Facts
On November 15, 1995, Far East Bank and Trust Company (FEBTC) and B. Berris Merchandising (BBM), a sole proprietorship owned by Buenafrido, entered into a Loan Agreement for the total amount of P5,000,000.00 with interest at prevailing market rates payable within a period of five years inclusive of a six-month grace period via 18 quarterly amortizations on the principal balance and based on diminishing principal balance and payable every quarter in arrears. To secure the loan, the spouses Berris executed a real estate mortgage on parcels of land covered by Transfer Certificates of Title (TCT) Nos. 129163 and 74496, a chattel mortgage on their rice mill, and a Comprehensive Surety Agreement.
FEBTC also granted BBM a Discounting Line facility in the total amount of P15,000,000.00 with expiry on July 31, 1997. On July 3, 1997, the discounting line was renewed for the same amount, valid until July 31, 1998. On February 16, 1998, the parties increased the discounting facility to P18,000,000.00 with the same expiry on July 31, 1998. It also provided that the discounting accommodation shall be partially secured by a real estate mortgage on TCT Nos. 129163, 74496, 27852, 31079 and 296868 and the chattel mortgage on the rice mill.
Meanwhile, on April 15, 1996, the spouses Berris, for and in behalf of BBM, executed Promissory Note (PN) No. 104-961106/TLS in the total amount of P5,000,000.00 due on April 16, 2001 with an interest of 14.5% per annum and carrying the same provisions as the Term Loan Agreement, i.e. payable within a period of five years inclusive of six-month grace period via 18 quarterly amortizations on the principal balance and based on diminishing principal balance and payable every quarter in arrears. Thereafter, the spouses Berris, for and in behalf of BBM, executed 4 PNs. All PNs bore similar provisions which entitled FEBTC to 25% of the amount due by way of attorney’s fees in case of default. In addition, the last four PNs provided that FEBTC is entitled to liquidated damages of 1% for every 30 days or a fraction thereof on the amount due in case of default.
The spouses Berris failed to pay their obligations under the PNs. Hence, on August 5, 1998, FEBTC sent a letter demanding payment of the total amount of P21,055,555.54 representing both their Discounting Line and Loan Agreement availments, exclusive of interest, penalties another charges. The bank, on December 15, 1998, sent another letter to the spouses Berris reiterating its demand for payment of the same amount exclusive of interest, penalties and other charges. On February 3, 1999, FEBTC, through counsel, sent a Final Demand Letter21 to the spouses Berris demanding that they pay their obligations amounting P21,055,555.54 exclusive of interest, penalties and other charges, not later than February 19, 1999.
On August 19, 1999, the bank filed a Petition for Extra-Judicial Foreclosure of Real Estate Mortgage under Act No. 3135, as amended, before the RTC of Sta. Cruz, Laguna over the properties covered by TCT Nos. T-129163 and 74496 for the loans covered by PN Nos. 2-104-980258 BDC and 2-104-980888 BDC. Thereafter, on August 30, 1999, FEBTC filed its complaint for the collection.
On October 23, 2000, the spouses Berris filed a Complaint for the Annulment of Sale with Prayer for Injunction and Restraining Order. On April 7, 2000, the Securities and Exchange Commission (SEC) approved the merger of the Bank of Philippine Islands (BPI) and FEBTC with the former as the surviving corporation.
The RTC Makati rendered its Decision in favor of petitioner Asset Pool. The RTC Makati found that the spouses Berris indeed failed to pay their outstanding obligations under the PNs which constitute a contractual breach thereof.
On appeal, the appellate court reversed and set aside the August 29, 2008 Decision of the trial court. The appellate court held that the institution of the extrajudicial foreclosure of mortgage of the subject properties to satisfy the loans under PN Nos. 2-104-980258/BDC and 2-104-980888/BDC barred the filing of the collection suit filed by petitioner under PN Nos. 2-1040961106/TLS, 2-104-980259/bdc, 2-104-980296/bdc, 2-104-980975 BD/C and 2-104-981149/BDC. Asset Pool moved for reconsideration which was denied.
ISSUE: Whether or not the appellate court gravely erred in ruling that a previous filing of extrajudicial foreclosure of real estate mortgage barred a personal action for the collection of debt incurred by the spouses Berris
Ruling
YES. Petitioner may institute two alternative remedies against the spouses Berris: either a personal action for the collection of the promissory notes issued under the Discounting Line or a real action to foreclose the mortgage, but not both, simultaneously or successively. Although we recognize the right of the mortgage creditor to recover the deficiency when the mortgaged properties are not enough to satisfy the entire obligation, the action is only instituted after the termination of the foreclosure proceedings and not during its pendency, so as not to violate the prohibition against splitting of cause of action.
