G.R. No.

168736 April 19, 2006

SPOUSES ADELINA S. CUYCO and FELICIANO U. CUYCO, Petitioners,
vs. SPOUSES RENATO CUYCO and FILIPINA CUYCO, Respondents.
YNARES-SANTIAGO, J .:
FACTS:
1. Petitioners, spouses Adelina and Feliciano Cuyco, obtained a loan in the
amount of P1,500,000.00 from respondents, spouses Renato and Filipina
Cuyco, payable within one year at 18% interest per annum, and secured by a
Real Estate Mortgage
4
over a parcel of land with improvements thereon
situated in Cubao, Quezon City.
2. Petitioners obtained additional loans from the respondents in the aggregate
amount of P1,250,000.00.
3. Petitioners made payments amounting to P291,700.00,
7
but failed to settle
their outstanding loan obligations.
4. Thus, on September 10, 1997, respondents filed a complaint
8
for foreclosure
of mortgage with the RTC of Quezon City.
5. Petitioners filed a motion to dismiss
9
on the ground that the complaint states
no cause of action which was denied by the RTC
10
for lack of merit.
6. In their answer,
11
petitioners admitted their loan obligations but argued that
only the original loan of P1,500,000.00 was secured by the real estate
mortgage at 18% per annum and that there was no agreement that the same
will be compounded monthly.
7. RTC rendered judgment
12
in favor of the plaintiffs.
8. CA partially granted the petition and modified the RTC decision insofar as the
amount of the loan obligations secured by the real estate mortgage. It held that
by express intention of the parties, the real estate mortgage secured the
original P1,500,000.00 loan and the subsequent loans of P150,000.00 and
P500,000.00 obtained on July 1, 1992 and September 5, 1992, respectively.
As regards the loans obtained on May 31, 1992, October 29, 1992 and
January 13, 1993 in the amounts of P150,000.00, P200,000.00 and
P250,000.00, respectively, the appellate tribunal held that the parties never
intended the same to be secured by the real estate mortgage.
9. Hence, the instant petition for review.
ISSUE: WHETHER OR NOT PETITIONERS MUST PAY RESPONDENTS LEGAL
INTEREST OF 12% PER ANNUM ON THE STIPULATED INTEREST OF 18% PER
ANNUM EVEN IF THE SAME WAS NOT PROVIDED IN THE REAL ESTATE
MORTGAGE CONTRACT.
HELD: YES.
While a contract is the law between the parties,
18
it is also settled that an existing law
enters into and forms part of a valid contract without the need for the parties expressly
making reference to it.
19
Thus, the lower courts correctly applied Article 2212 of the Civil
Code as the basis for the imposition of the legal interest on the stipulated interest due. It
reads: Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
As a general rule, a mortgage liability is usually limited to the amount mentioned in the
contract.
31
However, the amounts named as consideration in a contract of mortgage do
not limit the amount for which the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and other indebtedness can be
gathered. This stipulation is valid and binding between the parties and is known in
American Jurisprudence as the "blanket mortgage clause," also known as a "dragnet
clause."
32

A "dragnet clause" operates as a convenience and accommodation to the borrowers as
it makes available additional funds without their having to execute additional security
documents, thereby saving time, travel, loan closing costs, costs of extra legal services,
recording fees, et cetera.
33

While a real estate mortgage may exceptionally secure future loans or advancements,
these future debts must be sufficiently described in the mortgage contract. An obligation
is not secured by a mortgage unless it comes fairly within the terms of the mortgage
contract.
34

The pertinent provisions of the November 26, 1991 real estate mortgage reads:
That the MORTGAGOR is indebted unto the MORTGAGEE in the sum of ONE
MILLION FIVE THOUSAND PESOS (sic) (1,500,000.00) Philippine Currency, receipt
whereof is hereby acknowledged and confessed, payable within a period of one year,
with interest at the rate of eighteen percent (18%) per annum;
That for and in consideration of said indebtedness, the MORTGAGOR does hereby
convey and deliver by way of MORTGAGE unto said MORTGAGEE, the latters heirs
and assigns, the following realty together with all the improvements thereon and
situated at Cubao, Quezon City, and described as follows:
x x x x
PROVIDED HOWEVER, that should the MORTGAGOR duly pay or cause to be paid
unto the MORTGAGEE or his heirs and assigns, the said indebtedness of ONE
MILLION FIVE HUNDRED THOUSAND PESOS (1,500,000.00), Philippine Currency,
together with the agreed interest thereon, within the agreed term of one year on a
monthly basis then this MORTGAGE shall be discharged, and rendered of no force and
effect, otherwise it shall subsist and be subject to foreclosure in the manner and form
provided by law.
It is clear from a perusal of the aforequoted real estate mortgage that there is no
stipulation that the mortgaged realty shall also secure future loans and advancements.
Thus, what applies is the general rule above stated.
Even if the parties intended the additional loans of P150,000.00 obtained on May 30,
1992, P150,000.00 obtained on July 1, 1992, and P500,00.00 obtained on September
5, 1992 to be secured by the same real estate mortgage, as shown in the
acknowledgement receipts, it is not sufficient in law to bind the realty for it was not
made substantially in the form prescribed by law.
In order to constitute a legal mortgage, it must be executed in a public document,
besides being recorded. A provision in a private document, although denominating the
agreement as one of mortgage, cannot be considered as it is not susceptible of
inscription in the property registry. A mortgage in legal form is not constituted by a
private document, even if such mortgage be accompanied with delivery of possession
of the mortgage property.
35
Besides, by express provisions of Section 127 of Act No.
496, a mortgage affecting land, whether registered under said Act or not registered at
all, is not deemed to be sufficient in law nor may it be effective to encumber or bind the
land unless made substantially in the form therein prescribed. It is required, among
other things, that the document be signed by the mortgagor executing the same, in the
presence of two witnesses, and acknowledged as his free act and deed before a notary
public. A mortgage constituted by means of a private document obviously does not
comply with such legal requirements.
36

What the parties could have done in order to bind the realty for the additional loans was
to execute a new real estate mortgage or to amend the old mortgage conformably with
the form prescribed by the law. Failing to do so, the realty cannot be bound by such
additional loans, which may be recovered by the respondents in an ordinary action for
collection of sums of money.


