1. Marilag v. Martinez, G.R. No.
201892, July 22, 2015 January 30, 1998 Decision, respondent refused to pay the amount covered by
[G.R. No. 201892. July 22, 2015.]
NORLINDA S. MARILAG, petitioner, vs. MARCELINO B. MARTINEZ,
respondent.
DECISION
PERLAS-BERNABE, J p:
Assailed in this petition for review on certiorari 1 are the Decision 2 dated
November 4, 2011 and the Resolution 3 dated May 14, 2012 of the Court of
Appeals (CA) in CA-G.R. CV No. 81258 which recalled and set aside the
Orders dated November 3, 2003 4 and January 14, 2004 5 of the Regional
Trial Court (RTC) of Las Pias City, Branch 202 (court a quo) in Civil Case No.
98-0156, and reinstated the Decision 6 dated August 28, 2003 directing
petitioner Norlinda S. Marilag (petitioner) to return to respondent Marcelino B.
Martinez (respondent) the latter's excess payment, plus interest, and to pay
attorney's fees and the costs of suit.
The Facts
On July 30, 1992, Rafael Martinez (Rafael), respondent's father, obtained from
petitioner a loan in the amount of P160,000.00, with a stipulated monthly
interest of five percent (5%), payable within a period of six (6) months. The
loan was secured by a real estate mortgage over a parcel of land covered by
Transfer Certificate of Title (TCT) No. T-208400. Rafael failed to settle his
obligation upon maturity and despite repeated demands, prompting petitioner
to file a Complaint for Judicial Foreclosure of Real Estate Mortgage before the
RTC of Imus, Cavite, Branch 90 7 (RTC-Imus) on November 10, 1995, 8
docketed as Civil Case No. 1208-95 (judicial foreclosure case).
Rafael failed to file his answer and, upon petitioner's motion, was declared in
default. After an ex parte presentation of petitioner's evidence, the RTC-Imus
issued a Decision 9 dated January 30, 1998, (January 30, 1998 Decision) in
the foreclosure case, declaring the stipulated 5% monthly interest to be
usurious and reducing the same to 12% per annum (p.a.). Accordingly, it
ordered Rafael to pay petitioner the amount of P229,200.00, consisting of the
principal of P160,000.00 and accrued interest of P59,200.00 from July 30,
1992 to September 30, 1995. 10 Records do not show that this Decision had
already attained finality.
Meanwhile, prior to Rafael's notice of the above decision, respondent agreed
to pay Rafael's obligation to petitioner which was pegged at P689,000.00. After
making a total payment of P400,000.00, 11 he executed a promissory note 12
dated February 20, 1998 (subject PN), binding himself to pay on or before
March 31, 1998 the amount of P289,000.00, "representing the balance of the
agreed financial obligation of [his] father to [petitioner]." 13 After learning of the
the subject PN despite demands, prompting petitioner to file a complaint 14 for
sum of money and damages before the court a quo on July 2, 1998, docketed
as Civil Case No. 98-0156 (collection case). CTIEac
Respondent filed his answer, 15 contending that petitioner has no cause of
action against him. He averred that he has fully settled Rafael's obligation and
that he committed a mistake in paying more than the amount due under the
loan, i.e., the amount of P229,200.00 as adjudged by the RTC-Imus in the
judicial foreclosure case which, thus, warranted the return of the excess
payment. He therefore prayed for the dismissal of the complaint, and
interposed a compulsory counterclaim for the release of the mortgage, the
return of the excess payment, and the payment of moral and exemplary
damages, attorney's fees and litigation expenses. 16
The Court A Quo's Ruling
In a Decision 17 dated August 28, 2003 (August 28, 2003 Decision), the court
a quo denied recovery on the subject PN. It found that the consideration for its
execution was Rafael's indebtedness to petitioner, the extinguishment of which
necessarily results in the consequent extinguishment of the cause therefor.
Considering that the RTC-Imus had adjudged Rafael liable to petitioner only
for the amount of P229,200.00, for which a total of P400,000.00 had already
been paid, the court a quo found no valid or compelling reason to allow
petitioner to recover further on the subject PN. There being an excess payment
of P171,000.00, it declared that a quasi-contract (in the concept of solutio
indebiti) exists between the parties and, accordingly, directed petitioner to
return the said amount to respondent, plus 6% interest p.a. 18 reckoned from
the date of judicial demand 19 on August 6, 1998 until fully paid, and to pay
attorney's fees and the costs of suit. 20
In an Order 21 dated November 3, 2003 (November 3, 2003 Order), however,
the court a quo granted petitioner's motion for reconsideration, and recalled
and set aside its August 28, 2003 Decision. It declared that the causes of
action in the collection and foreclosure cases are distinct, and respondent's
failure to comply with his obligation under the subject PN justifies petitioner to
seek judicial relief. It further opined that the stipulated 5% monthly interest is
no longer usurious and is binding on respondent considering the suspension
of the Usury Law pursuant to Central Bank Circular 905, series of 1982.
Accordingly, it directed respondent to pay the amount of P289,000.00 due
under the subject PN, plus interest at the legal rate reckoned from the last
extra-judicial demand on May 15, 1998, until fully paid, as well as attorney's
fees and the costs of suit. 22
Aggrieved, respondent filed a motion for reconsideration 23 which was denied
in an Order 24 dated January 14, 2004, prompting him to elevate the matter to
the CA. 25
The CA Ruling
In a Decision 26 dated November 4, 2011, the CA recalled and set aside the
court a quo's November 3, 2003 and January 14, 2004 Orders, and reinstated
the August 28, 2003 Decision. It held that the doctrine of res judicata finds
application in the instant case, 27 considering that both the judicial foreclosure
and collection cases were filed as a consequence of the non-payment of
Rafael's loan, which was the principal obligation secured by the real estate
mortgage and the primary consideration for the execution of the subject PN.
Since res judicata only requires substantial, not actual, identity of causes of
action and/or identity of issue, 28 it ruled that the judgment in the judicial
foreclosure case relating to Rafael's obligation to petitioner is final and
conclusive on the collection case.
Petitioner's motion for reconsideration was denied in a Resolution 29 dated
May 14, 2012; hence, this petition.
The Issue Before the Court
The essential issue for the Court's resolution is whether or not the CA
committed reversible error in upholding the dismissal of the collection case.
The Court's Ruling
The petition lacks merit.
A case is barred by prior judgment or res judicata when the following elements
concur: (a) the judgment sought to bar the new action must be final; (b) the
decision must have been rendered by a court having jurisdiction over the
subject matter and the parties; (c) the disposition of the case must be a
judgment on the merits; and (d) there must be as between the first and second
action, identity of parties, subject matter, and causes of action. 30
After a punctilious review of the records, the Court finds the principle of res
judicata to be inapplicable to the present case. This is because the records are
bereft of any indication that the August 28, 2003 Decision in the judicial
foreclosure case had already attained finality, evidenced, for instance, by a
copy of the entry of judgment in the said case. Accordingly, with the very first
element of res judicata missing, said principle cannot be made to obtain.
This notwithstanding, the Court holds that petitioner's prosecution of the
collection case was barred, instead, by the principle of litis pendentia in view
of the substantial identity of parties and singularity of the causes of action in
the foreclosure and collection cases, such that the prior foreclosure case
barred petitioner's recourse to the subsequent collection case. SaCIDT
To lay down the basics, litis pendentia, as a ground for the dismissal of a civil
action, refers to that situation wherein another action is pending between the
same parties for the same cause of action, such that the second action
becomes unnecessary and vexatious. For the bar of litis pendentia to be
invoked, the following requisites must concur: (a) identity of parties, or at least
such parties as represent the same interests in both actions; (b) identity of
rights asserted and relief prayed for, the relief being founded on the same
facts; and (c) the identity of the two preceding particulars is such that any
judgment rendered in the pending case, regardless of which party is successful
would amount to res judicata in the other. 31 The underlying principle of litis
pendentia is the theory that a party is not allowed to vex another more than
once regarding the same subject matter and for the same cause of action. This
theory is founded on the public policy that the same subject matter should not
be the subject of controversy in courts more than once, in order that possible
conflicting judgments may be avoided for the sake of the stability of the rights
and status of persons, and also to avoid the costs and expenses incident to
numerous suits. 32 Consequently, a party will not be permitted to split up a
single cause of action and make it a basis for several suits as the whole cause
must be determined in one action. 33 To be sure, splitting a cause of action is
a mode of forum shopping by filing multiple cases based on the same cause
of action, but with different prayers, where the ground of dismissal is litis
pendentia (or res judicata, as the case may be). 34
In this relation, it must be noted that the question of whether a cause of action
is single and entire or separate is not always easy to determine and the same
must often be resolved, not by the general rules, but by reference to the facts
and circumstances of the particular case. The true rule, therefore, is whether
the entire amount arises from one and the same act or contract which must,
thus, be sued for in one action, or the several parts arise from distinct and
different acts or contracts, for which a party may maintain separate suits. 35
In loan contracts secured by a real estate mortgage, the rule is that the
creditor-mortgagee has a single cause of action against the debtor-mortgagor,
i.e., to recover the debt, through the filing of a personal action for collection of
sum of money or the institution of a real action to foreclose on the mortgage
security. The two remedies are alternative, 36 not cumulative or successive,
37 and each remedy is complete by itself. Thus, if the creditor-mortgagee opts
to foreclose the real estate mortgage, he waives the action for the collection of
the unpaid debt, 38 except only for the recovery of whatever deficiency may
remain in the outstanding obligation of the debtor-mortgagor after deducting
the bid price in the public auction sale of the mortgaged properties. 39
Accordingly, a deficiency judgment shall only issue after it is established that
the mortgaged property was sold at public auction for an amount less than the
outstanding obligation.
In the present case, records show that petitioner, as creditor-mortgagee,
instituted an action for judicial foreclosure pursuant to the provisions of Rule
68 of the Rules of Court in order to recover on Rafael's debt. In light of the
foregoing discussion, the availment of such remedy thus bars recourse to the
subsequent filing of a personal action for collection of the same debt, in this
case, under the principle of litis pendentia, considering that the foreclosure
case only remains pending as it was not shown to have attained finality.
While the ensuing collection case was anchored on the promissory note
executed by respondent who was not the original debtor, the same does not
constitute a separate and distinct contract of loan which would have given rise
to a separate cause of action upon breach. Notably, records are bereft of any
indication that respondent's agreement to pay Rafael's loan obligation and the
execution of the subject PN extinguished by novation 40 the contract of loan
between Rafael and petitioner, in the absence of express agreement or any
act of equal import. Well-settled is the rule that novation is never presumed,
but must be clearly and unequivocally shown. Thus, in order for a new
agreement to supersede the old one, the parties to a contract must expressly
agree that they are abrogating their old contract in favor of a new one, 41 which
was not shown here.
On the contrary, it is significant to point out that: (a) the consideration for the
subject PN was the same consideration that supported the original loan
obligation of Rafael; (b) respondent merely assumed to pay Rafael's remaining
unpaid balance in the latter's behalf, i.e., as Rafael's agent or representative;
42 and (c) the subject PN was executed after respondent had assumed to pay
Rafael's obligation and made several payments thereon. Case law states that
the fact that the creditor accepts payments from a third person, who has
assumed the obligation, will result merely in the addition of debtors, not
novation, and the creditor may enforce the obligation against both debtors. 43
For ready reference, the subject PN reads in full:
February 20, 1998
PROMISSORY NOTE
P289,000.00
=========
I, MARCELINO B. MARTINEZ, son of Mr. RAFAEL MARTINEZ, of legal age,
Filipino, married and a resident of No. 091 Anabu I-A, Imus, Cavite, by these
presents do hereby specifically and categorically PROMISE, UNDERTAKE
and bind myself in behalf of my father, to pay to Miss NORLINDA S. MARILAG,
Mortgagee-Creditor of my said father, the sum of TWO HUNDRED EIGHTY
NINE THOUSAND PESOS (P289,000.00), Philippine Currency, on or before
MARCH 31, 1998, representing the balance of the agreed financial obligation
of my said father to her. (Emphases supplied)
Executed at Pamplona I, Las Pias City, Metro Manila, this 20th day of
February, 1998.
Sgd.
MARCELINO B. MARTINEZ
Promissor 44
Petitioner's contention that the judicial foreclosure and collection cases
enforce independent rights 45 must, therefore, fail because the Deed of Real
Estate Mortgage 46 and the subject PN both refer to one and the same
obligation, i.e., Rafael's loan obligation. As such, there exists only one cause
of action for a single breach of that obligation. Petitioner cannot split her cause
of action on Rafael's unpaid loan obligation by filing a petition for the judicial
foreclosure of the real estate mortgage covering the said loan, and, thereafter,
a personal action for the collection of the unpaid balance of said obligation not
comprising a deficiency arising from foreclosure, without violating the
proscription against splitting a single cause of action, where the ground for
dismissal is either res judicata or litis pendentia, as in this case. cHECAS
As elucidated by this Court in the landmark case of Bachrach Motor Co., Inc.
v. Icarangal. 47
For non-payment of a note secured by mortgage, the creditor has a single
cause of action against the debtor. This single cause of action consists in the
recovery of the credit with execution of the security. In other words, the creditor
in his action may make two demands, the payment of the debt and the
foreclosure of his mortgage. But both demands arise from the same cause, the
non-payment of the debt, and, for that reason, they constitute a single cause
of action. Though the debt and the mortgage constitute separate agreements,
the latter is subsidiary to the former, and both refer to one and the same
obligation. Consequently, there exists only one cause of action for a single
breach of that obligation. Plaintiff, then, by applying the rule above stated,
cannot split up his single cause of action by filing a complaint for payment of
the debt, and thereafter another complaint for foreclosure of the mortgage. If
he does so, the filing of the first complaint will bar the subsequent complaint.
By allowing the creditor to file two separate complaints simultaneously or
successively, one to recover his credit and another to foreclose his mortgage,
we will, in effect, be authorizing him plural redress for a single breach of
contract at so much cost to the courts and with so much vexation and
oppression to the debtor. (Emphases and underscoring supplied)
Further on the point, the fact that no foreclosure sale appears to have been
conducted is of no moment because the remedy of foreclosure of mortgage is
deemed chosen upon the filing of the complaint therefor. 48 In Suico Rattan &
Buri Interiors, Inc. v. CA, 49 it was explained:

. . . . In sustaining the rule that prohibits mortgage creditors from pursuing both
the remedies of a personal action for debt or a real action to foreclose the
mortgage, the Court held in the case of Bachrach Motor Co., Inc. v. Esteban
Icarangal, et al. that a rule which 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 and obnoxious to law and equity, 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. Hence, 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, pursuant to the provisions of Rule 68 of the Rules of Court. 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 accordance with
the provisions of Act No. 3135, as amended by Act No. 4118. (Emphases
supplied)
As petitioner had already instituted judicial foreclosure proceedings over the
mortgaged property, she is now barred from availing herself of an ordinary
action for collection, regardless of whether or not the decision in the
foreclosure case had attained finality. In fine, the dismissal of the collection
case is in order. Considering, however, that respondent's claim for return of
excess payment partakes of the nature of a compulsory counterclaim and,
thus, survives the dismissal of petitioner's collection suit, the same should be
resolved based on its own merits and evidentiary support. 50
Records show that other than the matter of interest, the principal loan
obligation and the payments made were not disputed by the parties.
Nonetheless, the Court finds the stipulated 5% monthly interest to be
excessive and unconscionable. In a plethora of cases, the Court has affirmed
that stipulated interest rates of three percent (3%)per month and higher are
excessive, iniquitous, unconscionable, and exorbitant, 51 hence, illegal 52 and
void for being contrary to morals. 53 In Agner v. BPI Family Savings Bank,
Inc., 54 the Court had the occasion to rule:
Settled is the principle which this Court has affirmed in a number of cases that
stipulated interest rates of three percent (3%) per month and higher are
excessive, iniquitous, unconscionable, and exorbitant. While Central Bank
Circular No. 905-82, which took effect on January 1, 1983, effectively removed
the ceiling on interest rates for both secured and unsecured loans, regardless
of maturity, nothing in the said circular could possibly be read as granting carte
blanche authority to lenders to raise interest rates to levels which would either
enslave their borrowers or lead to a hemorrhaging of their assets. Since the
stipulation on the interest rate is void for being contrary to morals, if not against
the law, it is as if there was no express contract on said interest rate; thus, the
interest rate may be reduced as reason and equity demand. (Emphases
supplied) AHDacC
As such, the stipulated 5% monthly interest should be equitably reduced to 1%
per month or 12% p.a. reckoned from the execution of the real estate mortgage
on July 30, 1992. In order to determine whether there was any overpayment
as claimed by respondent, we first compute the interest until January 30, 1998
55 when he made a payment in the amount of P300,000.00 on Rafael's loan
obligation. Accordingly, the amount due on the loan as of the latter date is
hereby computed as follows:
Principal
P160,000.00
Add: Interest from 07/30/1992 to 01/30/1998
(P160,000.00 x 12% x 5.5 yrs.)
105,600.00
__________
Amount due on the loan
P265,600.00
Less: Payment made on 01/30/98
(300,000.00)
__________
Overpayment as of 01/30/98
(P34,400.00) 56
Thus, as of January 30, 1998, only the amount of P265,600.00 was due under
the loan contract, and the receipt of an amount more than that renders
petitioner liable for the return of the excess. Respondent, however, made
further payment in the amount of P100,000.00 57 on the belief that the subject
loan obligation had not yet been satisfied. Such payments were, therefore,
clearly made by mistake, giving rise to the quasi-contractual obligation of
solutio indebiti under Article 2154 58 in relation to Article 2163 59 of the Civil
Code.Not being a loan or forbearance of money, an interest of 6% p.a. should
be imposed on the amount to be refunded and on the damages and attorney's
fees awarded, if any, computed from the time of demand 60 until its
satisfaction. 61 Consequently, petitioner must return to respondent the excess
payments in the total amount of P134,400.00, with legal interest at the rate of
6% p.a. from the filing of the Answer on August 6, 1998 62 interposing a
counterclaim for such overpayment, until fully settled.
However, inasmuch as the court a quo failed to state in the body of its decision
the factual or legal basis for the award of attorney's fees to the respondent, as
required under Article 2208 63 of the New Civil Code, the Court resolves to
delete the same. The rule is well-settled that the trial court must clearly state
the reasons for awarding attorney's fees in the body of its decision, not merely
in its dispositive portion, as the appellate courts are precluded from
supplementing the bases for such award. 64
Finally, in the absence of showing that the court a quo's award of the costs of
suit in favor of respondent was patently capricious, 65 the Court finds no
reason to disturb the same.
WHEREFORE, the petition is DENIED. The Decision dated November 4, 2011
and the Resolution dated May 14, 2012 of the Court of Appeals in CA-G.R. CV
No. 81258 reinstating the court a quo's Decision dated August 28, 2003 in Civil
Case No. 98-0156 are hereby AFFIRMED with the MODIFICATIONS: (a)
directing petitioner Norlinda S. Marilag to return to respondent Marcelino B.
Martinez the latter's excess payments in the total amount of P134,400.00, plus
legal interest at the rate of 6% p.a. from the filing of the Answer on August 6,
1998 until full satisfaction; and (b) deleting the award of attorney's fees.
SO ORDERED.
||| (Marilag v. Martinez, G.R. No. 201892, [July 22, 2015])
2. Silos v. PNB, G.R. No. 181045, July 2, 2015
G.R. No. 181045 July 2, 2014
SPOUSES EDUARDO and LYDIA SILOS, Petitioners,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
DEL CASTILLO, J.:
In loan agreements, it cannot be denied that the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof
must be mutually agreed upon; otherwise, it has no binding effect. Moreover,
the Court cannot consider a stipulation granting a party the option to prepay
the loan if said party is not agreeable to the arbitrary interest rates imposed.
Premium may not be placed upon a stipulation in a contract which grants one
party the right to choose whether to continue with or withdraw from the
agreement if it discovers that what the other party has been doing all along is
improper or illegal.
This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2
of the Court of Appeals (CA) in CA-G.R. CV No. 79650, which affirmed with
modifications the February 28, 2003 Decision3 and the June 4, 2003 Order4
of the Regional Trial Court (RTC), Branch 6 of Kalibo, Aklan in Civil Case No.
5975.
Factual Antecedents
Spouses Eduardo and Lydia Silos (petitioners) have been in business for
about two decades of operating a department store and buying and selling of
ready-to-wear apparel. Respondent Philippine National Bank (PNB) is a
banking corporation organized and existing under Philippine laws.
To secure a one-year revolving credit line of P150,000.00 obtained from PNB,
petitioners constituted in August 1987 a Real Estate Mortgage5 over a 370-
square meter lot in Kalibo, Aklan covered by Transfer Certificate of Title No.
(TCT) T-14250. In July 1988,the credit line was increased to P1.8 million and
the mortgage was correspondingly increased to P1.8 million.6
And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was
executed to cover the same credit line, which was increased to P2.5 million,
and additional security was given in the form of a 134-square meter lot covered
by TCT T-16208. In addition, petitioners issued eight Promissory Notes8 and
signed a Credit Agreement.9 This July 1989 Credit Agreement contained a
stipulation on interest which provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per
annum. Interest shall be payable in advance every one hundred twenty days
at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan
depending on whatever policy the Bank may adopt in the future, including
without limitation, the shifting from the floating interest rate system to the fixed
interest rate system, or vice versa. Where the Bank has imposed on the Loan
interest at a rate per annum, which is equal to the Banks spread over the
current floating interest rate, the Borrower hereby agrees that the Bank may,
without need of notice to the Borrower, increase or decrease its spread over
the floating interest rate at any time depending on whatever policy it may adopt
in the future.10 (Emphases supplied)
The eight Promissory Notes, on the other hand, contained a stipulation
granting PNB the right to increase or reduce interest rates "within the limits
allowed by law or by the Monetary Board."11
The Real Estate Mortgage agreement provided the same right to increase or
reduce interest rates "at any time depending on whatever policy PNB may
adopt in the future."12
Petitioners religiously paid interest on the notes at the following rates:
1. 1st Promissory Note dated July 24, 1989 19.5%;
2. 2nd Promissory Note dated November 22, 1989 23%;
3. 3rd Promissory Note dated March 21, 1990 22%;
4. 4th Promissory Note dated July 19, 1990 24%;
5. 5th Promissory Note dated December 17, 1990 28%;
6. 6th Promissory Note dated February 14, 1991 32%;
7. 7th Promissory Note dated March 1, 1991 30%; and
8. 8th Promissory Note dated July 11, 1991 24%.13
In August 1991, an Amendment to Credit Agreement14 was executed by the
parties, with the following stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
each Availment from date of each Availment up to but not including the date
of full payment thereof at the rate per annum which is determined by the Bank
to be prime rate plus applicable spread in effect as of the date of each
Availment.15 (Emphases supplied)
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB
the following 18 Promissory Notes, which petitioners settled except the last
(the note covering the principal) at the following interest rates:
1. 9th Promissory Note dated November 8, 1991 26%;
2. 10th Promissory Note dated March 19, 1992 25%;
3. 11th Promissory Note dated July 11, 1992 23%;
4. 12th Promissory Note dated November 10, 1992 21%;
5. 13th Promissory Note dated March 15, 1993 21%;
6. 14th Promissory Note dated July 12, 1993 17.5%;
7. 15th Promissory Note dated November 17, 1993 21%;
8. 16th Promissory Note dated March 28, 1994 21%;
9. 17th Promissory Note dated July 13, 1994 21%;
10. 18th Promissory Note dated November 16, 1994 16%;
11. 19th Promissory Note dated April 10, 1995 21%;
12. 20th Promissory Note dated July 19, 1995 18.5%;
13. 21st Promissory Note dated December 18, 1995 18.75%;
14. 22nd Promissory Note dated April 22, 1996 18.5%;
15. 23rd Promissory Note dated July 22, 1996 18.5%;
16. 24th Promissory Note dated November 25, 1996 18%;
17. 25th Promissory Note dated May 30, 1997 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 25%.16
The 9th up to the 17th promissory notes provide for the payment of interest at
the "rate the Bank may at any time without notice, raise within the limits allowed
by law x x x."17
On the other hand, the 18th up to the 26th promissory notes including PN
9707237, which is the 26th promissory note carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated
may be increased or decreased for the subsequent Interest Periods, with prior
notice to the Borrower in the event of changes in interest rate prescribed by
law or the Monetary Board of the Central Bank of the Philippines, or in the
Banks overall cost of funds. I/We hereby agree that in the event I/we are not
agreeable to the interest rate fixed for any Interest Period, I/we shall have the
option top repay the loan or credit facility without penalty within ten (10)
calendar days from the Interest Setting Date.18 (Emphasis supplied)
Respondent regularly renewed the line from 1990 up to 1997, and petitioners
made good on the promissory notes, religiously paying the interests without
objection or fail. But in 1997, petitioners faltered when the interest rates soared
due to the Asian financial crisis. Petitioners sole outstanding promissory note
for P2.5 million PN 9707237 executed in July 1997 and due 120 days later
or on October 28, 1997 became past due, and despite repeated demands,
petitioners failed to make good on the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per
annum in case of default, as follows:
Without need for notice or demand, failure to pay this note or any installment
thereon, when due, shall constitute default and in such cases or in case of
garnishment, receivership or bankruptcy or suit of any kind filed against me/us
by the Bank, the outstanding principal of this note, at the option of the Bank
and without prior notice of demand, shall immediately become due and
payable and shall be subject to a penalty charge of twenty four percent (24%)
per annum based on the defaulted principal amount. x x x19 (Emphasis
supplied)
PNB prepared a Statement of Account20 as of October 12, 1998, detailing the
amount due and demandable from petitioners in the total amount of
P3,620,541.60, broken down as follows:
Principal P 2,500,000.00
Interest 538,874.94
Penalties 581,666.66
Total P 3,620,541.60
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB
foreclosed on the mortgage, and on January 14, 1999, TCTs T-14250 and T-
16208 were sold to it at auction for the amount of P4,324,172.96.21 The
sheriffs certificate of sale was registered on March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed Civil Case No.
5975, seeking annulment of the foreclosure sale and an accounting of the PNB
credit. Petitioners theorized that after the first promissory note where they
agreed to pay 19.5% interest, the succeeding stipulations for the payment of
interest in their loan agreements with PNB which allegedly left to the latter
the sole will to determine the interest rate became null and void. Petitioners
added that because the interest rates were fixed by respondent without their
prior consent or agreement, these rates are void, and as a result, petitioners
should only be made liable for interest at the legal rate of 12%. They claimed
further that they overpaid interests on the credit, and concluded that due to this
overpayment of steep interest charges, their debt should now be deemed paid,
and the foreclosure and sale of TCTs T-14250 and T-16208 became
unnecessary and wrongful. As for the imposed penalty of P581,666.66,
petitioners alleged that since the Real Estate Mortgage and the Supplement
thereto did not include penalties as part of the secured amount, the same
should be excluded from the foreclosure amount or bid price, even if such
penalties are provided for in the final Promissory Note, or PN 9707237.22
In addition, petitioners sought to be reimbursed an alleged overpayment of
P848,285.00 made during the period August 21, 1991 to March 5,
1998,resulting from respondents imposition of the alleged illegal and steep
interest rates. They also prayed to be awarded P200,000.00 by way of
attorneys fees.23
In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates;
that petitioners agreed that without prior notice, PNB may modify interest rates
depending on future policy adopted by it; and that the imposition of penalties
was agreed upon in the Credit Agreement. It added that the imposition of
penalties is supported by the all-inclusive clause in the Real Estate Mortgage
agreement which provides that the mortgage shall stand as security for any
and all other obligations of whatever kind and nature owing to respondent,
which thus includes penalties imposed upon default or non-payment of the
principal and interest on due date.
On pre-trial, the parties mutually agreed to the following material facts, among
others:
a) That since 1991 up to 1998, petitioners had paid PNB the total amount of
P3,484,287.00;25 and
b) That PNB sent, and petitioners received, a March 10, 2000 demand letter.26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement,
the Amendment to Credit Agreement, Real Estate Mortgage and the
Supplement thereto were all prepared by respondent PNB and were presented
to her and her husband Eduardo only for signature; that she was told by PNB
that the latter alone would determine the interest rate; that as to the
Amendment to Credit Agreement, she was told that PNB would fill up the
interest rate portion thereof; that at the time the parties executed the said
Credit Agreement, she was not informed about the applicable spread that PNB
would impose on her account; that the interest rate portion of all Promissory
Notes she and Eduardo issued were always left in blank when they executed
them, with respondents mere assurance that it would be the one to enter or
indicate thereon the prevailing interest rate at the time of availment; and that
they agreed to such arrangement. She further testified that the two Real Estate
Mortgage agreements she signed did not stipulate the payment of penalties;
that she and Eduardo consulted with a lawyer, and were told that PNBs
actions were improper, and so on March 20, 2000, they wrote to the latter
seeking a recomputation of their outstanding obligation; and when PNB did not
oblige, they instituted Civil Case No. 5975.27
On cross-examination, Lydia testified that she has been in business for 20
years; that she also borrowed from other individuals and another bank; that it
was only with banks that she was asked to sign loan documents with no
indicated interest rate; that she did not bother to read the terms of the loan
documents which she signed; and that she received several PNB statements
of account detailing their outstanding obligations, but she did not complain;
that she assumed instead that what was written therein is correct.28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole
witness for respondent, stated on cross-examination that as a practice, the
determination of the prime rates of interest was the responsibility solely of
PNBs Treasury Department which is based in Manila; that these prime rates
were simply communicated to all PNB branches for implementation; that there
are a multitude of considerations which determine the interest rate, such as
the cost of money, foreign currency values, PNBs spread, bank administrative
costs, profitability, and the practice in the banking industry; that in every
repricing of each loan availment, the borrower has the right to question the
rates, but that this was not done by the petitioners; and that anything that is
not found in the Promissory Note may be supplemented by the Credit
Agreement.29
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil Case
No. 5975.30
It ruled that:
1. While the Credit Agreement allows PNB to unilaterally increase its spread
over the floating interest rate at any time depending on whatever policy it may
adopt in the future, it likewise allows for the decrease at any time of the same.
Thus, such stipulation authorizing both the increase and decrease of interest
rates as may be applicable is valid,31 as was held in Consolidated Bank and
Trust Corporation (SOLIDBANK) v. Court of Appeals;32
2. Banks are allowed to stipulate that interest rates on loans need not be fixed
and instead be made dependent on prevailing rates upon which to peg such
variable interest rates;33
3. The Promissory Note, as the principal contract evidencing petitioners loan,
prevails over the Credit Agreement and the Real Estate Mortgage.
As such, the rate of interest, penalties and attorneys fees stipulated in the
Promissory Note prevail over those mentioned in the Credit Agreement and
the Real Estate Mortgage agreements;34
4. Roughly, PNBs computation of the total amount of petitioners obligation is
correct;35
5. Because the loan was admittedly due and demandable, the foreclosure was
regularly made;36
6. By the admission of petitioners during pre-trial, all payments made to PNB
were properly applied to the principal, interest and penalties.37
The dispositive portion of the trial courts Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the
respondent and against the petitioners by DISMISSING the latters petition.
Costs against the petitioners.
SO ORDERED.38
Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the
trial court granted only a modification in the award of attorneys fees, reducing
the same from 10% to 1%. Thus, PNB was ordered to refund to petitioner the
excess in attorneys fees in the amount of P356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the
interest rate charged by the respondent as well as the extra-judicial foreclosure
proceedings and the Certificate of Sale. However, respondent is directed to
refund to the petitioner the amount of P356,589.90 representing the excess
interest charged against the latter.
No pronouncement as to costs.
SO ORDERED.40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with the
following decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY
GRANTED. The modified Decision of the Regional Trial Court per Order dated
June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30-day
interest period for PN. No. 9707237 should be 12% per annum;
2. [T]hat the attorneys fees of10% is valid and binding; and
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the
bid price of P377,505.99 which is the difference between the total amount due
[PNB] and the amount of its bid price.
SO ORDERED.41
On the other hand, respondent did not appeal the June 4,2003 Order of the
trial court which reduced its award of attorneys fees. It simply raised the issue
in its appellees brief in the CA, and included a prayer for the reversal of said
Order.
In effect, the CA limited petitioners appeal to the following issues:
1) Whether x x x the interest rates on petitioners outstanding obligation were
unilaterally and arbitrarily imposed by PNB;
2) Whether x x x the penalty charges were secured by the real estate
mortgage; and
3) Whether x x x the extrajudicial foreclosure and sale are valid.42
The CA noted that, based on receipts presented by petitioners during trial, the
latter dutifully paid a total of P3,027,324.60 in interest for the period August 7,
1991 to August 6, 1997, over and above the P2.5 million principal obligation.
And this is exclusive of payments for insurance premiums, documentary stamp
taxes, and penalty. All the while, petitioners did not complain nor object to the
imposition of interest; they in fact paid the same religiously and without fail for
seven years. The appellate court ruled that petitioners are thus estopped from
questioning the same.
The CA nevertheless noted that for the period July 30, 1997 to August 14,
1997, PNB wrongly applied an interest rate of 25.72% instead of the agreed
25%; thus it overcharged petitioners, and the latter paid, an excess of P736.56
in interest.
On the issue of penalties, the CA ruled that the express tenor of the Real
Estate Mortgage agreements contemplated the inclusion of the PN 9707237-
stipulated 24% penalty in the amount to be secured by the mortgaged property,
thus
For and in consideration of certain loans, overdrafts and other credit
accommodations obtained from the MORTGAGEE and to secure the payment
of the same and those others that the MORTGAGEE may extend to the
MORTGAGOR, including interest and expenses, and other obligations owing
by the MORTGAGOR to the MORTGAGEE, whether direct or indirect,
principal or secondary, as appearing in the accounts, books and records of the
MORTGAGEE, the MORTGAGOR does hereby transfer and convey by way
of mortgage unto the MORTGAGEE x x x43 (Emphasis supplied)
The CA believes that the 24% penalty is covered by the phrase "and other
obligations owing by the mortgagor to the mortgagee" and should thus be
added to the amount secured by the mortgages.44
The CA then proceeded to declare valid the foreclosure and sale of properties
covered by TCTs T-14250 and T-16208, which came as a necessary result of
petitioners failure to pay the outstanding obligation upon demand.45 The CA
saw fit to increase the trial courts award of 1% to 10%, finding the latter rate
to be reasonable and citing the Real Estate Mortgage agreement which
authorized the collection of the higher rate.46
Finally, the CA ruled that petitioners are entitled to P377,505.09 surplus, which
is the difference between PNBs bid price of P4,324,172.96 and petitioners
total computed obligation as of January 14, 1999, or the date of the auction
sale, in the amount of P3,946,667.87.47
Hence, the present Petition.
Issues
The following issues are raised in this Petition:
I
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED
IN NOT NULLIFYING THE INTEREST RATE PROVISION IN THE CREDIT
AGREEMENT DATED JULY 24, 1989 X X X AND IN THE AMENDMENT TO
CREDIT AGREEMENT DATEDAUGUST 21, 1991 X X X WHICH LEFT TO
THE SOLE UNILATERAL DETERMINATION OF THE RESPONDENT PNB
THE ORIGINAL FIXING OF INTEREST RATE AND ITS INCREASE, WHICH
AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF THE [NEW CIVIL
CODE], AS ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF
APPEALS,G.R. [NO.] 113412, APRIL 17, 1996, AND CONTRARY TO PUBLIC
POLICY AND PUBLIC INTEREST, AND IN APPLYING THE PRINCIPLE OF
ESTOPPEL ARISING FROM THE ALLEGED DELAYED COMPLAINT OF
PETITIONER[S], AND [THEIR] PAYMENT OF THE INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT
ERRED IN NOT DECLARING THAT PNB IS NOT AT ALL ENTITLED TO ANY
INTEREST EXCEPT THE LEGAL RATE FROM DATE OF DEMAND, AND IN
NOT APPLYING THE EXCESS OVER THE LEGAL RATE OF THE
ADMITTED PAYMENTS MADE BY PETITIONER[S] FROM 1991-1998 IN
THE ADMITTED TOTAL AMOUNT OF P3,484,287.00, TO PAYMENT OF
THE PRINCIPAL OF P2,500,000.[00] LEAVING AN OVERPAYMENT
OFP984,287.00 REFUNDABLE BY RESPONDENT TO PETITIONER[S]
WITH INTEREST OF 12% PER ANNUM.

