First Metro Investment v.
Este Del Sol
November 15, 2001
Petitioner: First Metro Investment Corp. (FMIC)
Respondent: Este del Sol Mountain Reserve Inc. (EDS)
Facts:
FMIC granted EDS a loan of P7,385,500 to finance the construction and development of
the Este del Sol Mountain Reserve, a sports/resort complex project
The Loan Agreement provided that:
o The proceeds of the loan were to be released on a staggered basis
o The loan was payable in 36 equal and consecutive monthly amortizations
o In case of default, the amount due will be made subject to a 20% one-time penalty,
and EDS would have to pay liquidated damages at 2% per month, and attorneys
fees equal to 25% of the sum sought to be recovered which in no case shall be less
than P20,000 if a lawyer was hired
EDS executed several documents as security for payment:
o Real Estate Mortgage over 2 parcels of land
o Individual Continuing Suretyship agreements by 7 individuals to guarantee the
payment of ES up to the aggregate sum of P7,500,000 each
EDS also executed an Underwriting Agreement:
o FMIC shall underwrite the public offering of 120,000 common shares of EDS for a
onetime underwriting fee of P200,000
o For supervising the public offering shares, EDS shall pay FMIC P200,000 per annum
for 4 consecutive years
Simultaneously, EDS executed a Consultancy Agreement where EDS will pay FMIC a
consultancy fee of P332,500 per annum for 4 consecutive years
EDS failed to meet the schedule of repayment and appeared to have incurred a total
obligation of 12,679,630.98
Accordingly, FMIC caused the extrajudicial foreclosure of the real estate mortgage of EDS
and demanded payment from the individual sureties. However, the individual sureties,
despite individual demand sent to them, failed to pay for the deficiency.
FMIC instituted a instant collection suit for the deficiency against EDS.
Trial court ruled in favor of petitioner. CA reversed the decision.
Whether Central Bank Circular No. 905 should be given retroactive effect NO.
CB 905 took effect on January 1, 1983 and removed the ceiling on interest rates for secured
and unsecured loans, regardless of maturity.
It should not be applied retroactively to a contract executed on January 31, 1978, while
the Usury Law was in full force and effect.
The laws in force at the time the contract was made and entered into govern it.
Also note that CB 905 did not repeal the Usury Law but only suspended it. Only laws
can repeal laws. This gives more reason why retroactive effect of CB 905 should not be
presumed.
Whether the Underwriting Agreement (UA) and Consultancy Agreement (CA) were
executed to conceal a usurious loan YES.
A written contract between 2 parties is ordinarily the best evidence of the terms of that
contract such that Courts need to rely only on the face of the written contracts to determine
the intention of the parties.
However, the form of the contract is not conclusive. Parol evidence is admissible to show
that a written contract though legal in form was in fact a device to cover usury.
In this case, the facts taken altogether show that the Underwriting and Consultancy
Agreements were executed to conceal a usurious loan.
1. The UA and the CA were executed on the same date as the Loan Agreement and the
payment of the fees was set for a period of 4 years to coincide with the Loan
Agreement.
2. It was stipulated that the UA is a condition precedent and part and parcel of the
Loan Agreement.
3. EDS was billed P1,330,000 instead of P332,500 per annum as consultancy contrary
to what was stipulated.
4. The Underwriting, Supervision, and Consultancy fees were billed on the same
occasion of the first release of the loan.
5. FMIC was in fact unable to organize an underwriting/selling syndicate to sell any
shares of EDS and much less supervise such syndicate.
6. There was no need for a Consultancy Agreement since EDS officers appeared to be
more competent consultants.
Art. 1957 of the NCC provides:
o Art. 1957. Contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury shall be void. The borrower
may recover in accordance with the laws on usury.
In usurious loans, the entire obligation does not become void because of an agreement for
usurious interest. The unpaid principal debt remains valid but the stipulation as to the
usurious interest is void. Consequently, the debt is to be considered without stipulation as
to the interest.
Thus, the nullity of the stipulation on the usurious interest does not affect the lenders
right to receive back the principal amount of the loan. With respect to the debtor, the
amount paid as interest under a usurious agreement is recoverable by him, since the payment
is deemed to have been made under restraint, rather than voluntarily.
Petition denied. Decision of CA affirmed.