G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T.
CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in
his capacity as statutory receiver of Island Savings Bank, petitioners, vs. THE
HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.
MAKASIAR, CJ .:
1. On April 28, 1965, Island Savings Bank, upon favorable recommendation of its
legal department, approved the loan application for P80,000.00 of Sulpicio M.
Tolentino, who, as a security for the loan, executed on the same day a real
estate mortgage over his 100-hectare land located in Cubo, Las Nieves,
Agusa, and covered by TCT No. T-305, and which mortgage was annotated
on the said title the next day.
2. The approved loan application called for a lump sum P80,000.00 loan,
repayable in semi-annual installments for a period of 3 years, with 12% annual
interest.
3. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as
an additional capital to develop his other property into a subdivision.
4. A mere P17,000.00 partial release of the P80,000.00 loan was made by the
Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a
promissory note for P17,000.00 at 12% annual interest, payable within 3 years
from the date of execution of the contract at semi-annual installments of
P3,459.00 (p. 64, rec.).
5. An advance interest for the P80,000.00 loan covering a 6-month period
amounting to P4,800.00 was deducted from the partial release of P17,000.00.
But this pre-deducted interest was refunded to Sulpicio M. Tolentino on July
23, 1965, after being informed by the Bank that there was no fund yet
available for the release of the P63,000.00 balance (p. 47, rec.).
6. The Bank, thru its vice-president and treasurer, promised repeatedly the
release of the P63,000.00 balance (p. 113, rec.).
7. On August 13, 1965, the Monetary Board of the Central Bank, after finding
Island Savings Bank was suffering liquidity problems, issued Resolution No.
1049, which provides: ..1) To prohibit the bank from making new loans and
investments [except investments in government securities] excluding
extensions or renewals of already approved loans, provided that such
extensions or renewals shall be subject to review by the Superintendent of
Banks, who may impose such limitations as may be necessary to insure
correction of the bank's deficiency as soon as possible;
8. The Monetary Board, after finding that Island Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which
prohibited Island Savings Bank from doing business in the Philippines and
instructed the Acting Superintendent of Banks to take charge of the assets of
Island Savings Bank.
9. Island Savings Bank, in view of non-payment of the P17,000.00 covered by
the promissory note, filed an application for the extra-judicial foreclosure of the
real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino.
10. Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan
for injunction, specific performance or rescission and damages with
preliminary injunction, alleging that since Island Savings Bank failed to deliver
the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific
performance by ordering Island Savings Bank to deliver the P63,000.00 with
interest of 12% per annum from April 28, 1965, and if said balance cannot be
delivered, to rescind the real estate mortgage.
11. Trial court, upon the filing of a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank from continuing with the
foreclosure of the mortgage.
12. Trial court admitted the answer in intervention praying for the dismissal of the
petition of Sulpicio M. Tolentino and the setting aside of the restraining order,
filed by the Central Bank and by the Acting Superintendent of Banks (pp. 65-
76, rec.).
13. Trial court, after trial on the merits rendered its decision, finding unmeritorious
the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank
the amount of PI 7 000.00 plus legal interest and legal charges due thereon,
and lifting the restraining order so that the sheriff may proceed with the
foreclosure.
14. Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of
First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's
petition for specific performance, but it ruled that Island Savings Bank can
neither foreclose the real estate mortgage nor collect the P17,000.00 loan.
15. Hence, this instant petition by the central Bank.
ISSUE: If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real
estate mortgage be foreclosed to satisfy said amount?
HELD:
Since both parties were in default in the performance of their respective reciprocal
obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the
entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his
P17,000.00 debt within 3 years as stipulated, they are both liable for damages.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be
entirely foreclosed to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as that
of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the
debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the
accessory contract of real estate mortgage, the consideration of the debtor in furnishing
the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in
relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no
consideration was then in existence, as there was no debt yet because Island Savings
Bank had not made any release on the loan, does not make the real estate mortgage
void for lack of consideration. It is not necessary that any consideration should pass at
the time of the execution of the contract of real mortgage (Bonnevie vs. C.A., 125
SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the
consideration is subsequent to the mortgage, the mortgage can take effect only when
the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol.
176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when
there is partial failure of consideration, the mortgage becomes unenforceable to the
extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974
ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage
is less than the sum named in the mortgage, the mortgage cannot be enforced for more
than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88,
cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00
loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such
extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering
100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering
the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25
hectares is more than sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil
Code is inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided among the
successors in interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.
Neither can the creditor's heir who have received his share of the debt return the pledge
or cancel the mortgage, to the prejudice of other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted
presupposes several heirs of the debtor or creditor which does not obtain in this case.
Hence, the rule of indivisibility of a mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY
11, 1977 IS HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN
PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12%
INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO
AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED
FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE
MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY
HIS TOTAL INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY
DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR
OF SULPICIO M. TOLENTINO.
NO COSTS. SO ORDERED.


G. R. No. 147074
Spouses RODRIGO PADERES and SONIA PADERES , petitioners - versus CA,
Respondents.
FACTS:
Manila International Construction Corporation (MICC) executed a real estate
mortgage over 21 registered parcels of land including the improvements thereon in
favor of (Banco Filipino) in order to secure a loan of P1,885,000.00. It was
registered and annotated on the corresponding TCTs covering the properties.

Subsequently, MICC sold part of the mortgage land to Spouses Rodrigo and Sonia
Paderes, then another part to Spouses Isabelo and Juana Bergado. For failure of
MICC to settle its obligation, Banco Filipino filed a petition for extra-judicial
foreclosure of MICCs mortgage. Banco Filipino won the bidding. Consequently, a
certificate of sale was issued and the same was registered with the Registry of
Deeds.