II
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING
THAT PENALTIES ARE INCLUDEDIN THE SECURED AMOUNT, SUBJECT
TO FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR]
PROVIDED FOR IN THE REAL ESTATE MORTGAGE AS A SECURED
AMOUNT AND THEREFORE THE AMOUNT OF PENALTIES SHOULDHAVE
BEEN EXCLUDED FROM [THE] FORECLOSURE AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE
LOWER COURT, WHICH REDUCED THE ATTORNEYS FEES OF 10% OF
THE TOTAL INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL
FORECLOSURE TOONLY 1%, AND [AWARDING] 10% ATTORNEYS
FEES.48
Petitioners Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and
the Amendment to Credit Agreement should be declared null and void, for they
relegated to PNB the sole power to fix interest rates based on arbitrary criteria
or factors such as bank policy, profitability, cost of money, foreign currency
values, and bank administrative costs; spaces for interest rates in the two
Credit Agreements and the promissory notes were left blank for PNB to
unilaterally fill, and their consent or agreement to the interest rates imposed
thereafter was not obtained; the interest rate, which consists of the prime rate
plus the bank spread, is determined not by agreement of the parties but by
PNBs Treasury Department in Manila. Petitioners conclude that by this
method of fixing the interest rates, the principle of mutuality of contracts is
violated, and public policy as well as Circular 90549 of the then Central Bank
had been breached.
Petitioners question the CAs application of the principle of estoppel, saying
that no estoppel can proceed from an illegal act. Though they failed to timely
question the imposition of the alleged illegal interest rates and continued to
pay the loan on the basis of these rates, they cannot be deemed to have
acquiesced, and hence could recover what they erroneously paid.50
Petitioners argue that if the interest rates were nullified, then their obligation to
PNB is deemed extinguished as of July 1997; moreover, it would appear that
they even made an over payment to the bank in the amount of P984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements did
not include nor specify, as part of the secured amount, the penalty of 24%
authorized in PN 9707237, such amount of P581,666.66 could not be made
answerable by or collected from the mortgages covering TCTs T-14250 and
T-16208. Claiming support from Philippine Bank of Communications [PBCom]
v. Court of Appeals,51 petitioners insist that the phrase "and other obligations
owing by the mortgagor to the mortgagee"52 in the mortgage agreements
cannot embrace the P581,666.66 penalty, because, as held in the PBCom
case, "[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";53 while the mortgages are the accessory contracts,
what items are secured may only be determined from the provisions of the
mortgage contracts, and not from the Credit Agreement or the promissory
notes.
Finally, petitioners submit that the trial courts award of 1% attorneys fees
should be maintained, given that in foreclosures, a lawyers work consists
merely in the preparation and filing of the petition, and involves minimal
study.54 To allow the imposition of a staggering P396,211.00 for such work
would be contrary to equity. Petitioners state that the purpose of attorneys
fees in cases of this nature "is not to give respondent a larger compensation
for the loan than the law already allows, but to protect it against any future loss
or damage by being compelled to retain counsel x x x to institute judicial
proceedings for the collection of its credit."55 And because the instant case
involves a simple extrajudicial foreclosure, attorneys fees may be equitably
tempered.
Respondents Arguments
For its part, respondent disputes petitioners claim that interest rates were
unilaterally fixed by it, taking relief in the CA pronouncement that petitioners
are deemed estopped by their failure to question the imposed rates and their
continued payment thereof without opposition. It adds that because the Credit
Agreement and promissory notes contained both an escalation clause and a
de-escalation clause, it may not be said that the bank violated the principle of
mutuality. Besides, the increase or decrease in interest rates have been
mutually agreed upon by the parties, as shown by petitioners continuous
payment without protest. Respondent adds that the alleged unilateral
imposition of interest rates is not a proper subject for review by the Court
because the issue was never raised in the lower court.
As for petitioners claim that interest rates imposed by it are null and void for
the reasons that 1) the Credit Agreements and the promissory notes were
signed in blank; 2) interest rates were at short periods; 3) no interest rates
could be charged where no agreement on interest rates was made in writing;
4) PNB fixed interest rates on the basis of arbitrary policies and standards left
to its choosing; and 5) interest rates based on prime rate plus applicable
spread are indeterminate and arbitrary PNB counters:

a. That Credit Agreements and promissory notes were signed by petitioner[s]
in blank Respondent claims that this issue was never raised in the lower
court. Besides, documentary evidence prevails over testimonial evidence;
Lydia Silos testimony in this regard is self-serving, unsupported and
uncorroborated, and for being the lone evidence on this issue. The fact
remains that these documents are in proper form, presumed regular, and
endure, against arbitrary claims by Silos who is an experienced business
person that she signed questionable loan documents whose provisions for
interest rates were left blank, and yet she continued to pay the interests without
protest for a number of years.56
b. That interest rates were at short periods Respondent argues that the law
which governs and prohibits changes in interest rates made more than once
every twelve months has been removed57 with the issuance of Presidential
Decree No. 858.58
c. That no interest rates could be charged where no agreement on interest
rates was made in writing in violation of Article 1956 of the Civil Code, which
provides that no interest shall be due unless it has been expressly stipulated
in writing Respondent insists that the stipulated 25% per annum as embodied
in PN 9707237 should be imposed during the interim, or the period after the
loan became due and while it remains unpaid, and not the legal interest of 12%
as claimed by petitioners.59
d. That PNB fixed interest rates on the basis of arbitrary policies and standards
left to its choosing According to respondent, interest rates were fixed taking
into consideration increases or decreases as provided by law or by the
Monetary Board, the banks overall costs of funds, and upon agreement of the
parties.60
e. That interest rates based on prime rate plus applicable spread are
indeterminate and arbitrary On this score, respondent submits there are
various factors that influence interest rates, from political events to economic
developments, etc.; the cost of money, profitability and foreign currency
transactions may not be discounted.61
On the issue of penalties, respondent reiterates the trial courts finding that
during pre-trial, petitioners admitted that the Statement of Account as of
October 12, 1998 which detailed and included penalty charges as part of the
total outstanding obligation owing to the bank was correct. Respondent
justifies the imposition and collection of a penalty as a normal banking practice,
and the standard rate per annum for all commercial banks, at the time, was
24%.
Respondent adds that the purpose of the penalty or a penal clause for that
matter is to ensure the performance of the obligation and substitute for
damages and the payment of interest in the event of non-compliance.62 And
the promissory note being the principal agreement as opposed to the
mortgage, which is a mere accessory should prevail. This being the case, its
inclusion as part of the secured amount in the mortgage agreements is valid
and necessary.
Regarding the foreclosure of the mortgages, respondent accuses petitioners
of pre-empting consolidation of its ownership over TCTs T-14250 and T-
16208; that petitioners filed Civil Case No. 5975 ostensibly to question the
foreclosure and sale of properties covered by TCTs T-14250 and T-16208 in
a desperate move to retain ownership over these properties, because they
failed to timely redeem them.
Respondent directs the attention of the Court to its petition in G.R. No.
181046,63 where the propriety of the CAs ruling on the following issues is
squarely raised:
1. That the interest rate to be applied after the expiration of the first 30-day
interest period for PN 9707237 should be 12% per annum; and
2. That PNB should reimburse petitioners the excess in the bid price of
P377,505.99 which is the difference between the total amount due to PNB and
the amount of its bid price.
Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function of the Court to
re-examine or re-evaluate evidence adduced by the parties in the proceedings
below. The rule admits of certain well-recognized exceptions, though, as when
the lower courts findings are not supported by the evidence on record or are
based on a misapprehension of facts, or when certain relevant and undisputed
facts were manifestly overlooked that, if properly considered, would justify a
different conclusion. This case falls within such exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Courts
First Division denying respondents petition in G.R. No. 181046, due to late
filing, failure to attach the required affidavit of service of the petition on the trial
court and the petitioners, and submission of a defective verification and
certification of non-forum shopping. On June 25, 2008, the Court issued
another Resolution denying with finality respondents motion for
reconsideration of the March 5, 2008 Resolution. And on August 15, 2008,
entry of judgment was made. This thus settles the issues, as above-stated,
covering a) the interest rate or 12% per annum that applies upon expiration
of the first 30 days interest period provided under PN 9707237, and b)the CAs
decree that PNB should reimburse petitioner the excess in the bid price of
P377,505.09.
It appears that respondents practice, more than once proscribed by the Court,
has been carried over once more to the petitioners. In a number of decided
cases, the Court struck down provisions in credit documents issued by PNB
to, or required of, its borrowers which allow the bank to increase or decrease
interest rates "within the limits allowed by law at any time depending on
whatever policy it may adopt in the future." Thus, in Philippine National Bank
v. Court of Appeals,64 such stipulation and similar ones were declared in
violation of Article 130865 of the Civil Code. In a second case, Philippine
National Bank v. Court of Appeals,66 the very same stipulations found in the
credit agreement and the promissory notes prepared and issued by the
respondent were again invalidated. The Court therein said:
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future; Provided, that the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest
is reduced by law or by the Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest,
at any time without notice, beyond the stipulated rate of 12% but only "within
the limits allowed by law."
The Real Estate Mortgage contract likewise provided that
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the
obligation secured by this mortgage as well as the interest on the amount
which may have been advanced by the MORTGAGEE, in accordance with the
provision hereof, shall be subject during the life of this contract to such an
increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
xxxx
In making the unilateral increases in interest rates, petitioner bank relied on
the escalation clause contained in their credit agreement which provides, as
follows:
The Bank reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future and provided, that, the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment
in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684
which further amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after
Section 7, to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of
money, goods or credits may stipulate that the rate of interest agreed upon
may be increased in the event that the applicable maximum rate of interest is
increased bylaw or by the Monetary Board; Provided, That such stipulation
shall be valid only if there is also a stipulation in the agreement that the rate of
interest agreed upon shall be reduced in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board; Provided
further, That the adjustment in the rate of interest agreed upon shall take effect
on or after the effectivity of the increase or decrease in the maximum rate of
interest.
Section 1 of P.D. No. 1684 also empowered the Central Banks Monetary
Board to prescribe the maximum rates of interest for loans and certain
forbearances. Pursuant to such authority, the Monetary Board issued Central
Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other
Financial Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges.
The rate of interest, including commissions, premiums, fees and other
charges, on any loan, or forbearance of any money, goods or credits,
regardless of maturity and whether secured or unsecured, shall not be subject
to any ceiling prescribed under or pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties
to stipulate freely regarding any subsequent adjustment in the interest rate that
shall accrue on a loan or forbearance of money, goods or credits. In fine, they
can agree to adjust, upward or downward, the interest previously stipulated.
However, contrary to the stubborn insistence of petitioner bank, the said law
and circular did not authorize either party to unilaterally raise the interest rate
without the others consent.
It is basic that there can be no contract in the true sense in the absence of the
element of agreement, or of mutual assent of the parties. If this assent is
wanting on the part of the one who contracts, his act has no more efficacy than
if it had been done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement. In the case of
loan contracts, it cannot be gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner banks posturing that the escalation clause
at bench gives it unbridled right to unilaterally upwardly adjust the interest on
private respondents loan. That would completely take away from private
respondents the right to assent to an important modification in their agreement,
and would negate the element of mutuality in contracts. In Philippine National
Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held
x x x The unilateral action of the PNB in increasing the interest rate on the
private respondents loan violated the mutuality of contracts ordained in Article
1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void . . . . Hence, even assuming that the . . . loan
agreement between the PNB and the private respondent gave the PNB a
license (although in fact there was none) to increase the interest rate at will
during the term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of adhesion,
where the parties do not bargain on equal footing, the weaker partys (the
debtor) participation being reduced to the alternative "to take it or leave it" . . .
. Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.67 (Emphases supplied)
Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court
invalidated the very same provisions in the respondents prepared Credit
Agreement, declaring thus:
The binding effect of any agreement between parties to a contract is premised
on two settled principles: (1) that any obligation arising from contract has the
force of law between the parties; and (2) that there must be mutuality between
the parties based on their essential equality. Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or
compliance of the contract which is left solely to the will of one of the parties,
is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that
respondent bank unilaterally altered the terms of its contract with petitioners
by increasing the interest rates on the loan without the prior assent of the latter.
In fact, the manner of agreement is itself explicitly stipulated by the Civil Code
when it provides, in Article 1956 that "No interest shall be due unless it has
been expressly stipulated in writing." What has been "stipulated in writing" from
a perusal of interest rate provision of the credit agreement signed between the
parties is that petitioners were bound merely to pay 21% interest, subject to a
possible escalation or de-escalation, when 1) the circumstances warrant such
escalation or de-escalation; 2) within the limits allowed by law; and 3) upon
agreement.
Indeed, the interest rate which appears to have been agreed upon by the
parties to the contract in this case was the 21% rate stipulated in the interest
provision. Any doubt about this is in fact readily resolved by a careful reading
of the credit agreement because the same plainly uses the phrase "interest
rate agreed upon," in reference to the original 21% interest rate. x x x
xxxx
Petitioners never agreed in writing to pay the increased interest rates
demanded by respondent bank in contravention to the tenor of their credit
agreement. That an increase in interest rates from 18% to as much as 68% is
excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire principal
(P7,735,004.66) which was applied to interest alone. By the time the spouses
tendered the amount of P40,142,518.00 in settlement of their obligations;
respondent bank was demanding P58,377,487.00 over and above those
amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as
they are not solely potestative but based on reasonable and valid grounds.
Here, as clearly demonstrated above, not only [are] the increases of the
interest rates on the basis of the escalation clause patently unreasonable and
unconscionable, but also there are no valid and reasonable standards upon
which the increases are anchored.
xxxx
In the face of the unequivocal interest rate provisions in the credit agreement
and in the law requiring the parties to agree to changes in the interest rate in
writing, we hold that the unilateral and progressive increases imposed by
respondent PNB were null and void. Their effect was to increase the total
obligation on an eighteen million peso loan to an amount way over three times
that which was originally granted to the borrowers. That these increases,
occasioned by crafty manipulations in the interest rates is unconscionable and
neutralizes the salutary policies of extending loans to spur business cannot be
disputed.69 (Emphases supplied)
Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the
above doctrine was reiterated:
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and severally promise to
pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its office in San
Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY (P15,000.00),
Philippine Currency, together with interest thereon at the rate of 12% per
annum until paid, which interest rate the Bank may at any time without notice,
raise within the limits allowed by law, and I/we also agree to pay jointly and
severally ____% per annum penalty charge, by way of liquidated damages
should this note be unpaid or is not renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made
subject to the condition that any and/or all extensions hereof that will leave any
portion of the amount still unpaid after 730 days shall automatically convert the
outstanding balance into a medium or long-term obligation as the case may be
and give the Bank the right to charge the interest rates prescribed under its
policies from the date the account was originally granted.
To secure payment of the loan the parties executed a real estate mortgage
contract which provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this mortgage as well
as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provision hereof, shall be subject during
the life of this contract to such an increase within the rate allowed by law, as
the Board of Directors of the MORTGAGEE may prescribe for its debtors.
xxxx
To begin with, PNBs argument rests on a misapprehension of the import of
the appellate courts ruling. The Court of Appeals nullified the interest rate
increases not because the promissory note did not comply with P.D. No. 1684
by providing for a de-escalation, but because the absence of such provision
made the clause so one-sided as to make it unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings &
Mortgage Bank v. Navarro that although P.D. No. 1684 is not to be retroactively
applied to loans granted before its effectivity, there must nevertheless be a de-
escalation clause to mitigate the one-sidedness of the escalation clause.
Indeed because of concern for the unequal status of borrowers vis--vis the
banks, our cases after Banco Filipino have fashioned the rule that any increase
in the rate of interest made pursuant to an escalation clause must be the result
of agreement between the parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes
authorized PNB to increase the stipulated interest per annum" within the limits
allowed by law at any time depending on whatever policy [PNB] may adopt in
the future; Provided, that the interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced
by law or by the Monetary Board." The real estate mortgage likewise provided:
The rate of interest charged on the obligation secured by this mortgage as well
as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provisions hereof, shall be subject
during the life of this contract to such an increase within the rate allowed by
law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.
Pursuant to these clauses, PNB successively increased the interest from 18%
to 32%, then to 41% and then to 48%. This Court declared the increases
unilaterally imposed by [PNB] to be in violation of the principle of mutuality as
embodied in Art.1308 of the Civil Code, which provides that "[t]he contract
must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them." As the Court explained:
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the P1.8 million loan agreement between the PNB
and the private respondent gave the PNB a license (although in fact there was
none) to increase the interest rate at will during the term of the loan, that
license would have been null and void for being violative of the principle of
mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain
on equal footing, the weaker partys (the debtor) participation being reduced
to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance
Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom
the courts of justice must protect against abuse and imposition.
A similar ruling was made in Philippine National Bank v. Court of Appeals. The
credit agreement in that case provided:
The BANK reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future: Provided, that the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest
is reduced by law or by the Monetary Board. . . .
As in the first case, PNB successively increased the stipulated interest so that
what was originally 12% per annum became, after only two years, 42%. In
declaring the increases invalid, we held:
We cannot countenance petitioner banks posturing that the escalation clause
at bench gives it unbridled right to unilaterally upwardly adjust the interest on
private respondents loan. That would completely take away from private
respondents the right to assent to an important modification in their agreement,
and would negate the element of mutuality in contracts.
Only recently we invalidated another round of interest increases decreed by
PNB pursuant to a similar agreement it had with other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905,
nothing in the said circular could possibly be read as granting respondent bank
carte blanche authority to raise interest rates to levels which would either
enslave its borrowers or lead to a hemorrhaging of their assets.
In this case no attempt was made by PNB to secure the conformity of private
respondents to the successive increases in the interest rate. Private
respondents assent to the increases can not be implied from their lack of
response to the letters sent by PNB, informing them of the increases. For as
stated in one case, no one receiving a proposal to change a contract is obliged
to answer the proposal.71 (Emphasis supplied)
We made the same pronouncement in a fifth case, New Sampaguita Builders
Construction, Inc. v. Philippine National Bank,72 thus
Courts have the authority to strike down or to modify provisions in promissory
notes that grant the lenders unrestrained power to increase interest rates,
penalties and other charges at the latters sole discretion and without giving
prior notice to and securing the consent of the borrowers. This unilateral
authority is anathema to the mutuality of contracts and enable lenders to take
undue advantage of borrowers. Although the Usury Law has been effectively
repealed, courts may still reduce iniquitous or unconscionable rates charged
for the use of money. Furthermore, excessive interests, penalties and other
charges not revealed in disclosure statements issued by banks, even if
stipulated in the promissory notes, cannot be given effect under the Truth in
Lending Act.73 (Emphasis supplied)
Yet again, in a sixth disposition, Philippine National Bank v. Spouses
Rocamora,74 the above pronouncements were reiterated to debunk PNBs
repeated reliance on its invalidated contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez
and the 1996 case of PNB v. CA and Spouses Basco. Taking no heed of these
rulings, the escalation clause PNB used in the present case to justify the
increased interest rates is no different from the escalation clause assailed in
the 1996 PNB case; in both, the interest rates were increased from the agreed
12% per annum rate to 42%. x x x
xxxx
On the strength of this ruling, PNBs argument that the spouses Rocamoras
failure to contest the increased interest rates that were purportedly reflected in
the statements of account and the demand letters sent by the bank amounted
to their implied acceptance of the increase should likewise fail.
Evidently, PNBs failure to secure the spouses Rocamoras consent to the
increased interest rates prompted the lower courts to declare excessive and
illegal the interest rates imposed. Togo around this lower court finding, PNB
alleges that the P206,297.47 deficiency claim was computed using only the
original 12% per annum interest rate. We find this unlikely. Our examination of
PNBs own ledgers, included in the records of the case, clearly indicates that
PNB imposed interest rates higher than the agreed 12% per annum rate. This
confirmatory finding, albeit based solely on ledgers found in the records,
reinforces the application in this case of the rule that findings of the RTC, when 8th Promissory Note dated July 11, 1991 24%.79
affirmed by the CA, are binding upon this Court.75 (Emphases supplied)
On the other hand, the August 1991 Amendment to Credit Agreement contains
Verily, all these cases, including the present one, involve identical or similar the following stipulation regarding interest:
provisions found in respondents credit agreements and promissory notes.
Thus, the July 1989 Credit Agreement executed by petitioners and respondent 1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
contained the following stipulation on interest: each Availment from date of each Availment up to but not including the date
of full payment thereof at the rate per annum which is determined by the Bank
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% to be prime rate plus applicable spread in effect as of the date of each
[per annum]. Interest shall be payable in advance every one hundred twenty Availment.80 (Emphases supplied)
days at the rate prevailing at the time of the renewal.
and under this Amendment to Credit Agreement, petitioners again executed
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan and signed the following promissory notes in blank, for the respondent to later
depending on whatever policy the Bank may adopt in the future, including on enter the corresponding interest rates, which it did, as follows:
without limitation, the shifting from the floating interest rate system to the fixed
interest rate system, or vice versa. Where the Bank has imposed on the Loan 9th Promissory Note dated November 8, 1991 26%;
interest at a rate per annum which is equal to the Banks spread over the
current floating interest rate, the Borrower hereby agrees that the Bank may, 10th Promissory Note dated March 19, 1992 25%;
without need of notice to the Borrower, increase or decrease its spread over
the floating interest rate at any time depending on whatever policy it may adopt 11th Promissory Note dated July 11, 1992 23%;
in the future.76 (Emphases supplied)
12th Promissory Note dated November 10, 1992 21%;
while the eight promissory notes issued pursuant thereto granted PNB the right
to increase or reduce interest rates "within the limits allowed by law or the 13th Promissory Note dated March 15, 1993 21%;
Monetary Board"77 and the Real Estate Mortgage agreement included the
same right to increase or reduce interest rates "at any time depending on 14th Promissory Note dated July 12, 1993 17.5%;
whatever policy PNB may adopt in the future."78
15th Promissory Note dated November 17, 1993 21%;
On the basis of the Credit Agreement, petitioners issued promissory notes
which they signed in blank, and respondent later on entered their 16th Promissory Note dated March 28, 1994 21%;
corresponding interest rates, as follows:
17th Promissory Note dated July 13, 1994 21%;
1st Promissory Note dated July 24, 1989 19.5%;
18th Promissory Note dated November 16, 1994 16%;
2nd Promissory Note dated November 22, 1989 23%;
19th Promissory Note dated April 10, 1995 21%;
3rd Promissory Note dated March 21, 1990 22%;
20th Promissory Note dated July 19, 1995 18.5%;
4th Promissory Note dated July 19, 1990 24%;
21st Promissory Note dated December 18, 1995 18.75%;
5th Promissory Note dated December 17, 1990 28%;
22nd Promissory Note dated April 22, 1996 18.5%;
6th Promissory Note dated February 14, 1991 32%;
23rd Promissory Note dated July 22, 1996 18.5%;
7th Promissory Note dated March 1, 1991 30%; and
24th Promissory Note dated November 25, 1996 18%;

