How does one satisfy an unpaid creditor without being unfair to a distressed debtor? This was the dilemma tackled by Dean Nilo T. Divina of the University of Santo Tomas (UST) Faculty of Civil Law and one of the 10 holders of the “Chief Justice Panganiban Professorial Chairs on Liberty and Prosperity” during a well-attended public lecture at the UST recently.
Standard of fairness
As the president of the Philippine Association of Law Schools, Dean Divina was cheered by his colleagues, including Dean Danilo L. Concepcion of the University of the Philippines (UP) College of Law, who is also a holder of the same professorial chair. In the audience, too, were UST Rector Herminio V. Dagohoy, Vice Rector Richard Ang, and Law Regent Isidro Abano, as well as jurists, professors, lawyers and students.
Normally, borrowers, whether individuals or corporations, are expected to pay the principal and stipulated interest rate within the agreed period. But the lenders or creditors should not recover more than what they are entitled to and the debtors should not be made to pay more than what they justly owe their creditors, regardless of what their written agreements may provide. In line with this standard of fairness, Dean Divina floated four proposals.
First, the Central Bank should periodically (“at least annually”) set a range of acceptable interest rates for loans. In 1982, the Usury Law was suspended, thereby giving the contracting parties the freedom to stipulate any interest rate. Nonetheless, our Supreme Court has nullified agreed rates that are “unconscionable or excessive.”
What is unconscionable or excessive is difficult to define. For example, in 2001 (Solangon vs Salazar), the Court struck down a stipulated rate of 72 percent per year and reduced it to 12 percent. But in 2002 (Silvestre vs Ramos), it upheld an agreed rate of 7 percent per month.
In 2007 (Bacolor vs Banco Filipino), it brushed aside an interest rate of 24 percent per year. But in 2009 (Macalinao vs BPI), it rejected 3 percent per month interest and penalty charge for credit cards and reduced it to 24 percent per year.
True, what is equitable or conscionable depends on the facts of each case. True also, the Bangko Sentral—on July 1, 2013—lowered the legal interest rate that parties may charge in the absence of stipulation from 12 percent to 6 percent. Nonetheless, the uncertainty on the rates, especially compounded and penalty rates, remain.
Dragnet clause
Second, Dean Divina believes creditors “should not be allowed to hide behind a dragnet clause to conceal the true amount of the secured loan.” A dragnet clause uses properties under mortgage or pledge to secure future loans not covered by the original mortgage or pledge.
While the Supreme Court has upheld the validity of dragnet clauses, they are, in Dean Divina’s opinion, unfair because (1) they may include loans incurred in the far future when the debtors may have already forgotten the dragnet clauses on their properties; (2) they prevent full disclosure to future lenders of the full extent of the debtors’ credit worthiness; and (3) they deprive the government of the proper amount of documentary stamp taxes and mortgage registration fees.
Third, if the mortgagee is a banking institution, Dean Divina proposes that the minimum bid during foreclosure sales should be equivalent to at least the appraised value of the property being sold. Normally, in mortgage foreclosures, there are no minimum bids because the debtors are allowed to redeem the property sold within one year by paying only the price for which the property was sold.
However, for banking institutions, the redemption price is not just the price paid during the auction, but the total outstanding loan plus stipulated interest, regardless of the amount of the bid price. If the bid price is small and the bank is the bidder, the latter would own the property and yet still be able to collect on the balance of the loan outstanding after deducting the bid price. Hence, the poor mortgagor is still liable to pay the deficiency after repaying the bid price.
Fourth, “rehabilitation receivers” are appointed by courts to rehabilitate or assist bankrupt corporations to return to normalcy. However, courts have very little choices on whom to appoint because there is no accredited list of qualified receivers. So, the UST dean is proposing the accreditation by the Supreme Court of a list of “trustworthy, competent, credible and readily-available receivers at the disposal of the relevant parties and the courts.” This will assure better help to distressed debtor-corporations.
To conclude, Dean Divina believes that “creditor-debtor relationships characterized by fairness and equity lead to efficient and responsible use of credit which in turn promotes economic development and prosperity.”
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Legal vs grammatical
Some readers, probably lawyers, asked why my column on March 23 (“Ombudsman to decide on PDAF cases shortly”) used the words “state’s witness” repeatedly, instead of “state witness.” Yes, the law and the Rules of Court employ “state witness.” In fact, in the original I e-mailed to the Inquirer, I followed the legal words “state witness.” But our eagle-eyed opinion editor corrected it to “state’s witness.” I concede that this is more grammatical. Thus, one should say “plaintiff’s witness” or “defendant’s witness,” not “plaintiff witness” or “defendant witness.” Well, readers can choose between being legal and being grammatical.
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