Banco Filipino thereafter filed before the Regional Trial Court Makati a petition for
issuance of writ of possession. The RTC granted the petition. Pursuant to the Writ
of Possession, Spouses Bergado et al. were ordered to vacate the premises.
However, they filed an action to Court of Appeals (CA) questioning the validity of
writ of possession. CA rendered decision against the Bergado et al. and upheld the
writ of possession. Hence, this petition.
ISSUE: Whether or not the Bergado et al. have superior rights over Banco Filipino? NO
HELD:
That petitioners purchased their properties from MICC in good faith is of no
moment. The purchases took place after MICCs mortgage to Banco Filipino had been
registered in accordance with Article 2125[20] of the Civil Code and the provisions of
P.D. 1529 (PROPERTY REGISTRY DECREE).[21] As such, under Articles 1312[22]
and 2126[23] of the Civil Code, a real right or lien in favor of Banco Filipino had already
been established, subsisting over the properties until the discharge of the principal
obligation, whoever the possessor(s) of the land might be.
Appellants position clashes with precepts well-entrenched in law. By Article
2126 of the Civil Code, a mortgage directly and immediately subjects the property on
which it is imposed, whoever the possessor may be, to the fulfillment of the obligation
for whose security it was constituted. Sale or transfer cannot affect or release the
mortgage. A purchaser is necessarily bound to acknowledge and respect the
encumbrance to which is subjected the purchased thing and which is at the disposal of
the creditor in order that he, under the terms of the contract, may recover the amount
of his credit there from. For, a recorded real estate mortgage is a right in rem, a lien on
the property whoever its owner may be. Because the personality of the owner is
disregarded; the mortgage subsists notwithstanding changes of ownership; the last
transferee is just as much of a debtor as the first one; and this, independent of whether
the transferee knows or not the person of the mortgagee. So it is, that a mortgage lien
is inseperable from the property mortgaged. All subsequent purchasers thereof must
respect the mortgage, whether the transfer to them be with or without the consent of the
mortgagee. For, the mortgage, until discharge, follows the property
Respecting Bergado et al.s claim that their houses should have been
excluded from the auction sale of the mortgaged properties, it does not lie. The
provision of Article 448 of the Civil Code, cited by Bergado et al, which pertain to those
who, in good faith, mistakenly build, plant or sow on the land of another, has no
application to the case at bar.
Here, the record clearly shows that Bergado et al purchased their respective
houses from MICC, as evidenced by the Addendum to Deed of Sale dated October 1,
1983 and the Deed of Absolute Sale dated January 9, 1984.
Being improvements on the subject properties constructed by mortgagor
MICC, there is no question that they were also covered by MICCs real estate mortgage
following the terms of its contract with Banco Filipino and Article 2127 of the Civil Code
the mortgage extends to the natural accessions, to the improvements, growing fruits,
and the rents or income not yet received when the obligation becomes due, and to the
amount of the indemnity granted or owing to the proprietor from the insurers of the
property mortgaged, or in virtue of expropriation for public use, with the declarations,
amplifications and limitations established by law, whether the estate remains in the
possession of the mortgagor, or it passes into the hands of a third person.