25th Promissory Note dated May 30, 1997 17.5%; and
26th Promissory Note (PN 9707237) dated July 30, 1997 25%.81
The 9th up to the 17th promissory notes provide for the payment of interest at
the "rate the Bank may at any time without notice, raise within the limits allowed
by law x x x."82 On the other hand, the 18th up to the 26th promissory notes
which includes PN 9707237 carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated
may be increased or decreased for the subsequent Interest Periods, with prior
notice to the Borrower in the event of changes in interest rate prescribed by
law or the Monetary Board of the Central Bank of the Philippines, or in the
Banks overall cost of funds. I/We hereby agree that in the event I/we are not
agreeable to the interest rate fixed for any Interest Period, I/we shall have the
option to prepay the loan or credit facility without penalty within ten (10)
calendar days from the Interest Setting Date.83 (Emphasis supplied)
These stipulations must be once more invalidated, as was done in previous
cases. The common denominator in these cases is the lack of agreement of
the parties to the imposed interest rates. For this case, this lack of consent by
the petitioners has been made obvious by the fact that they signed the
promissory notes in blank for the respondent to fill. We find credible the
testimony of Lydia in this respect. Respondent failed to discredit her; in fact,
its witness PNB Kalibo Branch Manager Aspa admitted that interest rates were
fixed solely by its Treasury Department in Manila, which were then simply
communicated to all PNB branches for implementation. If this were the case,
then this would explain why petitioners had to sign the promissory notes in
blank, since the imposable interest rates have yet to be determined and fixed
by respondents Treasury Department in Manila.
Moreover, in Aspas enumeration of the factors that determine the interest
rates PNB fixes such as cost of money, foreign currency values, bank
administrative costs, profitability, and considerations which affect the banking
industry it can be seen that considerations which affect PNBs borrowers are
ignored. A borrowers current financial state, his feedback or opinions, the
nature and purpose of his borrowings, the effect of foreign currency values or
fluctuations on his business or borrowing, etc. these are not factors which
influence the fixing of interest rates to be imposed on him. Clearly,
respondents method of fixing interest rates based on one-sided,
indeterminate, and subjective criteria such as profitability, cost of money, bank
costs, etc. is arbitrary for there is no fixed standard or margin above or below
these considerations.
The stipulation in the promissory notes subjecting the interest rate to review
does not render the imposition by UCPB of interest rates on the obligations of
the spouses Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased
by the LENDER considering among others the prevailing financial and
monetary conditions; or the rate of interest and charges which other banks or
financial institutions charge or offer to charge for similar accommodations;
and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.
It should be pointed out that the authority to review the interest rate was given
[to] UCPB alone as the lender. Moreover, UCPB may apply the considerations
enumerated in this provision as it wishes. As worded in the above provision,
UCPB may give as much weight as it desires to each of the following
considerations: (1) the prevailing financial and monetary condition;(2) the rate
of interest and charges which other banks or financial institutions charge or
offer to charge for similar accommodations; and/or(3) the resulting profitability
to the LENDER (UCPB) after due consideration of all dealings with the
BORROWER (the spouses Beluso). Again, as in the case of the interest rate
provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two
options of UCPB as to the interest to be imposed, as both options violate the
principle of mutuality of contracts.84 (Emphases supplied)
To repeat what has been said in the above-cited cases, any modification in the
contract, such as the interest rates, must be made with the consent of the
contracting parties.1wphi1 The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of the
agreement. In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof
must be mutually agreed upon; otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in
question no longer provide that the parties shall agree upon the interest rate
to be fixed; -instead, they are worded in such a way that the borrower shall
agree to whatever interest rate respondent fixes. In credit agreements covered
by the above-cited cases, it is provided that:
The Bank reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future: Provided, that, the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment
in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in maximum interest rate.85 (Emphasis supplied)
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the
Loan depending on whatever policy the Bank may adopt in the future, including
without limitation, the shifting from the floating interest rate system to the fixed
interest rate system, or vice versa. Where the Bank has imposed on the Loan
interest at a rate per annum, which is equal to the Banks spread over the
current floating interest rate, the Borrower hereby agrees that the Bank may,
without need of notice to the Borrower, increase or decrease its spread over
the floating interest rate at any time depending on whatever policy it may adopt
in the future.86 (Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
each Availment from date of each Availment up to but not including the date
of full payment thereof at the rate per annum which is determined by the Bank
to be prime rate plus applicable spread in effect as of the date of each
Availment.87 (Emphasis supplied)
Plainly, with the present credit agreement, the element of consent or
agreement by the borrower is now completely lacking, which makes
respondents unlawful act all the more reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not apply
to them, for "[e]stoppel cannot be predicated on an illegal act. As between the
parties to a contract, validity cannot be given to it by estoppel if it is prohibited
by law or is against public policy."88
It appears that by its acts, respondent violated the Truth in Lending Act, or
Republic Act No. 3765, which was enacted "to protect x x x citizens from a lack
of awareness of the true cost of credit to the user by using a full disclosure of
such cost with a view of preventing the uninformed use of credit to the
detriment of the national economy."89 The law "gives a detailed enumeration
of the specific information required to be disclosed, among which are the
interest and other charges incident to the extension of credit."90 Section 4
thereof provides that a disclosure statement must be furnished prior to the
consummation of the transaction, thus:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended,
prior to the consummation of the transaction, a clear statement in writing
setting forth, to the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
Under Section 4(6), "finance charge" represents the amount to be paid by the
debtor incident to the extension of credit such as interest or discounts,
collection fees, credit investigation fees, attorneys fees, and other service
charges. The total finance charge represents the difference between (1) the
aggregate consideration (down payment plus installments) on the part of the
debtor, and (2) the sum of the cash price and non-finance charges.91
By requiring the petitioners to sign the credit documents and the promissory
notes in blank, and then unilaterally filling them up later on, respondent violated
the Truth in Lending Act, and was remiss in its disclosure obligations. In one
case, which the Court finds applicable here, it was held:
UCPB further argues that since the spouses Beluso were duly given copies of
the subject promissory notes after their execution, then they were duly notified
of the terms thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides
that the disclosure statement must be furnished prior to the consummation of
the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended,
prior to the consummation of the transaction, a clear statement in writing
setting forth, to the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
The rationale of this provision is to protect users of credit from a lack of
awareness of the true cost thereof, proceeding from the experience that banks
are able to conceal such true cost by hidden charges, uncertainty of interest
rates, deduction of interests from the loaned amount, and the like. The law
thereby seeks to protect debtors by permitting them to fully appreciate the true
cost of their loan, to enable them to give full consent to the contract, and to
properly evaluate their options in arriving at business decisions. Upholding
UCPBs claim of substantial compliance would defeat these purposes of the
Truth in Lending Act. The belated discovery of the true cost of credit will too
often not be able to reverse the ill effects of an already consummated business
decision.
In addition, the promissory notes, the copies of which were presented to the
spouses Beluso after execution, are not sufficient notification from UCPB. As
earlier discussed, the interest rate provision therein does not sufficiently
indicate with particularity the interest rate to be applied to the loan covered by
said promissory notes.92 (Emphases supplied)
However, the one-year period within which an action for violation of the Truth
in Lending Act may be filed evidently prescribed long ago, or sometime in
2001, one year after petitioners received the March 2000 demand letter which
contained the illegal charges.
The fact that petitioners later received several statements of account detailing
its outstanding obligations does not cure respondents breach. To repeat, the
belated discovery of the true cost of credit does not reverse the ill effects of an
already consummated business decision.93
Neither may the statements be considered proposals sent to secure the
petitioners conformity; they were sent after the imposition and application of
the interest rate, and not before. And even if it were to be presumed that these
are proposals or offers, there was no acceptance by petitioners. "No one
receiving a proposal to modify a loan contract, especially regarding interest, is
obliged to answer the proposal."94
Loan and credit arrangements may be made enticing by, or "sweetened" with,
offers of low initial interest rates, but actually accompanied by provisions
written in fine print that allow lenders to later on increase or decrease interest
rates unilaterally, without the consent of the borrower, and depending on
complex and subjective factors. Because they have been lured into these
contracts by initially low interest rates, borrowers get caught and stuck in the
web of subsequent steep rates and penalties, surcharges and the like. Being
ordinary individuals or entities, they naturally dread legal complications and
cannot afford court litigation; they succumb to whatever charges the lenders
impose. At the very least, borrowers should be charged rightly; but then again
this is not possible in a one-sided credit system where the temptation to abuse
is strong and the willingness to rectify is made weak by the eternal desire for
profit.
Given the above supposition, the Court cannot subscribe to respondents
argument that in every repricing of petitioners loan availment, they are given
the right to question the interest rates imposed. The import of respondents line
of reasoning cannot be other than that if one out of every hundred borrowers
questions respondents practice of unilaterally fixing interest rates, then only
the loan arrangement with that lone complaining borrower will enjoy the benefit
of review or re-negotiation; as to the 99 others, the questionable practice will
continue unchecked, and respondent will continue to reap the profits from such
unscrupulous practice. The Court can no more condone a view so perverse.
This is exactly what the Court meant in the immediately preceding cited case
when it said that "the belated discovery of the true cost of credit does not
reverse the ill effects of an already consummated business decision;"95 as to
the 99 borrowers who did not or could not complain, the illegal act shall have
become a fait accompli to their detriment, they have already suffered the
oppressive rates.
Besides, that petitioners are given the right to question the interest rates
imposed is, under the circumstances, irrelevant; we have a situation where the
petitioners do not stand on equal footing with the respondent. It is doubtful that
any borrower who finds himself in petitioners position would dare question
respondents power to arbitrarily modify interest rates at any time. In the
second place, on what basis could any borrower question such power, when
the criteria or standards which are really one-sided, arbitrary and subjective
for the exercise of such power are precisely lost on him?
For the same reasons, the Court cannot validly consider that, as stipulated in
the 18th up to the 26th promissory notes, petitioners are granted the option to
prepay the loan or credit facility without penalty within 10 calendar days from
the Interest Setting Date if they are not agreeable to the interest rate fixed. It
has been shown that the promissory notes are executed and signed in blank,
meaning that by the time petitioners learn of the interest rate, they are already
bound to pay it because they have already pre-signed the note where the rate
is subsequently entered.
Besides, premium may not be placed upon a stipulation in a contract which
grants one party the right to choose whether to continue with or withdraw from
the agreement if it discovers that what the other party has been doing all along
is improper or illegal.
Thus said, respondents arguments relative to the credit documents that
documentary evidence prevails over testimonial evidence; that the credit
documents are in proper form, presumed regular, and endure, against arbitrary
claims by petitioners, experienced business persons that they are, they signed
questionable loan documents whose provisions for interest rates were left
blank, and yet they continued to pay the interests without protest for a number
of years deserve no consideration.
With regard to interest, the Court finds that since the escalation clause is
annulled, the principal amount of the loan is subject to the original or stipulated
rate of interest, and upon maturity, the amount due shall be subject to legal
interest at the rate of 12% per annum. This is the uniform ruling adopted in
previous cases, including those cited here.96 The interests paid by petitioners
should be applied first to the payment of the stipulated or legal and unpaid
interest, as the case may be, and later, to the capital or principal.97
Respondent should then refund the excess amount of interest that it has
illegally imposed upon petitioners; "[t]he amount to be refunded refers to that
paid by petitioners when they had no obligation to do so."98 Thus, the parties
original agreement stipulated the payment of 19.5% interest; however, this rate
was intended to apply only to the first promissory note which expired on
November 21, 1989 and was paid by petitioners; it was not intended to apply
to the whole duration of the loan. Subsequent higher interest rates have been
declared illegal; but because only the rates are found to be improper, the
obligation to pay interest subsists, the same to be fixed at the legal rate of 12%
per annum. However, the 12% interest shall apply only until June 30, 2013.
Starting July1, 2013, the prevailing rate of interest shall be 6% per annum
pursuant to our ruling in Nacar v. Gallery Frames99 and Bangko Sentral ng
Pilipinas-Monetary Board Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any
installment thereon, when due, shall constitute default, and a penalty charge
of 24% per annum based on the defaulted principal amount shall be imposed.
Petitioners claim that this penalty should be excluded from the foreclosure
amount or bid price because the Real Estate Mortgage and the Supplement
thereto did not specifically include it as part of the secured amount.
Respondent justifies its inclusion in the secured amount, saying that the
purpose of the penalty or a penal clause is to ensure the performance of the
obligation and substitute for damages and the payment of interest in the event
of non-compliance.100 Respondent adds that the imposition and collection of
a penalty is a normal banking practice, and the standard rate per annum for all
commercial banks, at the time, was 24%. Its inclusion as part of the secured
amount in the mortgage agreements is thus valid and necessary.
The Court sustains petitioners view that the penalty may not be included as
part of the secured amount. Having found the credit agreements and
promissory notes to be tainted, we must accord the same treatment to the
mortgages. After all, "[a] mortgage and a note secured by it are deemed parts
of one transaction and are construed together."101 Being so tainted and
having the attributes of a contract of adhesion as the principal credit
documents, we must construe the mortgage contracts strictly, and against the
party who drafted it. An examination of the mortgage agreements reveals that
nowhere is it stated that penalties are to be included in the secured amount.
Construing this silence strictly against the respondent, the Court can only
conclude that the parties did not intend to include the penalty allowed under
PN 9707237 as part of the secured amount. Given its resources, respondent
could have if it truly wanted to conveniently prepared and executed an
amended mortgage agreement with the petitioners, thereby including penalties
in the amount to be secured by the encumbered properties. Yet it did not.
With regard to attorneys fees, it was plain error for the CA to have passed
upon the issue since it was not raised by the petitioners in their appeal; it was
the respondent that improperly brought it up in its appellees brief, when it
should have interposed an appeal, since the trial courts Decision on this issue
is adverse to it. It is an elementary principle in the subject of appeals that an
appellee who does not himself appeal cannot obtain from the appellate court
any affirmative relief other than those granted in the decision of the court
below.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal
be permitted to make counter assignments of error in ordinary actions, when
the purpose is merely to defend himself against an appeal in which errors are
alleged to have been committed by the trial court both in the appreciation of
facts and in the interpretation of the law, in order to sustain the judgment in his
favor but not when his purpose is to seek modification or reversal of the
judgment, in which case it is necessary for him to have excepted to and
appealed from the judgment.102
Since petitioners did not raise the issue of reduction of attorneys fees, the CA
possessed no authority to pass upon it at the instance of respondent. The
ruling of the trial court in this respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties to the
respondent as creditor and to the petitioners who are entitled to a refund as a
consequence of overpayment considering that they paid more by way of
interest charges than the 12% per annum103 herein allowed the case should
be remanded to the lower court for proper accounting and computation,
applying the following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and
paid;
2. All subsequent promissory notes (from the 2nd to the 26th promissory notes)
shall carry an interest rate of only 12% per annum.104 Thus, interest payment
made in excess of 12% on the 2nd promissory note shall immediately be
applied to the principal, and the principal shall be accordingly reduced. The
reduced principal shall then be subjected to the 12%105 interest on the 3rd
promissory note, and the excess over 12% interest payment on the 3rd
promissory note shall again be applied to the principal, which shall again be
reduced accordingly. The reduced principal shall then be subjected to the 12%
interest on the 4th promissory note, and the excess over12% interest payment
on the 4th promissory note shall again be applied to the principal, which shall
again be reduced accordingly. And so on and so forth;
3. After the above procedure is carried out, the trial court shall be able to
conclude if petitioners a) still have an OUTSTANDING
BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND ABOVE
THEIR TOTAL OBLIGATION (principal and interest);
4. Such outstanding balance/obligation, if there be any, shall then be subjected
to a 12% per annum interest from October 28, 1997 until January 14, 1999,
which is the date of the auction sale;
5. Such outstanding balance/obligation shall also be charged a 24% per
annum penalty from August 14, 1997 until January 14, 1999. But from this total
penalty, the petitioners previous payment of penalties in the amount of
P202,000.00made on January 27, 1998106 shall be DEDUCTED;
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final
and executory award of 1% attorneys fees shall be ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorneys
fees (6.) shall be DEDUCTED from the bid price of P4,324,172.96. The
penalties (5.) are not included because they are not included in the secured
amount;
8. The difference in (7.) [P4,324,172.96 LESS sum total of the outstanding
balance (3.), interest (4.), and 1% attorneys fees (6.)] shall be DELIVERED
TO THE PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and
T-16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns
out that petitioners made an OVERPAYMENT, the interest (4.), penalties (5.),
and the award of 1% attorneys fees (6.) shall be DEDUCTED from the
overpayment. There is no outstanding balance/obligation precisely because
petitioners have paid beyond the amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.),
and award of 1% attorneys fees (6.), the excess shall be RETURNED to the
petitioners, with legal interest, under the principle of solutio indebiti;107
12. Likewise, if the overpayment exceeds the total amount of interest (4.) and
award of 1% attorneys fees (6.), the trial court shall INVALIDATE THE
EXTRAJUDICIAL FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorneys
fees (6.) exceed petitioners overpayment, then the excess shall be
DEDUCTED from the bid price of P4,324,172.96;
14. The difference in (13.) [P4,324,172.96 LESS sum total of the interest (4.)
and 1% attorneys fees (6.)] shall be DELIVERED TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and
T-16208. The outstanding penalties, if any, shall be collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out that
the petitioners made payments exceeding what they actually owe by way of
principal, interest, and attorneys fees, then the mortgaged properties need not
answer for any outstanding secured amount, because there is not any; quite
the contrary, respondent must refund the excess to petitioners.1wphi1 In
such case, the extrajudicial foreclosure and sale of the properties shall be
declared null and void for obvious lack of basis, the case being one of solutio
indebiti instead. If, on the other hand, it turns out that petitioners overpayments
in interests do not exceed their total obligation, then the respondent may
consolidate its ownership over the properties, since the period for redemption
has expired. Its only obligation will be to return the difference between its bid
price (P4,324,172.96) and petitioners total obligation outstanding except
penalties after applying the latters overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8,
2007 Decision of the Court of Appeals in CA-G.R. CV No. 79650 is ANNULLED
and SET ASIDE. Judgment is hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th
Promissory Notes are DECLARED NULL AND VOID, and such notes shall
instead be subject to interest at the rate of twelve percent (12%) per annum
up to June 30, 2013, and starting July 1, 2013, six percent (6%) per annum
until full satisfaction;
2. The penalty charge imposed in Promissory Note No. 9707237 shall be
EXCLUDED from the amounts secured by the real estate mortgages;
3. The trial courts award of one per cent (1%) attorneys fees is REINSTATED;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of
Kalibo, Aklan for the computation of overpayments made by petitioners
spouses Eduardo and Lydia Silos to respondent Philippine National Bank,
taking into consideration the foregoing dispositions, and applying the
procedure hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a determination as to the
validity of the extrajudicial foreclosure and sale, declaring the same null and
void in case of overpayment and ordering the release and return of Transfer
Certificates of Title Nos. T-14250 and TCT T-16208 to petitioners, or ordering
the delivery to the petitioners of the difference between the bid price and the
total remaining obligation of petitioners, if any;
6. In the meantime, the respondent Philippine National Bank is ENJOINED
from consolidating title to Transfer Certificates of Title Nos. T-14250 and T-
16208 until all the steps in the procedure above set forth have been taken and
applied;
7. The reimbursement of the excess in the bid price of P377,505.99, which
respondent Philippine National Bank is ordered to reimburse petitioners,
should be HELD IN ABEYANCE until the true amount owing to or owed by the
parties as against each other is determined;
8. Considering that this case has been pending for such a long time and that
further proceedings, albeit uncomplicated, are required, the trial court is
ORDERED to proceed with dispatch.
SO ORDERED.
3. YHT Realty Corp. v. CA, G.R. No. 126780, February 17, 2005
[G.R. No. 126780. February 17, 2005]
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM,
petitioners, vs. THE COURT OF APPEALS and MAURICE McLOUGHLIN,
respondents.
DECISION
TINGA, J.:
The primary question of interest before this Court is the only legal issue in the
case: It is whether a hotel may evade liability for the loss of items left with it for
safekeeping by its guests, by having these guests execute written waivers
holding the establishment or its employees free from blame for such loss in
light of Article 2003 of the Civil Code which voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision[1] dated 19
October 1995 of the Court of Appeals which affirmed the Decision[2] dated 16
December 1991 of the Regional Trial Court (RTC), Branch 13, of Manila,
finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez
(Lainez) and Anicia Payam (Payam) jointly and solidarily liable for damages in
an action filed by Maurice McLoughlin (McLoughlin) for the loss of his
American and Australian dollars deposited in the safety deposit box of
Tropicana Copacabana Apartment Hotel, owned and operated by YHT Realty
Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist,
used to stay at Sheraton Hotel during his trips to the Philippines prior to 1984
when he met Tan. Tan befriended McLoughlin by showing him around,
introducing him to important people, accompanying him in visiting
impoverished street children and assisting him in buying gifts for the children
and in distributing the same to charitable institutions for poor children. Tan
convinced McLoughlin to transfer from Sheraton Hotel to Tropicana where
Lainez, Payam and Danilo Lopez were employed. Lopez served as manager
of the hotel while Lainez and Payam had custody of the keys for the safety
deposit boxes of Tropicana. Tan took care of McLoughlins booking at the
Tropicana where he started staying during his trips to the Philippines from
December 1984 to September 1987.[3]
On 30 October 1987, McLoughlin arrived from Australia and registered with
Tropicana. He rented a safety deposit box as it was his practice to rent a safety
deposit box every time he registered at Tropicana in previous trips. As a tourist,
McLoughlin was aware of the procedure observed by Tropicana relative to its
safety deposit boxes. The safety deposit box could only be opened through
the use of two keys, one of which is given to the registered guest, and the other
remaining in the possession of the management of the hotel. When a
registered guest wished to open his safety deposit box, he alone could
personally request the management who then would assign one of its
employees to accompany the guest and assist him in opening the safety
deposit box with the two keys.[4]
McLoughlin allegedly placed the following in his safety deposit box: Fifteen
Thousand US Dollars (US$15,000.00) which he placed in two envelopes, one
envelope containing Ten Thousand US Dollars (US$10,000.00) and the other
envelope Five Thousand US Dollars (US$5,000.00); Ten Thousand Australian
Dollars (AUS$10,000.00) which he also placed in another envelope; two (2)
other envelopes containing letters and credit cards; two (2) bankbooks; and a
checkbook, arranged side by side inside the safety deposit box.[5]
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin
opened his safety deposit box with his key and with the key of the management
and took therefrom the envelope containing Five Thousand US Dollars
(US$5,000.00), the envelope containing Ten Thousand Australian Dollars
(AUS$10,000.00), his passports and his credit cards.[6] McLoughlin left the
other items in the box as he did not check out of his room at the Tropicana
during his short visit to Hongkong. When he arrived in Hongkong, he opened
the envelope which contained Five Thousand US Dollars (US$5,000.00) and
discovered upon counting that only Three Thousand US Dollars
(US$3,000.00) were enclosed therein.[7] Since he had no idea whether
somebody else had tampered with his safety deposit box, he thought that it
was just a result of bad accounting since he did not spend anything from that
envelope.[8]
After returning to Manila, he checked out of Tropicana on 18 December 1987
and left for Australia. When he arrived in Australia, he discovered that the
envelope with Ten Thousand US Dollars (US$10,000.00) was short of Five
Thousand US Dollars (US$5,000). He also noticed that the jewelry which he
bought in Hongkong and stored in the safety deposit box upon his return to
Tropicana was likewise missing, except for a diamond bracelet.[9]
When McLoughlin came back to the Philippines on 4 April 1988, he asked
Lainez if some money and/or jewelry which he had lost were found and
returned to her or to the management. However, Lainez told him that no one
in the hotel found such things and none were turned over to the management.
He again registered at Tropicana and rented a safety deposit box. He placed
therein one (1) envelope containing Fifteen Thousand US Dollars
(US$15,000.00), another envelope containing Ten Thousand Australian
Dollars (AUS$10,000.00) and other envelopes containing his traveling
papers/documents. On 16 April 1988, McLoughlin requested Lainez and
Payam to open his safety deposit box. He noticed that in the envelope
containing Fifteen Thousand US Dollars (US$15,000.00), Two Thousand US
Dollars (US$2,000.00) were missing and in the envelope previously containing
Ten Thousand Australian Dollars (AUS$10,000.00), Four Thousand Five
Hundred Australian Dollars (AUS$4,500.00) were missing.[10]
When McLoughlin discovered the loss, he immediately confronted Lainez and
Payam who admitted that Tan opened the safety deposit box with the key
assigned to him.[11] McLoughlin went up to his room where Tan was staying
and confronted her. Tan admitted that she had stolen McLoughlins key and
was able to open the safety deposit box with the assistance of Lopez, Payam
and Lainez.[12] Lopez also told McLoughlin that Tan stole the key assigned to
McLoughlin while the latter was asleep.[13]
McLoughlin requested the management for an investigation of the incident.
Lopez got in touch with Tan and arranged for a meeting with the police and
McLoughlin. When the police did not arrive, Lopez and Tan went to the room
of McLoughlin at Tropicana and thereat, Lopez wrote on a piece of paper a
promissory note dated 21 April 1988. The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and
US$2,000.00 or its equivalent in Philippine currency on or before May 5,
1988.[14]
Lopez requested Tan to sign the promissory note which the latter did and
Lopez also signed as a witness. Despite the execution of promissory note by
Tan, McLoughlin insisted that it must be the hotel who must assume
responsibility for the loss he suffered. However, Lopez refused to accept the
responsibility relying on the conditions for renting the safety deposit box
entitled Undertaking For the Use Of Safety Deposit Box,[15] specifically
paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA APARTMENT HOTEL
from any liability arising from any loss in the contents and/or use of the said
deposit box for any cause whatsoever, including but not limited to the
presentation or use thereof by any other person should the key be lost;
...
4. To return the key and execute the RELEASE in favor of TROPICANA
APARTMENT HOTEL upon giving up the use of the box.[16]
On 17 May 1988, McLoughlin went back to Australia and he consulted his
lawyers as to the validity of the abovementioned stipulations. They opined that
the stipulations are void for being violative of universal hotel practices and
customs. His lawyers prepared a letter dated 30 May 1988 which was signed
by McLoughlin and sent to President Corazon Aquino.[17] The Office of the
President referred the letter to the Department of Justice (DOJ) which
forwarded the same to the Western Police District (WPD).[18]
After receiving a copy of the indorsement in Australia, McLoughlin came to the
Philippines and registered again as a hotel guest of Tropicana. McLoughlin
went to Malacaang to follow up on his letter but he was instructed to go to the
DOJ. The DOJ directed him to proceed to the WPD for documentation. But
McLoughlin went back to Australia as he had an urgent business matter to
attend to.
For several times, McLoughlin left for Australia to attend to his business and
came back to the Philippines to follow up on his letter to the President but he
failed to obtain any concrete assistance.[19]
McLoughlin left again for Australia and upon his return to the Philippines on 25
August 1989 to pursue his claims against petitioners, the WPD conducted an
investigation which resulted in the preparation of an affidavit which was
forwarded to the Manila City Fiscals Office. Said affidavit became the basis of
preliminary investigation. However, McLoughlin left again for Australia without
receiving the notice of the hearing on 24 November 1989. Thus, the case at
the Fiscals Office was dismissed for failure to prosecute. Mcloughlin requested
the reinstatement of the criminal charge for theft. In the meantime, McLoughlin
and his lawyers wrote letters of demand to those having responsibility to pay
the damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at
Malate, Manila. Meetings were held between McLoughlin and his lawyer which
resulted to the filing of a complaint for damages on 3 December 1990 against
YHT Realty Corporation, Lopez, Lainez, Payam and Tan (defendants) for the
loss of McLoughlins money which was discovered on 16 April 1988. After filing
the complaint, McLoughlin left again for Australia to attend to an urgent
business matter. Tan and Lopez, however, were not served with summons,
and trial proceeded with only Lainez, Payam and YHT Realty Corporation as
defendants.
After defendants had filed their Pre-Trial Brief admitting that they had
previously allowed and assisted Tan to open the safety deposit box,
McLoughlin filed an Amended/Supplemental Complaint[20] dated 10 June
1991 which included another incident of loss of money and jewelry in the safety
deposit box rented by McLoughlin in the same hotel which took place prior to
16 April 1988.[21] The trial court admitted the Amended/Supplemental
Complaint.
During the trial of the case, McLoughlin had been in and out of the country to
attend to urgent business in Australia, and while staying in the Philippines to
attend the hearing, he incurred expenses for hotel bills, airfare and other
transportation expenses, long distance calls to Australia, Meralco power
expenses, and expenses for food and maintenance, among others.[22]
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the
dispositive portion of which reads:
WHEREFORE, above premises considered, judgment is hereby rendered by
this Court in favor of plaintiff and against the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the sum of
US$11,400.00 or its equivalent in Philippine Currency of P342,000.00, more
or less, and the sum of AUS$4,500.00 or its equivalent in Philippine Currency
of P99,000.00, or a total of P441,000.00, more or less, with 12% interest from
April 16 1988 until said amount has been paid to plaintiff (Item 1, Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff the sum of
P3,674,238.00 as actual and consequential damages arising from the loss of
his Australian and American dollars and jewelries complained against and in
prosecuting his claim and rights administratively and judicially (Items II, III, IV,
V, VI, VII, VIII, and IX, Exh. CC);
3. Ordering defendants, jointly and severally, to pay plaintiff the sum of
P500,000.00 as moral damages (Item X, Exh. CC);
4. Ordering defendants, jointly and severally, to pay plaintiff the sum of
P350,000.00 as exemplary damages (Item XI, Exh. CC);
5. And ordering defendants, jointly and severally, to pay litigation expenses in
the sum of P200,000.00 (Item XII, Exh. CC);
6. Ordering defendants, jointly and severally, to pay plaintiff the sum of
P200,000.00 as attorneys fees, and a fee of P3,000.00 for every appearance;
and
7. Plus costs of suit.
SO ORDERED.[23]
The trial court found that McLoughlins allegations as to the fact of loss and as
to the amount of money he lost were sufficiently shown by his direct and
straightforward manner of testifying in court and found him to be credible and
worthy of belief as it was established that McLoughlins money, kept in
Tropicanas safety deposit box, was taken by Tan without McLoughlins
consent. The taking was effected through the use of the master key which was
in the possession of the management. Payam and Lainez allowed Tan to use
the master key without authority from McLoughlin. The trial court added that if
McLoughlin had not lost his dollars, he would not have gone through the
trouble and personal inconvenience of seeking aid and assistance from the
Office of the President, DOJ, police authorities and the City Fiscals Office in
his desire to recover his losses from the hotel management and Tan.[24]
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry
worth approximately One Thousand Two Hundred US Dollars (US$1,200.00)
which allegedly occurred during his stay at Tropicana previous to 4 April 1988,
no claim was made by McLoughlin for such losses in his complaint dated 21
November 1990 because he was not sure how they were lost and who the
responsible persons were. But considering the admission of the defendants in
their pre-trial brief that on three previous occasions they allowed Tan to open
the box, the trial court opined that it was logical and reasonable to presume
that his personal assets consisting of Seven Thousand US Dollars
(US$7,000.00) and jewelry were taken by Tan from the safety deposit box
without McLoughlins consent through the cooperation of Payam and
Lainez.[25]
The trial court also found that defendants acted with gross negligence in the
performance and exercise of their duties and obligations as innkeepers and
were therefore liable to answer for the losses incurred by McLoughlin.[26]
Moreover, the trial court ruled that paragraphs (2) and (4) of the Undertaking
For The Use Of Safety Deposit Box are not valid for being contrary to the
express mandate of Article 2003 of the New Civil Code and against public
policy.[27] Thus, there being fraud or wanton conduct on the part of
defendants, they should be responsible for all damages which may be
attributed to the non-performance of their contractual obligations.[28]
The Court of Appeals affirmed the disquisitions made by the lower court except
as to the amount of damages awarded. The decretal text of the appellate
courts decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby
AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the plaintiff/appellee
the following amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00 and
AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares from Sidney [sic]
to Manila and back for a total of eleven (11) trips;
3) One-half of P336,207.05 or P168,103.52 representing payment to
Tropicana Apartment Hotel;
4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon
Tower;
5) One-half of P179,863.20 or P89,931.60 for the taxi xxx transportation from
the residence to Sidney [sic] Airport and from MIA to the hotel here in Manila,
for the eleven (11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
7) One-half of P356,400.00 or P178,000.00 representing expenses for food
and maintenance;
8) P50,000.00 for moral damages;
9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorneys fees.
With costs.
SO ORDERED.[29]
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court
in this appeal by certiorari.
Petitioners submit for resolution by this Court the following issues: (a) whether
the appellate courts conclusion on the alleged prior existence and subsequent
loss of the subject money and jewelry is supported by the evidence on record;
(b) whether the finding of gross negligence on the part of petitioners in the
performance of their duties as innkeepers is supported by the evidence on
record; (c) whether the Undertaking For The Use of Safety Deposit Box
admittedly executed by private respondent is null and void; and (d) whether
the damages awarded to private respondent, as well as the amounts thereof,
are proper under the circumstances.[30]
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions
of law and any peripheral factual question addressed to this Court is beyond
the bounds of this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the fact
of prior existence of the dollars and the jewelry which had been lost while
deposited in the safety deposit boxes of Tropicana, the basis of the trial court
and the appellate court being the sole testimony of McLoughlin as to the
contents thereof. Likewise, petitioners dispute the finding of gross negligence
on their part as not supported by the evidence on record.
We are not persuaded. We adhere to the findings of the trial court as affirmed
by the appellate court that the fact of loss was established by the credible
testimony in open court by McLoughlin. Such findings are factual and therefore
beyond the ambit of the present petition.
The trial court had the occasion to observe the demeanor of McLoughlin while
testifying which reflected the veracity of the facts testified to by him. On this
score, we give full credence to the appreciation of testimonial evidence by the
trial court especially if what is at issue is the credibility of the witness. The oft-
repeated principle is that where the credibility of a witness is an issue, the
established rule is that great respect is accorded to the evaluation of the
credibility of witnesses by the trial court.[31] The trial court is in the best
position to assess the credibility of witnesses and their testimonies because of
its unique opportunity to observe the witnesses firsthand and note their
demeanor, conduct and attitude under grilling examination.[32]
We are also not impressed by petitioners argument that the finding of gross
negligence by the lower court as affirmed by the appellate court is not
supported by evidence. The evidence reveals that two keys are required to
open the safety deposit boxes of Tropicana. One key is assigned to the guest
while the other remains in the possession of the management. If the guest
desires to open his safety deposit box, he must request the management for
the other key to open the same. In other words, the guest alone cannot open
the safety deposit box without the assistance of the management or its
employees. With more reason that access to the safety deposit box should be
denied if the one requesting for the opening of the safety deposit box is a
stranger. Thus, in case of loss of any item deposited in the safety deposit box,
it is inevitable to conclude that the management had at least a hand in the
consummation of the taking, unless the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of
Tropicana, had custody of the master key of the management when the loss
took place. In fact, they even admitted that they assisted Tan on three separate
occasions in opening McLoughlins safety deposit box.[33] This only proves
that Tropicana had prior knowledge that a person aside from the registered
guest had access to the safety deposit box. Yet the management failed to
notify McLoughlin of the incident and waited for him to discover the taking
before it disclosed the matter to him. Therefore, Tropicana should be held
responsible for the damage suffered by McLoughlin by reason of the
negligence of its employees.
The management should have guarded against the occurrence of this incident
considering that Payam admitted in open court that she assisted Tan three
times in opening the safety deposit box of McLoughlin at around 6:30 A.M. to
7:30 A.M. while the latter was still asleep.[34] In light of the circumstances
surrounding this case, it is undeniable that without the acquiescence of the
employees of Tropicana to the opening of the safety deposit box, the loss of
McLoughlins money could and should have been avoided.
The management contends, however, that McLoughlin, by his act, made its
employees believe that Tan was his spouse for she was always with him most
of the time. The evidence on record, however, is bereft of any showing that
McLoughlin introduced Tan to the management as his wife. Such an inference
from the act of McLoughlin will not exculpate the petitioners from liability in the
absence of any showing that he made the management believe that Tan was
his wife or was duly authorized to have access to the safety deposit box. Mere
close companionship and intimacy are not enough to warrant such conclusion
considering that what is involved in the instant case is the very safety of
McLoughlins deposit. If only petitioners exercised due diligence in taking care
of McLoughlins safety deposit box, they should have confronted him as to his
relationship with Tan considering that the latter had been observed opening
McLoughlins safety deposit box a number of times at the early hours of the
morning. Tans acts should have prompted the management to investigate her
relationship with McLoughlin. Then, petitioners would have exercised due
diligence required of them. Failure to do so warrants the conclusion that the
management had been remiss in complying with the obligations imposed upon
hotel-keepers under the law.
Under Article 1170 of the New Civil Code, those who, in the performance of
their obligations, are guilty of negligence, are liable for damages. As to who
shall bear the burden of paying damages, Article 2180, paragraph (4) of the
same Code provides that the owners and managers of an establishment or
enterprise are likewise responsible for damages caused by their employees in
the service of the branches in which the latter are employed or on the occasion
of their functions. Also, this Court has ruled that if an employee is found
negligent, it is presumed that the employer was negligent in selecting and/or
supervising him for it is hard for the victim to prove the negligence of such
employer.[35] Thus, given the fact that the loss of McLoughlins money was
consummated through the negligence of Tropicanas employees in allowing
Tan to open the safety deposit box without the guests consent, both the
assisting employees and YHT Realty Corporation itself, as owner and operator
of Tropicana, should be held solidarily liable pursuant to Article 2193.[36]
The issue of whether the Undertaking For The Use of Safety Deposit Box
executed by McLoughlin is tainted with nullity presents a legal question
appropriate for resolution in this petition. Notably, both the trial court and the
appellate court found the same to be null and void. We find no reason to
reverse their common conclusion. Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting
notices to the effect that he is not liable for the articles brought by the guest.
Any stipulation between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in Articles 1998 to 2001[37] is
suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public
policy precisely to apply to situations such as that presented in this case. The
hotel business like the common carriers business is imbued with public
interest. Catering to the public, hotelkeepers are bound to provide not only
lodging for hotel guests and security to their persons and belongings. The twin
duty constitutes the essence of the business. The law in turn does not allow
such duty to the public to be negated or diluted by any contrary stipulation in
so-called undertakings that ordinarily appear in prepared forms imposed by
hotel keepers on guests for their signature.
In an early case,[38] the Court of Appeals through its then Presiding Justice
(later Associate Justice of the Court) Jose P. Bengzon, ruled that to hold
hotelkeepers or innkeeper liable for the effects of their guests, it is not
necessary that they be actually delivered to the innkeepers or their employees.
It is enough that such effects are within the hotel or inn.[39] With greater reason
should the liability of the hotelkeeper be enforced when the missing items are
taken without the guests knowledge and consent from a safety deposit box
provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the undertaking manifestly contravene Article 2003
of the New Civil Code for they allow Tropicana to be released from liability
arising from any loss in the contents and/or use of the safety deposit box for
any cause whatsoever.[40] Evidently, the undertaking was intended to bar any
claim against Tropicana for any loss of the contents of the safety deposit box
whether or not negligence was incurred by Tropicana or its employees. The
New Civil Code is explicit that the responsibility of the hotel-keeper shall
extend to loss of, or injury to, the personal property of the guests even if caused
by servants or employees of the keepers of hotels or inns as well as by
strangers, except as it may proceed from any force majeure.[41] It is the loss
through force majeure that may spare the hotel-keeper from liability. In the
case at bar, there is no showing that the act of the thief or robber was done
with the use of arms or through an irresistible force to qualify the same as force
majeure.[42]
Petitioners likewise anchor their defense on Article 2002[43] which exempts
the hotel-keeper from liability if the loss is due to the acts of his guest, his
family, or visitors. Even a cursory reading of the provision would lead us to
reject petitioners contention. The justification they raise would render nugatory
the public interest sought to be protected by the provision. What if the
negligence of the employer or its employees facilitated the consummation of a
crime committed by the registered guests relatives or visitor? Should the law
exculpate the hotel from liability since the loss was due to the act of the visitor
of the registered guest of the hotel? Hence, this provision presupposes that
the hotel-keeper is not guilty of concurrent negligence or has not contributed
in any degree to the occurrence of the loss. A depositary is not responsible for
the loss of goods by theft, unless his actionable negligence contributes to the
loss.[44]
In the case at bar, the responsibility of securing the safety deposit box was
shared not only by the guest himself but also by the management since two
keys are necessary to open the safety deposit box. Without the assistance of
hotel employees, the loss would not have occurred. Thus, Tropicana was guilty
of concurrent negligence in allowing Tan, who was not the registered guest, to
open the safety deposit box of McLoughlin, even assuming that the latter was
also guilty of negligence in allowing another person to use his key. To rule
otherwise would result in undermining the safety of the safety deposit boxes in
hotels for the management will be given imprimatur to allow any person, under
the pretense of being a family member or a visitor of the guest, to have access
to the safety deposit box without fear of any liability that will attach thereafter
in case such person turns out to be a complete stranger. This will allow the
hotel to evade responsibility for any liability incurred by its employees in
conspiracy with the guests relatives and visitors.
Petitioners contend that McLoughlins case was mounted on the theory of
contract, but the trial court and the appellate court upheld the grant of the
claims of the latter on the basis of tort.[45] There is nothing anomalous in how
the lower courts decided the controversy for this Court has pronounced a
jurisprudential rule that tort liability can exist even if there are already
contractual relations. The act that breaks the contract may also be tort.[46]
As to damages awarded to McLoughlin, we see no reason to modify the
amounts awarded by the appellate court for the same were based on facts and
law. It is within the province of lower courts to settle factual issues such as the
proper amount of damages awarded and such finding is binding upon this
Court especially if sufficiently proven by evidence and not unconscionable or
excessive. Thus, the appellate court correctly awarded McLoughlin Two
Thousand US Dollars (US$2,000.00) and Four Thousand Five Hundred
Australian dollars (AUS$4,500.00) or their peso equivalent at the time of
payment,[47] being the amounts duly proven by evidence.[48] The alleged loss
that took place prior to 16 April 1988 was not considered since the amounts
alleged to have been taken were not sufficiently established by evidence. The
appellate court also correctly awarded the sum of P308,880.80, representing
the peso value for the air fares from Sydney to Manila and back for a total of
eleven (11) trips;[49] one-half of P336,207.05 or P168,103.52 representing (8) P50,000.00 for moral damages;
payment to Tropicana;[50] one-half of P152,683.57 or P76,341.785
representing payment to Echelon Tower;[51] one-half of P179,863.20 or (9) P10,000.00 as exemplary damages; and
P89,931.60 for the taxi or transportation expenses from McLoughlins
residence to Sydney Airport and from MIA to the hotel here in Manila, for the (10) P200,000 representing attorneys fees.
eleven (11) trips;[52] one-half of P7,801.94 or P3,900.97 representing Meralco
power expenses;[53] one-half of P356,400.00 or P178,000.00 representing With costs.
expenses for food and maintenance.[54]
SO ORDERED.
The amount of P50,000.00 for moral damages is reasonable. Although trial
courts are given discretion to determine the amount of moral damages, the 4. Durban Apartments Corp. v. Pioneer Ins. & Surety Corp., G.R. No.
appellate court may modify or change the amount awarded when it is palpably 179419, January 12, 2011
and scandalously excessive. Moral damages are not intended to enrich a
complainant at the expense of a defendant. They are awarded only to enable SECOND DIVISION
the injured party to obtain means, diversion or amusements that will serve to
alleviate the moral suffering he has undergone, by reason of defendants DURBAN APARTMENTS CORPORATION, doing business under the name
culpable action.[55] and style of City Garden Hotel,
Petitioner,
The awards of P10,000.00 as exemplary damages and P200,000.00
representing attorneys fees are likewise sustained.

