G.R. No.

177260 March 30, 2011

LOTTO RESTAURANT CORPORATION, represented by SUAT KIM GO, Petitioner,

vs.
BPI FAMILY SAVINGS BANK, INC., Respondent.

D E C I S I O N

ABAD, J.:

This case is about a bank�s right under the loan agreement to adjust the loan
interest from a fixed rate to the prevailing market rate and, further, to foreclose
the real estate mortgage that secures the same upon the borrower�s default.

The Facts and the Case

On December 23, 1999 petitioner Lotto Restaurant Corporation (Lotto) got a loan
of ?3,000,000.00 from the DBS Bank (DBS) at an interest rate of 11.5% per annum.
The promissory note it executed provided that Lotto would pay DBS a monthly
amortization of ?35,045.69 for 180 months. To secure payment of the loan, Lotto,
represented by Suat Kim Go (Go), its General Manager, mortgaged to DBS a
condominium unit that belonged to it.1

Lotto paid its monthly amortizations for 12 months from December 24, 1999 to
December 24, 2000. But in January 2001, after DBS increased the interest to 19% per
annum, Lotto contested the increase and stopped paying the loan. After respondent
BPI Family Savings Bank, Inc. (BPI) acquired DBS, Lotto tried to negotiate with BPI
for reduction of interest but the latter agreed to reduce it to only 14.7% per
annum, which was still unacceptable to Lotto.2

On October 21, 2002 BPI foreclosed the mortgage on Lotto�s condominium unit3 to
satisfy its unpaid claim of ?5,283,470.26, which included interest, penalties, fire
insurance premium, attorney�s fees, and estimated foreclosure expenses. BPI�s
computation applied an interest rate of 19% per annum for the period December 24,
2000 to November 24, 2001; and 14.7% per annum for the period December 24, 2001 to
October 10, 2002.4

To stop the foreclosure, Lotto filed against BPI with the Regional Trial Court
(RTC) of Manila5 in Civil Case 02-105415 an action for reformation or annulment of
real estate mortgage with prayer for a temporary restraining order (TRO) and
preliminary injunction.6 The RTC issued a TRO on January 3, 2003 and a preliminary
injunction on February 6, 2003,7 enjoining the foreclosure sale of the condominium
unit. Mediation in the case failed.8

On January 11, 2005 the RTC rendered a decision in Lotto�s favor,9 finding that DBS
breached the stipulations in the promissory note when it unilaterally increased the
interest rate on its loan from 11.5% to 19% per annum. Further, the RTC held that
the mortgage on the condominium unit was void since the Lotto Board of Directors
did not authorize Go to sign the document. The RTC directed the Register of Deeds
to cancel the encumbrance on Lotto�s title and ordered Lotto to pay BPI its loan of
?2,990,832.00 at ?35,045.69 a month, less the amortizations that it already paid.

Aggrieved, BPI appealed to the Court of Appeals (CA), which reversed the RTC
Decision on November 22, 200610 in CA-G.R. CV 84701. The CA held that Lotto was
estopped from questioning the validity of the promissory note and the real estate
mortgage since, having authorized Go to take out a loan from the bank, it followed
that it also authorized her to provide the security that the loan required. The CA
also clarified that Lotto�s gross loan was ?3,000,000.00; the ?2,990,832.00 that
the RTC referred to was the net proceeds of the loan.
As to the increase in the interest rate, the CA found that the 11.5% rate provided
in the promissory note pertained only to the period from December 24, 1999 to
December 24, 2000. The note provided that, upon the lapse of that period, the loan
would already bear an interest based on the prevailing market rate. The increase
from 11.5% to 19% for the subsequent period was thus valid. The CA upheld the
mortgage and lifted the RTC�s writ of preliminary injunction. With the denial of
its motion for reconsideration,11 Lotto filed the present petition for review.

The Issues Presented

The issues in this case are:

1. Whether or not DBS, now BPI, validly adjusted the rate of interest on Lotto�s
loan from 11.5% to 19% per annum beginning on December 24, 2000; and

2. Whether or not BPI has the right to foreclose the real estate mortgage for non-
payment of the loan.

The Court�s Ruling

One. Lotto insists that DBS had no right to unilaterally increase the interest rate
on its loan from 11.5% to 19% per annum after the passage of a year. Lotto argues
that DBS could, under the terms and conditions of the promissory note, make such
adjustments only after 180 months following the execution of the promissory note.

But, paragraphs 7 and 8 of the promissory note12 clearly provide that the 11.5%
interest rate per annum applied only to the first year of the loan. Thus:

7. EFFECTIVE INTEREST RATE (nr=er) 11.5* %p.a.

(Method of Computation attached) 12.24.99-12.24.2000

8. SCHEDULE OF PAYMENT

a. Single payment due on _________ ?_______

(Date)
b. Total Installment Payments __________ ?_______
Payable in 180* months/year
(no. of payments) * Thereafter interest to be based
on prevailing market rate.
at ? 35,045.69 each installment___________
1.24.00 (sic)-12.24.00 (Emphasis added)
It is plainly clear from paragraph 7 above that the 11.5% per annum interest was to
apply to the period December 24, 1999 to December 24, 2000 ("12.24.99-12.24.00").
They form but one statement of the stipulated interest rate and the period to which
such interest rate applied. Additionally, the statement of applicable interest rate
bears an asterisk sign, which footnoted the information that "[t]hereafter interest
to be based on prevailing market rate." This means that the rate of interest would
be adjusted to the prevailing market rate after December 24, 2000.

