First Metro Investment Corporation vs. Este Del Sol Mountain Reserve, Inc.

The Usury Law and CB Circular Nos. 416 and 905 and BSP Circular No. 799 - Remedies G.R. No. 141811 – FMIC vs. Este Del Sol Mountain Reserve, Inc. De Leon, Jr., J. FMIC loaned P7.4M to Este Del Sol with 16% interest per annum and the proceeds were to be released on a staggered basis. Property was mortgaged as security for the loan and the owners of Este Del Sol were made sureties. Pursuant to the Loan Agreement, Este del Sol executed Underwriting and Consultancy Agreements where mandatory accessory fees such as underwriting fee, consultancy fee, and supervision fee amounting to P1.7M was to be paid to FMIC. The aforementioned fees amounting to P1.7M were deducted from the first release of the loan. Este Del Sol failed to meet the schedule of repayment in accordance with the schedule of amortization, so FMIC foreclosed on the property. The public auction sale still did not cover the debt, including interests and penalty, so FMIC tried to secure payment from the sureties. Upon failure to secure payment, FMIC filed a collection suit against the sureties. TC ruled in favor of the FMIC. CA reversed. SC affirmed CA, holding that the Underwriting and Consultancy Agreements were simply devices to cover an illegal scheme employed by FMIC to collect excessively usurious interest. DOCTRINE An apparently lawful loan is usurious when it is intended that additional compensation for the loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for the lender’s services which are of little value or which are not in face to be rendered. The nullity of the stipulation on the usurious interest does not affect the lender’s 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 still recoverable, since the payment is deemed to have been made under restraint, rather than voluntarily. IMPORTANT PEOPLE First Metro Investment Corporation (FMIC) - lender Este Del Sol Mountain Reserve, Inc. (ESTE) - borrower FACTS 1. FMIC and ESTE entered into a Loan Agreement for P7.4M with an interest of 16% per annum and 25% atty.’s fees. a. A real estate mortgage over 2 parcels of land was executed to secure the loan; and the owners of ESTE were made to be sureties to guarantee the payment of all ESTE’s obligations. b. As provided for in the Loan Agreement, ESTE executed Underwriting and Consultancy Agreements wherein mandatory accessory fees such as underwriting fee, consultancy fee, and supervision fee amounting to P1.7M was to be paid to FMIC. c. The loan was to be released on a staggered basis; and FMIC deducted the P1.7M from the first release of the loan. 2. ESTE failed to meet the schedule of repayment in accordance with the schedule of amortization, so FMIC caused an extrajudicial foreclosure of the real estate mortgage. 3. The debt was still not covered by the public auction sale so FMIC tried to secure payment of the balance from the sureties, but the demands were left unheeded. 4. FMIC instituted the instant collection suit against the sureties to collect the alleged deficiency balance. 5. The respondent sureties sought the dismissal of the suit in their Answer, alleging that the Underwriting and Consultancy Agreements were subterfuges resorted to by FMIC, imposed on ESTE, to camouflage usurious interests charged by FMIC. 6. Trial court ruled IFO FMIC and ordered payment of the alleged deficiency balance. 7. TC decision appealed to the CA. 1

a. CA reversed TC; Underwriting and Consultancy Agreements were made to conceal the excessively usurious interests charged by FMIC. 8. FMIC filed MR  MR denied. Hence, this petition. ISSUE with HOLDING 1. W/N the P1.7M mandatory accessory fees in the Underwriting and Consultancy Agreements were usurious interests – YES a. An apparently lawful loan is usurious when it is intended that additional compensation for the loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for the lender’s services which are of little value or which are not in face to be rendered. i. The law will not permit a usurious loan to hide behind a legal form; the transaction must be construed as a whole to determine if there is an intention to violate the Usury Law. b. There are several facts and circumstances in the present case which show that the U&C Agreements were simply devices to cover FMIC’s illegal scheme to collect usurious interests: i. The U&C Agreements and the Loan Agreement were executed simultaneously, thus they shall remain effective for the same period; ii. The execution of the U&C Agreements was a condition precedent for the bank to extend the loan to respondent; iii. ESTE was billed the whole consultancy fee in the first release of the loan when the contract stipulates that only the first year consultancy fee will be billed in the first release; iv. The entire P1.7M was deducted in the first release of the loan; v. FMIC failed to comply with its obligation to organize an underwriting/selling syndicate to sell any share of stock of ESTE, (and ESTE already had its own licensed marketing arm so there was really no need to enter into an Underwriting Agreement); vi. FMIC failed to comply with its obligation under the Consultancy Agreement, (and such service was also unnecessary as the consultants of the ESTE were competent in their own). c. Art. 1957: Contracts and stipulation, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with laws on usury. d. Since the U&C Agreements were null and void for violating the Usury Law: i. Borrower can recover the amounts paid as interest under the usurious agreement; ii. However, as to the Loan Agreement, the lender still has the right to receive back the principal amount. iii. In this case: Amount due to ESTE (P1.7M as interests paid under U&C Agreements) should be offset with principal amount due to FMIC (P759K after foreclosure sale). FMIC ordered to pay the difference to ESTE, as held by CA. DISPOSITIVE PORTION Petition Denied. DIGESTER: Liana

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