WHEREFORE, foregoing premises considered, the Decision of the Court of

Appeals dated 19 October 1995 is hereby AFFIRMED. Petitioners are - versus -
directed, jointly and severally, to pay private respondent the following amounts:

(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of

payment;
PIONEER INSURANCE AND SURETY CORPORATION,
(2) P308,880.80, representing the peso value for the air fares from Sydney to Respondent.
Manila and back for a total of eleven (11) trips; G.R. No. 179419

(3) One-half of P336,207.05 or P168,103.52 representing payment to Present:

Tropicana Copacabana Apartment Hotel;
CARPIO, J.,
(4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Chairperson,
Tower; NACHURA,
PERALTA,
(5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation ABAD, and
expense from McLoughlins residence to Sydney Airport and from MIA to the MENDOZA, JJ.
hotel here in Manila, for the eleven (11) trips;

(6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;

Promulgated:
(7) One-half of P356,400.00 or P178,200.00 representing expenses for food
and maintenance; January 12, 2011
x------------------------------------------------------------------------------------x

DECISION
NACHURA, J.:
For review is the Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No.
86869, which affirmed the decision[2] of the Regional Trial Court (RTC),
Branch 66, Makati City, in Civil Case No. 03-857, holding petitioner Durban
Apartments Corporation solely liable to respondent Pioneer Insurance and
Surety Corporation for the loss of Jeffrey Sees (Sees) vehicle.
The facts, as found by the CA, are simple.
On July 22, 2003, [respondent] Pioneer Insurance and Surety Corporation x x
x, by right of subrogation, filed [with the RTC of Makati City] a Complaint for
Recovery of Damages against [petitioner] Durban Apartments Corporation,
doing business under the name and style of City Garden Hotel, and [defendant
before the RTC] Vicente Justimbaste x x x. [Respondent averred] that: it is the
insurer for loss and damage of Jeffrey S. Sees [the insureds] 2001 Suzuki
Grand Vitara x x x with Plate No. XBH-510 under Policy No. MC-CV-HO-01-
0003846-00-D in the amount of P1,175,000.00; on April 30, 2002, See arrived
and checked in at the City Garden Hotel in Makati corner Kalayaan Avenues,
Makati City before midnight, and its parking attendant, defendant x x x
Justimbaste got the key to said Vitara from See to park it[. O]n May 1, 2002,
at about 1:00 oclock in the morning, See was awakened in his room by [a]
telephone call from the Hotel Chief Security Officer who informed him that his
Vitara was carnapped while it was parked unattended at the parking area of
Equitable PCI Bank along Makati Avenue between the hours of 12:00 [a.m.]
and 1:00 [a.m.]; See went to see the Hotel Chief Security Officer, thereafter
reported the incident to the Operations Division of the Makati City Police Anti-
Carnapping Unit, and a flash alarm was issued; the Makati City Police Anti-
Carnapping Unit investigated Hotel Security Officer, Ernesto T. Horlador, Jr. x
x x and defendant x x x Justimbaste; See gave his Sinumpaang Salaysay to
the police investigator, and filed a Complaint Sheet with the PNP Traffic
Management Group in Camp Crame, Quezon City; the Vitara has not yet been
recovered since July 23, 2002 as evidenced by a Certification of Non-
Recovery issued by the PNP TMG; it paid the P1,163,250.00 money claim of
See and mortgagee ABN AMRO Savings Bank, Inc. as indemnity for the loss
of the Vitara; the Vitara was lost due to the negligence of [petitioner] Durban
Apartments and [defendant] Justimbaste because it was discovered during the
investigation that this was the second time that a similar incident of carnapping
happened in the valet parking service of [petitioner] Durban Apartments and
no necessary precautions were taken to prevent its repetition; [petitioner]
Durban Apartments was wanting in due diligence in the selection and
supervision of its employees particularly defendant x x x Justimbaste; and
defendant x x x Justimbaste and [petitioner] Durban Apartments failed and
refused to pay its valid, just, and lawful claim despite written demands.
Upon service of Summons, [petitioner] Durban Apartments and [defendant]
Justimbaste filed their Answer with Compulsory Counterclaim alleging that:
See did not check in at its hotel, on the contrary, he was a guest of a certain
Ching Montero x x x; defendant x x x Justimbaste did not get the ignition key
of Sees Vitara, on the contrary, it was See who requested a parking attendant
to park the Vitara at any available parking space, and it was parked at the
Equitable Bank parking area, which was within Sees view, while he and
Montero were waiting in front of the hotel; they made a written denial of the
demand of [respondent] Pioneer Insurance for want of legal basis; valet
parking services are provided by the hotel for the convenience of its customers
looking for a parking space near the hotel premises; it is a special privilege that
it gave to Montero and See; it does not include responsibility for any losses or
damages to motor vehicles and its accessories in the parking area; and the
same holds true even if it was See himself who parked his Vitara within the
premises of the hotel as evidenced by the valet parking customers claim stub
issued to him; the carnapper was able to open the Vitara without using the key
given earlier to the parking attendant and subsequently turned over to See
after the Vitara was stolen; defendant x x x Justimbaste saw the Vitara
speeding away from the place where it was parked; he tried to run after it, and
blocked its possible path but to no avail; and See was duly and immediately
informed of the carnapping of his Vitara; the matter was reported to the nearest
police precinct; and defendant x x x Justimbaste, and Horlador submitted
themselves to police investigation.
During the pre-trial conference on November 28, 2003, counsel for
[respondent] Pioneer Insurance was present. Atty. Monina Lee x x x, counsel
of record of [petitioner] Durban Apartments and Justimbaste was absent,
instead, a certain Atty. Nestor Mejia appeared for [petitioner] Durban
Apartments and Justimbaste, but did not file their pre-trial brief.
On November 5, 2004, the lower court granted the motion of [respondent]
Pioneer Insurance, despite the opposition of [petitioner] Durban Apartments
and Justimbaste, and allowed [respondent] Pioneer Insurance to present its
evidence ex parte before the Branch Clerk of Court.
See testified that: on April 30, 2002, at about 11:30 in the evening, he drove
his Vitara and stopped in front of City Garden Hotel in Makati Avenue, Makati
City; a parking attendant, whom he had later known to be defendant x x x
Justimbaste, approached and asked for his ignition key, told him that the latter
would park the Vitara for him in front of the hotel, and issued him a valet
parking customers claim stub; he and Montero, thereafter, checked in at the
said hotel; on May 1, 2002, at around 1:00 in the morning, the Hotel Security
Officer whom he later knew to be Horlador called his attention to the fact that
his Vitara was carnapped while it was parked at the parking lot of Equitable
PCI Bank which is in front of the hotel; his Vitara was insured with [respondent]
Pioneer Insurance; he together with Horlador and defendant x x x Justimbaste
went to Precinct 19 of the Makati City Police to report the carnapping incident,
and a police officer came accompanied them to the Anti-Carnapping Unit of
the said station for investigation, taking of their sworn statements, and flashing
of a voice alarm; he likewise reported the said incident in PNP TMG in Camp
Crame where another alarm was issued; he filed his claim with [respondent]
Pioneer Insurance, and a representative of the latter, who is also an adjuster
of Vesper Insurance Adjusters-Appraisers [Vesper], investigated the incident;
and [respondent] Pioneer Insurance required him to sign a Release of Claim
and Subrogation Receipt, and finally paid him the sum of P1,163,250.00 for
his claim.
Ricardo F. Red testified that: he is a claims evaluator of [petitioner] Pioneer
Insurance tasked, among others, with the receipt of claims and documents
from the insured, investigation of the said claim, inspection of damages, taking
of pictures of insured unit, and monitoring of the processing of the claim until
its payment; he monitored the processing of Sees claim when the latter
reported the incident to [respondent] Pioneer Insurance; [respondent] Pioneer
Insurance assigned the case to Vesper who verified Sees report, conducted
an investigation, obtained the necessary documents for the processing of the
claim, and tendered a settlement check to See; they evaluated the case upon
receipt of the subrogation documents and the adjusters report, and eventually
recommended for its settlement for the sum of P1,163,250.00 which was
accepted by See; the matter was referred and forwarded to their counsel, R.B.
Sarajan & Associates, who prepared and sent demand letters to [petitioner]
Durban Apartments and [defendant] Justimbaste, who did not pay
[respondent] Pioneer Insurance notwithstanding their receipt of the demand
letters; and the services of R.B. Sarajan & Associates were engaged, for
P100,000.00 as attorneys fees plus P3,000.00 per court appearance, to
prosecute the claims of [respondent] Pioneer Insurance against [petitioner]
Durban Apartments and Justimbaste before the lower court.
Ferdinand Cacnio testified that: he is an adjuster of Vesper; [respondent]
Pioneer Insurance assigned to Vesper the investigation of Sees case, and he
was the one actually assigned to investigate it; he conducted his investigation
of the matter by interviewing See, going to the City Garden Hotel, required
subrogation documents from See, and verified the authenticity of the same; he
learned that it is the standard procedure of the said hotel as regards its valet
parking service to assist their guests as soon as they get to the lobby entrance,
park the cars for their guests, and place the ignition keys in their safety key
box; considering that the hotel has only twelve (12) available parking slots, it
has an agreement with Equitable PCI Bank permitting the hotel to use the
parking space of the bank at night; he also learned that a Hyundai Starex van
was carnapped at the said place barely a month before the occurrence of this
incident because Liberty Insurance assigned the said incident to Vespers, and
Horlador and defendant x x x Justimbaste admitted the occurrence of the same
in their sworn statements before the Anti-Carnapping Unit of the Makati City
Police; upon verification with the PNP TMG [Unit] in Camp Crame, he learned
that Sees Vitara has not yet been recovered; upon evaluation, Vesper
recommended to [respondent] Pioneer Insurance to settle Sees claim for
P1,045,750.00; See contested the recommendation of Vesper by reasoning
out that the 10% depreciation should not be applied in this case considering
the fact that the Vitara was used for barely eight (8) months prior to its loss;
and [respondent] Pioneer Insurance acceded to Sees contention, tendered the
sum of P1,163,250.00 as settlement, the former accepted it, and signed a
release of claim and subrogation receipt.
The lower court denied the Motion to Admit Pre-Trial Brief and Motion for
Reconsideration field by [petitioner] Durban Apartments and Justimbaste in its
Orders dated May 4, 2005 and October 20, 2005, respectively, for being
devoid of merit.[3]
Thereafter, on January 27, 2006, the RTC rendered a decision, disposing, as
follows:
WHEREFORE, judgment is hereby rendered ordering [petitioner Durban
Apartments Corporation] to pay [respondent Pioneer Insurance and Surety
Corporation] the sum of P1,163,250.00 with legal interest thereon from July
22, 2003 until the obligation is fully paid and attorneys fees and litigation
expenses amounting to P120,000.00.
SO ORDERED.[4]
On appeal, the appellate court affirmed the decision of the trial court, viz.:
WHEREFORE, premises considered, the Decision dated January 27, 2006 of
the RTC, Branch 66, Makati City in Civil Case No. 03-857 is hereby AFFIRMED
insofar as it holds [petitioner] Durban Apartments Corporation solely liable to
[respondent] Pioneer Insurance and Surety Corporation for the loss of Jeffrey
Sees Suzuki Grand Vitara.
SO ORDERED.[5]
Hence, this recourse by petitioner.
The issues for our resolution are:
1. Whether the lower courts erred in declaring petitioner as in default for failure
to appear at the pre-trial conference and to file a pre-trial brief;
2. Corollary thereto, whether the trial court correctly allowed respondent to
present evidence ex-parte;
3. Whether petitioner is liable to respondent for attorneys fees in the amount
of P120,000.00; and
4. Ultimately, whether petitioner is liable to respondent for the loss of Sees
vehicle.
The petition must fail.
We are in complete accord with the common ruling of the lower courts that
petitioner was in default for failure to appear at the pre-trial conference and to
file a pre-trial brief, and thus, correctly allowed respondent to present evidence
ex-parte. Likewise, the lower courts did not err in holding petitioner liable for
the loss of Sees vehicle.
Well-entrenched in jurisprudence is the rule that factual findings of the trial
court, especially when affirmed by the appellate court, are accorded the
highest degree of respect and are considered conclusive between the
parties.[6] A review of such findings by this Court is not warranted except upon
a showing of highly meritorious circumstances, such as: (1) when the findings
of a trial court are grounded entirely on speculation, surmises, or conjectures;
(2) when a lower courts inference from its factual findings is manifestly
mistaken, absurd, or impossible; (3) when there is grave abuse of discretion in
the appreciation of facts; (4) when the findings of the appellate court go beyond
the issues of the case, or fail to notice certain relevant facts which, if properly
considered, will justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings of fact are conclusions without
mention of the specific evidence on which they are based, are premised on the
absence of evidence, or are contradicted by evidence on record.[7] None of
the foregoing exceptions permitting a reversal of the assailed decision exists
in this instance.
Petitioner urges us, however, that strong [and] compelling reason[s] such as
the prevention of miscarriage of justice warrant a suspension of the rules and
excuse its and its counsels non-appearance during the pre-trial conference
and their failure to file a pre-trial brief.
We are not persuaded.
Rule 18 of the Rules of Court leaves no room for equivocation; appearance of
parties and their counsel at the pre-trial conference, along with the filing of a
corresponding pre-trial brief, is mandatory, nay, their duty. Thus, Section 4 and
Section 6 thereof provide:
SEC. 4. Appearance of parties.It shall be the duty of the parties and their
counsel to appear at the pre-trial. The non-appearance of a party may be
excused only if a valid cause is shown therefor or if a representative shall
appear in his behalf fully authorized in writing to enter into an amicable
settlement, to submit to alternative modes of dispute resolution, and to enter
into stipulations or admissions of facts and documents.
SEC. 6. Pre-trial brief.The parties shall file with the court and serve on the
adverse party, in such manner as shall ensure their receipt thereof at least
three (3) days before the date of the pre-trial, their respective pre-trial briefs
which shall contain, among others:
xxxx
Failure to file the pre-trial brief shall have the same effect as failure to appear
at the pre-trial.
Contrary to the foregoing rules, petitioner and its counsel of record were not
present at the scheduled pre-trial conference. Worse, they did not file a pre-
trial brief. Their non-appearance cannot be excused as Section 4, in relation
to Section 6, allows only two exceptions: (1) a valid excuse; and (2)
appearance of a representative on behalf of a party who is fully authorized in
writing to enter into an amicable settlement, to submit to alternative modes of
dispute resolution, and to enter into stipulations or admissions of facts and
documents.
Petitioner is adamant and harps on the fact that November 28, 2003 was
merely the first scheduled date for the pre-trial conference, and a certain Atty.
Mejia appeared on its behalf. However, its assertion is belied by its own
admission that, on said date, this Atty. Mejia did not have in his possession the
Special Power of Attorney issued by petitioners Board of Directors.
As pointed out by the CA, petitioner, through Atty. Lee, received the notice of
pre-trial on October 27, 2003, thirty-two (32) days prior to the scheduled
conference. In that span of time, Atty. Lee, who was charged with the duty of
notifying petitioner of the scheduled pre-trial conference,[8] petitioner, and
Atty. Mejia should have discussed which lawyer would appear at the pre-trial
conference with petitioner, armed with the appropriate authority therefor.
Sadly, petitioner failed to comply with not just one rule; it also did not proffer a
reason why it likewise failed to file a pre-trial brief. In all, petitioner has not
shown any persuasive reason why it should be exempt from abiding by the
rules.
The appearance of Atty. Mejia at the pre-trial conference, without a pre-trial
brief and with only his bare allegation that he is counsel for petitioner, was
correctly rejected by the trial court. Accordingly, the trial court, as affirmed by
the appellate court, did not err in allowing respondent to present evidence ex-
parte.
Former Chief Justice Andres R. Narvasas words continue to resonate, thus:
Everyone knows that a pre-trial in civil actions is mandatory, and has been so
since January 1, 1964. Yet to this day its place in the scheme of things is not
fully appreciated, and it receives but perfunctory treatment in many courts.
Some courts consider it a mere technicality, serving no useful purpose save
perhaps, occasionally to furnish ground for non-suiting the plaintiff, or declaring
a defendant in default, or, wistfully, to bring about a compromise. The pre-trial
device is not thus put to full use. Hence, it has failed in the main to accomplish
the chief objective for it: the simplification, abbreviation and expedition of the
trial, if not indeed its dispensation. This is a great pity, because the objective
is attainable, and with not much difficulty, if the device were more intelligently
and extensively handled.
xxxx
Consistently with the mandatory character of the pre-trial, the Rules oblige not
only the lawyers but the parties as well to appear for this purpose before the
Court, and when a party fails to appear at a pre-trial conference (he) may be
non-suited or considered as in default. The obligation to appear denotes not
simply the personal appearance, or the mere physical presentation by a party
of ones self, but connotes as importantly, preparedness to go into the different
subject assigned by law to a pre-trial. And in those instances where a party
may not himself be present at the pre-trial, and another person substitutes for
him, or his lawyer undertakes to appear not only as an attorney but in
substitution of the clients person, it is imperative for that representative of the
lawyer to have special authority to make such substantive agreements as only
the client otherwise has capacity to make. That special authority should
ordinarily be in writing or at the very least be duly established by evidence
other than the self-serving assertion of counsel (or the proclaimed
representative) himself. Without that special authority, the lawyer or
representative cannot be deemed capacitated to appear in place of the party;
hence, it will be considered that the latter has failed to put in an appearance at
all, and he [must] therefore be non-suited or considered as in default,
notwithstanding his lawyers or delegates presence.[9]
We are not unmindful that defendants (petitioners) preclusion from presenting
evidence during trial does not automatically result in a judgment in favor of
plaintiff (respondent). The plaintiff must still substantiate the allegations in its
complaint.[10] Otherwise, it would be inutile to continue with the plaintiffs
presentation of evidence each time the defendant is declared in default.
In this case, respondent substantiated the allegations in its complaint, i.e., a
contract of necessary deposit existed between the insured See and petitioner.
On this score, we find no error in the following disquisition of the appellate
court:
[The] records also reveal that upon arrival at the City Garden Hotel, See gave
notice to the doorman and parking attendant of the said hotel, x x x
Justimbaste, about his Vitara when he entrusted its ignition key to the latter. x
x x Justimbaste issued a valet parking customer claim stub to See, parked the
Vitara at the Equitable PCI Bank parking area, and placed the ignition key
inside a safety key box while See proceeded to the hotel lobby to check in.
The Equitable PCI Bank parking area became an annex of City Garden Hotel
when the management of the said bank allowed the parking of the vehicles of
hotel guests thereat in the evening after banking hours.[11]
Article 1962, in relation to Article 1998, of the Civil Code defines a contract of
deposit and a necessary deposit made by persons in hotels or inns:
Art. 1962. A deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and returning the
same. If the safekeeping of the thing delivered is not the principal purpose of
the contract, there is no deposit but some other contract.
Art. 1998. The deposit of effects made by travelers in hotels or inns shall also
be regarded as necessary. The keepers of hotels or inns shall be responsible
for them as depositaries, provided that notice was given to them, or to their
employees, of the effects brought by the guests and that, on the part of the
latter, they take the precautions which said hotel-keepers or their substitutes
advised relative to the care and vigilance of their effects.
Plainly, from the facts found by the lower courts, the insured See deposited his
vehicle for safekeeping with petitioner, through the latters employee,
Justimbaste. In turn, Justimbaste issued a claim stub to See. Thus, the
contract of deposit was perfected from Sees delivery, when he handed over to
Justimbaste the keys to his vehicle, which Justimbaste received with the
obligation of safely keeping and returning it. Ultimately, petitioner is liable for
the loss of Sees vehicle.
Lastly, petitioner assails the lower courts award of attorneys fees to
respondent in the amount of P120,000.00. Petitioner claims that the award is
not substantiated by the evidence on record.
We disagree.

While it is a sound policy not to set a premium on the right to litigate,[12] we
find that respondent is entitled to reasonable attorneys fees. Attorneys fees
may be awarded when a party is compelled to litigate or incur expenses to
protect its interest,[13] or when the court deems it just and equitable.[14] In
this case, petitioner refused to answer for the loss of Sees vehicle, which was
deposited with it for safekeeping. This refusal constrained respondent, the
insurer of See, and subrogated to the latters right, to litigate and incur
expenses. However, we reduce the award of P120,000.00 to P60,000.00 in
view of the simplicity of the issues involved in this case.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals
in CA-G.R. CV No. 86869 is AFFIRMED with the MODIFICATION that the
award of attorneys fees is reduced to P60,000.00. Costs against petitioner.
SO ORDERED.
5. JN Devt. Corp. v. Phil. Export & Foreign Loan Guarantee Corp.,
G.R. No. 151060, August 31, 2005
[G.R. No. 151060. August 31, 2005]
JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR
STA. ANA, petitioners, vs. PHILIPPINE EXPORT AND FOREIGN LOAN
GUARANTEE CORPORATION, respondent.
[G.R. No. 151311. August 31, 2005]
NARCISO V. CRUZ, petitioner, vs. PHILIPPINE EXPORT and FOREIGN
LOAN GUARANTEE CORPORATION, respondent.
DECISION
TINGA, J.:
Before us are consolidated petitions questioning the Decision[1] of the Court
of Appeals (CA) in CA-G.R. CV No. 61318, entitled Philippine Export and
Foreign Loan Guarantee Corporation v. JN Development Corporation, et al.,
which reversed the Decision of the Regional Trial Court (RTC) of Makati,
Branch 60.
On 13 December 1979, petitioner JN Development Corporation (JN) and
Traders Royal Bank (TRB) entered into an agreement whereby TRB would
extend to JN an Export Packing Credit Line for Two Million Pesos
(P2,000,000.00). The loan was covered by several securities, including a real
estate mortgage[2] and a letter of guarantee from respondent Philippine Export
and Foreign Loan Guarantee Corporation (PhilGuarantee), now Trade and
Investment Development Corporation of the Philippines, covering seventy
percent (70%) of the credit line.[3] With PhilGuarantee issuing a guarantee in
favor of TRB,[4] JN, petitioner spouses Rodrigo and Leonor Sta. Ana[5] and
petitioner Narciso Cruz[6] executed a Deed of Undertaking[7] (Undertaking) to
assure repayment to PhilGuarantee.
It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8
October 1980 TRB requested PhilGuarantee to make good its guarantee.[8]
PhilGuarantee informed JN about the call made by TRB, and inquired about
the action of JN to settle the loan.[9] Having received no response from JN, on
10 March 1981 PhilGuarantee paid TRB Nine Hundred Thirty Four Thousand
Eight Hundred Twenty Four Pesos and Thirty Four Centavos
(P934,824.34).[10] Subsequently, PhilGuarantee made several demands on
JN, but the latter failed to pay. On 30 May 1983, JN, through Rodrigo Sta. Ana,
proposed to settle the obligation by way of development and sale of the
mortgaged property.[11] PhilGuarantee, however, rejected the proposal.
PhilGuarantee thus filed a Complaint[12] for collection of money and damages
against herein petitioners.
In its Decision dated 20 August 1998, the RTC dismissed PhilGuarantees
Complaint as well as the counterclaim of petitioners. It ruled that petitioners
are not liable to reimburse PhilGuarantee what it had paid to TRB. Crucial to
this holding was the courts finding that TRB was able to foreclose the real
estate mortgage executed by JN, thus extinguishing petitioners obligation.[13]
Moreover, there was no showing that after the said foreclosure, TRB had
demanded from JN any deficiency or the payment of the difference between
the proceeds of the foreclosure sale and the actual loan.[14] In addition, the
RTC held that since PhilGuarantees guarantee was good for only one year
from 17 December 1979, or until 17 December 1980, and since it was not
renewed after the expiry of said period, PhilGuarantee had no more legal duty
to pay TRB on 10 March 1981.[15] The RTC likewise ruled that Cruz cannot
be held liable under the Undertaking since he was not the one who signed the
document, in line with its finding that his signature found in the records is totally
different from the signature on the Undertaking.[16]
According to the RTC, the failure of TRB to sue JN for the recovery of the loan
precludes PhilGuarantee from seeking recoupment from the spouses Sta. Ana
and Cruz what it paid to TRB. Thus, PhilGuarantees payment to TRB amounts
to a waiver of its right under Art. 2058 of the Civil Code.[17]
Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA. The
appellate court reversed the RTC and ordered petitioners to pay
PhilGuarantee Nine Hundred Thirty Four Thousand Six Hundred Twenty Four
Pesos and Thirty Four Centavos (P934,624.34), plus service charge and
interest.[18]
In reaching its denouement, the CA held that the RTCs finding that the loan
was extinguished by virtue of the foreclosure sale of the mortgaged property
had no factual support,[19] and that such finding is negated by Rodrigo Sta.
Anas testimony that JN did not receive any notice of foreclosure from
PhilGuarantee or from TRB. [20] Moreover, Sta. Ana even offered the same
mortgaged property to PhilGuarantee to settle its obligations with the latter.[21]
The CA also ruled that JNs obligation had become due and demandable within
the one-year period of effectivity of the guarantee; thus, PhilGuarantees
payment to TRB conformed with its guarantee, although the payment itself was
effected one year after the maturity date of the loan.[22] Contrary to the trial
courts finding, the CA ruled that the contract of guarantee was not extinguished
by the alleged lack of evidence on PhilGuarantees consent to the extensions
granted by TRB to JN.[23] Interpreting Art. 2058 of the Civil Code,[24] the
appellate court explained that while the provision states that the guarantor
cannot be compelled to pay unless the properties of the debtor are exhausted,
the guarantor is not precluded from waiving the benefit of excussion and
paying the obligation altogether.[25]
Finally, the CA found that Narciso Cruz was unable to prove the alleged forgery
of his signature in the Undertaking, the evidence presented not being sufficient
to overcome the presumption of regularity of the Undertaking which is a
notarized document. [26]
Petitioners sought reconsideration of the Decision and prayed for the
admission of documents evidencing the foreclosure of the real estate
mortgage, but the motion for reconsideration was denied by the CA for lack of
merit. The CA ruled that the documentary evidence presented by petitioners
cannot be considered as newly discovered evidence, it being already in
existence while the case was pending before the trial court, the very forum
before which it should have been presented. Besides, a foreclosure sale per
se is not proof of petitioners payment of the loan to PhilGuarantee, the CA
added.[27]
So now before the Court are the separate petitions for review of the CA
Decision. JN and the spouses Sta. Ana, petitioners in G.R. No. 151060, posit
that the CA erred in interpreting Articles 2079, 2058, and 2059 of the Civil Code
in its Decision.[28] Meanwhile, petitioner Narciso Cruz in G.R. No. 151311
claims that the CA erred when it held that petitioners are liable to
PhilGuarantee despite its payment after the expiration of its contract of
guarantee and the lack of PhilGuarantees consent to the extensions granted
by TRB to JN. Moreover, Cruz questions the reversal of the ruling of the trial
court anent his liability as a signatory to the Undertaking.[29]
On the other hand, PhilGuarantee maintains that the date of default, not the
actual date of payment, determines the liability of the guarantor and that having
paid TRB when the loan became due, it should be indemnified by
petitioners.[30] It argues that, contrary to petitioners claim, there could be no
waiver of its right to excussion more explicit than its act of payment to TRB
very directly.[31] Besides, the right to excussion is for the benefit of the
guarantor and is not a defense for the debtor to raise and use to evade
liability.[32] Finally, PhilGuarantee maintains that there is no sufficient
evidence proving the alleged forgery of Cruzs signature on the Undertaking,
which is a notarized document and as such must be accorded the presumption
of regularity.[33]
The Court finds for PhilGuarantee.
Under a contract of guarantee, the guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do
so.[34] The guarantor who pays for a debtor, in turn, must be indemnified by
the latter.[35] However, the guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor and resorted to
all the legal remedies against the debtor.[36] This is what is otherwise known
as the benefit of excussion.
It is clear that excussion may only be invoked after legal remedies against the
principal debtor have been expanded. Thus, it was held that the creditor must
first obtain a judgment against the principal debtor before assuming to run after
the alleged guarantor, for obviously the exhaustion of the principals property
cannot even begin to take place before judgment has been obtained.[37] The
law imposes conditions precedent for the invocation of the defense. Thus, in
order that the guarantor may make use of the benefit of excussion, he must
set it up against the creditor upon the latters demand for payment and point
out to the creditor available property of the debtor within the Philippines
sufficient to cover the amount of the debt.[38]
While a guarantor enjoys the benefit of excussion, nothing prevents him from
paying the obligation once demand is made on him. Excussion, after all, is a
right granted to him by law and as such he may opt to make use of it or waive
it. PhilGuarantees waiver of the right of excussion cannot prevent it from
demanding reimbursement from petitioners. The law clearly requires the
debtor to indemnify the guarantor what the latter has paid.[39]
Petitioners claim that PhilGuarantee had no more obligation to pay TRB
because of the alleged expiration of the contract of guarantee is untenable.
The guarantee, dated17 December 1979, states:
In the event of default by JNDC and as a consequence thereof,
PHILGUARANTEE is made to pay its obligation arising under the aforesaid
guarantee PHILGUARANTEE shall pay the BANK the amount of P1.4 million
or 70% of the total obligation unpaid
....

