covered by PDCP's REMs.
Lastly, the failure to send a notice of
Paradigm vs. BPI (2017)
G.R. No. 191174 | 2017-06-07
Subject: The registration of the REMs, even if contrary to the
supposed intent of the parties, did not affect the validity of
the mortgage contracts; Fraud perpetrated, if any, was not the type to
avoid a contract; No novation took place; The trial court's finding that
Sengkon did not avail under the Credit Line taints the foreclosure of the
mortgage; 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; FEBTC's failure to send personal notice to the mortgagor is
fatal to the validity of the foreclosure proceedings; Cortes ruling no
longer good law; In case of doubt in a contract of adhesion, the doubt
should be resolved against the party who prepared it
Facts:
In February 1996, Sengkon Trading, a sole proprietorship owned by
Anita Go, obtained a P100 Million loan from Far East Bank and Trust
Company (FEBTC) under an Omnibus Line credit facility with several
sub-facilities.
In April 1996, FEBTC again granted Sengkon another P60 Million
Credit Line under an "Agreement for Credit Line." Two real estate
mortgage (REM) contracts were executed by PDCP President Anthony
L. Go (Go) to partially secure Sengkon's obligations under this Credit
Line. One REM secured the amount of P8 Million, and the other REM
secured the amount of P42.4 Million.
FEBTC approved the conversion of Sengkon's P100 Million Omnibus
Line to P150 Million LC-TR Line and the change of the account name
to SENGKON TRADING, INC. (STI).
Sengkon defaulted in the payment of its loan obligations. Thus, FEBTC
demanded payment from PDCP of alleged Credit Line and Trust
Receipt availments with a principal balance of P244,277,199.68 plus
interest and other charges which Sengkon failed to pay.
PDCP proposed to pay approximately P50 Million, corresponding to
the obligations secured by its property, for the release of its properties
but FEBTC pressed for a comprehensive repayment scheme for the
entirety of Sengkon's obligations.
Meanwhile, the negotiations were put on hold because BPI acquired
FEBTC and assumed the rights and obligations of the latter.
Upon verification with the Registry of Deeds, PDCP discovered that
FEBTC extra-judicially foreclosed the first and second mortgage
without notice to it as mortgagor and sold the mortgaged properties to
FEBTC as the lone bidder.
PDCP filed a Complaint for Annulment of Mortgage and Damages
against BPI, successor-in-interest of FEBTC, alleging that the REMs
and their foreclosure were null and void.
The RTC nullified the REMs and the foreclosure proceedings. It also
awarded damages to PDCP. The RTC observed that while BPI claimed
that the period of said credit line was extended up to July 31, 1997,
PDCP was not notified of the extension and thus could not have
consented to the extension. Further, the RTC agreed with PDCP that
novation took place in this case, which resulted in discharging the latter
from its obligations as third-party mortgagor. It also nullified the
foreclosure proceedings because the original copies of the promissory
notes (PNs) were not presented in court and no notice of the
extrajudicial foreclosure sale was given to PDCP.
The Court of Appeals (CA) reversed the RTC's ruling on all points. The
CA ruled that novation could not have taken place from FEBTC's mere
act of approving Sengkon's request to change account name from
Sengkon to STI. The CA added that since the REMs contain a dragnet
clause, the other obligations not under the Credit Line were still
extrajudicial foreclosure sale to PDCP did not affect the validity of the
foreclosure sale because personal notice to the mortgagor is not even
generally required. Hence, this petition.
Held:
The registration of the REMs, even if contrary to the supposed
intent of the parties, did not affect the validity of
the mortgage contracts
1. According to PDCP, when FEBTC registered both REMs, even if
the intent was only to register one, the validity of both REMs was
vitiated by lack of consent. The REMs were constituted merely as
"partial security" for Sengkon's obligations and therefore there was
really no intent to be bound under both REM.
2. To begin with, the registration of the REM contract is not
essential to its validity. (Article 2085, Civil Code). In relation thereto,
Article 2125 of the Civil Code states that: “In addition to the requisites
stated in Article 2085, it is indispensable, in order that a mortgage may
be validly constituted, that the document in which it appears be
recorded in the Registry of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between the parties.” Hence, as
between them, the mere fact that there is as yet no compliance with
the requirement that it be recorded cannot be a bar to foreclosure.
