional rate partakes of the nature of a penalty clause, which is sanctioned by law.

LIGUTAN vs. COURT OF APPEALS GR. No. 138677, February 12, 2002 FACTS: Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan from private respondent Security Bank and Trust Company. Petitioners executed a promissory note to pay the sum loaned with an interest of 15.189% per annum upon maturity and to pay a penalty of 5%every month on the outstanding principal and interest in case of default. On maturity of the obligation, petitioners failed to settle the debt despite several demands from the bank. Consequently, the bank filed a complaint for recovery of the due amount. After trial of the case, the Trial court ruled in favor of the Bank, ordering petitioners to pay the respondent the sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 5% per month penalty charge among others. On appeal of the case, petitioners prayed for the reduction of the 5%stipulated penalty for being unconscionable. The Court of Appeals ruled that in the interest of justice and public policy, a penalty of 3% per month or 36% per annum would suffice. But still, petitioners dispute the said decision. ISSUE: Whether or not the 15.189% interest and the penalty of three (3%) percent per month or thirty-six (36%) percent per annum imposed by private respondent bank on petitioners loan obligation are exorbitant, iniquitous and unconscionable. HELD: The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of the court. The essence or rationale for the payment of interest is not exactly the same as that of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest. What may justify a court in not allowing the creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid agreement, may not equally justify the non-payment or reduction of interest. Indeed, the interest prescribed in loan financing arrangements is a fundamental part of the banking business and the core of a bank's existence. The Court of Appeals, exercising its good judgment in the

instant case, has rightly reduced the penalty interest from 5% a month to3% a month.