This guarantee shall be valid for a period of one (1) year from date hereof but
may be renewed upon payment by JNDC of the guarantee fee at the same
rate of 1.5% per annum.[40]
The guarantee was only up to 17 December 1980. JNs obligation with TRB fell
due on 30 June 1980, and demand on PhilGuarantee was made by TRB on
08 October 1980. That payment was actually made only on 10 March 1981
does not take it out of the terms of the guarantee. What is controlling is that
default and demand on PhilGuarantee had taken place while the guarantee
was still in force.
There is likewise no merit in petitioners claim that PhilGuarantees failure to
give its express consent to the alleged extensions granted by TRB to JN had
extinguished the guarantee. The requirement that the guarantor should
consent to any extension granted by the creditor to the debtor under Art. 2079
is for the benefit of the guarantor. As such, it is likewise waivable by the
guarantor. Thus, even assuming that extensions were indeed granted by TRB
to JN, PhilGuarantee could have opted to waive the need for consent to such
extensions. Indeed, a guarantor is not precluded from waiving his right to be
notified of or to give his consent to extensions obtained by the debtor. Such
waiver is not contrary to public policy as it is purely personal and does not
affect public interest.[41] In the instant case, PhilGuarantees waiver can be
inferred from its actual payment to TRB after the latters demand, despite JNs
failure to pay the renewal/guarantee fee as indicated in the guarantee.[42]
For the above reasons, there is no basis for petitioners claim that
PhilGuarantee was a mere volunteer payor and had no legal obligation to pay
TRB. The law does not prohibit the payment by a guarantor on his own volition,
heedless of the benefit of excussion. In fact, it recognizes the right of a
guarantor to recover what it has paid, even if payment was made before the
debt becomes due,[43] or if made without notice to the debtor,[44] subject of
course to some conditions.
Petitioners invocation of our ruling in Willex Plastic Industries, Corp. v. Court
of Appeals[45] is misplaced, if not irrelevant. In the said case, the guarantor
claimed that it could not be proceeded against without first exhausting all of
the properties of the debtor. The Court, finding that there was an express
renunciation of the benefit of excussion in the contract of guarantee, ruled
against the guarantor.
The cited case finds no application in the case a quo. PhilGuarantee is not
invoking the benefit of excussion. It cannot be overemphasized that excussion
is a right granted to the guarantor and, therefore, only he may invoke it at his
discretion.
The benefit of excussion, as well as the requirement of consent to extensions
of payment, is a protective device pertaining to and conferred on the guarantor.
These may be invoked by the guarantor against the creditor as defenses to
bar the unwarranted enforcement of the guarantee. However, PhilGuarantee
did not avail of these defenses when it paid its obligation according to the tenor
of the guarantee once demand was made on it. What is peculiar in the instant
case is that petitioners, the principal debtors themselves, are muddling the
issues and raising the same defenses against the guarantor, which only the
guarantor may invoke against the creditor, to avoid payment of their own
obligation to the guarantor. The Court cannot countenance their self-seeking
desire to be exonerated from the duty to reimburse PhilGuarantee after it had
paid TRB on their behalf and to unjustly enrich themselves at the expense of
PhilGuarantee.
Petitioners assert that TRBs alleged foreclosure of the real estate mortgage
over the land executed as security for the loan agreement had extinguished
PhilGuarantees obligation; thus, PhilGuarantees recourse should be directed
against TRB, as per the pari-passu provision[46] in the contract of
guarantee.[47] We disagree.
The foreclosure was made on 27 August 1993, after the case was submitted
for decision in 1992 and before the issuance of the decision of the court a quo
in 1998.[48] Thus, foreclosure was resorted to by TRB against JN when they
both had become aware that PhilGuarantee had already paid TRB and that
there was a pending case filed by PhilGuarantee against petitioners. This
matter was not raised and proved in the trial court, nor in the appeal before the
CA, but raised for the first time in petitioners motion for reconsideration in the
CA. In their appellants Brief, petitioners claimed that there was no need for the
defendant-appellee JNDC to present any evidence before the lower court to
show that indeed foreclosure of the REM took place.[49] As properly held by
the CA,
Firstly, the documents evidencing foreclosure of mortgage cannot be
considered as newly discovered evidence. The said documents were already
subsisting and should have been presented during the trial of the case. The
alleged foreclosure sale was made on August 23, 1993 while the decision was
rendered by the trial court on August 20, 1998 about five (5) years thereafter.
These documents were likewise not submitted by the defendants-appellees
when they submitted their appellees Brief to this Court. Thus, these cannot be
considered as newly discovered evidence but are more correctly ascribed as
suppressed forgotten evidence Secondly, the alleged foreclosure sale is not
proof of payment of the loan by defendant-appellees to the plaintiffs-
appellants.[50]
Besides, the complaint a quo was filed by PhilGuarantee as guarantor for JN,
and its cause of action was premised on its payment of JNs obligation after the
latters default. PhilGuarantee was well within its rights to demand
reimbursement for such payment made, regardless of whether the creditor,
TRB, was subsequently able to obtain payment from JN. If double payment
was indeed made, then it is JN which should go after TRB, and not
PhilGuarantee. Petitioners have no one to blame but themselves, having
allowed the foreclosure of the property for the full value of the loan despite
knowledge of PhilGuarantees payment to TRB. Having been aware of such
payment, they should have opposed the foreclosure, or at the very least, filed
a supplemental pleading with the trial court informing the same of the
foreclosure sale.
Likewise, petitioners cannot invoke the pari-passu clause in the guarantee, not
being parties to the said agreement. The clause is clearly for the benefit of the
guarantor and no other.
The Court notes the letter[51] of Rodrigo Sta. Ana offering, by way of
settlement of JNs obligations to PhilGuarantee, the very same parcel of land
mortgaged as security for the loan agreement. This further weakens the
position of petitioners, since it becomes obvious that they acknowledged the
payment made by PhilGuarantee on their behalf and that they were in fact
willing to negotiate with PhilGuarantee for the settlement of the said obligation
before the filing of the complaint a quo.
Anent the issue of forgery, the CA is correct in reversing the decision of the
trial court. Save for the denial of Narciso Cruz that it was not his signature in
the Undertaking and the perfunctory comparison of the signatures, nothing in
the records would support the claim of forgery. Forgery cannot be presumed
and must be proved by clear, positive and convincing evidence and the burden
of proof lies on the party alleging forgery.[52] Mere denial will not suffice to
overcome the positive value of the Undertaking, which is a notarized
document, has in its favor the presumption of regularity, and carries the
evidentiary weight conferred upon it with respect to its due execution.[53] Even
in cases where the alleged forged signature was compared to samples of
genuine signatures to show its variance therefrom, this Court still found such
evidence insufficient.[54] Mere variance of the signatures cannot be
considered as conclusive proof that the same were forged.[55]
WHEREFORE, the consolidated petitions are DENIED. The Decision of the
Court of Appeals in CA-G.R. CV No. 61318 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
6. Yan Chiu v. CA, G.R. No. 78519, September 26, 1989
G.R. No. L-78519 September 26, 1989
VICTORIA YAU CHU, assisted by her husband MICHAEL CHU, petitioners,
vs.
HON. COURT OF APPEALS, FAMILY SAVINGS BANK and/or CAMS
TRADING ENTERPRISES, INC., respondents.
Francisco A. Lara, Jr. for petitioner.
D. T. Ramos and Associates for respondent Family Savings Bank.
Romulo T. Santos for respondent CAMS Trading.
GRINO-AQUINO, J.:
This is a petition for review on certiorari to annul and set aside the Court of
Appeals' decision dated October 28, 1986 in CA-G.R. CV No. 03269 which
affirmed the decision of the trial court in favor of the private respondents in an
action to recover the petitioners' time deposits in the respondent Family
Savings Bank.
Since 1980, the petitioner, Victoria Yau Chu, had been purchasing cement on
credit from CAMS Trading Enterprises, Inc. (hereafter "CAMS Trading" for
brevity). To guaranty payment for her cement withdrawals, she executed in
favor of Cams Trading deeds of assignment of her time deposits in the total
sum of P320,000 in the Family Savings Bank (hereafter the Bank). Except for
the serial numbers and the dates of the time deposit certificates, the deeds of
assignment, which were prepared by her own lawyer, uniformly provided
... That the assignment serves as a collateral or guarantee for the payment of
my obligation with the said CAMS TRADING ENTERPRISES, INC. on account
of my cement withdrawal from said company, per separate contract executed
between us.
On July 24,1980, Cams Trading notified the Bank that Mrs. Chu had an unpaid
account with it in the sum of P314,639.75. It asked that it be allowed to encash
the time deposit certificates which had been assigned to it by Mrs. Chu. It
submitted to the Bank a letter dated July 18, 1980 of Mrs. Chu admitting that
her outstanding account with Cams Trading was P404,500. After verbally
advising Mrs. Chu of the assignee's request to encash her time deposit
certificates and obtaining her verbal conformity thereto, the Bank agreed to
encash the certificates.It delivered to Cams Trading the sum of P283,737.75
only, as one time deposit certificate (No. 0048120954) lacked the proper
signatures. Upon being informed of the encashment, Mrs. Chu demanded from
the Bank and Cams Trading that her time deposit be restored. When neither
complied, she filed a complaint to recover the sum of P283,737.75 from them.
The case was docketed in the Regional Trial Court of Makati, Metro Manila
(then CFI of Rizal, Pasig Branch XIX), as Civil Case No. 38861.
In a decision dated December 12, 1983, the trial court dismissed the complaint
for lack of merit.
Chu appealed to the Court of Appeals (CA-G.R. CV No. 03269) which affirmed
the dismissal of her complaint.
In this petition for review, she alleges that the Court of Appeals erred:
1. In not annulling the encashment of her time deposit certificates as a
pactum commissorium; and
2. In not finding that the obligations secured by her time deposits had
already been paid.
We find no merit in the petition for review.
The Court of Appeals found that the deeds of assignment were contracts of
pledge, but, as the collateral was also money or an exchange of "peso for
peso," the provision in Article 2112 of the Civil Code for the sale of the thing
pledged at public auction to convert it into money to satisfy the pledgor's
obligation, did not have to be followed. All that had to be done to convert the
pledgor's time deposit certificates into cash was to present them to the bank
for encashment after due notice to the debtor.
The encashment of the deposit certificates was not a pacto commissorio which
is prohibited under Art. 2088 of the Civil Code. A pacto commissorio is a
provision for the automatic appropriation of the pledged or mortgaged property
by the creditor in payment of the loan upon its maturity. The prohibition against
a pacto commissorio is intended to protect the obligor, pledgor, or mortgagor
against being overreached by his creditor who holds a pledge or mortgage
over property whose value is much more than the debt. Where, as in this case,
the security for the debt is also money deposited in a bank, the amount of
which is even less than the debt, it was not illegal for the creditor to encash the
time deposit certificates to pay the debtors' overdue obligation, with the latter's
consent.
Whether the debt had already been paid as now alleged by the debtor, is a
factual question which the Court of Appeals found not to have been proven for
the evidence which the debtor sought to present on appeal, were receipts for
payments made prior to July 18, 1980. Since the petitioner signed on July 18,
1980 a letter admitting her indebtedness to be in the sum of P404,500, and
there is no proof of payment made by her thereafter to reduce or extinguish
her debt, the application of her time deposits, which she had assigned to the
creditor to secure the payment of her debt, was proper. The Court of Appeals
did not commit a reversible error in holding that it was so.
WHEREFORE, the petition for review is denied. Costs against the appellant.
SO ORDERED.
7. Sps. Yap v. Sps. Dy, G.R. No. 171868; Dumaguete Rural Bank v. Sps.
Dy, G.R. No. 171991, July 27, 2011
SPOUSES FRANCISCO D. YAP and WHELMA S. YAP,
Petitioners,
G.R. No. 171868
- versus -
SPOUSES ZOSIMO DY, SR. and NATIVIDAD CHIU DY, SPOUSES
MARCELINO MAXINO and REMEDIOS L. MAXINO, PROVINCIAL SHERIFF
OF NEGROS ORIENTAL and DUMAGUETE RURAL BANK, INC.,
Respondents.
x-------------------------x
DUMAGUETE RURAL BANK, INC. (DRBI) herein represented by Mr. William
D.S. Dichoso,
Petitioners,
-versus-
SPOUSES ZOSIMO DY, SR. and NATIVIDAD CHIU DY, SPOUSES
MARCELINO MAXINO and REMEDIOS MAXINO, and SPOUSES
FRANCISCO D. YAP and WHELMA S. YAP,
Respondents. (2) TCT No. T-20301
Lot 3 of Plan Psu-124376
17,373 sq.m.
(3) TCT No. T-14780
Lot 4 of Plan Pcs-11728
27,875 sq.m.
(4) TCT No. T-14794
Lot 5 of Plan Psu-124376
2,900 sq.m.
(5) TCT No. T-14781
G.R. No. 171991 Lot 6 of Plan Pcs-11728
16,087 sq.m.
Present: (6) TCT No. T-14783
Lot 8 of Plan Pcs-11728
CORONA, C.J., 39,888 sq.m
Chairperson, The Tirambulos likewise own a parcel of land denominated as Lot 846,
LEONARDO-DE CASTRO, covered by Tax Declaration No. 08109.
BERSAMIN, On December 3, 1976, the Tirambulos executed a Real Estate Mortgage[3]
DEL CASTILLO, and over Lots 1, 4, 5, 6 and 8 in favor of the Rural Bank of Dumaguete, Inc.,
VILLARAMA, JR., JJ. predecessor of Dumaguete Rural Bank, Inc. (DRBI), to secure a P105,000
loan extended by the latter to them. Later, the Tirambulos obtained a second
loan for P28,000 and also executed a Real Estate Mortgage[4] over Lots 3 and
846 in favor of the same bank on August 3, 1978.
Promulgated: Subsequently, on October 27, 1979, the Tirambulos sold all seven mortgaged
lots to the spouses Zosimo Dy, Sr. and Natividad Chiu (the Dys) and the
July 27, 2011 spouses Marcelino C. Maxino and Remedios Lasola (the Maxinos) without the
x--------------------------------------------------x consent and knowledge of DRBI. This sale, which was embodied in a Deed of
DECISION Absolute Sale,[5] was followed by a default on the part of the Tirambulos to
VILLARAMA, JR., J.: pay their loans to DRBI. Thus, DRBI extrajudicially foreclosed the December
May persons to whom several mortgaged lands were transferred without the 3, 1976 mortgage and had Lots 1, 4, 5, 6 and 8 sold at public auction on March
knowledge and consent of the creditor redeem only several parcels if all the 31, 1982.
lands were sold together for a single price at the foreclosure sale? This is the
principal issue presented to us for resolution in these two petitions for review At the auction sale, DRBI was proclaimed the highest bidder and bought said
on certiorari assailing the May 17, 2005 Decision[1] and March 15, 2006 lots for P216,040.93. The Sheriffs Certificate of Sale[6] stated that the sale is
Resolution[2] of the Court of Appeals (CA) in CA-G.R. C.V. No. 57205. subject to the rights of redemption of the mortgagor (s) or any other persons
The antecedents are as follows: authorized by law so to do, within a period of one (1) year from registration
hereof.[7] The certificate of sale, however, was not registered until almost a
The spouses Tomas Tirambulo and Salvacion Estorco (Tirambulos) are the year later, or on June 24, 1983.
registered owners of several parcels of land located in Ayungon, Negros
Oriental, registered under Transfer Certificate of Title (TCT) Nos. T-14794, T- On July 6, 1983, or twelve (12) days after the sale was registered, DRBI sold
14777, T-14780, T-14781, T-14783 and T-20301 of the Registry of Deeds of Lots 1, 3 and 6 to the spouses Francisco D. Yap and Whelma D. Yap (the
Negros Oriental, and more particularly designated as follows: Yaps) under a Deed of Sale with Agreement to Mortgage.[8] It is important to
note, however, that Lot 3 was not among the five properties foreclosed and
(1) TCT No. T-14777 bought by DRBI at public auction.
Lot 1 of Plan Pcs-11728
61,371 sq.m.
On August 8, 1983, or well within the redemption period, the Yaps filed a
Motion for Writ of Possession[9] alleging that they have acquired all the rights
and interests of DRBI over the foreclosed properties and are entitled to
immediate possession of the same because the one-year redemption period
has lapsed without any redemption being made. Said motion, however, was
ordered withdrawn on August 22, 1983[10] upon motion of the Yaps, who gave
no reason therefor.[11] Three days later, or on August 25, 1983, the Yaps
again filed a Motion for Writ of Possession.[12] This time the motion was
granted, and a Writ of Possession[13] over Lots 1, 3 and 6 was issued in favor
of the Yaps on September 5, 1983. They were placed in possession of Lots 1,
3 and 6 seven days later.
On May 22, 1984, roughly a month before the one-year redemption period was
set to expire, the Dys and the Maxinos attempted to redeem Lots 1, 3 and 6.
They tendered the amount of P40,000.00 to DRBI and the Yaps,[14] but both
refused, contending that the redemption should be for the full amount of the
winning bid of P216,040.93 plus interest for all the foreclosed properties.
Thus, on May 28, 1984, the Dys and the Maxinos went to the Office of the
Sheriff of Negros Oriental and paid P50,625.29 (P40,000.00 for the principal
plus P10,625.29 for interests and Sheriffs Commission) to effect the
redemption.[15] Noticing that Lot 3 was not included in the foreclosure
proceedings, Benjamin V. Diputado, Clerk of Court and Provincial Sheriff,
issued a Certificate of Redemption[16] in favor of the Dys and the Maxinos
only for Lots 1 and 6, and stated in said certificate that Lot 3 is not included in
the foreclosure proceedings. By letter[17] of even date, Atty. Diputado also
duly notified the Yaps of the redemption of Lots 1 and 6 by the Dys and the
Maxinos, as well as the non-inclusion of Lot 3 among the foreclosed properties.
He advised the Yaps to personally claim the redemption money or send a
representative to do so.
In a letter to the Provincial Sheriff on May 31, 1984, the Yaps refused to take
delivery of the redemption price arguing that one of the characteristics of a
mortgage is its indivisibility and that one cannot redeem only some of the lots
foreclosed because all the parcels were sold for a single price at the auction
sale.[18]
On June 1, 1984, the Provincial Sheriff wrote the Dys and the Maxinos
informing them of the Yaps refusal to take delivery of the redemption money
and that in view of said development, the tender of the redemption money was
being considered as a consignation.[19]
On June 15, 1984, the Dys and the Maxinos filed Civil Case No. 8426 with the
Regional Trial Court of Negros Oriental for accounting, injunction, declaration
of nullity (with regard to Lot 3) of the Deed of Sale with Agreement to Mortgage,
and damages against the Yaps and DRBI. In their complaint,[20] they prayed
a) That the Deed of Sale With Agreement to Mortgage be declared null and
void ab initio;
b) That defendant Yap[s] possession of Lot No. 3, TCT No. T20301 based
as it was on a void sale, be declared illegal from the very beginning;
c) That defendants be ordered to render to plaintiffs a fair accounting of the
harvests and income which defendants made from said Lot No. 3 and, in
addition, be ordered to pay to plaintiffs damages for wrongfully depriving
plaintiffs of the use and enjoyment of said property;
d) That the redemption which plaintiffs made of Lot No. 1, TCT No. 14777,
and Lot No. 6, TCT No. 14781, through the Provincial Sheriff of Negros
Oriental, be declared valid and binding on the defendants, thereby releasing
and freeing said parcels of land from whatever liens or claims that said
defendants might have on them;
e) That defendants be likewise ordered to render to plaintiffs full and fair
accounting of all the harvests, fruits, and income that they or either of them
might have derived from said two parcels of land starting from the time
defendant Yap first took possession thereof and harvested the coconuts in
September, 1983;
f) That, after the accounting herein prayed for, defendants be required to
deliver to plaintiffs the net proceeds of the income from the three parcels of
land subject of this case, together with interest at the legal rate;
g) That for his acts of misrepresentation and deceit in obtaining a writ of
possession over the three parcels of land subject of this case, and for the
highly irregular and anomalous procedures and maneuvers employed by
defendant Yap in securing said writ, as well as for harvesting the coconuts
even after knowing that plaintiffs had already fully redeemed the properties in
question and, with respect to Lot No. 3, after knowing that the same was not
in fact included in the foreclosure and, therefore, could not have been validly
sold by the bank to him, said defendant Yap be condemned to pay plaintiffs
moral damages in the amount of P200,000.00, plus punitive and exemplary
damages in the amount of P100,000.00;
h) That for falsifying the Sheriffs Certificate of Sale and selling unlawfully
Lot No. 3, TCT No. T-20301, to its co-defendant Yap, defendant DRBI be
condemned to pay to plaintiffs actual damages in the amount of P50,000.00;
moral damages in the amount of P200,000.00; and punitive and exemplary
damages in the amount of P100,000.00;
i) That defendants be condemned to pay solidarily to plaintiffs attorneys
fees in the amount of P50,000.00; other legitimate expenses of litigation in the
amount of P30,000.00; and the costs of suit;
j) That pending hearing of this case, a writ of preliminary injunction be
issued enjoining and restraining the defendants, particularly defendant Yap,
from disturbing and interfering the plaintiffs possession and other rights of
ownership over the land in question;
k) That pending hearing of the petition for preliminary injunction, a temporary
restraining order be issued against the defendants, particularly against
defendant Yap, to serve the same purpose for which the writ of preliminary
injunction is herein prayed for; and
l) That, after hearing of the main case, said preliminary injunction be made
permanent.
Furthermore, plaintiffs pray for all other reliefs which may be just and equitable
in the premises.[21]
Thereafter, on June 19, 1984, the Dys and the Maxinos consigned to the trial
court an additional sum of P83,850.50 plus sheriffs commission fee of P419.25
representing the remaining balance of the purchase price that the Yaps still
owed DRBI by virtue of the sale to them by the DRBI of Lots 1, 3 and 6.[22]
Meanwhile, by letter[23] dated June 27, 1984, the Yaps told DRBI that no
redemption has been made by the Tirambulos or their successors-in-interest
and requested DRBI to consolidate its title over the foreclosed properties by
requesting the Provincial Sheriff to execute the final deed of sale in favor of
the bank so that the latter can transfer the titles of the two foreclosed properties
to them.
On the same date, the Yaps also wrote the Maxinos informing the latter that
during the last harvest of the lots bought from DRBI, they excluded from the
harvest Lot 3 to show their good faith. Also, they told the Maxinos that they
were formally turning over the possession of Lot 3 to the Maxinos, without
prejudice to the final determination of the legal implications concerning Lot 3.
As to Lots 1 and 6, however, the Yaps stated that they intended to consolidate
ownership over them since there has been no redemption as contemplated by
law. Included in the letter was a liquidation of the copra proceeds harvested
from September 7, 1983 to April 30, 1984 for Lots 1, 3 and 6.[24]
Later, on July 5, 1984, the Yaps filed Civil Case No. 8439 for consolidation of
ownership, annulment of certificate of redemption, and damages against the
Dys, the Maxinos, the Provincial Sheriff of Negros Oriental and DRBI. In their
complaint,[25] the Yaps prayed
1. That [they] be declared the exclusive owners of Lot No. 1 covered by
TCT No. T-14777 and Lot No. 6 covered by TCT No. T-14781 for failure on the
part of defendants Zosimo Dy, Sr., and Marcelino Maxino to redeem the
properties in question within one (1) year from the auction sale.
2. That defendants be [declared] solidarily liable to pay moral damages in
the amount of ONE HUNDRED THOUSAND PESOS (P100,000.00),
THIRTY[-]FIVE THOUSAND PESOS (P35,000.00) as attorneys fees and
FIFTEEN THOUSAND PESOS (P15,000.00) as exemplary damages;
3. That the Provincial Sheriff be required to execute the final Deed of Sale
in favor of the bank and the bank be in turn required to transfer the property to
the plaintiffs in accordance with the Deed of Sale with Mortgage.
4. That the court grant such other relief as may be deemed just and equitable
under the premises.[26]
Civil Case Nos. 8426 and 8439 were tried jointly.
On October 24, 1985, the Yaps, by counsel, filed a motion to withdraw from
the provincial sheriff the redemption money amounting to P50,373.42.[27] Said
motion was granted on October 28, 1985 after a Special Power of Attorney
executed by Francisco Yap in favor of his brother Valiente Yap authorizing the
latter to receive the P50,373.42 redemption money was presented in court.[28]
On February 12, 1997, the trial court rendered decision[29] in favor of the
Yaps. The fallo reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Dismissing the complaint of Dy and Maxino spouses in Civil Case No.
8426 as well as the bank and the Yap spouses counterclaim for lack of factual
and legal basis;
2. In Civil Case No. 8439:
a) Declaring the Yap spouses, plaintiffs therein, the exclusive owners of Lot
No. 1 covered by TCT No. T-14777 and Lot No. 6 covered by TCT No. T-14781
for failure on the part of the Dy and Maxino spouses, defendants therein, to
redeem the properties in question within one (1) year from the auction sale.
b) Directing the Provincial Sheriff of Negros Oriental to execute the Final
Deed of Sale in favor of the bank and the latter to transfer the subject
properties to the Yap spouses in accordance with the Deed of Sale With
Mortgage.
SO ORDERED.[30]
On March 7, 1997, the trial court amended the above dispositive portion upon
motion of DRBI, as follows:
Wherefore, judgment is hereby rendered as follows:
1. The Certificate of Redemption issued by the Provincial Sheriff (Exh. M)
is hereby declared null and void;
2. The Provincial Sheriff of Negros Oriental is hereby ordered to execute a
Final Deed of Sale of the foreclosed properties in favor of the defendant
Dumaguete Rural Bank, Inc., subject to the rights of the Yap spouses acquired
in accordance with the Deed of Sale with Mortgage;
3. The Deed of Sale dated [October] 27, 1979, made by Tirambulo and
Estorco in favor of the Dys and Maxinos covering all the seven (7) parcels of
land in question, is hereby declared null and void;
4. In Civil Case No. 8439, declaring the Yap Spouses, the exclusive owners
of Lot No. 1, covered by TCT No. T-14777, and Lot No. 6, covered by TCT No.
T-14781, for failure on the part of the Dy and Maxino Spouses, to redeem said
properties within one (1) year from the date of the registration of the auction
sale;
5. All other claims and counterclaims are hereby dismissed for lack of merit.
SO ORDERED.[31]
The trial court held that the Dys and the Maxinos failed to formally offer their
evidence; hence, the court could not consider the same. It also upheld the
Deed of Sale with Agreement to Mortgage between the Yaps and DRBI, ruling
that its genuineness and due execution has been admitted by the Dys and the
Maxinos and that it is not contrary to law, morals, good customs, public policy
or public order. Thus, ownership of Lots 1, 3 and 6 was transferred to the Yaps.
The trial court further held that the Dys and the Maxinos failed to exercise their
rights of redemption properly and timely. They merely deposited the amount
of P50,625.29 with the Sheriff, whereas the amount due on the mortgage deed
is P216,040.93.
Aggrieved by the above ruling, the Dys and the Maxinos elevated the case to
the CA. They argued that the trial court erred in:
1) ... failing to consider plaintiffs evidence [testimonial, including the
testimony of the Provincial Sheriff of Negros Oriental (Attorney Benjamin V.
Diputado) and plaintiff Attorney Marcelino C. Maxino] and documentary
[Exhibits A through TT (admitted under Order of 3 March 1995)];
2) failing to declare void or annul the purported contract of sale by
Dumaguete Rural Bank, Inc. to Francisco D. Yap and Whelma S. Yap of Lots
1, 3, and 6, during the redemption period [the purported seller (bank) not being
the owner thereof, and Lot 3 not being included in the foreclosure/auction sale
and could not have been acquired by the Bank thereat];
3) not holding that the parcels of land had been properly and validly
redeemed in good faith, defendant Yap, the Provincial Sheriff, the Clerk of
Court, and Mr. Mario Dy, having accepted redemption/consignation (or, in not
fixing the redemption price and allowing redemption);
4) not holding that by withdrawing the redemption money
consigned/deposited by plaintiffs to the Court, and turning over possession of
the parcels of land to plaintiffs, defendants Yap accepted, ratified, and
confirmed redemption by plaintiffs of the parcels of land acquired at
foreclosure/auction sale by the Bank and purportedly sold by it to and
purchased by Yap;
5) not finding and holding that all the parcels of land covered by the
foreclosed mortgage held by Dumaguete Rural Bank had been acquired by
and are in the possession of plaintiffs as owners and that defendants bank and
Yap had disposed of and/or lost their rights and interests and/or any cause of
action and their claims had been extinguished and mooted or otherwise
settled, waived and/or merged in plaintiffs-appellants;
6) not holding that defendants Yap have no cause of action to quiet title as
they had no title or possession of the parcels of land in question and in
declaring defendants Yap spouses the exclusive owners of Lot No. 1 covered
by TCT No. T-14777 and Lot No. 6 covered by TCT No. T-14781 and in
directing the Provincial Sheriff to execute the final deed of sale in favor of the
bank and the latter to transfer the subject properties to the Yap spouses in
accordance with the Deed of Sale with Mortgage which included Lot No. 3
which was not foreclosed by the Sheriff and was not included in the certificate
of sale issued by him and despite their acceptance, ratification, and
confirmation of the redemption as well as acknowledgment of possession of
the parcels of land by plaintiffs;
7) issuing an amended decision after perfection of plaintiffs appeal and
without waiting for their comment (declaring the Certificate of Redemption
issued by the Provincial Sheriff (Exh. M) null and void; ordering the Provincial
Sheriff of Negros Oriental to execute a Final Deed of Sale of the foreclosed
properties in favor of the defendant Dumaguete Rural Bank, Inc., subject to
the rights of the Yap spouses acquired in accordance with the Deed of Sale
with Mortgage (Exh. B-Maxino and Dy; Exh. 1 Yap); declaring null and void the
Deed of Sale dated Oct[ober] 27, 1979, made by Tirambulo and Estorco in
favor of the Dys and Maxinos covering all the seven (7) parcels of land in
question; in Civil Case No. 8439, declaring the Yap spouses, the exclusive
owners of Lot No. 1, covered by TCT No. T-14777, and Lot No. 6, covered by
TCT No. T-14781, for failure on the part of the Dy and Maxino spouses, to
redeem said properties within (1) year from the date of registration of the
auction sale) after plaintiffs had perfected appeal of the 12 February 1997
decision, without hearing or awaiting plaintiffs comment, and in the face of the
records showing that the issues were never raised, much less litigated, insofar
as Tirambulo, as well in the face of the foregoing circumstances, especially
dismissal of defendants claims and counterclaims and acquisition of ownership
and possession of the parcels of land by plaintiffs as well as disposition and/or
loss of defendants rights and interests and cause of action in respect thereof
and/or settlement, waiver, and/or extinguishment of their claims, and merger
in plaintiffs-appellants, and without stating clearly the facts and the law upon
which it is based[; and]
8) not finding, holding and ruling that defendants acted in bad faith and in
an abusive and oppressive manner, if not contrary to law; and in not awarding
plaintiffs damages.[32]
On May 17, 2005, the CA rendered a decision reversing the March 7, 1997
amended decision of the trial court. The dispositive portion of the assailed CA
decision reads:
IN LIGHT OF THE FOREGOING, this appeal is GRANTED. The decision as
well as the amended decision of the Regional Trial Court is REVERSED AND
SET ASIDE. In lieu thereof[,] judgment is hereby rendered as follows:
1. Declaring the sale made by Dumaguete Rural Bank Inc. to Sps. Francisco
and Whelma Yap with respect to Lot No. 3 under TCT No. T-20301 as null and
void;
2. Declaring the redemption made by Spouses Dy and Spouses Maxino
with regards to Lot No. 6 under TCT No. T-14781 and Lot No. 1 under TCT
No. [T-]14777 as valid;
3. Ordering defendants, Sps. Yap, to deliver the possession and ownership
thereof to Sps. Dy and Sps. Maxino; to give a fair accounting of the proceeds
of these three parcels of land and to tender and deliver the corresponding
amount of income from October 24, 1985 until the finality of this judgment[;
and]
4. Condemning the defendant bank to pay damages to Spouses Dy and
Spouses Maxino the amount of P20,000.00 as moral damages and
P200,000.00 as exemplary damages and attorneys fees in the amount of
P50,000.00.
All other claims are dismissed.
Costs against the appellees.
SO ORDERED.[33]
The CA held that the trial court erred in ruling that it could not consider the
evidence for the Dys and the Maxinos allegedly because they failed to formally
offer the same. The CA noted that although the testimonies of Attys. Marcelino
C. Maxino and Benjamin V. Diputado were not formally offered, the procedural
lapse was cured when the opposing counsel cross-examined said witnesses.
Also, while the original TSNs of the witnesses for the plaintiffs in Civil Case
No. 8426 were burned, the latters counsel who had copies thereof, furnished
the Yaps copies for their scrutiny and comment. The CA further noted that the
trial court also admitted all the documentary exhibits of the Dys and the
Maxinos on March 3, 1995. Unfortunately, however, the trial court simply failed
to locate the pertinent documents in the voluminous records of the cases.
On the merits, the CA ruled that the Dys and the Maxinos had proven their
cause of action sufficiently. The CA noted that their claim that Lot 3 was not
among the properties foreclosed was duly corroborated by Atty. Diputado, the
Provincial Sheriff who conducted the foreclosure sale. The Yaps also failed to
rebut their contention regarding the formers acceptance of the redemption
money and their delivery of the possession of the three parcels of land to the
Dys and the Maxinos. The CA also noted that not only did the Yaps deliver
possession of Lot 3 to the Dys and the Maxinos, they also filed a Motion to
Withdraw the Redemption Money from the Provincial Sheriff and withdrew the
redemption money.
As to the question whether the redemption was valid or not, the CA found no
need to discuss the issue. It found that the bank was in bad faith and therefore
cannot insist on the protection of the law regarding the need for compliance
with all the requirements for a valid redemption while estoppel and unjust
enrichment operate against the Yaps who had already withdrawn the
redemption money.
Upon motion for reconsideration of the Yaps, however, the CA amended its
decision on March 15, 2006 as follows:
IN LIGHT OF THE FOREGOING, this appeal is GRANTED. The decision as
well as the amended decision of the Regional Trial Court is REVERSED AND
SET ASIDE. In lieu thereof[,] judgment is hereby rendered as follows:
1.Declaring the sale made by Dumaguete Rural Bank Inc. to Sps. Francisco
and Whelma Yap with respect to Lot No. 3 under TCT No. T-20301 null and
void;
2.Declaring the redemption made by Spouses Dy and Spouses Maxino with
regards to Lot No. 6 under TCT No. T-14781 and Lot No. 1 under TCT No. [T-
]14777 as valid;
3. Condemning the defendant bank to pay damages to Spouses Dy and
Spouses Maxino the amount of P20,000.00 as moral damages and
P200,000.00 as exemplary damages and attorneys fees in the amount of
P50,000.00.
All other claims are dismissed.
Costs against the appellees.
SO ORDERED.[34]
Hence, the consolidated petitions assailing the appellate courts decision.
The Yaps argue in the main that there is no valid redemption of the properties
extrajudicially foreclosed. They contend that the P40,000.00 cannot be
considered a valid tender of redemption since the amount of the auction sale
is P216,040.93. They also argue that a valid tender of payment for redemption
can only be made to DRBI since at that time, their rights were subordinate to
the final consolidation of ownership by the bank.
DRBI, aside from insisting that all seven mortgaged properties (which thus
includes Lot 3) were validly foreclosed, argues, for its part, that the appellate
court erred in sustaining the redemption made by the Dys and Maxinos. It
anchors its argument on the fact that the sale of the Tirambulos to the Dys and
Maxinos was without the banks consent. The Dys and Maxinos therefore could
not have assumed the character of debtors because a novation of the contract
of mortgage between the Tirambulos and DRBI did not take place as such a
novation is proscribed by Article 1293 of the Civil Code. And there being no
valid redemption within the contemplation of law and DRBI being the highest
bidder during the auction sale, DRBI has become the absolute owner of the
properties mortgaged when the redemption period expired.
DRBI further argues that it was unfair and unjust for them to be held liable for
damages for supposedly wrongfully foreclosing on Lot 3, depriving the Dys and
the Maxinos of the use of the land, and registering the Certificate of Sale which
included Lot 3 when it should have excluded the same. DRBI argues that as a
juridical person, it only authorized and consented, through its Board of
Directors, to lawful processes. The unlawful acts of the Sheriff, who is
considered as an agent of the bank in the foreclosure proceedings, cannot
bind DRBI. Moreover, DRBI cannot be liable for damages on the basis of an
affidavit that was submitted only before the CA as the bank had no chance to
cross-examine the affiant and determine the veracity and propriety of the
statements narrated in said affidavit.
Thus, the issues to be resolved in the instant case are essentially as follows:
(1) Is Lot 3 among the foreclosed properties? (2) To whom should the payment
of redemption money be made? (3) Did the Dys and Maxinos validly redeem
Lots 1 and 6? and (4) Is DRBI liable for damages?
As to the first issue, we find that the CA correctly ruled that the Dys and
Maxinos were able to prove their claim that Lot 3 was not among the properties
foreclosed and that it was merely inserted by the bank in the Sheriffs Certificate
of Sale. As Atty. Diputado, the Provincial Sheriff, testified, the application for
foreclosure was only for five parcels of land, namely, Lots 1, 4, 5, 6 and 8.
Accordingly, only said five parcels of land were included in the publication and
sold at the foreclosure sale. When he was shown a copy of the Sheriffs
Certificate of Sale consisting of three pages, he testified that it was altered
because Lot 3 and Lot 846 were included beyond the xxx that marked the end
of the enumeration of the lots foreclosed.[35] Also, a perusal of DRBIs
application for foreclosure of real estate mortgage[36] shows that it explicitly
refers to only one deed of mortgage to settle the Tirambulos indebtedness
amounting to P216,040.93. This is consistent with the Notice of Extrajudicial
Sale of Mortgaged Property, published in the Dumaguete Star Informer on
February 18, 25 and March 4, 1982,[37] announcing the sale of Lots 1, 4, 5, 6
and 8 for the satisfaction of the indebtedness amounting to P216,040.93. It is
also consistent with the fact that Lots 1, 4, 5, 6 and 8 are covered by only one
real estate mortgage, the Real Estate Mortgage[38] dated December 3, 1976.
Indeed, that the foreclosure sale refers only to Lots 1, 4, 5, 6 and 8 is clear
from the fact that Lots 1, 4, 5, 6 and 8 and Lot 3 are covered by two separate
real estate mortgages. DRBI failed to refute these pieces of evidence against
it.
As to the second issue regarding the question as to whom payment of the
redemption money should be made, Section 31,[39] Rule 39 of the Rules of
Court then applicable provides:
SEC. 31. Effect of redemption by judgment debtor, and a certificate to be
delivered and recorded thereupon. To whom payments on redemption made.If
the judgment debtor redeem, he must make the same payments as are
required to effect a redemption by a redemptioner, whereupon the effect of the
sale is terminated and he is restored to his estate, and the person to whom the
payment is made must execute and deliver to him a certificate of redemption
acknowledged or approved before a notary public or other officer authorized
to take acknowledgments of conveyances of real property. Such certificate
must be filed and recorded in the office of the registrar of deeds of the province
in which the property is situated, and the registrar of deeds must note the
record thereof on the margin of the record of the certificate of sale. The
payments mentioned in this and the last preceding sections may be made to
the purchaser or redemptioner, or for him to the officer who made the sale.
(Emphasis supplied.)
Here, the Dys and the Maxinos complied with the above-quoted provision. Well
within the redemption period, they initially attempted to pay the redemption
money not only to the purchaser, DRBI, but also to the Yaps. Both DRBI and
the Yaps however refused, insisting that the Dys and Maxinos should pay the
whole purchase price at which all the foreclosed properties were sold during
the foreclosure sale. Because of said refusal, the Dys and Maxinos correctly
availed of the alternative remedy by going to the sheriff who made the sale. As
held in Natino v. Intermediate Appellate Court,[40] the tender of the redemption
money may be made to the purchaser of the land or to the sheriff. If made to
the sheriff, it is his duty to accept the tender and execute the certificate of
redemption.
But were the Dys and Maxinos entitled to redeem Lots 1 and 6 in the first
place? We rule in the affirmative.
The Dys and the Maxinos have legal personality to redeem the subject
properties.
Contrary to petitioners contention, the Dys and Maxinos have legal personality
to redeem the subject properties despite the fact that the sale to the Dys and
Maxinos was without DRBIs consent. In Litonjua v. L & R Corporation,[41] this
Court declared valid the sale by the mortgagor of mortgaged property to a third
person notwithstanding the lack of written consent by the mortgagee, and
likewise recognized the third persons right to redeem the foreclosed property,
to wit:
Coming now to the issue of whether the redemption offered by PWHAS on
account of the spouses Litonjua is valid, we rule in the affirmative. The sale
by the spouses Litonjua of the mortgaged properties to PWHAS is valid.
Therefore, PWHAS stepped into the shoes of the spouses Litonjua on account
of such sale and was in effect, their successor-in-interest. As such, it had the
right to redeem the property foreclosed by L & R Corporation. Again,
Tambunting, supra, clarifies that
x x x. The acquisition by the Hernandezes of the Escuetas rights over the
property carried with it the assumption of the obligations burdening the
property, as recorded in the Registry of Property, i.e., the mortgage debts in
favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by stepping
into the Escuetas shoes as assignees, had the obligation to pay the mortgage
debts, otherwise, these debts would and could be enforced against the
property subject of the assignment. Stated otherwise, the Hernandezes, by
the assignment, obtained the right to remove the burdens on the property
subject thereof by paying the obligations thereby secured; that is to say, they
had the right of redemption as regards the first mortgage, to be exercised
within the time and in the manner prescribed by law and the mortgage deed;
and as regards the second mortgage, sought to be judicially foreclosed but yet
unforeclosed, they had the so-called equity of redemption.
The right of PWHAS to redeem the subject properties finds support in Section
6 of Act 3135 itself which gives not only the mortgagor-debtor the right to
redeem, but also his successors-in-interest. As vendee of the subject
properties, PWHAS qualifies as such a successor-in-interest of the spouses
Litonjua.[42]
Likewise, we rule that the Dys and the Maxinos validly redeemed Lots 1 and
6.
The requisites of a valid redemption are present
The requisites for a valid redemption are: (1) the redemption must be made
within twelve (12) months from the time of the registration of the sale in the
Office of the Register of Deeds; (2) payment of the purchase price of the
property involved, plus 1% interest per month thereon in addition, up to the
time of redemption, together with the amount of any assessments or taxes
which the purchaser may have paid thereon after the purchase, also with 1%
interest on such last named amount; and (3) written notice of the redemption
must be served on the officer who made the sale and a duplicate filed with the
Register of Deeds of the province.[43]
There is no issue as to the first and third requisites. It is undisputed that the
Dys and the Maxinos made the redemption within the 12-month period from
the registration of the sale. The Dys and Maxinos effected the redemption on
May 24, 1984, when they deposited P50,373.42 with the Provincial Sheriff, and
on June 19, 1984, when they deposited an additional P83,850.50. Both dates
were well within the one-year redemption period reckoned from the June 24,
1983 date of registration of the foreclosure sale. Likewise, the Provincial
Sheriff who made the sale was properly notified of the redemption since the
Dys and Maxinos deposited with him the redemption money after both DRBI
and the Yaps refused to accept it.
The second requisite, the proper redemption price, is the main subject of
contention of the opposing parties.
The Yaps argue that P40,000.00 cannot be a valid tender of redemption since
the amount of the auction sale was P216,040.93. They further contend that the
mortgage is indivisible so in order for the tender to be valid and effectual, it
must be for the entire auction price plus legal interest.
We cannot subscribe to the Yaps argument on the indivisibility of the
mortgage. As held in the case of Philippine National Bank v. De los Reyes,[44]
the doctrine of indivisibility of mortgage does not apply once the mortgage is
extinguished by a complete foreclosure thereof as in the instant case. The
Court held:
The parties were accordingly embroiled in a hermeneutic disparity on their
aforesaid contending positions. Yet, the rule on the indivisibility of mortgage
finds no application to the case at bar. The particular provision of the Civil Code
referred to provides:
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be
divided among the successors in interest of the debtor or of the creditor.
Therefore, the debtors heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is
not completely satisfied.
Neither can the creditors heir who received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of the other heirs who have
not been paid.
From these provisions is excepted the case in which, there being several
things given in mortgage or pledge, each one of these guarantees only a
determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge
or mortgage as the portion of the debt for which each thing is specially
answerable is satisfied.
From the foregoing, it is apparent that what the law proscribes is the
foreclosure of only a portion of the property or a number of the several
properties mortgaged corresponding to the unpaid portion of the debt where
before foreclosure proceedings partial payment was made by the debtor on
his total outstanding loan or obligation. This also means that the debtor cannot
ask for the release of any portion of the mortgaged property or of one or some
of the several lots mortgaged unless and until the loan thus, secured has been
fully paid, notwithstanding the fact that there has been a partial fulfillment of
the obligation. Hence, it is provided that the debtor who has paid a part of the
debt cannot ask for the proportionate extinguishment of the mortgage as long
as the debt is not completely satisfied.
That the situation obtaining in the case at bar is not within the purview of the
aforesaid rule on indivisibility is obvious since the aggregate number of the lots
which comprise the collaterals for the mortgage had already been foreclosed
and sold at public auction. There is no partial payment nor partial
extinguishment of the obligation to speak of. The aforesaid doctrine, which is
actually intended for the protection of the mortgagee, specifically refers to the
release of the mortgage which secures the satisfaction of the indebtedness
and naturally presupposes that the mortgage is existing. Once the mortgage
is extinguished by a complete foreclosure thereof, said doctrine of indivisibility
ceases to apply since, with the full payment of the debt, there is nothing more
to secure.[45] (Emphasis supplied.)
Nothing in the law prohibits the piecemeal redemption of properties sold at one
foreclosure proceeding. In fact, in several early cases decided by this Court,
the right of the mortgagor or redemptioner to redeem one or some of the
foreclosed properties was recognized.
In the 1962 case of Castillo v. Nagtalon,[46] ten parcels of land were sold at
public auction. Nagtalon, who owned three of the ten parcels of land sold,
wanted to redeem her properties. Though the amount she tendered was found
as insufficient to effectively release her properties, the Court held that the
tender of payment was made timely and in good faith and thus, in the interest
of justice, Nagtalon was given the opportunity to complete the redemption
purchase of three of the ten parcels of land foreclosed.
Also, in the later case of Dulay v. Carriaga,[47] wherein Dulay redeemed eight
of the seventeen parcels of land sold at public auction, the trial court declared
the piecemeal redemption of Dulay as void. Said order, however, was annulled
and set aside by the Court on certiorari and the Court upheld the redemption
of the eight parcels of land sold at public auction.
Clearly, the Dys and Maxinos can effect the redemption of even only two of
the five properties foreclosed. And since they can effect a partial redemption,
they are not required to pay the P216,040.93 considering that it is the purchase
price for all the five properties foreclosed.
So what amount should the Dys and Maxinos pay in order for their redemption
of the two properties be deemed valid considering that when the five properties
were auctioned, they were not separately valued?
Contrary to the Yaps contention, the amount paid by the Dys and Maxinos
within the redemption period for the redemption of just two parcels of land was
not only P40,000.00 but totaled to P134,223.92 (P50,373.42 paid on May 28,
1984 plus P83,850.50 paid on June 19, 1984). That is more than 60% of the
purchase price for the five foreclosed properties, to think the Dys and Maxinos
were only redeeming two properties. We find that it can be considered a
sufficient amount if we were to base the proper purchase price on the
proportion of the size of Lots 1 and 6 with the total size of the five foreclosed
properties, which had the following respective sizes:
Lot 1
61,371 square meters
Lot 6
16,087 square meters
Lot 5
2,900 square meters
Lot 4
27,875 square meters
Lot 8
39,888 square meters
TOTAL
148,121 square meters
The two subject properties to be redeemed, Lots 1 and 6, have a total area of
77,458 square meters or roughly 52% of the total area of the foreclosed
properties. Even with this rough approximation, we rule that there is no reason
to invalidate the redemption of the Dys and Maxinos since they tendered 60%
of the total purchase price for properties constituting only 52% of the total area.
However, there is a need to remand the case for computation of the pro-rata
value of Lots 1 and 6 based on their true values at that time of redemption for
the purposes of determining if there is any deficiency or overpayment on the
part of the Dys and Maxinos.
As to the award of damages in favor of the Dys and Maxinos, we agree with
the appellate court for granting the same.
The CA correctly observed that the act of DRBI in falsifying the Sheriffs
Certificate of Sale to include Lots 3 and 846, even if said additional lots were
not among the properties foreclosed, was the proximate cause of the
pecuniary loss suffered by the Dys and Maxinos in the form of lost income from
Lot 3.
Likewise, the CA also correctly awarded moral damages. Paragraph 10, Article
2219 of the Civil Code provides that moral damages may be recovered in case
of acts and actions referred to in Article 21 of the same Code. Article 21 reads:
ART. 21 Any person who willfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall compensate the
latter for the damage.
As previously discussed, DRBIs act of maliciously including two additional
properties in the Sheriffs Certificate of Sale even if they were not included in
the foreclosed properties caused the Dys and Maxinos pecuniary loss. Hence,
DRBI is liable to pay moral damages.
The award of exemplary damages is similarly proper. Exemplary or corrective
damages are imposed, by way of example or correction for the public good, in
addition to the moral, temperate, liquidated or compensatory damages.[48] We
cannot agree more with the following ratio of the appellate court in granting the
same:
Additionally, what is alarming to the sensibilities of the Court is the deception
employed by the bank in adding other properties in the certificate of sale under
public auction without them being included in the public auction conducted. It
cannot be overemphasized that being a lending institution, prudence dictates
that it should employ good faith and due diligence with the properties entrusted
to it. It was the bank which submitted the properties ought to be foreclosed to
the sheriff. It only submitted five (5) properties for foreclosure. Yet, it caused
the registration of the Certificate of Sale under public auction which listed more
properties than what was foreclosed. On this aspect, exemplary damages in
the amount of P200,000.00 are in order.[49]
There being an award of exemplary damages, the award of attorneys fees is
likewise proper as provided in paragraph 1, Article 2208 of the Civil Code.
WHEREFORE, the petitions for review on certiorari are DENIED for lack of
merit. The Decision dated May 17, 2005 and Resolution dated March 15, 2006
of the Court of Appeals in CA-G.R. C.V. No. 57205 are hereby AFFIRMED
with the MODIFICATION that the case is REMANDED to the Regional Trial
Court of Negros Oriental, Branch 44, Dumaguete City, for the computation of
the pro-rata value of properties covered by TCT No. T-14777 (Lot 1) and TCT
No. T-14781 (Lot 6) of the Registry of Deeds of Negros Oriental at the time of
redemption to determine if there is a deficiency to be settled by or overpayment
to be refunded to respondent Spouses Zosimo Dy, Sr. and Natividad Chiu and
Spouses Marcelino C. Maxino and Remedios Lasola with regard to the
redemption money they paid.
With costs against the petitioners.
SO ORDERED.
8. Pameca Wood Treatment Plant Inc. v. CA, G.R. No. 106435, July 22,
1996
[G.R. No. 106435. July 14, 1999]
PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES,
VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO, petitioners, vs. HON.
COURT OF APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES,
respondents.
DECISION
GONZAGA-REYES, J.:
Before Us for review on certiorari is the decision of the respondent Court of
Appeals in CA G.R. CV No. 27861, promulgated on April 23, 1992,[1] affirming
in toto the decision of the Regional Trial Court of Makati[2] to award respondent
banks deficiency claim, arising from a loan secured by chattel mortgage.
The antecedents of the case are as follows:
On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA)
obtained a loan of US$267,881.67, or the equivalent of P2,000,000.00 from
respondent Bank. By virtue of this loan, petitioner PAMECA, through its
President, petitioner Herminio C. Teves, executed a promissory note for the
said amount, promising to pay the loan by installment. As security for the said
loan, a chattel mortgage was also executed over PAMECAs properties in
Dumaguete City, consisting of inventories, furniture and equipment, to cover
the whole value of the loan.

