CREDIT BATCH 2

A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION vs. CA
This is a petition for review on certiorari of the decision rendered on February 29, 1996 by
the Court of Appeals[1] reversing, in toto, the decision of the Regional Trial Court of Pasig
City in Civil Case No. 62290, as well as the appellate courts resolution of May 7, 1996
denying reconsideration.
Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million
to private respondents, the spouses Romulo and Erlinda Javillonar, in consideration of
which the latter executed the following documents: (a) a promissory note, dated November
27, 1991, stating an interest charge of 4% per month for six months; (b) a deed of
mortgage over realty covered by TCT No. 58748, together with the improvements thereon;
and (c) an undated deed of sale of the mortgaged property in favor of the mortgagee,
petitioner A. Francisco Realty.[2]
The interest on the said loan was to be paid in four installments: half of the total amount
agreed upon (P900,000.00) to be paid in advance through a deduction from the proceeds
of the loan, while the balance to be paid monthly by means of checks post-dated March
27, April 27, and May 27, 1992. The promissory note expressly provided that upon failure
of the MORTGAGOR [private respondents] to pay the interest without prior arrangement
with the MORTGAGEE [petitioner], full possession of the property will be transferred and
the deed of sale will be registered. [3] For this purpose, the owners duplicate of TCT No.
58748 was delivered to petitioner A. Francisco Realty.
Petitioner claims that private respondents failed to pay the interest and, as a
consequence, it registered the sale of the land in its favor on February 21, 1992. As a
result, TCT No. 58748 was cancelled and in lieu thereof TCT No. PT-85569 was issued in
the name of petitioner A. Francisco Realty.[4]
Private respondents subsequently obtained an additional loan of P2.5 Million from
petitioner on March 13, 1992 for which they signed a promissory note which reads:
In their answer, respondents admitted liability on the loan but alleged that it was not their
intent to sell the realty as the undated deed of sale was executed by them merely as an
additional security for the payment of their loan. Furthermore, they claimed that they were
not notified of the registration of the sale in favor of petitioner A. Francisco Realty and that
there was no interest then unpaid as they had in fact been paying interest even
subsequent to the registration of the sale. As an alternative defense,
respondents contended that the complaint was actually for ejectment and, therefore, the
Regional Trial Court had no jurisdiction to try the case. As counterclaim, respondents
sought the cancellation of TCT No. PT-85569 as secured by petitioner and the issuance of
a new title evidencing their ownership of the property.[7]
On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive
portion of which reads as follows:
WHEREFORE, prescinding from the foregoing considerations, judgment is hereby
rendered declaring as legal and valid, the right of ownership of A. Francisco Realty And
Development Corporation, over the property subject of this case and now registered in its
name as owner thereof, under TCT No. 85569 of the Register of Deeds of Rizal, situated
at No. 56 Dragonfly Street, Valle Verde VI, Pasig, Metro Manila.
Consequently, defendants are hereby ordered to cease and desist from further committing
acts of dispossession or from withholding possession from plaintiff, of the said property as
herein described and specified. Claim for damages in all its forms, however, including
attorneys fees, are hereby denied, no competent proofs having been adduced on record,
in support thereof.[8]
Respondent spouses appealed to the Court of Appeals which reversed the decision of the
trial court and dismissed the complaint against them. The appellate court ruled that the
Regional Trial Court had no jurisdiction over the case because it was actually an action for
unlawful detainer which is exclusively cognizable by municipal trial courts. Furthermore, it
ruled that, even presuming jurisdiction of the trial court, the deed of sale was void for being
in fact a pactum commissorium which is prohibited by Art. 2088 of the Civil Code.