However, the foregoing rule against splitting of cause of action is not applicable to the herein collection suit covering PN No. 2-104-961106/TLS which was drawn against the Loan Agreement.
As earlier discussed, the Loan Agreement is separate and distinct from the Discounting Line. Thus, there could be no violation of the prohibition against splitting a cause of action when FEBTC instituted a foreclosure of mortgage on TCT Nos. 129163 and 74496 for PN Nos. 2-104-980258 BDC and 2-104-980888 BDC drawn against the Discounting Line and successively filed a collection suit to recover the debt due under PN 2-104-961106/TLS which was drawn against the Loan Agreement.
Being separate and distinct contracts, FEBTC, as the mortgage creditor, may institute either a personal action for the collection of debt, or a real action to foreclose the mortgage under the Loan Agreement. Obviously, FEBTC chose to elect a personal action to recover the amount due on PN No. 2-104-961106/TLS by filing the herein complaint as it is not barred by nor violative of the rule on prohibition against splitting of cause of action.
Furthermore, the real estate mortgage is just an accessory contract, thus, it does not control the principal agreements, i.e. the Loan Agreement and the Discounting Line, as it is only dependent upon the latter obligations. Hence, even if the real estate mortgage secured all of the obligations of the spouses Berris to the bank, whether existing or future indebtedness, it will not modify nor change the fact that they entered into two separate and distinct obligations which give rise to separate actions regardless of whether they become due and demandable at the same time or not.
To note, the Loan Agreement was secured by a real estate mortgage on only two of the five real properties, i.e. TCT Nos. 129163 and 74496, of the spouses Berris. This further bolsters the fact that the Loan Agreement gives rise to a separate cause of action of either an extrajudicial foreclosure or a collection suit, alternatively.
The indivisibility of the mortgage was also not violated when the bank filed an extra-judicial foreclosure of TCT Nos. 129163 and 74496 to effect payment under the Discounting Line and thereafter, filed a collection suit for PN No. 2-104-961106/TLS under the Loan Agreement during the pendency of the foreclosure. Article 2089 of the Civil Code 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 debtor’s heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as the debt is not completely satisfied.
Neither can the creditor’s 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 them 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.
The records are bereft of any copy of the real estate mortgage constituted on TCT Nos. 129163 and 74496 as well as on TCT Nos. 27852, 31079 and 296868. The only basis of their existence are the provisions of the Term Loan Agreement and the Agreements for Renewal of Discounting Line, and the admission of the parties herein.
The extrajudicial foreclosure of the mortgage constituted over TCT Nos. 129163 and 74496 was effected solely for the satisfaction of the PN Nos. 2-104-980258 BDC and 2-104-980888 BDC under the Discounting Line although the Loan Agreement was also covered by the same mortgaged properties and was also due and demandable at that time. Being separate and distinct obligations, the FEBTC is not required to effect payment of the two obligations on the foreclosure of TCT Nos. 129163 and 74496.
Even assuming that the real estate mortgage has a blanket mortgage or dragnet clause covering all future loans without need of executing another set of security documents,67 the same cannot restrict the bank from pursuing different actions on the two obligations of the spouses Berris although both obligations were already due and demandable. While the real estate mortgage on TCT Nos. 129163 and 74496 covers both the Loan Agreement and the PNs under the Discounting Line, the two obligations exist independently of each other and cannot bar the institution of foreclosure or collection suit on either cases.
Hence, FEBTC’s failure to include the PN No. 2-104-961106/TLS under the Loan Agreement in the foreclosure of TCT Nos. 129163 and 74496 is deemed to be a waiver of its lien on the said mortgaged properties. Nonetheless, the bank and its successor-in-interest, herein petitioner, may still collect the unpaid PN No. 2-104-961106/TLS under the Loan Agreement in an ordinary collection suit before its right to collect prescribes.
In sum, the appellate court correctly denied the petitioner’s claim for collection of sum of money under PN Nos. 2-104-980259/bdc, 2-104-980296/bdc, 2-104-980975 BD/C and 2-104-981149/BDC drawn against the Discounting Line Facility as they are considered barred when FEBTC instituted a Petition for Extrajudicial Foreclosure for PN Nos. 2-104-980258 BDC and 2-104-980888 BDC likewise under the same Discounting Line, in violation of the prohibition against splitting of cause of action.