On January 18, 1984, and upon petitioner PAMECAs failure to pay,
respondent bank extrajudicially foreclosed the chattel mortgage, and, as sole
bidder in the public auction, purchased the foreclosed properties for a sum of
P322,350.00. On June 29, 1984, respondent bank filed a complaint for the
collection of the balance of P4,366,332.46[3] with Branch 132 of the Regional
Trial Court of Makati City against petitioner PAMECA and private petitioners
herein, as solidary debtors with PAMECA under the promissory note.
On February 8, 1990, the RTC of Makati rendered a decision on the case, the
dispositive portion of which we reproduce as follows:
WHEREFORE, judgment is hereby rendered ordering the defendants to pay
jointly and severally plaintiff the (1) sum of P4,366,332.46 representing the
deficiency claim of the latter as of March 31, 1984, plus 21% interest per
annum and other charges from April 1, 1984 until the whole amount is fully
paid and (2) the costs of the suit. SO ORDERED.[4]
The Court of Appeals affirmed the RTC decision. Hence, this Petition.
The petition raises the following grounds:
1. Respondent appellate court gravely erred in not reversing the decision of
the trial court, and in not holding that the public auction sale of petitioner
PAMECAs chattels were tainted with fraud, as the chattels of the said
petitioner were bought by private respondent as sole bidder in only 1/6 of the
market value of the property, hence unconscionable and inequitable, and
therefore null and void.
2. Respondent appellate court gravely erred in not applying by analogy Article
1484 and Article 2115 of the Civil Code by reading the spirit of the law, and
taking into consideration the fact that the contract of loan was a contract of
adhesion.
3. The appellate court gravely erred in holding the petitioners Herminio Teves,
Victoria Teves and Hiram Diday R. Pulido solidarily liable with PAMECA Wood
Treatment Plant, Inc. when the intention of the parties was that the loan is only
for the corporations benefit.
Relative to the first ground, petitioners contend that the amount of P322,350.00
at which respondent bank bid for and purchased the mortgaged properties was
unconscionable and inequitable considering that, at the time of the public sale,
the mortgaged properties had a total value of more than P2,000,000.00.
According to petitioners, this is evident from an inventory dated March 31,
1980[5], which valued the properties at P2,518,621.00, in accordance with the
terms of the chattel mortgage contract[6] between the parties that required that
the inventories be maintained at a level no less than P2 million. Petitioners
argue that respondent banks act of bidding and purchasing the mortgaged
properties for P322,350.00 or only about 1/6 of their actual value in a public
sale in which it was the sole bidder was fraudulent, unconscionable and
inequitable, and constitutes sufficient ground for the annulment of the auction
sale.
To this, respondent bank contends that the above-cited inventory and chattel
mortgage contract were not in fact submitted as evidence before the RTC of
Makati, and that these documents were first produced by petitioners only when
the case was brought to the Court of Appeals.[7] The Court of Appeals, in turn,
disregarded these documents for petitioners failure to present them in
evidence, or to even allude to them in their testimonies before the lower
court.[8] Instead, respondent court declared that it is not at all unlikely for the
chattels to have sufficiently deteriorated as to have fetched such a low price at
the time of the auction sale.[9] Neither did respondent court find anything
irregular or fraudulent in the circumstance that respondent bank was the sole
bidder in the sale, as all the legal procedures for the conduct of a foreclosure
sale have been complied with, thus giving rise to the presumption of regularity
in the performance of public duties.[10]
Petitioners also question the ruling of respondent court, affirming the RTC, to
hold private petitioners, officers and stockholders of petitioner PAMECA, liable
with PAMECA for the obligation under the loan obtained from respondent
bank, contrary to the doctrine of separate and distinct corporate
personality.[11] Private petitioners contend that they became signatories to the
promissory note only as a matter of practice by the respondent bank, that the
promissory note was in the nature of a contract of adhesion, and that the loan
was for the benefit of the corporation, PAMECA, alone.[12]
Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit
that Articles 1484[13] and 2115[14] of the Civil Code be applied in analogy to
the instant case to preclude the recovery of a deficiency claim.[15]
Petitioners are not the first to posit the theory of the applicability of Article 2115
to foreclosures of chattel mortgage. In the leading case of Ablaza vs.
Ignacio[16], the lower court dismissed the complaint for collection of deficiency
judgment in view of Article 2141 of the Civil Code, which provides that the
provisions of the Civil Code on pledge shall also apply to chattel mortgages,
insofar as they are not in conflict with the Chattel Mortgage Law. It was the
lower courts opinion that, by virtue of Article 2141, the provisions of Article
2115 which deny the creditor-pledgee the right to recover deficiency in case
the proceeds of the foreclosure sale are less than the amount of the principal
obligation, will apply.
This Court reversed the ruling of the lower court and held that the provisions
of the Chattel Mortgage Law regarding the effects of foreclosure of chattel
mortgage, being contrary to the provisions of Article 2115, Article 2115 in
relation to Article 2141, may not be applied to the case.
Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:
xxx
The officer making the sale shall, within thirty days thereafter, make in writing
a return of his doings and file the same in the office of the Registry of Deeds
where the mortgage is recorded, and the Register of Deeds shall record the
same. The fees of the officer for selling the property shall be the same as the
case of sale on execution as provided in Act Numbered One Hundred and
Ninety, and the amendments thereto, and the fees of the Register of Deeds
for registering the officers return shall be taxed as a part of the costs of sale,
which the officer shall pay to the Register of Deeds. The return shall particularly
describe the articles sold, and state the amount received for each article, and
shall operate as a discharge of the lien thereon created by the mortgage. The
proceeds of such sale shall be applied to the payment, first, of the costs and
expenses of keeping and sale, and then to the payment of the demand or
obligation secured by such mortgage, and the residue shall be paid to persons
holding subsequent mortgages in their order, and the balance, after paying the
mortgage, shall be paid to the mortgagor or persons holding under him on
demand. (Emphasis supplied)
It is clear from the above provision that the effects of foreclosure under the
Chattel Mortgage Law run inconsistent with those of pledge under Article 2115.
Whereas, in pledge, the sale of the thing pledged extinguishes the entire
principal obligation, such that the pledgor may no longer recover proceeds of
the sale in excess of the amount of the principal obligation, Section 14 of the
Chattel Mortgage Law expressly entitles the mortgagor to the balance of the
proceeds, upon satisfaction of the principal obligation and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining
the excess of the sale proceeds there is a corollary obligation on the part of
the debtor-mortgagee to pay the deficiency in case of a reduction in the price
at public auction. As explained in Manila Trading and Supply Co. vs. Tamaraw
Plantation Co.[17], cited in Ablaza vs. Ignacio, supra:
While it is true that section 3 of Act No. 1508 provides that a chattel mortgage
is a conditional sale, it further provides that it is a conditional sale of personal
property as security for the payment of a debt, or for the performance of some
other obligation specified therein. The lower court overlooked the fact that the
chattels included in the chattel mortgage are only given as security and not as
a payment of the debt, in case of a failure of payment.
The theory of the lower court would lead to the absurd conclusion that if the
chattels mentioned in the mortgage, given as security, should sell for more
than the amount of the indebtedness secured, that the creditor would be
entitled to the full amount for which it might be sold, even though that amount
was greatly in excess of the indebtedness. Such a result certainly was not
contemplated by the legislature when it adopted Act No. 1508. There seems
to be no reason supporting that theory under the provision of the law. The
value of the chattels changes greatly from time to time, and sometimes very
rapidly. If, for example, the chattels should greatly increase in value and a sale
under that condition should result in largely overpaying the indebtedness, and
if the creditor is not permitted to retain the excess, then the same token would
require the debtor to pay the deficiency in case of a reduction in the price of
the chattels between the date of the contract and a breach of the condition.
Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other
authors on the question of chattel mortgages, have said, that in case of a sale
under a foreclosure of a chattel mortgage, there is no question that the
mortgagee or creditor may maintain an action for the deficiency, if any should
occur. And the fact that Act No. 1508 permits a private sale, such sale is not,
in fact, a satisfaction of the debt, to any greater extent than the value of the
property at the time of the sale. The amount received at the time of the sale,
of course, always requiring good faith and honesty in the sale, is only a
payment, pro tanto, and an action may be maintained for a deficiency in the
debt.
We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases
reiterating it[18]
Neither do We find tenable the application by analogy of Article 1484 of the
Civil Code to the instant case. As correctly pointed out by the trial court, the
said article applies clearly and solely to the sale of personal property the price
of which is payable in installments. Although Article 1484, paragraph (3)
expressly bars any further action against the purchaser to recover an unpaid
balance of the price, where the vendor opts to foreclose the chattel mortgage
on the thing sold, should the vendees failure to pay cover two or more
installments, this provision is specifically applicable to a sale on installments.
To accommodate petitioners prayer even on the basis of equity would be to
expand the application of the provisions of Article 1484 to situations beyond
its specific purview, and ignore the language and intent of the Chattel
Mortgage Law. Equity, which has been aptly described as justice outside
legality, is applied only in the absence of, and never against, statutory law or
judicial rules of procedure.[19]
We are also unable to find merit in petitioners submission that the public
auction sale is void on grounds of fraud and inadequacy of price. Petitioners
never assailed the validity of the sale in the RTC, and only in the Court of
Appeals did they attempt to prove inadequacy of price through the documents,
i.e., the Open-End Mortgage on Inventory and inventory dated March 31, 1980,
likewise attached to their Petition before this Court. Basic is the rule that parties
may not bring on appeal issues that were not raised on trial.
Having nonetheless examined the inventory and chattel mortgage document
as part of the records, We are not convinced that they effectively prove that
the mortgaged properties had a market value of at least P2,000,000.00 on
January 18, 1984, the date of the foreclosure sale. At best, the chattel
mortgage contract only indicates the obligation of the mortgagor to maintain
the inventory at a value of at least P2,000,000.00, but does not evidence
compliance therewith. The inventory, in turn, was as of March 31, 1980, or
even prior to April 17, 1980, the date when the parties entered into the
contracts of loan and chattel mortgage, and is far from being an accurate
estimate of the market value of the properties at the time of the foreclosure
sale four years thereafter. Thus, even assuming that the inventory and chattel
mortgage contract were duly submitted as evidence before the trial court, it is
clear that they cannot suffice to substantiate petitioners allegation of
inadequacy of price.
Furthermore, the mere fact that respondent bank was the sole bidder for the
mortgaged properties in the public sale does not warrant the conclusion that
the transaction was attended with fraud. Fraud is a serious allegation that
requires full and convincing evidence,[20] and may not be inferred from the
lone circumstance that it was only respondent bank that bid in the sale of the
foreclosed properties. The sparseness of petitioners evidence in this regard
leaves Us no discretion but to uphold the presumption of regularity in the
conduct of the public sale.
We likewise affirm private petitioners joint and several liability with petitioner
corporation in the loan. As found by the trial court and the Court of Appeals,
the terms of the promissory note unmistakably set forth the solidary nature of
private petitioners commitment. Thus:
On or before May 12, 1980, for value received, PAMECA WOOD
TREATMENT PLANT, INC., a corporation organized and existing under the
laws of the Philippines, with principal office at 304 El Hogar Filipina Building,
San Juan, Manila, promise to pay to the order of DEVELOPMENT BANK OF
THE PHILIPPINES at its office located at corner Buendia and Makati Avenues,
Makati, Metro Manila, the principal sum of TWO HUNDRED SIXTY SEVEN
THOUSAND EIGHT HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS
(US$ 267,881.67) with interest at the rate of three per cent (3%) per annum
over DBPs borrowing rate for these funds. Before the date of maturity, we
hereby bind ourselves, jointly and severally, to make partial payments as
follows:
xxx
In case of default in the payment of any installment above, we bind ourselves
to pay DBP for advances xxx
xxx
We further bind ourselves to pay additional interest and penalty charges on
loan amortizations or portion thereof in arrears as follows:
xxx
"In addition to the above, we also bind ourselves to pay for bank advances for
insurance premiums, taxes xxx
xxx
"We further bind ourselves to reimburse DBP on a pro-rata basis for all costs
incurred by DBP on the foreign currency borrowings from where the loan shall
be drawn xxx
xxx
In case of non-payment of the amount of this note or any portion of it on
demand, when due, or any other amount or amounts due on account of this
note, the entire obligation shall become due and demandable, and if, for the
enforcement of the payment thereof, the DEVELOPMENT BANK OF THE
PHILIPPINES is constrained to entrust the case to its attorneys, we jointly and
severally bind ourselves to pay for attorneys fees as provided for in the
mortgage contract, in addition to the legal fees and other incidental expenses.
In the event of foreclosure of the mortgage securing this note, we further bind
ourselves jointly and severally to pay the deficiency, if any. (Emphasis
supplied)[21]
The promissory note was signed by private petitioners in the following manner:
PAMECA WOOD TREATMENT PLANT, INC.
By:
(Sgd) HERMINIO G. TEVES
(For himself & as President of above-named corporation)
 affirming the Decision of the Regional Trial Court (RTC) of Pasig City, Branch
(Sgd) HIRAM DIDAY PULIDO 160, in favor of respondents.

(Sgd) VICTORIA V. TEVES[22]
From the foregoing, it is clear that private petitioners intended to bind
themselves solidarily with petitioner PAMECA in the loan. As correctly
submitted by respondent bank, private petitioners are not made to answer for
the corporate act of petitioner PAMECA, but are made liable because they
made themselves co-makers with PAMECA under the promissory note.
IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of
the Court of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby
AFFIRMED. Costs against petitioners.
Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered
owners of a parcel of land in San Juan, Metro Manila, covered by Transfer
Certificate of Title (TCT) No. 438157 of the Register of Deeds of Rizal. On 10
July 1975, 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] This
mortgage was annotated at the back of TCT No. 438157. On 4 August 1975,
respondents executed the corresponding promissory note, PN BD#75/C-252,
covering the said loan, which provides that the loan matured on 4 August 1976
at an interest rate of 12% per annum with a 2% service charge, and that the
note is secured by a real estate mortgage as aforementioned.[3] Significantly,
the real estate mortgage contained the following clause:

SO ORDERED. That for and in consideration of certain loans, overdraft and other credit
accommodations obtained from the Mortgagee by the Mortgagor and/or
9. Prudential Bank v. Alviar, G.R. No. 150197, July 28, 2005 ________________ hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and those that may hereafter
PRUDENTIAL BANK, G.R. No. 150197 be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty
Petitioner, Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the
Present: Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest
and expenses or any other obligation owing to the Mortgagee, whether direct
PUNO, J., or indirect, principal or secondary as appears in the accounts, books and
Chairman, records of the Mortgagee, the Mortgagor does hereby transfer and convey by
- versus - AUSTRIA-MARTINEZ, way of mortgage unto the Mortgagee, its successors or assigns, the parcels of
CALLEJO, SR., land which are described in the list inserted on the back of this document,
TINGA, and and/or appended hereto, together with all the buildings and improvements now
CHICO-NAZARIO, JJ. existing or which may hereafter be erected or constructed thereon, of which
DON A. ALVIAR and GEORGIA the Mortgagor declares that he/it is the absolute owner free from all liens and
B. ALVIAR, incumbrances. . . .[4]
Respondents. Promulgated:
July 28, 2005
On 22 October 1976, Don Alviar executed another promissory note, PN
x-------------------------------------------------------------------x 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
DECISION passbook is to be surrendered to the bank until the amount secured by the
hold-out is settled.[5]
TINGA, J.: On 27 December 1976, 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.
Before us is a petition for review on certiorari under Rule 45 of the Rules of As provided in the note, the loan is secured by Clean-Phase out TOD CA 3923,
Court. Petitioner Prudential Bank seeks the reversal of the Decision[1] of the which means that the temporary overdraft incurred by Donalco Trading, Inc.
Court of Appeals dated 27 September 2001 in CA-G.R. CV No. 59543 with petitioner is to be converted into an ordinary loan in compliance with a
Central Bank circular directing the discontinuance of overdrafts.[7]