PROMISSORY NOTE
Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals
denied the motion in its resolution, dated May 7, 1996. Hence, this petition for review on
For value received, I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT certiorari raising the following issues:
CORPORATION, the additional sum of Two Million Five Hundred Thousand Pesos
(P2,500,000.00) on or before April 27, 1992, with interest at the rate of four percent (4%) a
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE
month until fully paid and if after the said date this note and/or the other promissory note
REGIONAL TRIAL COURT HAD NO JURISDICTION OVER THE COMPLAINT FILED BY
of P7.5 Million remains unpaid and/or unsettled, without any need for prior demand or
THE PETITIONER.
notification, I promise to vacate voluntarily and willfully and/or allow A. FRANCISCO
REALTY AND DEVELOPMENT CORPORATION to appropriate and occupy for their
exclusive use the real property located at 56 Dragonfly, Valle Verde VI, Pasig, Metro WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE
Manila.[5] CONTRACTUAL DOCUMENTS SUBJECT OF THE INSTANT CASE ARE
CONSTITUTIVE OF PACTUM COMMISSORIUM AS DEFINED UNDER ARTICLE 2088
OF THE CIVIL CODE OF THE PHILIPPINES.
Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly
interest from May 1992, plus surcharges. As respondent spouses refused to vacate,
petitioner filed the present action for possession before the Regional Trial Court in Pasig On the first issue, the appellate court stated:
City.[6]
Ostensibly, the cause of action in the complaint indicates a case for unlawful detainer, as
contra-distinguished from accion publiciana. As contemplated by Rule 70 of the Rules of
CREDIT BATCH 2
Court, an action for unlawful detainer which falls under the exclusive jurisdiction of the
Metropolitan or Municipal Trial Courts, is defined as withholding from by a person from
another for not more than one year, the possession of the land or building to which the
latter is entitled after the expiration or termination of the supposed rights to hold
possession by virtue of a contract, express or implied. (Tenorio vs. Gamboa, 81 Phil. 54;
Dikit vs. Dicaciano, 89 Phil. 44).If no action is initiated for forcible entry or unlawful
detainer within the expiration of the 1 year period, the case may still be filed under the
plenary action to recover possession by accion publiciana before the Court of First
Instance (now the Regional Trial Court) (Medina vs. Valdellon, 63 SCRA 278). In plain
language, the case at bar is a legitimate ejectment case filed within the 1 year period from
the jurisdictional demand to vacate. Thus, the Regional Trial Court has no jurisdiction over
the case. Accordingly, under Section 33 of B.P. Blg. 129 Municipal Trial Courts are vested
with the exclusive original jurisdiction over forcible entry and unlawful detainer case. (Sen
Po Ek Marketing Corp. vs. CA, 212 SCRA 154 [1990])[9]
We think the appellate court is in error. What really distinguishes an action for unlawful
detainer from a possessory action (accion publiciana) and from a reivindicatory action
(accion reivindicatoria) is that the first is limited to the question of possession de facto.
An unlawful detainer suit (accion interdictal) together with forcible entry are the two forms
of an ejectment suit that may be filed to recover possession of real property. Aside from
the summary action of ejectment, accion publiciana or the plenary action to recover the
right of possession and accion reivindicatoria or the action to recover ownership which
includes recovery of possession, make up the three kinds of actions to judicially recover
possession.
Illegal detainer consists in withholding by a person from another of the possession of a
land or building to which the latter is entitled after the expiration or termination of the
formers right to hold possession by virtue of a contract, express or implied. An ejectment
suit is brought before the proper inferior court to recover physical possession only or
possession de facto and not possession de jure, where dispossession has lasted for not
more than one year. Forcible entry and unlawful detainer are quieting processes and the
one-year time bar to the suit is in pursuance of the summary nature of the action. The use
of summary procedure in ejectment cases is intended to provide an expeditious means of
protecting actual possession or right to possession of the property. They are not
processes to determine the actual title to an estate. If at all, inferior courts are empowered
to rule on the question of ownership raised by the defendant in such suits, only to resolve
the issue of possession. Its determination on the ownership issue is, however, not
conclusive.[10]
The allegations in both the original and the amended complaints of petitioner before
the trial court clearly raise issues involving more than the question of possession, to wit:
(a) the validity of the transfer of ownership to petitioner; (b) the alleged new liability of
private respondents for P400,000.00 a month from the time petitioner made its demand on
