PNB vs.

ENCINA

G.R no. 174055 February 12, 2008

Tinga, J.:

FACT

On September 12, 1995, plaintiff-appellant Encina obtained a P500,000.00 loan to Philippine

National Bank as additional capital for their metal craft business secured by promissory note and a real
estate mortgage. On September 6, 1996 Encina obtained additional loan of P200,000.00 as additional for
palay production, which fully paid on February 4, 1997. Another loan was obtained in the amount of
P400,000.00 as a capital for their common carrier business. Dependant –appellee PNB subsequently
granted a P1,250,000.00 all purpose credit facility to Encina availed into Encina on the amount of
P1,050,000.00 for their metal craft business. Later, Encina availed the remaining P200,000.00 credit
facility, secured by a promissory note dated May 22, 2008

On the maturity of the loan obligation, Encina failed to pay his obligation to PNB prompting them to file a
petition for sale of the mortgaged properties in Regional Trial Court in San Jose, Occidental, Mindoro. The
petition has been granted and the property was sold to PNB as the highest bidder.

On November 15, 2001, a Contract of lease was executed between PNB and Encina pursuant to
the request of plaintiff Encina to allow them to lease the property for a monthly rental of P7,500.00. On
july 18, 2002, plaintiffs-appellants Encina sued PNB in action for the foreclosure of the sales and damages
with a prayer for extension and grace period, alleging that the loan, being an agricultural, hence, with
longer gestation periods, should have been restricted by PNB for a longer period atleast 7 years: that no
penalties should have been imposed by the dependant-appellee PNB; that the extra foreclosure sale of
their properties was null and void; that for being in violation of Usury Law, the loan contracts and all
accessory contracts pertaining thereto is null and void; and that the foreclosure of the said property is not
complied with the requirements impose in RA 3135, hence the entire foreclosure is null and void.

PNB filed a motion to dismiss on the grounds that the agricultural loan dated September 13, 1995
and February 4, 1997 has been fully paid so they can no longer seek for gestation period, and they also
failed to settle their loan to the metal craft business. PNB also contended that Usury law is not applicable
and PNB complied with the requirements of posting publications set forth by RA 3135. On March 10, 2003,
the trial court dismissed the complaint. The dismissal was reverse by the court of Appeals. CA ruled that
there is no definite agreement between PNB and Encina as to interest rate to be impose to the loan.
Therefore, the loan cannot be said to be matured so as to justify the extrajudicial foreclosure of the
mortgage of the properties. The appellate court denied reconsideration in its resolution dated august 4,
2006. PNB contended that the Court of Appeals should not have rendered decision on the merits.
ISSUE

Whether or not the loan contracts and all accessory contracts pertaining thereto were null and void
that for being in violation of the Usury Law

Held

Considering that all the loan covered by the said Promissory Notes are secured with a mortgage upon
registered real estate, all those contracts of loan are null and void because they are in violation of or
contrary to the provisions of the Usury Law (Act No. 2655, as amended) particularly Section 2 thereof
which is photocopied hereunder from Philippine Permanent and General Statutes, to wit: In view of the
violation of the Usury Law, the contracts of loan, and its accessory contracts are likewise null and void,
namely: a) Real Estate Mortgage Contract, as well as Promissory Notes executed therewith are also null
and void.