[G.R. No. 118552. February 5, 1996]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COURT OF APPEALS
and THE SPOUSES ALEJANDRO and AMPARO CASAFRANCA, respondents.
DAVIDE, JR., J :
FACTS:
1. Plaintiff spouses Alejandro and Amparo Casafranca, used to be the owners of
Lot 802-B-2-B-2-F-1
2. They sold the lot to Carlos Po who paid part of the agreed price. The latter,
after securing a title in his name (TCT No. 66446), mortgaged the lot to the
Philippine Bank of Communications (PBCom for short) to secure a loan of
P330,000.
3. It appears that in a civil action that ensued between them, plaintiff spouses
obtained a favorable judgment against Carlos Po (Exh C). Later, in an auction
sale to satisfy Carlos Pos judgment obligation, plaintiff spouses acquired the
aforesaid lot and a Certificate of Sale was executed in their favor (Exh D).
4. Meanwhile, PBCom applied for extrajudicial foreclosure of the mortgage
executed by Carlos Po (Exh E), and in the succeeding auction sale held, it
acquired the lot at its winning bid of P1,006,540.56.
5. The corresponding Certificate of Sale was then executed in its favor (Exh F). It
appears further that sometime in 1981 plaintiff Amparo Casafranca who had
stepped into the shoes of mortgagor Carlos Po by virtue of the auction sale in
her favor (Exh D) offered to redeem the property from PBCom by tendering to
its manager, Isidore Falek, a check in the amount of P500,000 which, in her
estimate, would be sufficient to settle the account of Carlos Po.
6. PBCom did not accept the check as it insisted that any such redemption
should be at the price it acquired the lot in the auction sale.
7. In reaction, plaintiffs filed against PBCom Civil Case No. R-21700 in the RTC
of Cebu for nullification of the foreclosure and auction sale (Exh M).
8. In a judgment which became final and executory on 17 September 1986 (Exh
H) the Court set aside the extrajudicial foreclosure and auction sale and
declared that the obligation secured by the mortgage executed by Carlos Po
was only P330,000 plus stipulated interest and charges (Exh G).
9. Subsequently, in a letter dated 4 December 1986 PBCom advised plaintiff
spouses to pay the sum of P884,281.38 purportedly representing Carlos Pos
principal account of P330,000, interest and charges thereon, attorneys fee[s]
and realty taxes which it paid for the lot (Exh. I).
10. Plaintiffs, however, did not agree with said Statement of Account and since the
account remained unpaid, PBCom again applied for extrajudicial foreclosure of
mortgage (Exh J), which culminated in an auction sale of the lot on 2 April
1987, during which it was sold to Natalie Limchio for P1,184,000 (Exh L).
11. On 6 April 1988 plaintiffs commenced the present action to nullify the auction
sale in favor of Natalie Limchio. It is alleged in the complaint that the second
foreclosure was void as it was based on a bloated account.
12. Plaintiffs further alleged that PBCom refused to turn over the correct amount of
residue after paying off the mortgage and costs of the sale. Upon plaintiffs
application, the Court issued on 7 April 1988 a TRO enjoining defendant
sheriffs from transferring the title of the lot in favor of defendant Natalie
Limchio and the latter, from taking possession of the lot.
13. However, before the pre-trial conference could be held, plaintiffs signified their
intention to pursue only their alternative demand for the residue or balance of
the proceeds of the auction sale less the correct outstanding account which
was secured by the mortgage. For this purpose they filed an amended
complaint only against PBCom (pp. 296-305, rollo) which was admitted, in
which they pray for recovery of the sum of P625,724.90 as residue after
paying off the outstanding account [to] the tune of P558,275.80, realty taxes
paid by PBCom and costs of the foreclosure proceeding.
14. RTC rendered in favor of plaintiffs Alejandro and Amparo Casafranca for the
sum of P273,653.32 representing the residue or balance of the proceeds of
the auction sale conducted on 2 April 1987 after deducting therefrom
publication expenses and paying off the total account due to defendant
Philippine Bank of Communications, and ordering the latter to pay unto
plaintiffs the aforesaid amount.
15. The Court of Appeals affirmed the decision of the trial court in toto and
subsequently denied the parties separate motions for reconsideration.
16. The petitioner and the private respondents then instituted with this Court
separate petitions for certiorari under Rule 45 of the Rules of Court. While that
of the petitioner was docketed as G.R. No. 118552 (this case), that of the
private respondents was docketed as G.R. No. 118809 and assigned to the
Second Division. However, the two actions were not consolidated.
ISSUE: Whether, in the foreclosure of a real estate mortgage, the penalties stipulated in
two promissory notes secured by the mortgage may be charged against the mortgagors
as part of the sums secured, although the mortgage contract does not mention the said
penalties.
HELD: NO.
We immediately discern that the mortgage contract does not at all mention the penalties
stipulated in the promissory notes. However, the petitioner insists that the penalties are
covered by the following provision of the mortgage contract:
This mortgage is given as security for the payment to the MORTGAGEE on demand or
at maturity, as the case may be, of all promissory notes, letters of credit, trust receipts,
bills of exchange, drafts, overdrafts and all other obligations of every kind already
incurred or which hereafter may be incurred. . .
The mortgage provision relied upon by the petitioner is known in American
jurisprudence as a dragnet clause, which is specifically phrased to subsume all debts
of past or future origin. Such clauses are carefully scrutinized and strictly
construed.[22]
The mortgage contract is also one of adhesion as it was prepared solely by the
petitioner and the only participation of the other party was the affixing of his signature or
adhesion thereto. Being a contract of adhesion, the mortgage is to be strictly
construed against the petitioner, the party which prepared the agreement. [23]
A reading, not only of the earlier quoted provision, but of the entire mortgage
contract yields no mention of penalty charges.[24] Construing this silence strictly
against the petitioner, it can fairly be concluded that the petitioner did not intend to
include the penalties on the promissory notes in the secured amount. This explains the
finding by the trial court, as affirmed by the Court of Appeals, that penalties and
charges are not due for want of stipulation in the mortgage contract. [25]
Indeed, a mortgage must sufficiently describe the debt sought to be secured,
which description must not be such as to mislead or deceive, and an obligation is not
secured by a mortgage unless it comes fairly within the terms of the mortgage.[26] In
this case, the mortgage contract provides that it secures notes and other evidences of
indebtedness. Under the rule of ejusdem generis,[27] where a description of things of a
particular class or kind is accompanied by words of a generic character, the generic
words will usually be limited to things of a kindred nature with those particularly
enumerated. [28] A penalty charge does not belong to the species of obligations
enumerated in the mortgage, hence, the said contract cannot be understood to secure
the penalty.
There is also sufficient authority to declare that any ambiguity in a contract
whose terms are susceptible of different interpretations must be read against the party
who drafted it.[29]
A mortgage and a note secured by it are deemed parts of one transaction and
are construed together,[30] thus, an ambiguity is created when the notes provide for the
payment of a penalty but the mortgage contract does not. Construing the ambiguity
against the petitioner, it follows that no penalty was intended to be covered by the
mortgage. The mortgage contract consisted of three pages with no less than seventeen
conditions in fine print; it included provisions for interest and attorneys fees similar to
those in the promissory notes; and it even provided for the payment of taxes and
insurance charges. Plainly. the petitioner can be as specific as it wants to be, yet it
simply did not specify nor even allude to, that the penalty in the promissory notes would
be secured by the mortgage. This can then only be interpreted to mean that the
petitioner had no design of including the penalty in the amount secured.

PRUDENTIAL BANK V. DON A. ALVIAR and GEORGIA B. ALVIAR


TINGA, J .:

FACTS:


1. Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered
owners of a parcel of land in San Juan, Metro Manila.
2. They executed a deed of real estate mortgage in favor of petitioner Prudential
Bank to secure the payment of a loan worth P250,000.00.[2]
3. This mortgage was annotated at the back of TCT No. 438157.
4. Respondents executed the corresponding promissory note, PN BD#75/C-252,
covering the said loan.
5. Don Alviar executed another promissory note, PN BD#76/C-345 for
P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was
secured by a hold-out on the mortgagors foreign currency savings account
with the bank under Account No. 129, and that the mortgagors passbook is to
be surrendered to the bank until the amount secured by the hold-out is
settled.[5]
6. Respondent spouses executed for Donalco Trading, Inc., of which the
husband and wife were President and Chairman of the Board and Vice
President,[6] respectively, PN BD#76/C-430 covering P545,000.000. As
provided in the note, the loan is secured by Clean-Phase out TOD CA 3923,
which means that the temporary overdraft incurred by Donalco Trading, Inc.
with petitioner is to be converted into an ordinary loan in compliance with a
Central Bank circular directing the discontinuance of overdrafts.[7]
7. Petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a
straight loan of P545,000.00, the proceeds of which shall be used to liquidate
the outstanding loan of P545,000.00 TOD.
8. The letter likewise mentioned that the securities for the loan were the deed of
assignment on two promissory notes executed by Bancom Realty Corporation
with Deed of Guarantee in favor of A.U. Valencia and Co. and the chattel
mortgage on various heavy and transportation equipment.[8]
9. Respondents paid petitioner P2,000,000.00, to be applied to the obligations of
G.B. Alviar Realty and Development, Inc. and for the release of the real estate
mortgage for the P450,000.00 loan covering the two (2) lots located at Vam
Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The
payment was acknowledged by petitioner who accordingly released the
mortgage over the two properties.[9]
10. Petitioner moved for the extrajudicial foreclosure of the mortgage on the
property covered by TCT No. 438157. Per petitioners computation,
respondents had the total obligation of P1,608,256.68, covering the three (3)
promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C-345
for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus assessed past
due interests and penalty charges. The public auction sale of the mortgaged
property was set on 15 January 1980.[10]
11. Respondents filed a complaint for damages with a prayer for the issuance of a
writ of preliminary injunction with the RTC of Pasig,[11] claiming that they have
paid their principal loan secured by the mortgaged property, and thus the
mortgage should not be foreclosed.
12. For its part, petitioner averred that the payment of P2,000,000.00 made on 6
March 1979 was not a payment made by respondents, but by G.B. Alviar
Realty and Development Inc., which has a separate loan with the bank
secured by a separate mortgage.[12]
13. The trial court dismissed the complaint and ordered the Sheriff to proceed with
the extra-judicial foreclosure.[13]
14. The trial court issued an Order setting aside its earlier decision and awarded
attorneys fees to respondents.[15] It found that only the P250,000.00 loan is
secured by the mortgage on the land covered by TCT No. 438157. On the
other hand, the P382,680.83 loan is secured by the foreign currency deposit
account of Don A. Alviar, while the P545,000.00 obligation was an unsecured
loan, being a mere conversion of the temporary overdraft of Donalco Trading,
Inc. in compliance with a Central Bank circular. According to the trial court, the
blanket mortgage clause relied upon by petitioner applies only to future loans
obtained by the mortgagors, and not by parties other than the said mortgagors,
such as Donalco Trading, Inc., for which respondents merely signed as
officers thereof.
15. The Court of Appeals affirmed the Order of the trial court but deleted the
award of attorneys fees.[17] It ruled that while a continuing loan or credit
accommodation based on only one security or mortgage is a common practice
in financial and commercial institutions, such agreement must be clear and
unequivocal. In the instant case, the parties executed different promissory
notes agreeing to a particular security for each loan. Thus, the appellate court
ruled that the extrajudicial foreclosure sale of the property for the three loans is
improper.[18]
16. Aggrieved, petitioner filed the instant petition.