3. Hence, even assuming that the parties indeed agreed to register
only one of the two REMs, the subsequent registration of both REMs
did not affect an already validly executed REM if there was no other
basis for the declaration of its nullity. That the REMs were intended
merely as "partial security" does not make PDCP's argument more
plausible because the PDCP's act of surrendering all the titles to the
properties to FEBTC clearly establishes PDCP's intent to mortgage all
of the four properties in favor of FEBTC to secure Sengkon's obligation
under the Credit Line.
Fraud perpetrated, if any, was not the type to avoid a contract
4. Under Article 1344 of the Civil Code, the fraud must be serious to
annul or avoid a contract and render it voidable. This fraud or
deception must be so material that had it not been present, the
defrauded party would not have entered into the contract.
5. In the present case, even if FEBTC represented that it will not
register one of the REMs, PDCP cannot disown the REMs it executed
after FEBTC reneged on its alleged promise. As earlier stated, with or
without the registration of the REMs, as between the parties thereto,
the same is valid and PDCP is already bound thereby. The signature of
PDCP's President coupled with its act of surrendering the titles to the
four properties to FEBTC is proof that no fraud existed in the execution
of the contract. Arguably at most, FEBTC's act of registering the
mortgage only amounted to dolo incidente which is not the kind of
fraud that avoids a contract.
6. In contracts, a fraud known as dolo causante or causal fraud is
basically a deception used by one party prior to or simultaneous with
the contract, in order to secure the consent of the other. The deceit
employed must be serious. In contradistinction, only some particular or
accident of the obligation is referred to by incidental fraud or dolo
incidente, or that which is not serious in character and without which
the other party would have entered into the contract anyway.
No novation took place
7. Novation is a mode of extinguishing an obligation by changing its
objects or principal obligations, by substituting a new debtor in place of
the old one, or by subrogating a third person to the rights of the
creditor. Article 1293 of the Civil Code defines novation as "consists in
substituting a new debtor in the place of the original one, [which] may
be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor."
8. However, while the consent of the creditor need not be expressed
but may be inferred from the creditor's clear and unmistakable acts,to
effect a subjective novation by a change in the person of the debtor it is
necessary that the old debtor be released expressly from the
obligation, and the third person or new debtor assumes his place in the
relation. There is no novation without such release as the third person
who has assumed the debtor's obligation becomes merely a co-debtor
or surety.
9. The well-settled rule is that novation is never presumed. Novation
will not be allowed unless it is clearly shown by express agreement, or
by acts of equal import. PDCP failed to prove by preponderance of
evidence that Sengkon was already expressly released from the
obligation and that STI assumed the former's obligation. Again, the
Deed of Assumption of Line which was supposed to embody STI's
assumption of all the obligations of Sengkon under the line was not
signed by the parties. While FEBTC indeed approved Sengkon's
request for the "change in account name" from Sengkon to STI, such
mere change in account name alone does not meet the required
degree of certainty to establish novation absent any other
circumstance to bolster said conclusion.
The trial court's finding that Sengkon did not avail under the
Credit Line taints the foreclosure of the mortgage
10. The trial court made a factual finding that Sengkon's availment
under the Credit Line, which is the one secured by PDCP's properties,
may be made only within one year, or from April 19, 1996 to April 30,
1997. While FEBTC claimed that the period of said credit line was
extended up to July 31, 1997, PDCP was not notified of the extension.
At any rate, the RTC found that "no evidence had been adduced to
show that Sengkon availed of any loan under the credit line up to July
31, 1997".
11. There was simply no evidence to support the conclusion that the
PNs were in fact availments under the Credit Line secured by PDCP's
properties. The PNs that were used by FEBTC in its Petition for
Extrajudicial Foreclosure of Mortgage were all executed beyond the
extended duration of Sengkon's Credit Line (until July 1997). While
FEBTC wrote a letter dated September 18, 1997, which is a few days
short of the date of the earliest PN (September 23, 1997), addressed to
STI, approving the renewal of the debtor's Credit Line subject to the
condition that the Line "shall be partially secured" by the PDCP's
mortgaged properties, it is worthy to note that this letter did not bear
the conforme of the debtor, lending credence to the trial court's
observation. In this light, FEBTC's failure to heed PDCP's request for
the segregation of the amounts secured by its properties assumes
critical significance. The lack of proof that the availments subject of the
foreclosure proceedings were within the coverage of PDCP's REMs
explains FEBTC's omission.