them to vacate; and (c) the alleged continuing liability of private respondents under both
loans to pay interest and surcharges on such. As petitioner A. Francisco Realty alleged in
its amended complaint:
5. To secure the payment of the sum of P7.5 Million together with the monthly
interest, the defendant spouses agreed to execute a Deed of Mortgage over the
property with the express condition that if and when they fail to pay monthly
interest or any infringement thereof they agreed to convert the mortgage into a
Deed of Absolute Sale in favor of the plaintiff by executing Deed of Sale thereto,
copy of which is hereto attached and incorporated herein as Annex A;
6. That in order to authorize the Register of Deeds into registering the Absolute
Sale and transfer to the plaintiff, defendant delivered unto the plaintiff the said
Deed of Sale together with the original owners copy of Transfer Certificate of Title
No. 58748 of the Registry of Rizal, copy of which is hereto attached and made an
integral part herein as Annex B;
7. That defendant spouses later secured from the plaintiff an additional loan
of P2.5 Million with the same condition as aforementioned with 4% monthly
interest;
8. That defendants spouses failed to pay the stipulated monthly interest and as
per agreement of the parties, plaintiff recorded and registered the Absolute Deed
of Sale in its favor on and was issued Transfer Certificate of Title No. PT-85569,
copy of which is hereto attached and incorporated herein as Annex C;
9. That upon registration and transfer of the Transfer Certificate of Title in the
name of the plaintiff, copy of which is hereto attached and incorporated herein as
Annex C, plaintiff demanded the surrender of the possession of the above-
described parcel of land together with the improvements thereon, but defendants
failed and refused to surrender the same to the plaintiff without justifiable reasons
thereto; Neither did the defendants pay the interest of 4% a month from May, 1992
plus surcharges up to the present;
10. That it was the understanding of the parties that if and when the defendants
shall fail to pay the interest due and that the Deed of Sale be registered in favor of
plaintiff, the defendants shall pay a monthly rental of P400,000.00 a month until
they vacate the premises, and that if they still fail to pay as they are still failing to
pay the amount of P400,000.00 a month as rentals and/or interest, the plaintiff
shall take physical possession of the said property;[11]
It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues
which involved more than a simple claim for the immediate possession of the subject
property. Such issues range across the full scope of rights of the respective parties under
their contractual arrangements. As held in an analogous case:
The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace of
Hagonoy, Bulacan extended far beyond the issues generally involved in unlawful detainer
suits. The litigants therein did not raise merely the question of who among them was
entitled to the possession of the fishpond of Federico Suntay. For all judicial purposes,
they likewise prayed of the court to rule on their respective rights under the various
contractual documents their respective deeds of lease, the deed of assignment and the
promissory note upon which they predicate their claims to the possession of the said
fishpond. In other words, they gave the court no alternative but to rule on the validity or
nullity of the above documents. Clearly, the case was converted into the determination of
the nature of the proceedings from a mere detainer suit to one that is incapable of
pecuniary estimation and thus beyond the legitimate authority of the Justice of the Peace
Court to rule on.[12]
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Nor can it be said that the compulsory counterclaim filed by respondent spouses
challenging the title of petitioner A. Francisco Realty was merely a collateral attack which
would bar a ruling here on the validity of the said title.
A counterclaim is considered a complaint, only this time, it is the original defendant who
becomes the plaintiff (Valisno v. Plan, 143 SCRA 502 (1986). It stands on the same footing
and is to be tested by the same rules as if it were an independent action. Hence, the same
rules on jurisdiction in an independent action apply to a counterclaim (Vivar v. Vivar, 8
SCRA 847 (1963); Calo v. Ajax International, Inc. v. 22 SCRA 996 (1968); Javier
v. Intermediate Appellate Court, 171 SCRA 605 (1989); Quiason, Philippine Courts and
Their Jurisdictions, 1993 ed., p. 203).[13]
On the second issue, the Court of Appeals held that, even on the assumption that the trial
court has jurisdiction over the instant case, petitioners action could not succeed because
the deed of sale on which it was based was void, being in the nature of a pactum
commissorium prohibited by Art. 2088 of the Civil Code which provides:
ART. 2088. The creditor cannot appropriate the things given by way to pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.
With respect to this question, the ruling of the appellate court should be affirmed.