ISSUE: whether the blanket mortgage clause applies even to subsequent
advancements for which other securities were intended, or particularly, to PN BD#76/C-
345.

HELD: NO.

Under American jurisprudence, two schools of thought have emerged on
this question. One school advocates that a dragnet clause so worded as to be broad
enough to cover all other debts in addition to the one specifically secured will be
construed to cover a different debt, although such other debt is secured by another
mortgage.[44] The contrary thinking maintains that a mortgage with such a clause will
not secure a note that expresses on its face that it is otherwise secured as to its
entirety, at least to anything other than a deficiency after exhausting the security
specified therein,[45] such deficiency being an indebtedness within the meaning of the
mortgage, in the absence of a special contract excluding it from the arrangement.[46]

The latter school represents the better position. The parties having conformed to
the blanket mortgage clause or dragnet clause, it is reasonable to conclude that they
also agreed to an implied understanding that subsequent loans need not be secured
by other securities, as the subsequent loans will be secured by the first mortgage. In
other words, the sufficiency of the first security is a corollary component of the dragnet
clause. But of course, there is no prohibition, as in the mortgage contract in issue,
against contractually requiring other securities for the subsequent loans. Thus, when
the mortgagor takes another loan for which another security was given it could not be
inferred that such loan was made in reliance solely on the original security with the
dragnet clause, but rather, on the new security given. This is the reliance on the
security test.

Hence, based on the reliance on the security test, the California court in the cited
case made an inquiry whether the second loan was made in reliance on the original
security containing a dragnet clause. Accordingly, finding a different security was
taken for the second loan no intent that the parties relied on the security of the first loan
could be inferred, so it was held. The rationale involved, the court said, was that the
dragnet clause in the first security instrument constituted a continuing offer by the
borrower to secure further loans under the security of the first security instrument, and
that when the lender accepted a different security he did not accept the offer.[47]


It was therefore improper for petitioner in this case to seek foreclosure of
the mortgaged property because of non-payment of all the three promissory
notes. While the existence and validity of the dragnet clause cannot be denied, there
is a need to respect the existence of the other security given for PN BD#76/C-345. The
foreclosure of the mortgaged property should only be for the P250,000.00 loan covered
by PN BD#75/C-252, and for any amount not covered by the security for the second
promissory note. As held in one case, where deeds absolute in form were executed to
secure any and all kinds of indebtedness that might subsequently become due, a
balance due on a note, after exhausting the special security given for the payment of
such note, was in the absence of a special agreement to the contrary, within the
protection of the mortgage, notwithstanding the giving of the special security.[50] This
is recognition that while the dragnet clause subsists, the security specifically executed
for subsequent loans must first be exhausted before the mortgaged property can be
resorted to.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in
CA-G.R. CV No. 59543 is AFFIRMED.




[G.R. No. 130722. December 9, 1999]
SPS. REYNALDO K. LITONJUA and ERLINDA P. LITONJUA and PHIL. WHITE
HOUSE AUTO SUPPLY, INC., petitioners, vs. L & R CORPORATION, VICENTE
COLOYAN in his capacity as Acting Registrar of the Register of Deeds of Quezon City
thru Deputy Sheriff ROBERTO R. GARCIA, respondents.

FACTS:

The Litonjua spouses contracted a loan from L & R Corporation in the sum of
P400,000.00. It was secured by a real estate mortgage constituted by the spouses
on their two parcels of land located in Cubao, Quezon City. The contract
provided, inter alia, that the mortgagors were enjoined from conveying the
mortgaged property without the written consent of the mortgagee and that the
mortgagee had a right of first refusal in the event the mortgagors decided to sell the
property. The mortgage was duly registered with the Register.
Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as follows
"8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any other
manner encumber the real property/properties subject of this mortgage without the
prior written consent of the MORTGAGEE;
9. That should the MORTGAGORS decide to sell the real property/properties
subject of this mortgage, the MORTGAGEE shall be duly notified thereof by the
MORTGAGORS, and should the MORTGAGEE be interested to purchase the
same, the latter shall be given priority over all the other prospective buyers;