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.
12. The CA applied the dragnet clause in PDCP's REMs. According to
the CA, since the REMs contain a dragnet clause, then PDCP's
properties can be made to answer even if the PNs supporting the
Petition for Extrajudicial Foreclosure of Mortgage refer to Sengkon's
obligations in its other credit facilities.
13. A dragnet clause is a stipulation in a REM contract that extends
the coverage of a mortgage to advances or loans other than those
already obtained or specified in the contract. Where there are several
advances, however, 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 or unless there are clear and supportive
evidence to the contrary. This is especially true in this case where the
advances were not only several but were covered by different sub-
facilities.
14. 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. 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, such
deficiency being an indebtedness within the meaning of the mortgage,
in the absence of a special contract excluding it from the arrangement.
15. 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.
16. Here, the parties do not dispute that what the REMs secured were
only Sengkon's availments under the Credit Line and not all of
Sengkon's availments under other sub-facilities which are also secured
by other collaterals. Since the liability of PDCP's properties was not
unqualified, the PNs, used as basis of the Petition for Extrajudicial
Foreclosure of Mortgage should sufficiently indicate that it is within the
terms of PDCP's limited liability. In this case, the PNs failed to make
any reference to PDCP's availments, if any, under its Credit Line. In
fact, it did not even mention Sengkon's securities under the Credit
Line. The foregoing observations clearly support the trial court's
observation that FEBTC's foreclosure did not actually cover the
specific obligations secured by PDCP's properties.
FEBTC's failure to send personal notice to the mortgagor is fatal to the
validity of the foreclosure proceedings
17. FEBTC's failure to comply with its contractual obligation to send notice to
PDCP of the foreclosure sale is fatal to the validity of the foreclosure
proceedings. InMetropolitan Bank v. Wong, the Court ruled that while as a rule,
personal notice to the mortgagor is not required, such notice may be subject of a
contractual stipulation, the breach of which is sufficient to nullify the foreclosure
sale.
18. A contract is the law between the parties and, that absent any showing that
its provisions are wholly or in part contrary to law, morals, good customs, public
order, or public policy, it shall be enforced to the letter by the courts. Act No.
3135 only requires (1) the posting of notices of sale in three public places, and
(2) the publication of the same in a newspaper of general circulation. Personal
notice to the mortgagor is not necessary. Nevertheless, the parties to the
mortgage contract are not precluded from exacting additional requirements.
19. The fact that FEBTC caused the sending of a notice, albeit at a wrong
address, to PDCP is itself a clear proof that the parties did intend to impose a
contractual requirement of personal notice, FEBTC's undisputed breach of which
sufficiently nullifies the foreclosure proceeding.
Cortes ruling no longer good law
20. While the CA acknowledged that there was indeed a contractual stipulation
for notice to PDCP as mortgagor, it considered the absence of a particular
address in the space provided therefor in the mortgage contract as merely
evincing an expression of "general intent" between the parties and that this
cannot prevail against their "specific intent" that Act No. 3135 be the controlling
law between them, citing Cortes v. Intermediate Appellate Court. The Court
cannot agree with the CA. To begin with, the value of the doctrine enunciated in
Cortes has long been considered questionable by this Court.
21. Cortes has never been cited in subsequent rulings of the Court, nor has the
doctrine therein ever been reiterated. Its doctrinal value has been diminished by
the policy enunciated in Wong and the subsequent cases; that is, Act 3135
remains the controlling law, but the parties may agree, in addition to posting and
publication, to include personal notice to the mortgagor, the non-observance of
which renders the foreclosure proceedings null and void, since the foreclosure
proceedings become an illegal attempt by the mortgagee to appropriate the
property for itself.
In case of doubt in a contract of adhesion, the doubt should be resolved
against the party who prepared it
22. The mortgage contract containing said stipulation was a standard contract
prepared by FEBTC itself. If the latter did not intend to require personal notice, on
top of the statutory requirements of posting and publication, then said provision
should not have at all been included in the mortgage contract. In other words, the
REMs in this case are contracts of adhesion, and in case of doubt, the doubt
should be resolved against the party who prepared it.