Petitioner denies, however, that the promissory notes contain a pactum commissorium. It
contends that What is envisioned by Article 2088 of the Civil Code of the Philippines is a
provision in the deed of mortgage providing for the automatic conveyance of the
mortgaged property in case of the failure of the debtor to pay the loan (Tan v. West Coast
Life Assurance Co., 54 Phil. 361). A pactum commissorium is a forfeiture clause in a
deed of mortgage (Hechanova v. Adil, 144 SCRA 450; Montevergen v. Court of Appeals,
112 SCRA 641; Report of the Code Commission, 156).
Thus, before Article 2088 can find application herein, the subject deed of mortgage must
be scrutinized to determine if it contains such a provision giving the creditor the right to
appropriate the things given by way of mortgage without following the procedure
prescribed by law for the foreclosure of the mortgage (Ranjo v. Salmon, 15 Phil. 436). IN
SHORT, THE PROSCRIBED STIPULATION SHOULD BE FOUND IN THE MORTGAGE
DEED ITSELF.[14]
The contention is patently without merit. To sustain the theory of petitioner would be to
allow a subversion of the prohibition in Art. 2088.
In Nakpil v. Intermediate Appellate Court,[15] which involved the violation of a constructive
trust, no deed of mortgage was expressly executed between the parties in that case.
Nevertheless, this Court ruled that an agreement whereby property held in trust was
ceded to the trustee upon failure of the beneficiary to pay his debt to the former as
secured by the said property was void for being a pactum commissorium. It was there
held:
The arrangement entered into between the parties, whereby Pulong Maulap was to be
considered sold to him (respondent) x x x in case petitioner fails to reimburse Valdes, must
then be construed as tantamount to a pactum commissorium which is expressly prohibited
by Art. 2088 of the Civil Code. For, there was to be automatic appropriation of the property
by Valdez in the event of failure of petitioner to pay the value of the advances. Thus,
contrary to respondents manifestations, all the elements of a pactum commissorium were
present: there was a creditor-debtor relationship between the parties; the property was
used as security for the loan; and, there was automatic appropriation by respondent
of Pulong Maulap in case of default of petitioner.[16]
Similarly, the Court has struck down such stipulations as contained in deeds of sale
purporting to be pacto de retro sales but found actually to be equitable mortgages.
It has been consistently held that the presence of even one of the circumstances
enumerated in Art. 1602 of the New Civil Code is sufficient to declare a contract of sale
with right to repurchase an equitable mortgage. This is so because pacto de retro sales
with the stringent and onerous effects that accompany them are not favored. In case of
doubt, a contract purporting to be a sale with right to repurchase shall be construed as an
equitable mortgage.
Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that
complete and absolute title shall be vested on the vendee should the vendors fail to
redeem the property on the specified date. Such stipulation that the ownership of the
property would automatically pass to the vendee in case no redemption was effected
within the stipulated period is void for being a pactum commissorium which enables the
mortgagee to acquire ownership of the mortgaged property without need of foreclosure. Its
insertion in the contract is an avowal of the intention to mortgage rather that to sell the
property.[17]
Indeed, in Reyes v. Sierra[18] this Court categorically ruled that a mortgagees mere act of
registering the mortgaged property in his own name upon the mortgagors failure to
redeem the property amounted to the exercise of the privilege of a mortgagee in a pactum
commissorium.
Obviously, from the nature of the transaction, applicants predecessor-in-interest is a mere
mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran, the
mortgagor. The mortgagee, however, may recover the loan, although the mortgage
document evidencing the loan was nonregistrable being a purely private
instrument. Failure of mortgagor to redeem the property does not automatically vest
ownership of the property to the mortgagee, which would grant the latter the right to
appropriate the thing mortgaged or dispose of it. This violates the provision of Article 2088
of the New Civil Code, which reads:
The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose
by them. Any stipulation to the contrary is null and void.