While the mortgage obligation was still outstanding, the Litonjua spouses sold the
two parcels of land to Philippine White House Auto Supply, Inc. The sale was
annotated at the back of the certificate of title.
When the Litonjuas defaulted in the payment of the loan, L & R Corporation
initiated extrajudicial foreclosure of the mortgage. The mortgaged parcels were
sold at public auction to L & R Corporation. Then when L & R presented its
certificate of sale to the RD, it was informed of the previous sale made by the
Litonjua spouses to PWHAS.
L & R Corporation thereupon sought from the Register of Deeds the cancellation of
the annotation of sale to PWHAS calling attention to the proviso in the mortgage
agreement enjoining the Litonjua spouses from selling the property.
Subsequently, PWHAS, for the account of the Litonjua spouses, tendered payment
of the full redemption price to L & R Corporation. Upon the latters refusal to honor
the redemption, PWHAS tendered the amount with the Branch Clerk of Court.
The Deputy Sheriff informed L & R Corporation of the payment by PWHAS of the
full redemption price and advised it that it can claim the payment upon surrender of
its owners duplicate certificates of title, however, L & R Corporation would not
surrender the owners duplicate certificates of title.
The Litonjuas filed a petition to compel L & R Corporation to surrender the
duplicate certificates of title.

ISSUE:
a. whether or not paragraphs 8 and 9 of the Real Estate Mortgage are valid and
enforceable;
b. Whether or not the sale of the mortgaged properties by the spouses Litonjua to
PWHAS, without the knowledge and consent of L & R Corporation, is valid and
enforceable;

HELD:

Validity of prohibition against subsequent sale of mortgaged property without
prior written consent of mortgagee and validity of subsequent sale to PWHAS
Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not
binding upon the parties. Accordingly, the sale made by the spouses Litonjua to
PWHAS, notwithstanding the lack of prior written consent of L & R Corporation, is valid.

The stipulation in the real estate mortgage which prohibits the mortgagor from selling
the mortgaged property without the written consent of the mortgagee contravenes the
law. Article 2130 of the New Civil Code holds that a stipulation forbidding the owner
from alienating the immovable mortgaged shall be void. The phrase without (the)
written consent of the mortgagee, added by the parties in their contract is of no real
comfort to the mortgagee and did nothing but to stress, indeed, the restriction against
what should otherwise be an unimpeded right of the mortgagor to alienate the
property. The clear intention of the law is to outlaw a stipulation that would effectively
prevent the mortgagor from freely conveying the property during the life of the
mortgage. Needless to state, the injunction of the law may not be circumvented,
whether directly or indirectly, by the parties.
In Tambunting v. Rehabilitation Finance Corporation,
[30]
the validity of a similar
provision was specifically raised and discussed and found as invalid. It was there
ratiocinated that --
To be sure, the deed of second mortgage executed by the Escuetas in favor of Aurora
Tambunting, married to Antonio L. Tambunting, does contain a provision that the
property mortgaged shall not be x x x the subject of any new or subsequent contracts of
agreements, saving and excepting those having connection with the first mortgage with
the RFC, without first securing the written permission and consent of the
MORTGAGEE. But the provision can only be construed as directed against
subsequent mortgages or encumbrances, not to an alienation of the immovable
itself. For while covenants prohibiting the owner from constituting a later mortgage over
property registered under the Torrens Act have been held to be legally permissible
(Phil. Industrial Co. v. El Hogar Filipino, et al., 45 Phil. 336, 341-342; Bank of the
Philippines v. Ty Camco Sobrino, 57 Phil. 801), stipulations forbidding the owner from
alienating the immovable mortgaged are expressly declared void by law (Art. 2130,
Civil Code). It is clear that the stipulation against subsequent agreements above
mentioned had not been breached by the assignment by the Escuetas (to the
Hernandezes) of their right of redemption in connection with the mortgage constituted in
favor of the R.F.C. The assignment was not a subsequent mortgage or encumbrance,
licitly comprehended by the prohibitory stipulation, but was actually a sale or
conveyance of all their rights in the encumbered real property in truth, an alienation of
the immovable which could not lawfully be forbidden.
Insofar as the validity of the questioned stipulation prohibiting the mortgagor from
selling his mortgaged property without the consent of the mortgagee is concerned,
therefore, the ruling in the Tambunting case is still the controlling law. Indeed, we are
fully in accord with the pronouncement therein that such a stipulation violates Article
2130 of the New Civil Code. Both the lower court and the Court of Appeals in its
Amended Decision rationalize that since paragraph 8 of the subject Deed of Real
Estate Mortgage contains no absolute prohibition against the sale of the property
mortgaged but only requires the mortgagor to obtain the prior written consent of the
mortgagee before any such sale, Article 2130 is not violated thereby. This observation
takes a narrow and technical view of the stipulation in question without taking into
consideration the end result of requiring such prior written consent. True, the provision
does not absolutely prohibit the mortgagor from selling his mortgaged property; but
what it does not outrightly prohibit, it nevertheless achieves. For all intents and
purposes, the stipulation practically gives the mortgagee the sole prerogative to prevent
any sale of the mortgaged property to a third party. The mortgagee can simply withhold
its consent and thereby, prevent the mortgagor from selling the property. This creates
an unconscionable advantage for the mortgagee and amounts to a virtual prohibition on
the owner to sell his mortgaged property. In other words, stipulations like those
covered by paragraph 8 of the subject Deed of Real Estate Mortgage circumvent the
law, specifically,Article 2130 of the New Civil Code.

