FACTS:

The petitioners, spouses Jaime and Myrna Torres, obtained a credit line facility from Philippine Commercial and International Bank (PCIB) in 1995, secured by a real estate mortgage. PCIB eventually merged with Equitable Bank, now known as Equitable PCI Bank (EPCIB). The credit line underwent annual renewals until 2001, when the petitioners had an unpaid loan obligation. Petitioners proposed different payment schemes to settle their loan, but EPCIB denied their request for reinstatement of the credit line and proposed a restructuring package instead. Petitioner Jaime Torres agreed to the proposal. However, when the payment was due, petitioners failed to pay. EPCIB sent a demand letter, but petitioners only made a partial payment. EPCIB made it clear that the payment did not waive their right to demand the remaining balance. Further attempts at partial payment were made by petitioners, but the bank reminded them that their loan was still overdue. Ultimately, petitioners issued a stop payment order for one of their check payments. In response, EPCIB demanded full settlement of the loan.

On November 10, 2003, EPCIB demanded full settlement of the loan from the petitioners. When the demand was not met, EPCIB filed a petition for extrajudicial foreclosure of the mortgaged property. However, on December 8, 2003, the petitioners filed a complaint against EPCIB in the RTC for declaratory relief, injunction, and damages with an application for a temporary restraining order (TRO). The RTC issued a TRO enjoining EPCIB from proceeding with the foreclosure sale, and later granted a writ of preliminary injunction, effectively stopping the foreclosure sale. EPCIB filed a motion for reconsideration, but it was denied. EPCIB then filed a petition for certiorari before the Court of Appeals (CA), which nullified and set aside the RTC orders. Petitioners filed a motion for reconsideration, but it was denied. Hence, they filed the current petition before the Supreme Court.

ISSUES:

1. Whether there was novation of the terms of payment of the loan obligation.

2. Whether the acceptance of partial payments by the bank constituted agreement to the new terms of payment.

3. Whether there was novation of the terms of payment of the secured loan.

4. Whether the issuance of the preliminary injunction was proper.

5. Whether the application for a preliminary injunction was properly denied by the appellate court.

6. Whether the foreclosure of the mortgage property violates the rights of the petitioners.

7. Whether the disparity between the value of the mortgaged property and the unpaid debt is a ground to enjoin a foreclosure sale.

8. Whether the trial court gravely abused its discretion in granting the writ of preliminary injunction.

9. Whether the alleged VAT imposed on the principal obligation can be resolved in the main action.

RULING:

1. The Supreme Court ruled that there was no novation of the terms of payment of the loan obligation and that the acceptance of partial payments by the bank did not constitute agreement to the new terms of payment.

2. There was no novation of the terms of payment of the secured loan. The bank's acts before, simultaneously to, and after accepting payments argue against the idea of acquiescence to the change in payment terms. A novation through implied consent cannot be given imprimatur by the court.

3. The issuance of the preliminary injunction was not proper. The requisites for the issuance of a preliminary injunction were not satisfied. The minimum legal requisites for the issuance of a preliminary prohibitory injunction were not present, and the Court is aware that the matter of the issuance of a preliminary injunction is addressed to the sound discretion of the trial court. The writ of preliminary injunction can only be availed of upon the existence of well-defined circumstances and should be granted only when the law permits it and the emergency demands it.

4. The appellate court properly denied the application for a preliminary injunction. An injunction will not issue to protect a right not in esse and which may never arise or to restrain an act which does not give rise to a cause of action. The foreclosure of a mortgage property is a remedy provided by law and the mortgage contract itself. The applicant's right must be clear or unmistakable, which the petitioners failed to establish.

5. The foreclosure of the mortgage property does not violate the rights of the petitioners. The main purpose of the subsidiary contract of REM is to secure the principal obligation. When the mortgagors-debtors have defaulted in the amortization payments of their loans, the superior legal right of the secured unpaid creditors to exercise foreclosure proceedings on the mortgage property arises. Petitioners can participate in the foreclosure sale, redeem the mortgaged property within the redemption period, and prevent the displacement of students and employees of St. James College. The fact that the mortgaged property has a value much higher than their unpaid loan obligation does not affect the right of the mortgagee to exercise foreclosure.

6. The disparity between the value of the mortgaged property and the unpaid debt is not a ground to enjoin a foreclosure sale. The value of the mortgaged property does not affect the propriety of the auction sale as long as it is regularly and honestly conducted. Inadequacy of the bid price is inconsequential because the judgment debtor always has the chance to redeem and reacquire the property.

7. The trial court gravely abused its discretion in granting the writ of preliminary injunction. The application for injunctive relief did not clearly allege facts and circumstances showing the existence of the requisites for the issuance of the injunction.

8. The issue of the alleged VAT imposed on the principal obligation can be fully ventilated in the main action before the trial court.

PRINCIPLES:

• Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one that terminates it.

• Novation may be either extinctive or modificatory.

• Novation is extinctive when an old obligation is terminated by the creation of a new one that takes its place, and it is merely modificatory when the old obligation subsists to the extent that it remains compatible with the amendatory agreement.

• For novation to apply, there must be a previous valid obligation, the parties must agree to a new contract, the old contract must be extinguished, and there must be a valid new contract.

• Novation is never presumed, and the party alleging novation has the burden to show clearly and unequivocally that novation has occurred.

• The agreement or consent to novate may be inferred from the acts of a creditor.

• A novation cannot be granted through implied consent. (Implied Novation)

• The requisites for the issuance of a preliminary injunction are: (a) clear and unmistakable right to be protected; (b) material and substantial invasion of such right; (c) urgent need for the writ to prevent irreparable injury; and (d) no other ordinary, speedy, and adequate remedy exists to prevent irreparable injury.

• An application for a preliminary injunction requires the applicant's right to be clear or unmistakable.

• An injunction will not issue to protect a right not in esse and which may never arise or to restrain an act which does not give rise to a cause of action.

• The main purpose of the subsidiary contract of REM is to secure the principal obligation.

• Foreclosure of mortgage is a remedy provided by law and the mortgage contract itself.

• The foreclosure of a mortgage property does not ipso facto pass title to the winning bidder. The mortgagors continue to own the property until the expiration of the redemption period.

• The mortgagors have one year from the auction sale to redeem the mortgaged property.

• Disparity between the value of the mortgaged property and the unpaid debt is not sufficient to enjoin a foreclosure sale if it is regularly and honestly conducted.

• Applications for injunctive relief must clearly allege facts and circumstances showing the existence of the requisites for the entitlement to the writ.

• The issue of alleged taxes imposed on the principal obligation can be resolved in the main action.