The act of applicant in registering the property in his own name upon mortgagors failure to
redeem the property would amount to a pactum commissorium which is against good
morals and public policy.[19]
Thus, in the case at bar, the stipulations in the promissory notes providing that, upon
failure of respondent spouses to pay interest, ownership of the property would be
automatically transferred to petitioner A. Francisco Realty and the deed of sale in its favor
would be registered, are in substance a pactum commissorium. They embody the two
elements of pactum commissorium as laid down in Uy Tong v. Court of Appeals,[20] to wit:
The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the
Civil Code:
CREDIT BATCH 2
Art. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgagee, or dispose of the same. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to exist:
(1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged
by way of security for the payment of the principal obligation; and (2) that there should be
a stipulation for an automatic appropriation by the creditor of the thing pledged or
mortgaged in the event of non-payment of the principal obligation within the stipulated
period.[21]
The subject transaction being void, the registration of the deed of sale, by virtue of which
petitioner A. Francisco Realty was able to obtain TCT No. PT-85569 covering the subject
lot, must also be declared void, as prayed for by respondents in their counterclaim.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it dismissed
petitioners complaint against respondent spouses on the ground that the stipulations in the
promissory notes are void for being a pactum commissorium, but REVERSED insofar as it
ruled that the trial court had no jurisdiction over this case. The Register of Deeds of Pasig
City is hereby ORDERED to CANCEL TCT No. PT-85569 issued to petitioner and ISSUE
a new one in the name of respondent spouses. SO ORDERED.
FACTS: A. Fransisco Realty and Development and Herby Commercial and
Construction Corporation entered into a Land Development and Construction Contract.
Fransisco was the president of AFRDC while Ong was the president of HCCC. It was
agreed upon that HCCC would undertake the construction of housing units and the
development of a large parcel of land. The payment would be on a turnkey basis. To
facilitate the payment, AFDRC executed a Deed of Assignment to enable the HCCC to
collect payments from the GSIS. Further, they opened an account with a
bank from which checks would be issued by Fransisco and the GSIS president. HCCC
later on filed a complaint for the unpaid balance in pursuance to its agreement with
AFRDC. However, an amicable settlement ensued, which was embodied in a
Memorandum of Agreement. It was embodied in said agreement that GSIS recognizes its
indebtedness to HCCC and that HCCC would also pay its obligations to AFRDC. A year
later, it was found out that Diaz and Fransisco had drawn checks payable to Ong. Ong
denied accepting said checks and it was further found out that Diaz entrusted
the checks to Fransisco who later forged the signature of Ong, showing that he
indorsed the checks to her and then she deposited the checks to her personal
savings account. This incident prompted Ong to file a complaint against Fransisco.
HELD: Ongs signature was found to be forged by Fransisco.
Fransiscos contention that he was authorized to sign Ongs name in her favor
giving her authority to collect all the receivables of HCCC from GSIS. This contention is
bereft of any merit. The Negotiable Instruments Law provides that when a person is
under obligation to indorse in a representative capacity, he may indorse in such terms as
to negative personal liability. An agent, when so signing, should indicate that he is merely
signing as an agent in behalf of the principal and must disclose the name of his
principal. Otherwise, he will be held liable personally. And assuming she was
indeed authorized, she didn't comply with the requirements of the law. Instead of
signing Ongs name, she should have signed in her own name as agent of HCCC. Thus,
her contentions cannot support or validate her acts of forgery.
PRUDENTIAL BANK VS DON A. ALVIAR & GEORGIA ALVIAR
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court.
Petitioner Prudential Bank seeks the reversal of the Decision[1] of the Court of Appeals
dated 27 September 2001 in CA-G.R. CV No. 59543 affirming the Decision of the
Regional Trial Court (RTC) of Pasig City, Branch 160, in favor of respondents.
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:
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. . . .[4]
On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345
for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured by a
hold-out on the mortgagors foreign currency savings account with the bank under Account
No. 129, and that the mortgagors passbook is to be surrendered to the bank until the
amount secured by the hold-out is settled.[5]
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. As provided in the note, the loan
is secured by Clean-Phase out TOD CA 3923, which means that the temporary overdraft
incurred by Donalco Trading, Inc. with petitioner is to be converted into an ordinary loan in
compliance with a Central Bank circular directing the discontinuance of overdrafts. [7]
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
CREDIT BATCH 2
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
CREDIT BATCH 2
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
CREDIT BATCH 2
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.