Lotto of course calls attention to the statement down in paragraph 8 of the

promissory note (Schedule of Payment), particularly in its sub-paragraph b, that
the "Total Installment Payments" are "Payable in 180* months x x x." Lotto claims
that the asterisk sign after the figure "180" means that the interest would be
adjusted to the prevailing market rate at the end of 180 months. But Lotto�s
interpretation would have a ridiculous implication since that "180 months" is the
statement of the pay out period for the loan. The loan would have been paid after
180 months and, therefore, there would be no occasion for charging Lotto a new rate
of interest on a past loan.

Besides such interpretation would directly contravene the clear provision of

paragraph 7 that the 11.5% per annum interest was to apply only to the period
December 24, 1999 to December 24, 2000 ("12.24.99-12.24.00"). As held in Manila
International Airport Authority v. Judge Gingoyon,13 various stipulations in a
contract must be read together and given effect as their meanings warrant. Taken
together, paragraphs 7 and 8 intended the 11.5% interest rate to apply only to the
first year of the loan.1avvphi1

The Court has previously upheld as valid the proviso in loans that the interest
rate would be made to depend on the prevailing market rate. Such provision does not
signify an automatic increase in the interest. It simply means that the bank may
adjust the interest according to the prevailing market rate. This may result to
either an increase or a decrease in the interest.14

Two. Lotto claims that the real estate mortgage that Go executed was void since it
did not authorize her to execute the same and since DBS did not sign it. But Lotto
admitted in its complaint below that Go had obtained a loan from DBS on its behalf,
with the condominium unit as collateral.15 With this admission, Lotto should be
deemed estopped from assailing the validity and due execution of that mortgage
deed.

As to BPI�s right to foreclose, the records show that Lotto defaulted in its
obligation when it unjustifiably stopped paying its amortizations after the first
year. Consequently, there is no question that BPI (which succeeded DBS) had a clear
right to foreclose on Lotto�s collateral. The Court held in Equitable PCI Bank,
Inc. v. OJ-Mark Trading, Inc.16 that foreclosure is but a necessary consequence of
non-payment of mortgage indebtedness. The creditor-mortgagee has the right to
foreclose the mortgage, sell the property, and apply the proceeds of the sale to
the satisfaction of the unpaid loan.17

At any rate, not all is lost for Lotto. It could avail itself of lower interest
where the prevailing market rate warrants. And, under Section 4718 of the General
Banking Law, it has the right to redeem the property by paying the amount due, with
interest rate specified under the mortgage deed, as well as all the costs and
expenses incurred by the bank.19

WHEREFORE, the Court DENIES the petition and AFFIRMS the November 22, 2006 decision
and the March 28, 2007 resolution of the Court of Appeals in CA-G.R. CV 84701.

SO ORDERED.

ROBERTO A. ABAD
Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson

ANTONIO EDUARDO B. NACHURA

Associate Justice DIOSDADO M. PERALTA
Associate Justice
JOSE CATRAL MENDOZA
Associate Justice
A T T E S T A T I O N

I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Court�s Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairperson�s Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the
opinion of the Court�s Division.

RENATO C. CORONA
Chief Justice

Footnotes

1 Condominium Certificate of Title 6062-Ind.

2 Records, pp. 4-5.

3 Id. at 14-17.

4 Id. at 16.

5 Branch 36.

6 Records, pp. 3-8.

7 Id. at 72.

8 Id. at 98.

9 Rollo, pp. 30-41. Penned by Judge Wilfredo D. Reyes.

10 Id. at 75-95. Penned by Associate Justice Jose L. Sabio, Jr. and concurred in by
Associate Justices Rosalinda Asuncion-Vicente and Ramon M. Bato, Jr.

11 Id. at 130-131.

12 Records, p. 13.

13 513 Phil. 43, 50-51 (2005).

14 Polotan, Sr. v. Court of Appeals (Eleventh Division), 357 Phil. 250, 260 (1998).

15 Records, p. 4.

16 G.R. No. 165950, August 11, 2010.

17 Ramos v. Sarao, 491 Phil. 288, 300 (2005).

18 Section 47. Foreclosure of Real Estate Mortgage. � In the event of foreclosure,

whether judicially or extrajudicially, of any mortgage on real estate which is
security for any loan or other credit accommodation granted, the mortgagor or
debtor whose real property has been sold for the full or partial payment of his
obligation shall have the right within one year after the sale of the real estate,
to redeem the property by paying the amount due under the mortgage deed, with
interest thereon at the rate specified in the mortgage, and all the costs and
expenses incurred by the bank or institution from the sale and custody of said
property less the income derived therefrom. However, the purchaser at the auction
sale concerned whether in a judicial or extrajudicial foreclosure shall have the
right to enter upon and take possession of such property immediately after the date
of the confirmation of the auction sale and administer the same in accordance with
law. Any petition in court to enjoin or restrain the conduct of foreclosure
proceedings instituted pursuant to this provision shall be given due course only
upon the filing by the petitioner of a bond in an amount fixed by the court
conditioned that he will pay all the damages which the bank may suffer by the
enjoining or the restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant
to an extrajudicial foreclosure, shall have the right to redeem the property in
accordance with this provision until, but not after, the registration of the
certificate of foreclosure sale with the applicable Register of Deeds which in no
case shall be more than three (3) months after foreclosure, whichever is earlier.
Owners of property that has been sold in a foreclosure sale prior to the
effectivity of this Act shall retain their redemption rights until their
expiration.

19 Supra note 16.