On 16 March 1977, 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. 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]
On 06 March 1979, 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]
On 15 January 1980, 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]
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. 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]
On 15 March 1994, the trial court dismissed the complaint and ordered the
Sheriff to proceed with the extra-judicial foreclosure.[13] Respondents sought
reconsideration of the decision.[14] On 24 August 1994, 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.
On appeal to the Court of Appeals, petitioner made the following assignment
of errors:
I. The trial court erred in holding that the real estate mortgage
covers only the promissory note BD#75/C-252 for the sum of P250,000.00.
II. The trial court erred in holding that the promissory note BD#76/C-
345 for P2,640,000.00 (P382,680.83 outstanding principal balance) is not
covered by the real estate mortgage by expressed agreement.
III. The trial court erred in holding that Promissory Note BD#76/C-430
for P545,000.00 is not covered by the real estate mortgage.
IV. The trial court erred in holding that the real estate mortgage is a
contract of adhesion.
V. The trial court erred in holding defendant-appellant liable to pay
plaintiffs-appellees attorneys fees for P20,000.00.[16]
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]
The Court of Appeals, however, found that respondents have not yet paid the
P250,000.00 covered by PN BD#75/C-252 since the payment of
P2,000,000.00 adverted to by respondents was issued for the obligations of
G.B. Alviar Realty and Development, Inc.[19]
Aggrieved, petitioner filed the instant petition, reiterating the assignment of
errors raised in the Court of Appeals as grounds herein.
Petitioner maintains that the blanket mortgage clause or the dragnet clause in
the real estate mortgage expressly covers not only the P250,000.00 under PN
BD#75/C-252, but also the two other promissory notes included in the
application for extrajudicial foreclosure of real estate mortgage.[20] Thus, it
claims that it acted within the terms of the mortgage contract when it filed its
petition for extrajudicial foreclosure of real estate mortgage. Petitioner relies
on the cases of Lim Julian v. Lutero,[21] Tad-Y v. Philippine National Bank,[22]
Quimson v. Philippine National Bank,[23] C & C Commercial v. Philippine
National Bank,[24] Mojica v. Court of Appeals,[25] and China Banking
Corporation v. Court of Appeals,[26] all of which upheld the validity of
mortgage contracts securing future advancements.
Anent the Court of Appeals conclusion that the parties did not intend to include
PN BD#76/C-345 in the real estate mortgage because the same was
specifically secured by a foreign currency deposit account, petitioner states
that there is no law or rule which prohibits an obligation from being covered by
more than one security.[27] Besides, respondents even continued to withdraw
from the same foreign currency account even while the promissory note was
still outstanding, strengthening the belief that it was the real estate mortgage
that principally secured all of respondents promissory notes.[28] As for PN
BD#76/C-345, which the Court of Appeals found to be exclusively secured by
the Clean-Phase out TOD 3923, petitioner posits that such security is not
exclusive, as the dragnet clause of the real estate mortgage covers all the
obligations of the respondents.[29]
Moreover, petitioner insists that respondents attempt to evade foreclosure by
the expediency of stating that the promissory notes were executed by them
not in their personal capacity but as corporate officers. It claims that PN
BD#76/C-430 was in fact for home construction and personal consumption of
respondents. Thus, it states that there is a need to pierce the veil of corporate
fiction.[30]
Finally, petitioner alleges that the mortgage contract was executed by
respondents with knowledge and understanding of the dragnet clause, being
highly educated individuals, seasoned businesspersons, and political
personalities.[31] There was no oppressive use of superior bargaining power
in the execution of the promissory notes and the real estate mortgage.[32]
For their part, respondents claim that the dragnet clause cannot be applied to
the subsequent loans extended to Don Alviar and Donalco Trading, Inc. since
these loans are covered by separate promissory notes that expressly provide
for a different form of security.[33] They reiterate the holding of the trial court
that the blanket mortgage clause would apply only to loans obtained jointly by
respondents, and not to loans obtained by other parties.[34] Respondents also
place a premium on the finding of the lower courts that the real estate mortgage
clause is a contract of adhesion and must be strictly construed against
petitioner bank.[35]
The instant case thus poses the following issues pertaining to: (i) the validity
of the blanket mortgage clause or the dragnet clause; (ii) the coverage of the
blanket mortgage clause; and consequently, (iii) the propriety of seeking
foreclosure of the mortgaged property for the non-payment of the three loans.
At this point, it is important to note that one of the loans sought to be included
in the blanket mortgage clause was obtained by respondents for Donalco
Trading, Inc. Indeed, PN BD#76/C-430 was executed by respondents on
behalf of Donalco Trading, Inc. and not in their personal capacity. Petitioner
asks the Court to pierce the veil of corporate fiction and hold respondents liable
even for obligations they incurred for the corporation. The mortgage contract
states that the mortgage covers as well as those that the Mortgagee may
extend to the Mortgagor and/or DEBTOR, including interest and expenses or
any other obligation owing to the Mortgagee, whether direct or indirect,
principal or secondary. Well-settled is the rule that a corporation has a
personality separate and distinct from that of its officers and stockholders.
Officers of a corporation are not personally liable for their acts as such officers
unless it is shown that they have exceeded their authority.[36] However, the
legal fiction that a corporation has a personality separate and distinct from
stockholders and members may be disregarded if it is used as a means to
perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate issues.[37]
PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the
respondents, is not within the contemplation of the blanket mortgage clause.
Moreover, petitioner is unable to show that respondents are hiding behind the
corporate structure to evade payment of their obligations. Save for the notation
in the promissory note that the loan was for house construction and personal
consumption, there is no proof showing that the loan was indeed for
respondents personal consumption. Besides, petitioner agreed to the terms of
the promissory note. If respondents were indeed the real parties to the loan,
petitioner, a big, well-established institution of long standing that it is, should
have insisted that the note be made in the name of respondents themselves,
and not to Donalco Trading Inc., and that they sign the note in their personal
capacity and not as officers of the corporation.
Now on the main issues.
A blanket mortgage clause, also known as a dragnet clause in American
jurisprudence, is one which is specifically phrased to subsume all debts of past
or future origins. Such clauses are carefully scrutinized and strictly
construed.[38] Mortgages of this character enable the parties to provide
continuous dealings, the nature or extent of which may not be known or
anticipated at the time, and they avoid the expense and inconvenience of
executing a new security on each new transaction.[39] 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.[40] Indeed, it has been settled in a long line
of decisions that mortgages given to secure future advancements are valid and
legal contracts,[41] and the amounts named as consideration in said contracts
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.[42]
The blanket mortgage clause in the instant case states:
That for and in consideration of certain loans, overdraft and other credit
accommodations obtained from the Mortgagee by the Mortgagor and/or
________________ hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and those that may hereafter
be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty
Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest
and expenses or any other obligation owing to the Mortgagee, whether direct
or indirect, principal or secondary as appears in the accounts, books and
records of the Mortgagee, the Mortgagor does hereby transfer and convey by
way of mortgage unto the Mortgagee, its successors or assigns, the parcels of
land which are described in the list inserted on the back of this document,
and/or appended hereto, together with all the buildings and improvements now
existing or which may hereafter be erected or constructed thereon, of which
the Mortgagor declares that he/it is the absolute owner free from all liens and
incumbrances. . . .[43] (Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals, petitioner and
respondents intended the real estate mortgage to secure not only the
P250,000.00 loan from the petitioner, but also future credit facilities and
advancements that may be obtained by the respondents. The terms of the
above provision being clear and unambiguous, there is neither need nor
excuse to construe it otherwise.
The cases cited by petitioner, while affirming the validity of dragnet clauses or
blanket mortgage clauses, are of a different factual milieu from the instant
case. There, the subsequent loans were not covered by any security other
than that for the mortgage deeds which uniformly contained the dragnet
clause.
In the case at bar, the subsequent loans obtained by respondents were
secured by other securities, thus: PN BD#76/C-345, executed by Don Alviar
was secured by a hold-out on his foreign currency savings account, while PN
BD#76/C-430, executed by respondents for Donalco Trading, Inc., was
secured by Clean-Phase out TOD CA 3923 and eventually by a 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 by a chattel
mortgage on various heavy and transportation equipment. The matter of PN
BD#76/C-430 has already been discussed. Thus, the critical issue is whether
the blanket mortgage clause applies even to subsequent advancements for
which other securities were intended, or particularly, to PN BD#76/C-345.
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]
In another case, it was held that a mortgage with a dragnet clause is an offer
by the mortgagor to the bank to provide the security of the mortgage for
advances of and when they were made. Thus, it was concluded that the offer
was not accepted by the bank when a subsequent advance was made
because (1) the second note was secured by a chattel mortgage on certain
vehicles, and the clause therein stated that the note was secured by such
chattel mortgage; (2) there was no reference in the second note or chattel
mortgage indicating a connection between the real estate mortgage and the
advance; (3) the mortgagor signed the real estate mortgage by her name
alone, whereas the second note and chattel mortgage were signed by the
mortgagor doing business under an assumed name; and (4) there was no
allegation by the bank, and apparently no proof, that it relied on the security of
the real estate mortgage in making the advance.[48]
Indeed, in some instances, it has been held that in the absence of clear,
supportive evidence of a contrary intention, a mortgage containing a dragnet
clause will not be extended to cover future advances unless the document
evidencing the subsequent advance refers to the mortgage as providing
security therefor.[49]
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.
One other crucial point. The mortgage contract, as well as the promissory
notes subject of this case, is a contract of adhesion, to which respondents only
participation was the affixing of their signatures or adhesion thereto.[51] A
contract of adhesion is one in which a party imposes a ready-made form of
contract which the other party may accept or reject, but which the latter cannot
modify.[52]
The real estate mortgage in issue appears in a standard form, drafted and
prepared solely by petitioner, and which, according to jurisprudence must be
strictly construed against the party responsible for its preparation.[53] If the
parties intended that the blanket mortgage clause shall cover subsequent
advancement secured by separate securities, then the same should have been
indicated in the mortgage contract. Consequently, any ambiguity is to be taken
contra proferentum, that is, construed against the party who caused the
ambiguity which could have avoided it by the exercise of a little more care.[54]
To be more emphatic, any ambiguity in a contract whose terms are susceptible
of different interpretations must be read against the party who drafted it,[55]
which is the petitioner in this case.
Even the promissory notes in issue were made on standard forms prepared by
petitioner, and as such are likewise contracts of adhesion. Being of such
nature, the same should be interpreted strictly against petitioner and with even
more reason since having been accomplished by respondents in the presence
of petitioners personnel and approved by its manager, they could not have
been unaware of the import and extent of such contracts.
Petitioner, however, is not without recourse. Both the Court of Appeals and the
trial court found that respondents have not yet paid the P250,000.00, and gave
no credence to their claim that they paid the said amount when they paid
petitioner P2,000,000.00. Thus, the mortgaged property could still be properly
subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as
mentioned earlier, for any deficiency after D/A SFDX#129, security for PN
BD#76/C-345, has been exhausted, subject of course to defenses which are
available to respondents.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals
in CA-G.R. CV No. 59543 is AFFIRMED.
Costs against petitioner.
SO ORDERED.
10. China Banking Corp. v. CA, 333 Phil. 158 [1996]
THIRD DIVISION
[G.R. No. 121158. December 5, 1996.]
CHINA BANKING CORPORATION, ATTYS. REYNALDO M. CABUSORA and
RENATO C. TAGUIAM, petitioners, vs. COURT OF APPEALS, HON. PEDRO
T. SANTIAGO, SPS. SO CHING and CRISTINA SO, and NATIVE WEST
INTERNATIONAL TRADING CORP., respondents.
Lim Vigilia Cinco & Orencia for petitioner.
Antonio P. Barredo and Rodrigo D. Sta. Ana for private respondents.
SYLLABUS
1. CIVIL LAW; CONTRACTS; INTERPRETATION; ITS TASK IS THE
ASCERTAINMENT OF THE INTENTION OF THE CONTRACTING PARTIES.
An important task in contract interpretation is the ascertainment of the
intention of the contracting parties which is accomplished by looking at the
words they used to project that intention in their contract, i.e., all the words, not
just a particular word or two, and words in context, not words standing alone.
Article 1374 of the Civil Code, states that "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." SCHTac
2. ID.; ID.; MUST BE RESPECTED AS THE LAW BETWEEN CONTRACTING
PARTIES. The parties have stipulated that the provisions of Act No. 3135
is the controlling law in case of foreclosure. By invoking the said Act, there is
no doubt that it must "govern the manner in which the sale and redemption
shall be effected." Clearly, the fundamental principle that contracts are
respected as the law between the contracting parties finds application in the
present case, specially where they are not contrary to law, morals, good
customs and public policy.
3. ID.; ID.; MORTGAGE; STILL VALID AND LEGAL EVEN IF GIVEN TO
SECURE FUTURE ADVANCEMENTS OR LOANS. It is well settled that
mortgages given to secure future advancements or loans are valid and legal
contracts, and that the amounts named as consideration in said contracts 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.
4. ID.; ID.; ID.; WHEN IS FORECLOSURE VALID. Foreclosure is valid
where the debtors are in default in the payment of their obligation. The essence
of a contract of mortgage indebtedness is that a property has been identified
or set apart from the mass of the property of the debtor-mortgagor as security
for the payment of money or the fulfillment of an obligation to answer the
amount of indebtedness, in case of default of payment. It is a settled rule that
in a real estate mortgage when the obligation is not paid when due, the
mortgagee has the right to foreclose the mortgage and to have the property
seized and sold in view of applying the proceeds to the payment of the
obligation. In fact, aside from the mortgage contracts, the promissory notes
executed to evidence the loans also authorize the mortgagee to foreclose on
the mortgages. ACTIcS
5. ID.; ID.; ID.; REMEDIES OF THE MORTGAGEE IN CASE OF DEFAULT
BY THE MORTGAGOR. ". . . 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) or 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 (Soriano
vs. Enriquez, 24 Phil. 584; Banco de Islas Filipinas vs. Concepcion Hijos, 53
Phil. 86; Banco Nacional vs. Barreto, 53 Phil. 101). "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 Philippines, Inc vs. Intermediate
Appellate Court, 176 SCRA 741]
6. STATUTORY CONSTRUCTION; STATUTES; MAY NOT BE REPEALED
BY ADMINISTRATIVE DIRECTIVES. It is an elementary principle in
statutory construction that a statute is superior to an administrative directive
and the former cannot be repealed or amended by the latter.
7. REMEDIAL LAW; PROVISIONAL REMEDIES; WRIT OF PRELIMINARY
INJUNCTION; WHEN MAY BE AVAILED OF. A writ of preliminary
injunction, as an ancillary or preventive remedy, may only be resorted to by a
litigant to protect or preserve his rights or interests and for no other purpose
during the pendency of the principal action. But before a writ of preliminary
injunction may be issued, there must be a clear showing by the complaint that
there exists a right to be protected and that the acts against which the writ is
to be directed are violative of the said right. IcDESA
DECISION
FRANCISCO, J p:
China Banking Corporation (China Bank) extended several loans to Native
West International Trading Corporation (Native West) and to So Ching, Native
West's president. Native West in turn executed promissory notes 1 in favor of
China Bank. So Ching, with the marital consent of his wife, Cristina So,
additionally executed two mortgages over their properties, viz., a real estate
mortgage executed on July 27, 1989 covering a parcel of land situated in
Cubao, Quezon City, under TCT No. 277797, 2 and another executed on
August 10, 1989 covering a parcel of land located in Mandaluyong, under TCT
No. 5363. 3 The promissory notes matured and despite due demands by China
Bank neither private respondents Native West nor So Ching paid. Pursuant to
a provision embodied in the two mortgage contracts, China Bank filed petitions
for the extra-judicial foreclosure of the mortgaged properties before Notary
Public Atty. Renato E. Taguiam for TCT No. 277797, 4 and Notary Public Atty.
Reynaldo M. Cabusora for TCT No. 5363, 5 copies of which were given to the
spouses So Ching and Cristina So. After due notice and publication, the
notaries public scheduled the foreclosure sale of the spouses' real estate
properties on April 13, 1993. Eight days before the foreclosure sale, however,
private respondents filed a complaint 6 with the Regional Trial Court 7 for
accounting with damages and with temporary restraining order against
petitioners alleging the following causes of action:
"A. Defendants failed to comply with the mandates of Administrative Order No.
3 of the Supreme Court dated October 19, 1984.
"B. Defendants failed to comply with the mandates of Section 2 Presidential
Decree No. 1079 dated January 28, 1977.
"C. MORTGAGORS liability limited to P6,500,000.00 and P3,500,000.00
respectively in the Mortgages Annexes A and B respectively, but the same are
not included in the notice of foreclosure.
"D. Violation of Truth in Lending Act (RP Act No. 3765).
"E. In all the loans granted by DEFENDANT-BANK to plaintiffs and Borrowers,
the Bank charged interests in excess of the rate allowed by the Central Bank.
"F. Violation of Article 1308 of the Civil Code." 8
On April 7, 1993, the trial court issued a temporary restraining order to enjoin
the foreclosure sale. Thereafter counsels for the respective parties agreed to
file their pleadings and to submit the case, without further hearing, for
resolution. On April 28, 1993, the trial court, without passing upon the material
averments of the complaint, issued an Order granting the private respondents'
prayer for the issuance of preliminary injunction with the following proffered
justification:
"From the foregoing, it is quite apparent that a question of accounting poses a
thorny issue as between the litigants. Variance in the amounts involved relating
to the loan agreements must be judiciously passed upon by the Court and this
is only possible if a trial on the merits could be had as the matters appurtenant
thereto are evidentiary in nature.
"Under the premises, the accounting issue being evidentiary in character calls
for an issuance of a writ of preliminary injunction pending the adjudication of
the case. The issuance thereof at this particular stage of the case is merely a
preventive remedy designed to protect from irreparable injury to property or
other rights plaintiff may suffer, which a court of equity may take cognizance
of by commanding acts to be done or prohibiting their commission, as in the
instant suit, to restrain notaries public Cabusora and Taguiam as well as
defendant China Banking Corporation from continuing with the auction sale of
the subject properties, until further orders from this Court.
"Wherefore, premises considered, finding that the circumstances warrant the
issuance of a preliminary injunction, plaintiff's prayer is hereby GRANTED.
Consequent thereto, plaintiffs are hereby ordered to post a bond amounting to
P1 (ONE) Million to answer for whatever damages defendant may suffer as a
consequence of the writ." 9
Petitioners moved for reconsideration, but it was denied in an Order dated
September 23, 1993. To annul the trial court's Orders of April 28, 1993 and
September 23, 1993, petitioners elevated the case through certiorari and
prohibition 10 before public respondent Court of Appeals. 11 In a decision
dated January 17, 1995, respondent Court of Appeals held that Administrative
Circular No. 3 is the governing rule in extra-judicial foreclosure of mortgage,
which circular petitioners however failed to follow, and with respect to the
publication of the notice of the auction sale, the provisions of P.D. No. 1079 is
the applicable statute, 12 which decree petitioners similarly failed to obey.
Respondent Court of Appeals did not pass upon the other issues and confined
its additional lengthy discussion on the validity of the trial court's issuance of
the preliminary injunction, finding the same neither capricious nor whimsical
exercise of judgment that could amount to grave abuse of discretion. 13 The
Court of Appeals accordingly dismissed the petition, as well as petitioners'
subsequent motion for reconsideration. 14 Hence, the instant petition under
Rule 45 of the Rules of Court reiterating the grounds raised before respondent
court, to wit:
"I. PETITIONER CBC'S PETITIONS TO EXTRAJUDICIALLY FORECLOSE
THE REAL ESTATE MORTGAGES OF JULY 27, 1989 AND AUGUST 10,
1989 THRU PETITIONERS-NOTARIES PUBLIC, AND THE SCHEDULED
FORECLOSURE SALE ARE VALID AND LAWFUL;
"II. PRIVATE RESPONDENTS AND PETITIONER CBC HAD EXPRESSLY
AGREED TO CONSIDER THE SAME MORTGAGES AS VALID SECURITIES
FOR PROMPT AND FULL PAYMENT OF ALL AND ANY OBLIGATIONS OF
THE FORMER FROM THE LATTER;
"III. THE SUPPOSED VARIANCE IN THE TOTAL AMOUNT OF UNPAID
LOANS IS NOT A VALID BASIS TO ENJOIN THE FORECLOSURE OF THE
QUESTIONED MORTGAGES. THE MERE FAILURE TO PAY THE LOAN
SECURED BY SAID MORTGAGES IS THE ONLY, SINGLE REASON FOR
THEIR LAWFUL FORECLOSURE;
"IV. PETITIONER BANK HAD FURNISHED PRIVATE RESPONDENTS WITH
COPIES OF DISCLOSURE STATEMENTS IN COMPLIANCE WITH THE
TRUTH IN LENDING ACT, AND CHARGED THEM INTERESTS IN
ACCORDANCE WITH LAW AND PURSUANT TO ITS EXPRESS
AGREEMENT WITH THE LATTER;
"V. THE P1.0 MILLION INJUNCTION BOND REQUIRED BY THE
HONORABLE COURT A QUO ON PRIVATE RESPONDENTS IS GROSSLY
AND PATENTLY INADEQUATE." 15
At the outset, the Court's attention is drawn to the fact that since the filing of
this suit before the trial court, none of the substantial issues have been
resolved. To avoid and gloss over the issues raised by the parties, as what the
trial court and respondent Court of Appeals did, would unduly prolong this
litigation involving a rather simple case of foreclosure of mortgage.
Undoubtedly, this will run counter to the avowed purpose of the rules, i.e., to
assist the parties in obtaining just, speedy and inexpensive determination of
every action or proceeding. 16 The Court, therefore feels that the central
issues of the case, albeit unresolved by the courts below, should now be
settled specially as they involved pure questions of law. Furthermore, the
pleadings of the respective parties on file have amply ventilated their various
positions and arguments on the matter necessitating prompt adjudication.
Now to the core issues.
As the Court sees it, the crucial issues are: (1) whether or not the loans in
excess of the amounts expressly stated in the mortgage contracts can be
included as part of the loans secured by the real estate mortgages, (2) whether
or not petitioners can extrajudicially foreclose the properties subject of the
mortgages, (3) whether or not Administrative Order No. 3 should govern the
extrajudicial foreclosure of the properties, and (4) whether or not the writ of
preliminary injunction issued by the trial court is valid.
Petitioners aver that the additional loans extended in favor of private
respondents in excess of P6,500,000.00 and P3,500,000.00 amounts
respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage
contracts are also secured by the same collaterals or real estate properties,
citing as bases the introductory paragraph ("whereas clause") of the mortgage
contracts, as well as the stipulations stated therein under the first and second
paragraphs. Private respondents for their part argue that the additional loans
are clean loans, relying on some isolated parts of the same introductory
paragraph and first paragraph of the contracts, and also of the third paragraph.
As both parties offered a conflicting interpretation of the contract, then judicial
determination of the parties' intention is thus, inevitable. 17 Hereunder are the
pertinent identical introductory paragraphs and paragraphs 1 to 3 of the July
27, 1989 and August 10, 1989 mortgage contracts:
"WHEREAS, the MORTGAGEE has granted, and may from time to time
hereafter grant to the MORTGAGOR(S)/either of them/and/or NATIVE WEST
INTERNATIONAL TRADING CORP. hereinafter called the DEBTOR(S) credit
facilities not exceeding SIX MILLION FIVE HUNDRED THOUSAND PESOS
ONLY (P6,500,000.00) * Philippine currency, and the MORTGAGEE had
required the MORTGAGOR(S) to give collateral security for the payment of
any and all obligations heretofore contracted/incurred and which may
thereafter be contracted/incurred by the MORTGAGOR(S) and/or
DEBTOR(S), or any one of them, in favor of the MORTGAGEE;
"NOW, THEREFORE, as collateral security for the payment of the principal
and interest of the indebtedness/obligations herein referred to and the faithful
performance by the MORTGAGOR(S) of his (her, its) obligations hereunder,
the MORTGAGOR(S) hereby execute(s) a FIRST MORTGAGE, in favor of the
MORTGAGEE, free from all liens and encumbrances of any kind, that (those)
certain parcel(s) of land, together with all the
buildings/machineries/equipment/improvements now existing thereon, and
which may hereafter be placed thereon, described in the Schedule of
mortgaged properties described hereunder and/or which is hereto attached,
marked Exhibit "A" and made a part thereof.
"1. It is agreed that this mortgage shall respond for all the obligations
contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) or any one
of them, in favor of the MORTGAGEE up to the said sum of SIX MILLION FIVE
HUNDRED THOUSAND PESOS ONLY (P6,500,000.00) * regardless of the
manner in which the said obligations may have been contracted/incurred by
the MORTGAGOR(S) and/or DEBTOR(S) whether by advances or loans
made to him (her, it) by the MORTGAGEE, by the negotiation of mercantile
documents, including trust receipts, by the execution by the MORTGAGOR(S)
and/or DEBTOR(S) of money market instruments/commercial papers,
undertakings of guaranty of suretyship, or by endorsement of negotiable
instruments, or otherwise, the idea being to make this deed a comprehensive
and all embracing security that it is.
"2. Payments on account of the principal and interest of the credit granted by
the MORTGAGEE to the MORTGAGOR(S) and/or DEBTOR(S) may be made
from time to time, and as often as the MORTGAGOR(S) may elect; provided,
however, that in the event of such payments being so made that the
indebtedness to the MORTGAGEE may from time to time be reduced the
MORTGAGEE may make further advances and all sums whatsoever
advanced by the MORTGAGEE shall be secured by this mortgage, and partial
payments of said indebtedness from time to time shall not thereby be taken to
reduce by the amount of such payments the credit hereby secured. The said
credit shall extend to and account which shall, within the said limit of
P6,500,000.00 * exclusive of interest, be fluctuating and subject to increase or
decrease from time to time as the MORTGAGEE may approve, and this
mortgage shall stand as security for all indebtedness of the MORTGAGOR(S)
and/or DEBTOR(S), or any one of them, at any and all times outstanding,
regardless of partial or full payments at any time or times made by the
MORTGAGOR(S) and/or DEBTOR(S).
"3. It is hereby agreed that the MORTGAGEE may from time to time grant the
MORTGAGOR(S)/DEBTOR(S) credit facilities exceeding the amount secured
by this mortgage, without affecting the liability of the MORTGAGOR(S) under
this mortgage up to the amount stipulated." 18
An important task in contract interpretation is the ascertainment of the intention
of the contracting parties which is accomplished by looking at the words they
used to project that intention in their contract, i.e., all the words, not just a
particular word or two, and words in context, not words standing alone. 19
Indeed, Article 1374 of the Civil Code, states that "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." Applying the rule, we
find that the parties intent is to constitute the real estate properties as
continuing securities liable for future obligations beyond the amounts of P6.5
million and P3.5 million respectively stipulated in the July 27, 1989 and August
10, 1989 mortgage contracts. Thus, while the "whereas" clause initially
provides that "the mortgagee has granted, and may from time to time hereafter
grant to the mortgagors . . . credit facilities not exceeding six million five
hundred thousand pesos only (P6,500,000.00)" ** yet in the same clause it
provides that "the mortgagee had required the mortgagor(s) to give collateral
security for the payment of any and all obligations heretofore
contracted/incurred and which may thereafter be contracted/incurred by the
mortgagor(s) and/or debtor(s), or any one of them, in favor of the mortgagee"
which qualifies the initial part and shows that the collaterals or real estate
properties serve as securities for future obligations. The first paragraph which
ends with the clause, "the idea being to make this deed a comprehensive and
all embracing security that it is" supports this qualification.
Similarly, the second paragraph provides that "the mortgagee may take further
advances and all sums whatsoever advanced by the mortgagee shall be
secured by this mortgagee . . ." And although it was stated that "[t]he said credit
shall extend to any account which shall, within the said limit of P6,500,000.00
exclusive of interest," this part of the second sentence is again qualified by its
succeeding portion which provides that "this mortgage shall stand as security
for all indebtedness of the mortgagor(s) and/or debtor(s), or any one of them,
at any and all times outstanding . . ." Again, under the third paragraph, it is
provided that "the mortgagee may from time to time grant the
mortgagor(s)/debtor(s) credit facilities exceeding the amount secured by this
mortgage . . ." The fourth paragraph, 20 in addition, states that ". . . all such
withdrawals, and payments, whether evidenced by promissory notes or
otherwise, shall be secured by this mortgage" which manifestly shows that the
parties principally intended to constitute the real estate properties as
continuing securities for additional advancements which the mortgagee may,
upon application, extend. It is well settled that mortgages given to secure future
advancements or loans are valid and legal contracts, and that the amounts
named as consideration in said contracts 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. 21
Anent the second issue, we find that petitioners are entitled to foreclose the
mortgages. In their complaint for accounting with damages pending with the
trial court, private respondents averred that:
"8. Up to and until February, 1993, PLAINTIFF-CORPORATION had paid to
the DEFENDANT-BANK, the amount of THREE HUNDRED FIFTY
THOUSAND (P350,000.00) Pesos, Philippine Currency, and was willing to pay
the balance in installments of FOUR HUNDRED THOUSAND (P400,000.00)
Pesos, Philippine Currency, every month, in the meantime, but the
DEFENDANT-BANK refused to accept, demanding instead SEVEN
HUNDRED MILLION (P7,000,000.00) Pesos, Philippine Currency, a month.
"9. Inspite of the expressed willingness and commitment of plaintiffs to pay
their obligation in a manner which they could afford, on March 11, 1993,
MORTGAGORS and DEFENDANT-CORPORATION, each received a Letter
of Demand from DEFENDANT-BANK, for the payment of P28,775,615.14
exclusive of interest and penalty evidenced by 11 promissory notes enclosed
therein . . .
"10. Upon receipt of the letter, PLAINTIFF-CORPORATION through its
President pleaded with the Chairman of the Board of the DEFENDANT-BANK,
through whom Defendant-Corporation was transacting business with, to
accept its offer of payment of FOUR HUNDRED THOUSAND (P400,000.00)
Pesos, Philippine Currency, a month, in the meantime, which was again
refused by the said Chairman." 22
which allegations are a clear admission that they were unable to settle to the
fullest their obligation. Foreclosure is valid where the debtors, as in this case,
are in default in the payment of their obligation. 23 The essence of a contract
of mortgage indebtedness is that a property has been identified or set apart
from the mass of the property of the debtor-mortgagor as security for the
payment of money or the fulfillment of an obligation to answer the amount of
indebtedness, in case of default of payment. 24 It is a settled rule that in a real
estate mortgage when the obligation is not paid when due, the mortgagee has
the right to foreclose the mortgage and to have the property seized and sold
in view of applying the proceeds to the payment of the obligation. 25 In fact,
aside from the mortgage contracts, the promissory notes executed to evidence
the loans also authorize the mortgagee to foreclose on the mortgages. Thus:
". . . CHINA BANKING CORPORATION is hereby authorized to sell at public
or private sales such securities or things of value for the purpose of applying
their proceeds to such payments." 26
And while private respondents aver that they have already paid ten million
pesos, an allegation which has still to be settled before the trial court, the same
cannot be utilized as a shield to enjoin the foreclosure sale. A mortgage given
to secure advancements, we repeat, is a continuing security and is not
discharged by repayment of the amount named in the mortgage, until the full
amount of the advancements are paid. 27
With respect to the third issue, we find private respondents' contention that
Administrative Order No. 3 is the governing rule in foreclosure of mortgages
misplaced. The parties, we note, have stipulated that the provisions of Act No.
3135 is the controlling law in case of foreclosure. Thus:
"17. The MORTGAGOR(S) hereby grant(s) unto the MORTGAGEE full and
irrevocable power of attorney coupled with interest, in the event of breach of
any of the conditions of this mortgage, to sell, in its discretion, the mortgaged
properties at public auction, for cash and to the highest bidder, in the Province
or City where the mortgaged properties are located, before the Sheriff, or a
Notary Public, without court proceedings, after posting notices of sale for a
period of twenty days in three public places in said place; and after publication
of such notice in a newspaper of general circulation in the said place once a
week, for three consecutive weeks, and the MORTGAGEE is hereby
authorized to execute the deed of sale and all such other documents as may
be necessary in the premises all in accordance with the provisions of Act No.
3135 of the Philippine Legislature, as amended, and Section 78 of Republic
Act No. 337; . . ." 28 (Emphasis supplied.)
By invoking the said Act, there is no doubt that it must "govern the manner in
which the sale and redemption shall be effected." 29 Clearly, the fundamental
principle that contracts are respected as the law between the contracting
parties finds application in the present case, 30 specially where they are not
contrary to law, morals, good customs and public policy.
Moreover, Administrative Order No. 3 is a directive for executive judges and
clerks of courts which, under its preliminary paragraph is "[i]n line with the
responsibility of an Executive Judge, under Administrative Order No. 6, dated
June 30, 1975, for the management of courts within his administrative area,
included in which is the task of supervising directly the work of the Clerk of
Court, who is also the Ex-Oficio Sheriff, and his staff, . . ." Surely, a petition for
foreclosure with the notary public is not within the contemplation of the
aforesaid directive as the same is not filed with the court. At any rate,
Administrative Order No. 3 cannot prevail over Act No. 3135, as amended. It
is an elementary principle in statutory construction that a statute is superior to
an administrative directive and the former cannot be repealed or amended by
the latter.
On the last issue, we find that the issuance of the writ of injunction by the trial
court unjustified. A writ of preliminary injunction, as an ancillary or preventive
remedy, may only be resorted to by a litigant to protect or preserve his rights
or interests and for no other purpose during the pendency of the principal
action. 31 But before a writ of preliminary injunction may be issued, there must
be a clear showing by the complaint that there exists a right to be protected
and that the acts against which the writ is to be directed are violative of the
said right. 32 In the case at bench, we fail to see any reason why the
foreclosure of the mortgages should be enjoined. On the face of the clear
admission by private respondents that they were unable to settle their
obligations which were secured by the mortgages, petitioners have a clear
right to foreclose the mortgages which is a remedy provided by law. Thus, in
Caltex Philippines, Inc. v. Intermediate Appellate Court, 33 we reiterated the
rule that:
". . . 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) or 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 (Soriano v. Enriquez, 24
Phil 584; Banco de Islas Filipinas v. Concepcion Hijos, 53 Phil. 86; Banco
Nacional v. Barreto, 53 Phil. 101).
"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." 34
WHEREFORE, the instant petition is hereby GRANTED. The assailed
Decision, as well as the Resolution, of the Court of Appeals dated January 17,
1995 and July 7, 1995, respectively, are hereby REVERSED and SET ASIDE.
The preliminary writ of injunction issued by the trial court is hereby NULLIFIED.
This case is REMANDED to the court of conformity with this decision.
SO ORDERED.
||| (China Banking Corp. v. Court of Appeals, G.R. No. 121158, [December 5,
1996], 333 PHIL 158-175)
11. Pilipinas Shell Petroleum Corp. v. Royal Ferry Services, Inc., G.R. No.
188146, February 1, 2017
CHINA BANKING CORPORATION, ATTYS. REYNALDO M. CABUSORA and
RENATO C. TAGUIAM, petitioners, vs. COURT OF APPEALS, HON. PEDRO
T. SANTIAGO, SPS. SO CHING and CRISTINA SO, and NATIVE WEST
INTERNATIONAL TRADING CORP., respondents.
Lim Vigilia Cinco & Orencia for petitioner.
Antonio P. Barredo and Rodrigo D. Sta. Ana for private respondents.
SYLLABUS
1. CIVIL LAW; CONTRACTS; INTERPRETATION; ITS TASK IS THE
ASCERTAINMENT OF THE INTENTION OF THE CONTRACTING PARTIES.
 An important task in contract interpretation is the ascertainment of the
intention of the contracting parties which is accomplished by looking at the
words they used to project that intention in their contract, i.e., all the words, not
just a particular word or two, and words in context, not words standing alone.
Article 1374 of the Civil Code, states that "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." SCHTac
2. ID.; ID.; MUST BE RESPECTED AS THE LAW BETWEEN CONTRACTING
PARTIES. The parties have stipulated that the provisions of Act No. 3135
is the controlling law in case of foreclosure. By invoking the said Act, there is
no doubt that it must "govern the manner in which the sale and redemption
shall be effected." Clearly, the fundamental principle that contracts are
respected as the law between the contracting parties finds application in the
present case, specially where they are not contrary to law, morals, good
customs and public policy.
3. ID.; ID.; MORTGAGE; STILL VALID AND LEGAL EVEN IF GIVEN TO
SECURE FUTURE ADVANCEMENTS OR LOANS. It is well settled that
mortgages given to secure future advancements or loans are valid and legal
contracts, and that the amounts named as consideration in said contracts 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.
4. ID.; ID.; ID.; WHEN IS FORECLOSURE VALID. Foreclosure is valid
where the debtors are in default in the payment of their obligation. The essence
of a contract of mortgage indebtedness is that a property has been identified
or set apart from the mass of the property of the debtor-mortgagor as security
for the payment of money or the fulfillment of an obligation to answer the
amount of indebtedness, in case of default of payment. It is a settled rule that
in a real estate mortgage when the obligation is not paid when due, the
mortgagee has the right to foreclose the mortgage and to have the property
seized and sold in view of applying the proceeds to the payment of the
obligation. In fact, aside from the mortgage contracts, the promissory notes
executed to evidence the loans also authorize the mortgagee to foreclose on
the mortgages. ACTIcS
5. ID.; ID.; ID.; REMEDIES OF THE MORTGAGEE IN CASE OF DEFAULT
BY THE MORTGAGOR. ". . . 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) or 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 (Soriano
vs. Enriquez, 24 Phil. 584; Banco de Islas Filipinas vs. Concepcion Hijos, 53
Phil. 86; Banco Nacional vs. Barreto, 53 Phil. 101). "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 Philippines, Inc vs. Intermediate
Appellate Court, 176 SCRA 741]
6. STATUTORY CONSTRUCTION; STATUTES; MAY NOT BE REPEALED
BY ADMINISTRATIVE DIRECTIVES. It is an elementary principle in
statutory construction that a statute is superior to an administrative directive
and the former cannot be repealed or amended by the latter.
7. REMEDIAL LAW; PROVISIONAL REMEDIES; WRIT OF PRELIMINARY
INJUNCTION; WHEN MAY BE AVAILED OF. A writ of preliminary
injunction, as an ancillary or preventive remedy, may only be resorted to by a
litigant to protect or preserve his rights or interests and for no other purpose
during the pendency of the principal action. But before a writ of preliminary
injunction may be issued, there must be a clear showing by the complaint that
there exists a right to be protected and that the acts against which the writ is
to be directed are violative of the said right. IcDESA
DECISION
FRANCISCO, J p:
China Banking Corporation (China Bank) extended several loans to Native
West International Trading Corporation (Native West) and to So Ching, Native
West's president. Native West in turn executed promissory notes 1 in favor of
China Bank. So Ching, with the marital consent of his wife, Cristina So,
additionally executed two mortgages over their properties, viz., a real estate
mortgage executed on July 27, 1989 covering a parcel of land situated in
Cubao, Quezon City, under TCT No. 277797, 2 and another executed on
August 10, 1989 covering a parcel of land located in Mandaluyong, under TCT
No. 5363. 3 The promissory notes matured and despite due demands by China
Bank neither private respondents Native West nor So Ching paid. Pursuant to
a provision embodied in the two mortgage contracts, China Bank filed petitions
for the extra-judicial foreclosure of the mortgaged properties before Notary
Public Atty. Renato E. Taguiam for TCT No. 277797, 4 and Notary Public Atty.
Reynaldo M. Cabusora for TCT No. 5363, 5 copies of which were given to the
spouses So Ching and Cristina So. After due notice and publication, the
notaries public scheduled the foreclosure sale of the spouses' real estate
properties on April 13, 1993. Eight days before the foreclosure sale, however,
private respondents filed a complaint 6 with the Regional Trial Court 7 for
accounting with damages and with temporary restraining order against
petitioners alleging the following causes of action:
"A. Defendants failed to comply with the mandates of Administrative Order No.
3 of the Supreme Court dated October 19, 1984.
"B. Defendants failed to comply with the mandates of Section 2 Presidential
Decree No. 1079 dated January 28, 1977.
"C. MORTGAGORS liability limited to P6,500,000.00 and P3,500,000.00
respectively in the Mortgages Annexes A and B respectively, but the same are
not included in the notice of foreclosure.
"D. Violation of Truth in Lending Act (RP Act No. 3765).
"E. In all the loans granted by DEFENDANT-BANK to plaintiffs and Borrowers,
the Bank charged interests in excess of the rate allowed by the Central Bank.
"F. Violation of Article 1308 of the Civil Code." 8
On April 7, 1993, the trial court issued a temporary restraining order to enjoin
the foreclosure sale. Thereafter counsels for the respective parties agreed to
file their pleadings and to submit the case, without further hearing, for
resolution. On April 28, 1993, the trial court, without passing upon the material
averments of the complaint, issued an Order granting the private respondents'
prayer for the issuance of preliminary injunction with the following proffered
justification:
"From the foregoing, it is quite apparent that a question of accounting poses a
thorny issue as between the litigants. Variance in the amounts involved relating
to the loan agreements must be judiciously passed upon by the Court and this
is only possible if a trial on the merits could be had as the matters appurtenant
thereto are evidentiary in nature.
"Under the premises, the accounting issue being evidentiary in character calls
for an issuance of a writ of preliminary injunction pending the adjudication of
the case. The issuance thereof at this particular stage of the case is merely a
preventive remedy designed to protect from irreparable injury to property or
other rights plaintiff may suffer, which a court of equity may take cognizance
of by commanding acts to be done or prohibiting their commission, as in the
instant suit, to restrain notaries public Cabusora and Taguiam as well as
defendant China Banking Corporation from continuing with the auction sale of
the subject properties, until further orders from this Court.
"Wherefore, premises considered, finding that the circumstances warrant the
issuance of a preliminary injunction, plaintiff's prayer is hereby GRANTED.
Consequent thereto, plaintiffs are hereby ordered to post a bond amounting to
P1 (ONE) Million to answer for whatever damages defendant may suffer as a
consequence of the writ." 9
Petitioners moved for reconsideration, but it was denied in an Order dated
September 23, 1993. To annul the trial court's Orders of April 28, 1993 and
September 23, 1993, petitioners elevated the case through certiorari and
prohibition 10 before public respondent Court of Appeals. 11 In a decision
dated January 17, 1995, respondent Court of Appeals held that Administrative
Circular No. 3 is the governing rule in extra-judicial foreclosure of mortgage,
which circular petitioners however failed to follow, and with respect to the
publication of the notice of the auction sale, the provisions of P.D. No. 1079 is
the applicable statute, 12 which decree petitioners similarly failed to obey.
Respondent Court of Appeals did not pass upon the other issues and confined
its additional lengthy discussion on the validity of the trial court's issuance of
the preliminary injunction, finding the same neither capricious nor whimsical
exercise of judgment that could amount to grave abuse of discretion. 13 The
Court of Appeals accordingly dismissed the petition, as well as petitioners'
subsequent motion for reconsideration. 14 Hence, the instant petition under
Rule 45 of the Rules of Court reiterating the grounds raised before respondent
court, to wit:
"I. PETITIONER CBC'S PETITIONS TO EXTRAJUDICIALLY FORECLOSE
THE REAL ESTATE MORTGAGES OF JULY 27, 1989 AND AUGUST 10,
1989 THRU PETITIONERS-NOTARIES PUBLIC, AND THE SCHEDULED
FORECLOSURE SALE ARE VALID AND LAWFUL;
"II. PRIVATE RESPONDENTS AND PETITIONER CBC HAD EXPRESSLY
AGREED TO CONSIDER THE SAME MORTGAGES AS VALID SECURITIES
FOR PROMPT AND FULL PAYMENT OF ALL AND ANY OBLIGATIONS OF
THE FORMER FROM THE LATTER;
"III. THE SUPPOSED VARIANCE IN THE TOTAL AMOUNT OF UNPAID
LOANS IS NOT A VALID BASIS TO ENJOIN THE FORECLOSURE OF THE
QUESTIONED MORTGAGES. THE MERE FAILURE TO PAY THE LOAN
SECURED BY SAID MORTGAGES IS THE ONLY, SINGLE REASON FOR
THEIR LAWFUL FORECLOSURE;
"IV. PETITIONER BANK HAD FURNISHED PRIVATE RESPONDENTS WITH
COPIES OF DISCLOSURE STATEMENTS IN COMPLIANCE WITH THE
TRUTH IN LENDING ACT, AND CHARGED THEM INTERESTS IN
ACCORDANCE WITH LAW AND PURSUANT TO ITS EXPRESS
AGREEMENT WITH THE LATTER;
"V. THE P1.0 MILLION INJUNCTION BOND REQUIRED BY THE
HONORABLE COURT A QUO ON PRIVATE RESPONDENTS IS GROSSLY
AND PATENTLY INADEQUATE." 15
At the outset, the Court's attention is drawn to the fact that since the filing of
this suit before the trial court, none of the substantial issues have been
resolved. To avoid and gloss over the issues raised by the parties, as what the
trial court and respondent Court of Appeals did, would unduly prolong this
litigation involving a rather simple case of foreclosure of mortgage.
Undoubtedly, this will run counter to the avowed purpose of the rules, i.e., to
assist the parties in obtaining just, speedy and inexpensive determination of
every action or proceeding. 16 The Court, therefore feels that the central
issues of the case, albeit unresolved by the courts below, should now be
settled specially as they involved pure questions of law. Furthermore, the
pleadings of the respective parties on file have amply ventilated their various
positions and arguments on the matter necessitating prompt adjudication.
Now to the core issues.
As the Court sees it, the crucial issues are: (1) whether or not the loans in
excess of the amounts expressly stated in the mortgage contracts can be
included as part of the loans secured by the real estate mortgages, (2) whether
or not petitioners can extrajudicially foreclose the properties subject of the
mortgages, (3) whether or not Administrative Order No. 3 should govern the
extrajudicial foreclosure of the properties, and (4) whether or not the writ of
preliminary injunction issued by the trial court is valid.
Petitioners aver that the additional loans extended in favor of private
respondents in excess of P6,500,000.00 and P3,500,000.00 amounts
respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage
contracts are also secured by the same collaterals or real estate properties,
citing as bases the introductory paragraph ("whereas clause") of the mortgage
contracts, as well as the stipulations stated therein under the first and second
paragraphs. Private respondents for their part argue that the additional loans
are clean loans, relying on some isolated parts of the same introductory
paragraph and first paragraph of the contracts, and also of the third paragraph.
As both parties offered a conflicting interpretation of the contract, then judicial
determination of the parties' intention is thus, inevitable. 17 Hereunder are the
pertinent identical introductory paragraphs and paragraphs 1 to 3 of the July
27, 1989 and August 10, 1989 mortgage contracts:
"WHEREAS, the MORTGAGEE has granted, and may from time to time
hereafter grant to the MORTGAGOR(S)/either of them/and/or NATIVE WEST
INTERNATIONAL TRADING CORP. hereinafter called the DEBTOR(S) credit
facilities not exceeding SIX MILLION FIVE HUNDRED THOUSAND PESOS
ONLY (P6,500,000.00) * Philippine currency, and the MORTGAGEE had
required the MORTGAGOR(S) to give collateral security for the payment of
any and all obligations heretofore contracted/incurred and which may
thereafter be contracted/incurred by the MORTGAGOR(S) and/or
DEBTOR(S), or any one of them, in favor of the MORTGAGEE;
"NOW, THEREFORE, as collateral security for the payment of the principal
and interest of the indebtedness/obligations herein referred to and the faithful
performance by the MORTGAGOR(S) of his (her, its) obligations hereunder,
the MORTGAGOR(S) hereby execute(s) a FIRST MORTGAGE, in favor of the
MORTGAGEE, free from all liens and encumbrances of any kind, that (those)
certain parcel(s) of land, together with all the
buildings/machineries/equipment/improvements now existing thereon, and
which may hereafter be placed thereon, described in the Schedule of
mortgaged properties described hereunder and/or which is hereto attached,
marked Exhibit "A" and made a part thereof.
"1. It is agreed that this mortgage shall respond for all the obligations
contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) or any one
of them, in favor of the MORTGAGEE up to the said sum of SIX MILLION FIVE
HUNDRED THOUSAND PESOS ONLY (P6,500,000.00) * regardless of the
manner in which the said obligations may have been contracted/incurred by
the MORTGAGOR(S) and/or DEBTOR(S) whether by advances or loans
made to him (her, it) by the MORTGAGEE, by the negotiation of mercantile
documents, including trust receipts, by the execution by the MORTGAGOR(S)
and/or DEBTOR(S) of money market instruments/commercial papers,
undertakings of guaranty of suretyship, or by endorsement of negotiable
instruments, or otherwise, the idea being to make this deed a comprehensive
and all embracing security that it is.
"2. Payments on account of the principal and interest of the credit granted by
the MORTGAGEE to the MORTGAGOR(S) and/or DEBTOR(S) may be made
from time to time, and as often as the MORTGAGOR(S) may elect; provided,
however, that in the event of such payments being so made that the
indebtedness to the MORTGAGEE may from time to time be reduced the
MORTGAGEE may make further advances and all sums whatsoever
advanced by the MORTGAGEE shall be secured by this mortgage, and partial
payments of said indebtedness from time to time shall not thereby be taken to
reduce by the amount of such payments the credit hereby secured. The said
credit shall extend to and account which shall, within the said limit of
P6,500,000.00 * exclusive of interest, be fluctuating and subject to increase or
decrease from time to time as the MORTGAGEE may approve, and this
mortgage shall stand as security for all indebtedness of the MORTGAGOR(S)
and/or DEBTOR(S), or any one of them, at any and all times outstanding,
regardless of partial or full payments at any time or times made by the
MORTGAGOR(S) and/or DEBTOR(S).
"3. It is hereby agreed that the MORTGAGEE may from time to time grant the
MORTGAGOR(S)/DEBTOR(S) credit facilities exceeding the amount secured
by this mortgage, without affecting the liability of the MORTGAGOR(S) under
this mortgage up to the amount stipulated." 18
An important task in contract interpretation is the ascertainment of the intention
of the contracting parties which is accomplished by looking at the words they
used to project that intention in their contract, i.e., all the words, not just a
particular word or two, and words in context, not words standing alone. 19
Indeed, Article 1374 of the Civil Code, states that "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." Applying the rule, we
find that the parties intent is to constitute the real estate properties as
continuing securities liable for future obligations beyond the amounts of P6.5
million and P3.5 million respectively stipulated in the July 27, 1989 and August
10, 1989 mortgage contracts. Thus, while the "whereas" clause initially
provides that "the mortgagee has granted, and may from time to time hereafter
grant to the mortgagors . . . credit facilities not exceeding six million five
hundred thousand pesos only (P6,500,000.00)" ** yet in the same clause it
provides that "the mortgagee had required the mortgagor(s) to give collateral
security for the payment of any and all obligations heretofore
contracted/incurred and which may thereafter be contracted/incurred by the
mortgagor(s) and/or debtor(s), or any one of them, in favor of the mortgagee"
which qualifies the initial part and shows that the collaterals or real estate
properties serve as securities for future obligations. The first paragraph which
ends with the clause, "the idea being to make this deed a comprehensive and
all embracing security that it is" supports this qualification.
Similarly, the second paragraph provides that "the mortgagee may take further
advances and all sums whatsoever advanced by the mortgagee shall be
secured by this mortgagee . . ." And although it was stated that "[t]he said credit
shall extend to any account which shall, within the said limit of P6,500,000.00
exclusive of interest," this part of the second sentence is again qualified by its
succeeding portion which provides that "this mortgage shall stand as security
for all indebtedness of the mortgagor(s) and/or debtor(s), or any one of them,
at any and all times outstanding . . ." Again, under the third paragraph, it is
provided that "the mortgagee may from time to time grant the
mortgagor(s)/debtor(s) credit facilities exceeding the amount secured by this
mortgage . . ." The fourth paragraph, 20 in addition, states that ". . . all such
withdrawals, and payments, whether evidenced by promissory notes or
otherwise, shall be secured by this mortgage" which manifestly shows that the
parties principally intended to constitute the real estate properties as
continuing securities for additional advancements which the mortgagee may,
upon application, extend. It is well settled that mortgages given to secure future
advancements or loans are valid and legal contracts, and that the amounts
named as consideration in said contracts 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. 21
Anent the second issue, we find that petitioners are entitled to foreclose the
mortgages. In their complaint for accounting with damages pending with the
trial court, private respondents averred that:
"8. Up to and until February, 1993, PLAINTIFF-CORPORATION had paid to
the DEFENDANT-BANK, the amount of THREE HUNDRED FIFTY
THOUSAND (P350,000.00) Pesos, Philippine Currency, and was willing to pay
the balance in installments of FOUR HUNDRED THOUSAND (P400,000.00)
Pesos, Philippine Currency, every month, in the meantime, but the
DEFENDANT-BANK refused to accept, demanding instead SEVEN
HUNDRED MILLION (P7,000,000.00) Pesos, Philippine Currency, a month.
"9. Inspite of the expressed willingness and commitment of plaintiffs to pay
their obligation in a manner which they could afford, on March 11, 1993,
MORTGAGORS and DEFENDANT-CORPORATION, each received a Letter
of Demand from DEFENDANT-BANK, for the payment of P28,775,615.14
exclusive of interest and penalty evidenced by 11 promissory notes enclosed
therein . . .
"10. Upon receipt of the letter, PLAINTIFF-CORPORATION through its
President pleaded with the Chairman of the Board of the DEFENDANT-BANK,
through whom Defendant-Corporation was transacting business with, to
accept its offer of payment of FOUR HUNDRED THOUSAND (P400,000.00)
Pesos, Philippine Currency, a month, in the meantime, which was again
refused by the said Chairman." 22
which allegations are a clear admission that they were unable to settle to the
fullest their obligation. Foreclosure is valid where the debtors, as in this case,
are in default in the payment of their obligation. 23 The essence of a contract
of mortgage indebtedness is that a property has been identified or set apart
from the mass of the property of the debtor-mortgagor as security for the
payment of money or the fulfillment of an obligation to answer the amount of
indebtedness, in case of default of payment. 24 It is a settled rule that in a real
estate mortgage when the obligation is not paid when due, the mortgagee has
the right to foreclose the mortgage and to have the property seized and sold
in view of applying the proceeds to the payment of the obligation. 25 In fact,
aside from the mortgage contracts, the promissory notes executed to evidence
the loans also authorize the mortgagee to foreclose on the mortgages. Thus:
". . . CHINA BANKING CORPORATION is hereby authorized to sell at public
or private sales such securities or things of value for the purpose of applying
their proceeds to such payments." 26
And while private respondents aver that they have already paid ten million
pesos, an allegation which has still to be settled before the trial court, the same
cannot be utilized as a shield to enjoin the foreclosure sale. A mortgage given
to secure advancements, we repeat, is a continuing security and is not
discharged by repayment of the amount named in the mortgage, until the full
amount of the advancements are paid. 27
With respect to the third issue, we find private respondents' contention that
Administrative Order No. 3 is the governing rule in foreclosure of mortgages
misplaced. The parties, we note, have stipulated that the provisions of Act No.
3135 is the controlling law in case of foreclosure. Thus:
"17. The MORTGAGOR(S) hereby grant(s) unto the MORTGAGEE full and
irrevocable power of attorney coupled with interest, in the event of breach of
any of the conditions of this mortgage, to sell, in its discretion, the mortgaged
properties at public auction, for cash and to the highest bidder, in the Province
or City where the mortgaged properties are located, before the Sheriff, or a
Notary Public, without court proceedings, after posting notices of sale for a
period of twenty days in three public places in said place; and after publication
of such notice in a newspaper of general circulation in the said place once a
week, for three consecutive weeks, and the MORTGAGEE is hereby
authorized to execute the deed of sale and all such other documents as may
be necessary in the premises all in accordance with the provisions of Act No.
3135 of the Philippine Legislature, as amended, and Section 78 of Republic
Act No. 337; . . ." 28 (Emphasis supplied.)
By invoking the said Act, there is no doubt that it must "govern the manner in
which the sale and redemption shall be effected." 29 Clearly, the fundamental
principle that contracts are respected as the law between the contracting
parties finds application in the present case, 30 specially where they are not
contrary to law, morals, good customs and public policy.
Moreover, Administrative Order No. 3 is a directive for executive judges and
clerks of courts which, under its preliminary paragraph is "[i]n line with the
responsibility of an Executive Judge, under Administrative Order No. 6, dated
June 30, 1975, for the management of courts within his administrative area,
included in which is the task of supervising directly the work of the Clerk of
Court, who is also the Ex-Oficio Sheriff, and his staff, . . ." Surely, a petition for
foreclosure with the notary public is not within the contemplation of the
aforesaid directive as the same is not filed with the court. At any rate,
Administrative Order No. 3 cannot prevail over Act No. 3135, as amended. It
is an elementary principle in statutory construction that a statute is superior to
an administrative directive and the former cannot be repealed or amended by
the latter.
On the last issue, we find that the issuance of the writ of injunction by the trial
court unjustified. A writ of preliminary injunction, as an ancillary or preventive
remedy, may only be resorted to by a litigant to protect or preserve his rights
or interests and for no other purpose during the pendency of the principal
action. 31 But before a writ of preliminary injunction may be issued, there must
be a clear showing by the complaint that there exists a right to be protected
and that the acts against which the writ is to be directed are violative of the
said right. 32 In the case at bench, we fail to see any reason why the
foreclosure of the mortgages should be enjoined. On the face of the clear
admission by private respondents that they were unable to settle their
obligations which were secured by the mortgages, petitioners have a clear
right to foreclose the mortgages which is a remedy provided by law. Thus, in
Caltex Philippines, Inc. v. Intermediate Appellate Court, 33 we reiterated the
rule that:
". . . 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) or 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 (Soriano v. Enriquez, 24
Phil 584; Banco de Islas Filipinas v. Concepcion Hijos, 53 Phil. 86; Banco
Nacional v. Barreto, 53 Phil. 101).
"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." 34

