Tan v CA

G.R. No. 116285; October 19, 2001

Art. 1226 – Obligations with a penal clause

Facts:

·         Petitioner Antonio Tan obtained two loans each in the principal amount of P2 mio (P4 mio in total) from respondent CCP.

·         Petitioner defaulted but after a few partial payments, respondent restructured his loans, which he also failed to pay.

·         Petitioner proposed to respondent CCP a mode of paying the restructured loan.

·         Respondent instead demanded full payment within 10 days from receipt of said letter.

·         Respondent filed a complaint for collection of a sum of money, which obtained a decision in its favor.

·         On appeal, the petitioner asked for the reduction of the penalties and charges on his loan obligation, and eliminating the attorney’s fee, which was all denied by the CA.

Issue:

WoN there are contractual and legal bases for the imposition of the penalty, interest on the penalty and attorney’s fees.

Held:

            Yes, the Supreme Court finds their bases in accordance with the Promissory Note that the petitioner executed in favor of the respondent, and the Article 1226 of the New Civil Code.

            First, there is an express stipulation in the promissory note permitting the compounding of interest as provided in the 5th paragraph of the said promissory note: "Any interest which may be due if not paid shall be added to the total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law." Thus, any penalty interest not paid, when due, shall earn the legal interest of 12% per annum.

Second, Art. 1226 provides that in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

In the case at bar, the promissory note and the law both expressly provide for the imposition of interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan.

            Thus, the Court affirms CA decision with modifications.