Re: Validity and enforceability of stipulation granting the mortgagee the right of
first refusal
In the case at bar, PWHAS cannot claim ignorance of the right of first refusal
granted to L & R Corporation over the subject properties since the Deed of Real Estate
Mortgage containing such a provision was duly registered with the Register of
Deeds. As such, PWHAS is presumed to have been notified thereof by registration,
which equates to notice to the whole world.
All things considered, what then are the relative rights and obligations of the
parties? To recapitulate:, the sale between the spouses Litonjua and PWHAS is valid,
notwithstanding the absence of L & R Corporations prior written consent
thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its tender
of the redemption price, as successor-in-interest of the spouses Litonjua, within the
one-year period should have been accepted as valid by L & R Corporation. However,
while the sale is, indeed, valid, the same is rescissible because it ignored L & R
Corporations right of first refusal.
WHEREFORE, the Decision appealed from is hereby AFFIRMED with the
following MODIFICATIONS:
(a) Ordering the rescission of the sale of the mortgaged properties between
petitioners spouses Reynaldo and Erlinda Litonjua and Philippine White House Auto
Supply, Inc. and ordering said spouses to return to Philippine White House Auto
Supply, Inc. the purchase price of P430,000.00;
(b) Disallowing, due to the rescission of the sale made in its favor, the redemption
made by Philippine White House Auto Supply, Inc. and ordering Quezon City Sheriff
Roberto Garcia to return to it the redemption check of P240,798.94;
(c) Allowing respondent L & R Corporation to retain its consolidated titles to the
foreclosed properties but ordering it to pay to the Litonjua spouses the additional sum of
P189,201.96 representing the difference from the purchase price of P430,000.00 in the
rescinded sale;

G.R. No. 74730 August 25, 1989
CALTEX PHILIPPINES, INC., petitioner, vs. THE INTERMEDIATE APPELLATE
COURT and HERBERT MANZANA respondents.

FACTS:

Private respondent Herbert Manzana purchased on credit petroleum products from
petitioner Caltex Philippines, Inc. He executed a Deed a First Mortgage in favor of
CALTEX over a parcel of land in Camarines Norte to secure his debts to the latter.
On various occasions, CALTEX sent to Manzana statements of account and later
demanded payment of his entire debts. Because of Manzana's failure and refusal
to pay, CALTEX filed a complaint for the recovery of the whole amount of
P361,218.66.

On September 15, 1970, CALTEX foreclosed extra judicially the mortgaged
property. On October 30, 1970, the mortgaged property was sold at auction to
CALTEX, being the only bidder, for P20,000.00 as shown by the Sheriff s
Certificate of Sale. The foreclosure was allegedly known by Manzana only on
October 4, 1980 when such fact was manifested by CALTEX in its reply to the
opposition of Manzana to the motion for execution pending appeal.

On July 23, 1980, the trial court rendered judgment ordering Manzana to pay
CALTEX the amount of P353,218.66 after deducting P8,000.00 paid by Traders
Insurance and Surety Company on its surety bond, with interest thereon at 12%
per annum from August 17, 1970, plus 20% thereof as attorney's fees.

It was the opinion of the respondent court that "a reading of the issues raised by
the defendant-appellant shows that the question that needs resolution is whether or
not plaintiff-appellee can still avail of the complaint for the recovery of the balance
of indebtedness after having already foreclosed the property securing the same.
Nonetheless, CA affirmed.

On the basis of the first condition enumerated in the Deed of First Mortgage,
CALTEX submits that Manzana's indebtedness of P 361,218.66 was secured up to
the extent of P120,000.00 only, to wit (p. 50, Rollo):
This Mortgage is subject to the following terms and conditions:
l) The aforementioned indebtedness of THREE HUNDRED SIXTY-ONE
THOUSAND TWO HUNDRED EIGHTEEN & 66/100 (P361,218.66) of the
MORTGAGOR shall be paid upon demand by the MORTGAGEE; it being
expressly understood that the limit or maximum amount secured by this
mortgage is ONE HUNDRED TWENTY THOUSAND PESOS (P120,000.00) only.
On the other hand, on the basis of the fourth paragraph of the deed and the fourth
condition therein, Manzana contends that the whole outstanding obligation of
P361,218.66 was secured by the mortgage, to wit (pp. 49-50,Rollo):
NOW, THEREFORE, for and in consideration of the said overdue, payable and
demandable indebtedness of the MORTGAGOR to the MORTGAGEE in the sum
of THREE HUNDRED SIXTY-ONE THOUSAND TWO HUNDRED EIGHTEEN
PESOS & 66/100 (P361,218.66), Philippine Currency, the foregoing premises and
other x x x and valuable considerations, and to secure the faithful performance
by the MORTGAGOR of all the terms and conditions hereinafter set forth,
particularly the payment of the obligations hereby secured, the
MORTGAGOR does hereby convey BY WAY OF FIRST MORTGAGE. ...
x x x.
4) This mortgage shall remain in force to cover the afore-mentioned mentioned
outstanding indebtedness of the MORTGAGOR to the MORTGAGEE in the
amount of THREE HUNDRED SIDE ONE THOUSAND TWO HUNDRED
EIGHTEEN PESOS & 66/100 (P361,218.66).


ISSUE:
Whether or not the respondent court committed an error in giving due course to the
question whether CALTEX can avail at the same time of a personal action in court for
collection of a sum of money and the extrajudicial foreclosure of the deed of first
mortgage, which was only raised for the first time on appeal;