WHEREFORE, the instant petition is hereby GRANTED. The assailed
Decision, as well as the Resolution, of the Court of Appeals dated January 17,
1995 and July 7, 1995, respectively, are hereby REVERSED and SET ASIDE.
The preliminary writ of injunction issued by the trial court is hereby NULLIFIED.
This case is REMANDED to the court of conformity with this decision.
SO ORDERED.
||| (China Banking Corp. v. Court of Appeals, G.R. No. 121158, [December 5,
1996], 333 PHIL 158-175)
12. PNB v. Benedicto, et al., G.R. No. 171865, October 12, 2016
FIRST DIVISION
G.R. No. 171865, October 12, 2016
PHILIPPINE NATIONAL BANK, Petitioner, v. HEIRS OF BENEDICTO AND
AZUCENA ALONDAY, Respondent.
DECISION
BERSAMIN, J.:
The issue is whether the all-embracing or dragnet clause contained in the first
mortgage contract executed between the parties for the security of the first
loan could authorize the foreclosure of the property under the mortgage to
secure a second loan despite the full payment of the second loan.
Antecedents
On September 26, 1974, the Spouses Benedicto and Azucena Alonday
(Spouses Alonday) obtained an agricultural loan of P28,000.00 from the
petitioner at its Digos, Davao del Sur Branch, and secured the obligation by
constituting a real estate mortgage on their parcel of land situated in Sta. Cruz,
Davao del Sur registered under Original Certificate of Title (OCT) No. P-3599
of the Registry of Deeds of Davao del Sur.1chanrobleslaw
On June 11, 1980, the Spouses Alonday obtained a commercial loan for
P16,700.00 from the petitioner's Davao City Branch, and constituted a real
estate mortgage over their 598 square meter residential lot situated in Ulas,
Davao City registered under Transfer Certificate of Title (TCT) No. T-66139 of
the Registry of Deeds of Davao City.
It is noted that the mortgage contracts contained the following identical
provision, to wit:ChanRoblesVirtualawlibrary
That for and in consideration of certain loans, overdrafts, and other credit
accommodations, obtained from the Mortgagee, which is hereby fixed at
_________, Philippine Currency, and to secure the payment of the same and
those others that the Mortgagee may extend to the Mortgagor, including
interests and expenses, and other obligations owing by the Mortgagor to the
Mortgagee, whether direct or indirect, principal or secondary, as appearing in
the accounts, books and records of the Mortgagee, the Mortgagor does hereby
transfer and convey by way of mortgage unto the Mortgagee, its successors
or assigns, the parcel of land which is/are described in the list inserted at the
back of this document xxx. In case the Mortgagor executes subsequent
promissory note or notes either as renewal of the former note, as an extension
thereof, or as a new loan, or is given any other kind of accommodation, xxx,
this mortgage shall also stand as security for the payment of the said
promissory note or notes and/or accommodations without the necessity of
executing a new contract and this mortgage shall have the same force and
effect as if the said promissory note or notes and/or accommodations were
existing on the date thereof, notwithstanding full payments of any or all
obligations of the Mortgagors. This mortgage shall also stand as security for
said obligations and any and all other obligations of the Mortgagor to the
Mortgagee of whatever kind and nature, whether such obligations have been
contracted before, during or after the constitution of this mortgage. However,
if the Mortgagor shall pay the Mortgagee, its successors or assigns, the
obligations secured by this mortgage, together with interests, costs and other
expenses, on or before the date they are due, and shall keep and perform all
the covenants and agreements herein contained for the Mortgagor to keep and
perform, then this mortgage shall be null and void, otherwise, it shall remain in
full force and effect.2chanroblesvirtuallawlibrary
The Spouses Alonday made partial payments on the commercial loan, which
they renewed on December 23, 1983 for the balance of P15,950.00. The
renewed commercial loan, although due on December 25, 1984, was fully paid
on July 5, 1984.3chanrobleslaw
On August 6, 1984, respondents Mercy and Alberto Alonday, the children of
the Spouses Alonday, demanded the release of the mortgage over the
property covered by TCT No. T-66139. The petitioner informed them, however,
that the mortgage could not be released because the agricultural loan had not
yet been fully paid, and that as the consequence of the failure to pay, it had
foreclosed the mortgage over the property covered by OCT No. P-3599 on
August 17, 1984.
It appeared that notwithstanding such foreclosure, a deficiency balance of
P91,525.22 remained.4 Hence, the petitioner applied for the extra-judicial
foreclosure of the mortgage on the property covered by TCT No. T-66139. A
notice of extra-judicial sale was issued on August 20, 1984, and the property
covered by TCT No. T-66139 was sold on September 28, 1984 to the petitioner
in the amount of P29,900.00. Since the Alondays were unable to redeem the
property, the petitioner consolidated its ownership. Later on, the property was
sold for P48,000.00 to one Felix Malmis on November 10,
1989.5chanrobleslaw
According to the petitioner, the deed of mortgage relating to the property
covered by TCT No. T-66139 included an "all-embracing clause" whereby the
mortgage secured not only the commercial loan contracted with its Davao City
Branch but also the earlier agricultural loan contracted with its Digos Branch.
Judgment of the RTC
On July 8, 1994, therefore, the respondents instituted a complaint against the
petitioner in the Regional Trial Court (RTC) in Davao City to recover damages
and attorney's fees (Civil Case No. 23,021-94), averring that the foreclosure
and sale of the property covered by TCT No. T-66139 was illegal.
On November 28, 1997, the RTC rendered judgment finding in favor of the
respondents,6 and disposed as follows:ChanRoblesVirtualawlibrary
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and
against defendant bank, ordering said defendant
bank:ChanRoblesVirtualawlibrary
To pay plaintiffs the sum of One Million Seven Hundred Thousand
(P1,700,000.00) Pesos, representing the value of the land covered by TCT No.
T-66139;
To pay plaintiffs the sum of P20,000.00 as attorney's fees; and
cralawlawlibrary
To pay the costs of this suit.
SO ORDERED.7chanroblesvirtuallawlibrary
The RTC observed that if the petitioner had intended to have the second
mortgage secure the pre-existing agricultural loan, it should have made an
express reservation to that effect; that based on the all-embracing clause, the
mortgage was a contract of adhesion, and the ambiguities therein should be
construed strictly against the petitioner; that the last sentence of the all-
embracing clause provided that the mortgage would be null and void upon the
payment of the obligations secured by the mortgage; and that the petitioner
was guilty of bad faith in refusing to nullify the mortgage despite full payment
of the commercial loan prior to its maturity.
The RTC also ruled that because the property had already been sold to
Malmis, a third party not brought within the trial court's jurisdiction, it could not
order the return of the property; and that it was ordering the petitioner instead
to pay the respondents the value of the property under its present market
valuation.
Decision of the CA
Dissatisfied, the petitioner appealed to the Court of Appeals (CA). The appeal
was docketed as C.A.-G.R. CV No. 60625.
On August 31, 2005, the CA affirmed the RTC,8 observing that the mortgage,
being a contract of adhesion, should be construed strictly against the petitioner
as the patty who had drafted the same; and that although the petitioner had
argued, citing Mojica v. Court of Appeals,9 that all-embracing clauses were
valid to secure past, present and future loans, Mojica v. Court of Appeals was
not in point inasmuch as the facts therein were different from the facts herein.
The petitioner filed a motion for reconsideration, but the CA denied the motion
on February 27, 2006.10chanrobleslaw
Hence, this appeal by petition for review on certiorari.
Issues
The petitioner assigns the following errors to the CA, to
wit:ChanRoblesVirtualawlibrary
The Court of Appeals grievously erred in restricting and delimiting the scope
and validity of the standard "all-embracing clause" in real estate mortgage
contracts solely to future indebtedness and not to prior ones, contrary to
leading Supreme Court decisions on the matter.
Even assuming arguendo that the xxx decisions are inapplicable to the case
at bar, the Court of Appeals grievously erred in awarding the unsubstantiated
amount of P1.7 million in damages and P20,000.00 as attorney's fees against
PNB without factual and legal basis.11
The petitioner submits that Mojica v. Court of Appeals validates the use of an
all-embracing clause in a mortgage agreement to secure not only the amount
indicated on the mortgage instrument, but also the mortgagor's future and past
obligations; that by denying the applicability to the case of Mojica v. Court of
Appeals and other similar rulings, the CA disregarded the principle of stare
decisis; and that the CA in effect thereby regarded all-embracing clauses
invalid as to prior obligations.
Ruling of the Court
The appeal lacks merit.
The CA opined as follows:ChanRoblesVirtualawlibrary
The real estate mortgage on the property covered by TCT No. T-66139 was
specifically constituted to secure the payment of the commercial loan of the
Spouses ALONDAY. In the same manner, the real estate mortgage on the
property covered by OCT No. P-3599 was constituted to secure the payment
of their agricultural loan with the PNB. With the execution of separate mortgage
contracts for the two (2) loans, it is clear that the intention of the parties was to
limit the mortgage to the loan for which it was constituted.
xxxx
The [Mojica] case is not in point since the facts therein are different from the
case at bench. In Mojica vs. Court of Appeals, the mortgaged real estate
property was made to answer for future advancement or renewal of the loan,
whereas in the instant case, the foreclosure sale included a property which
was used as a security for a commercial loan which was obtained after the
agricultural loan.
The mortgage provision relied upon by appellant is known in American
jurisprudence as a "dragnet" clause, which is specifically phrased to subsume
all debts of past or future origin. Such clauses pursuant to the pronouncement
of the Supreme Court in DBP vs. Mirang must be "carefully scrutinized and
strictly construed."12chanrobleslaw
The petitioner wrongly insists that the CA, thr ough the foregoing ratiocination,
held that the all-embracing or dragnet clauses were altogether invalid as to
prior obligations. What the CA, although reiterating that the Court upheld the
validity of using real estate mortgages to secure future advancements, only
thereby pointed out that it could not find similar rulings as to mortgages
executed to secure prior loans.
There is no question, indeed, that all-embracing or dragnet clauses have been
recognized as valid means to secure debts of both future and past origins.13
Even so, we have likewise emphasized that such clauses were an exceptional
mode of securing obligations, and have held that obligations could only be
deemed secured by the mortgage if they came fairly within the terms of the
mortgage contract.14 For the all-embracing or dragnet clauses to secure future
loans, therefore, such loans must be sufficiently described in the mortgage
contract.15 If the requirement could be imposed on a future loan that was
uncertain to materialize, there is a greater reason that it should be applicable
to a past loan, which is already subsisting and known to the parties.
Nonetheless, it was undeniable that the petitioner had the opportunity to
include some form of acknowledgement of the previously subsisting
agricultural loan in the terms of the second mortgage contract The mere fact
that the mortgage constituted on the property covered by TCT No. T-66139
made no mention of the pre-existing loan could only strongly indicate that each
of the loans of the Spouses Alonday had been treated separately by the parties
themselves, and this sufficiently explained why the loans had been secured by
different mortgages.
Another indication that the second mortgage did not extend to the agricultural
loan was the fact that the second mortgage was entered into in connection
only with the commercial loan. Our ruling in Prudential Bank v. Alviar16 is then
relevant, to wit:ChanRoblesVirtualawlibrary
xxx 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."
xxx 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.17chanroblesvirtuallawlibrary
Although the facts in Prudential Bank were not entirely on all fours with those
of this case because the prior mortgage in Prudential Bank was sought to be
enforced against a subsequent loan already secured by other securities, the
logic in Prudential Bank is applicable here. The execution of the subsequent
mortgage by the parties herein to secure the subsequenlloan was an indication
that they had intended to treat each loan as distinct from the other, and that
they had intended to secure each of the loans individually and separately.
We further concur with the CA and the RTC in their holding that the mortgage
contracts executed by the Spouses Alonday were contracts of adhesion
exclusively prep red by the petitioner. Under Article 1306 of the Civil Code, the
contracting parties "may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order or public policy." This is an express
recognition by the law of the right of the people to enter into all manner of lawful
conventions as part of their safeguarded liberties. The objection against a
contract of adhesion lies most often in its negation of the autonomy of the will
of the parties in contracts. A contract of adhesion, albeit valid, becomes
objectionable only when it takes undue advantage of one of the parties the
weaker party- by having such party just adhere to the terms of the contract. In
such situation, the courts go to the succor of the weaker party by construing
any obscurity in the contract against the party who prepared the contract, the
latter being presumed as the stronger party to the agreement, and as the party
who caused the obscurity.18chanrobleslaw
To reiterate, in order for the all-embracing or dragnet clauses to secure future
and other loans, the loans thereby secured must be sufficiently described in
the mortgage contract. Considering that the agricultural loan had been pre-
existing when the mortgage was constituted on the property covered by TCT
No. T-66139, it would have been easy for the petitioner to have expressly
incorporated the reference to such agricultural loan in the mortgage contract
covering the commercial loan. But the petitioner did not. Being the party that
had prepared the contract of mortgage, its failure to do so should be construed
that it did not at all contemplate the earlier loan when it entered into the
subsequent mortgage.
Anent the value of the property covered by TCT No. T-66139, the findings of
the RTC on the valuation were as follows:ChanRoblesVirtualawlibrary
Considering that the property is located at the junction of the roads leading to
Toril and Calinan districts with big establishments all around, plaintiffs claim
that at the time of the filing of this case which was in 1994, the reasonable
market value of the land was P1,200.00 per square meter. To date, the value
could reasonably be P3,000.00 per square
meter.19chanroblesvirtuallawlibrary
Opining that the respondents should be indemnified the value of the loss
suffered from the illegal foreclosure of the property covered by TCT No. T-
66139, theCA adopted the valuation by the RTC on the established fair market
value of the property being P3,000.00/square meter, for a total of
P1,700,000.00 as damages to be awarded.20chanrobleslaw
The petitioner challenges the valuation as devoid of basis. It points out that the
complaint of the Spouses Alonday had placed the value of the property at
P1,200.00/square meter; and that respondent Alberto Alonday had testified
during the trial that the value of the property had been only P1,200.00/square
meter.
We uphold the challenge by the petitioner.
We are at a loss at how the RTC had computed and determined the valuation
at P3,000.00/square meter. Such determination was easily the product of
guesswork on the part of the trial court, for the language employed in its
judgment in reference to such value was "could reasonably be."21 On its part,
the CA adverted to the valuation as "approximately P3,000.00,"22 indicating
that its own determination of the fair market value was of similar tenor as that
by the RTC. Accordingly, the valuation by both lower courts cannot be upheld,
for it is basic enough that in their determination of actual damages, the comis
should eschew mere assertions, speculations, conjectures or guesswork;23
otherwise, they would be guilty of arbitrariness and whimsicality.
Moreover, the courts cannot grant reliefs not prayed for in the pleadings or in
excess of what is being sought by the party.24chanrobleslaw
To accord with what is fair, based on the records, we reduce the basis of the
actual damages to P1,200.00/square meter. Such valuation is insulated from
arbitrariness because it was made by the Spouses Alonday themselves in their
complaint, rendering a total of P717,600.00 as actual damages.
The lower courts did not impose interest on the judgment obligation to be paid
by the petitioner. Such interest is in the nature of compensatory interest, as
distinguished from monetary interest. It is relevant to elucidate on the
distinctions between these kinds of interest. In this regard, the Court has
expounded in Siga-an v. Villanueva:25cralawredcralawred
Interest is a compensation fixed by the parties for the use or forbearance of
money. This is referred to as monetary interest. Interest may also be imposed
by law or by courts as penalty or indemnity for damages. This is called
compensatory interest. The right to interest arises only by virtue of a contract
or by virtue of damages for delay or failure to pay the principal loan on which
interest is demanded.
Article 1956 of the Civil Code, which refers to monetary interest, specifically
mandates that no interest shall be due unless it has been expressly stipulated
in writing. As can be gleaned from the foregoing provision, payment of
monetary interest is allowed only if: (1) there was an express stipulation for the
payment of interest; and (2) the agreement for the payment of interest was
reduced in writing. The concurrence of the two conditions is required for the
payment of monetary interest. Thus, we have held that collection of interest
without any stipulation therefor in writing is prohibited by law.
xxxx
There are instances in which an interest may be imposed even in the absence
of express stipulation, verbal or written, regarding payment of interest. Article
2209 of the Civil Code states that if the obligation consists in the payment of a
sum of money, and the debtor incurs delay, a legal interest of 12% per annum
may be imposed as indemnity for damages if no stipulation on the payment of
interest was agreed upon. Likewise, Article 2212 of the Civil Code provides
that interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent on this point.
All the same, the interest under these two instances may be imposed only as
a penalty or damages for breach of contractual obligations. It cannot be
charged as a compensation for the use or forbearance of money. In other
words, the two instances apply only to compensatory interest and not to
monetary interest.26 xxx
The petitioner should be held liable for interest on the actual damages of
P717,600.00 representing the value of the propetiy with an area 598 square
meters that was lost to them through the unwarranted foreclosure, the same
to be reckoned from the date of judicial demand (i.e., the filing of the action by
the Spouses Alonday). At the time thereof, the rate was 12% per annum, and
such rate shall run until June 30, 2013. Thereafter, or starting on July 1, 2013,
the rate of interest shall be 6% per annum until full payment of the obligation,
pursuant to the ruling in Nacar v. Gallery Frames,27 which took into
consideration the lowering of interest rates by the Monetary Board.

In addition, Article 221228 of the Civil Code requires that interest due shall
earn legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point. Accordingly, the interest due shall
itself earn legal interest of 6% per annum from the date of finality of the
judgment until its full satisfaction, the interim period being deemed to be an
equivalent to a forbearance of credit.29chanrobleslaw

WHEREFORE, the Court AFFIRMS the decision promulgated in C.A.-G.R. CV

No. 60625 on August 31, 2005 in all respects subject to the following
MODIFICATIONS, namely: (1) the award of P1,700,000.00 representing the
value of the land covered by Transfer Certificate of Title No. T-66139 of the
Registry of Deeds of Davao City is REDUCED to P717,600.00, the same to be
paid by petitioner Philippine National Bank; (2) the principal amount of
P717,600.00 shall earn interest of 12% per annum from the filing of the
complaint until June 30, 2013, and interest of 6% per annum from July 1, 2013
until full payment; and (3) the interests thus earned shall also earn interest of
6% per annum from the finality of this decision until full payment.

SO ORDERED.chanRoblesvirtualLawlibrary