HELD:
Article 1374 of the Civil Code, regarding interpretation of contracts, provides:
ART. 1374. The various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result
from all of them taken jointly.
The Deed of First Mortgage seems to contain provisions that contradict one another.
However, considering all the provisions together, the first condition cited by CALTEX is
actually a specific provision while the fourth paragraph and the fourth condition cited by
Manzana are general provisions. This interpretation is bolstered by the third WHEREAS
clause and the penultimate paragraph of the deed, to wit (pp. 49-50, Rollo):
WHEREAS, the MORTGAGOR has offered to execute, sign and
deliver a First Mortgage over his property ..., only as partial
security for the aforementioned overdue, payable and demandable
indebtedness of the MORTGAGOR to the MORTGAGEE, which offer
of the MORTGAGOR is accepted by the MORTGAGEE. (emphasis
supplied)
x x x.
The MORTGAGOR binds himself to complete the securities required
by the MORTGAGEE and shall permit any authorized representative
of the MORTGAGEE to inspect the mortgaged property and all the
properties offered to be mortgaged to complete the required security.'
(emphasis supplied)
We therefore hold that Manzana's indebtedness of P 361,218.66 was secured up
to the extent of P120,000.00 only.
Thus, where a debt is secured by a mortgage and there is a default in payment on the
part of the mortgagor, the mortgagee has a choice of one (1) of two (2) remedies, but
he cannot have both. The mortgagee may:
1) foreclosure the mortgage; or
2) file an ordinary action to collect the debt.
- When the mortgagee chooses the foreclosure of the mortgage as a remedy, he
enforces his lien by the sale on foreclosure of the mortgaged property. The proceeds of
the sale will be applied to the satisfaction of the debt. With this remedy, he has a prior
lien on the property. In case of a deficiency, the mortgagee has the right to claim for the
deficiency resulting from the price obtained in the sale of the real property at public
auction and the outstanding obligation at the time of the foreclosure proceedings
- On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby
waives his mortgage lien. He will have no more priority over the mortgaged property. If
the judgment in the action to collect is favorable to him, and it becomes final and
executory, he can enforce said judgment by execution. He can even levy execution on
the same mortgaged property, but he will not have priority over the latter and there may
be other creditors who have better lien on the properties of the mortgagor.
CALTEX submits that the principles enunciated in the Bachrach case are not applicable
nor determinative of the case at bar for the reason that the factual circumstances
obtained in the said case are totally different from the instant case. In
the Bachrach case, the plaintiff instituted an action to foreclose the mortgage after the
money judgment in its favor remained unsatisfied whereas in the present case,
CALTEX initially filed a complaint for collection of the debt and during the pendency
thereof foreclosed extrajudicially the mortgage.
The mere act of filing a collection suit for the recovery of a debt secured by a mortgage
constitutes waiver of the other remedy of foreclosure. The rationale behind this was
adequately explained in theBachrach case, supra:
... a rule that would authorize the plaintiff to bring a personal action
against the debtor and simultaneously or successively another action
against the mortgaged property, would result not only in multiplicity of
suits so offensive to justice (Soriano vs. Enriques, 24 Phil. 584) and
obnoxious to law and equity (Osorio vs. San Agustin, 25 Phil. 404),
but also in subjecting the defendant to the vexation of being sued in
the place of his residence or of the residence of the plaintiff, and then
again in the place where the property lies.
In the present case, however, We shall not follow this rule to the letter but declare that it
is the collection suit which was waived and/or abandoned. This ruling is more in
harmony with the principles underlying our judicial system. It is of no moment that the
collection suit was filed ahead, what is determinative is the fact that the foreclosure
proceedings ended even before the decision in the collection suit was rendered. As a
matter of fact, CALTEX informed the trial court that it had already consolidated its
ownership over the property, in its reply to the opposition of Manzana to the motion for
execution pending appeal filed by it.


Bank of America vs American Realty Corporation GR 133876 December 29, 1999
Facts:
1. Petitioner granted loans to 3 foreign corporations. As security, the latter mortgaged a
property located in the Philippines owned by herein respondent ARC. ARC is a third
party mortgagor who pledged its own property in favor of the 3 debtor-foreign
corporations.
2. The debtors failed to pay. Thus, petitioner filed collection suits in foreign courts to
enforce the loan. Subsequently, it filed a petition in the Sheriff to extra-judicially
foreclose the said mortgage, which was granted.
3. On 12 February 1993, private respondent filed before the Pasig RTC, Branch 159, an
action for damages against the petitioner, for the latters act of foreclosing extra-
judicially the real estate mortgages despite the pendency of civil suits before foreign
courts for the collection of the principal loan.
Issue:
WON petitioners act of filing a collection suit against the principal debtors for the
recovery of the loan before foreign courts constituted a waiver of the remedy of
foreclosure.
Held: Yes.
1. Loan; Mortgage; remedies:
In the absence of express statutory provisions, a mortgage creditor may institute
against the mortgage debtor either a personal action or debt or a real action to
foreclose the mortgage. In other words, he may pursue either of the two remedies, but
not both. By such election, his cause of action can by no means be impaired, for each
of the two remedies is complete in itself.
In our jurisdiction, the remedies available to the mortgage creditor are deemed
alternative and not cumulative. Notably, an election of one remedy operates as a waiver
of the other. For this purpose, a remedy is deemed chosen upon the filing of the suit for
collection or upon the filing of the complaint in an action for foreclosure of mortgage. As
to extrajudicial foreclosure, such remedy is deemed elected by the mortgage creditor
upon filing of the petition not with any court of justice but with the Office of the Sheriff of
the province where the sale is to be made.
In the case at bar, petitioner only has one cause of action which is non-payment of the
debt. Nevertheless, alternative remedies are available for its enjoyment and exercise.
Petitioner then may opt to exercise only one of two remedies so as not to violate the
rule against splitting a cause of action.
Accordingly, applying the foregoing rules, we hold that petitioner, by the expediency of
filing four civil suits before foreign courts, necessarily abandoned the remedy to
foreclose the real estate mortgages constituted over the properties of third-party
mortgagor and herein private respondent ARC. Moreover, by filing the four civil actions
and by eventually foreclosing extra-judicially the mortgages, petitioner in effect
transgressed the rules against splitting a cause of action well-enshrined in
jurisprudence and our statute books.
2. Conflicts of Law
Incidentally, petitioner alleges that under English Law, which according to petitioner is
the governing law with regard to the principal agreements, the mortgagee does not lose
its security interest by simply filing civil actions for sums of money.
We rule in the negative.
In a long line of decisions, this Court adopted the well-imbedded principle in our
jurisdiction that there is no judicial notice of any foreign law. A foreign law must be
properly pleaded and proved as a fact. Thus, if the foreign law involved is not properly
pleaded and proved, our courts will presume that the foreign law is the same as our
local or domestic or internal law. This is what we refer to as the doctrine of processual
presumption.
In the instant case, assuming arguendo that the English Law on the matter were
properly pleaded and proved in said foreign law would still not find applicability.
Thus, when the foreign law, judgment or contract is contrary to a sound and established
public policy of the forum, the said foreign law, judgment or order shall not be applied.
Additionally, prohibitive laws concerning persons, their acts or property, and those
which have for their object public order, public policy and good customs shall not be
rendered ineffective by laws or judgments promulgated, or by determinations or
conventions agreed upon in a foreign country.
The public policy sought to be protected in the instant case is the principle imbedded in
our jurisdiction proscribing the splitting up of a single cause of action.
Moreover, foreign law should not be applied when its application would work undeniable
injustice to the citizens or residents of the forum. To give justice is the most important
function of law; hence, a law, or judgment or contract that is obviously unjust negates
the fundamental principles of Conflict of Laws.
Clearly then, English Law is not applicable.