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ASIATRUST DEVELOPMENT BANK v. CARMELO H. TUBLE

FACTS:

The respondent, Tuble, obtained a real estate loan from the petitioner, PNB, which was secured by a mortgage on a property. Tuble also had a consumption loan with an 18% annual interest rate. When Tuble defaulted on his payments, PNB initiated foreclosure proceedings and eventually acquired the property through foreclosure.

Tuble sought to redeem the property by paying the redemption price determined by PNB. However, Tuble disagreed with the inclusion of certain charges in the redemption price, specifically the 18% annual interest on the bid price of the property and the interest charges on the consumption loan.

The trial court ordered the refund of the excessive charges, as it found them to be unlawful and not supported by any legal basis. The court also ruled that the Real Estate Mortgage Contract was already extinguished due to the foreclosure and sale of the property.

The Court of Appeals affirmed the trial court's decision, stating that at the time of redemption, Tuble was only liable to pay 1% monthly interest plus taxes. The appellate court also dismissed PNB's argument to include new items, such as the car rental fee, in the redemption price.

PNB appealed to the Supreme Court, reiterating its claims regarding the inclusion of the 18% annual interest on the bid price and the interest charges on the Promissory Note. The Supreme Court clarified that the amount to be paid in redeeming the property is determined by the General Banking Act and not by the Rules of Court. The court also emphasized that the foreclosure extinguished the Real Estate Mortgage Contract, leaving only the right of redemption.

This case involves a dispute over the applicability of a dragnet clause in a mortgage contract. Petitioner borrowed a loan from the bank and executed a Real Estate Mortgage Contract to secure the loan. The contract included a dragnet clause which provided that the mortgage would secure all future and other loan obligations of the borrower. Subsequently, the borrower executed a promissory note establishing a separate loan obligation. The borrower defaulted on the promissory note, prompting the bank to file a collection suit. The borrower argued that the dragnet clause did not apply to the promissory note as the mortgage contract had already been extinguished. The mortgage contract was extinguished through a foreclosure followed by a consolidation of ownership by the bank. The lower courts ruled in favor of the bank, holding that the dragnet clause still applied and that the borrower was liable to pay the defaulted amount. Dissatisfied, the borrower sought a petition for review on certiorari before the Supreme Court.

ISSUES:

  1. Whether the Real Estate Mortgage Contract on the secured property is already extinguished.

  2. Whether the bank can use the Real Estate Mortgage Contract to collect on other obligations not included in the foreclosure proceedings.

  3. Whether Tuble had the right to redeem the security by paying the redemption price.

  4. Whether the bank can impose additional charges and include other loans in the redemption price.

  5. Whether the dragnet clause in the Real Estate Mortgage Contract justifies the imposition of an 18% annual interest on the redemption price.

  6. Whether there is ambiguity in the mortgage deed as to the applicable interest rate.

  7. Whether the consumption loan is covered by the dragnet clause in the real estate mortgage contract.

  8. Whether legal compensation can be invoked by Tuble.

  9. Whether Tuble can be declared in default for his obligation.

  10. Whether Tuble is entitled to moral and exemplary damages.

  11. Whether the bank can collect the 18% annual interest charges.

RULING:

  1. Yes, the Real Estate Mortgage Contract on the secured property is already extinguished once the proceeds from the sale of the property are applied to the payment of the obligation. The right of redemption granted by law remains.

  2. No, the bank cannot use the Real Estate Mortgage Contract to collect on other obligations not included in the foreclosure proceedings. It cannot foreclose an already foreclosed property.

  3. Yes, Tuble had the right to redeem the security by paying the redemption price within one year after the sale of the real estate. The terms of redemption are provided by law, and the mortgagee cannot dictate them.

  4. No, the bank cannot impose additional charges and include other loans in the redemption price. The freedom to stipulate the terms and conditions of an agreement is limited by law.

  5. Assuming the Real Estate Mortgage Contract subsists, the dragnet clause therein does not justify the imposition of an 18% annual interest on the redemption price. The mortgage agreement is to be strictly construed against the bank, and in this case, there is no specific mention of interest to be added in case of default or redemption in the contract.

  6. The ambiguity in the mortgage deed is to be construed against the bank that drafted it. The courts did not err in not applying the 18% interest rate per annum based on Promissory Note No. 0143, as it would negate the existence of the 0% interest charged by Promissory Note No. 0142.

  7. The consumption loan is not covered by the dragnet clause in the real estate mortgage contract because there is no reference to the earlier loan with a real estate mortgage in the consumption loan agreement, and the bank did not allege that it relied on the security of the real estate mortgage in granting the consumption loan. Therefore, the dragnet clause will not be extended to cover the consumption loan and its corresponding interest.

  8. Tuble cannot invoke legal compensation because his receivable was not yet determined and his obligations were already settled.

  9. Tuble cannot be declared in default as there was no substantial delay on his part and his obligations were already settled.

  10. Tuble is entitled to moral and exemplary damages due to the bank's unfair and unreasonable treatment, causing humiliation and besmirched reputation.

  11. The bank cannot collect the 18% annual interest charges for various reasons, including the extinguishment of the contract, ambiguity in the contract, and Tuble not being in default of his obligations.

PRINCIPLES:

  • In foreclosures, the mortgaged property is subject to the satisfaction of the obligation, and the payment through abnormal means extinguishes the obligation.

  • The right of redemption of foreclosed properties is a statutory privilege enjoyed by the debtor, and the terms of redemption are provided by law.

  • The power to decide whether or not to foreclose is the prerogative of the mortgagee, but the acts of the sheriff thereafter are governed by the provisions of the mortgage laws, and not by the instructions of the mortgagee.

  • A dragnet clause in a mortgage contract may exceptionally secure future loans or advancements, but it must come fairly within the terms of the mortgage contract. The mortgage agreement is to be carefully scrutinized and strictly construed against the bank, the party that prepared the agreement.

  • Additional charges, penalties, and interest must be stipulated in the mortgage contract; otherwise, they are not due. Silence or omission of additional charges is construed strictly against the bank.

  • Any ambiguity in a contract is to be construed against the party who caused the ambiguity.

  • A mortgage with a "dragnet clause" will not be extended to cover future advances unless the subsequent document refers to the mortgage as providing security.

  • Compensation can only be legally enforced if the debts are liquidated and demandable.

  • Legal compensation can only be invoked if certain conditions are met, including that both debts are liquidated and demandable and there is no retention or controversy over either debt.

  • Liquidated debts are those whose exact amount has already been determined.

  • Default can only be declared if there is substantial delay on the part of the debtor.

  • Moral damages include cases of besmirched reputation, moral shock, social humiliation, and similar injury.

  • Exemplary damages may be awarded to set an example for the public good.

  • Interest charges cannot be imposed if it is misplaced or not supported by a contractual basis.

  • Ambiguities in a contract are construed against the party who caused the ambiguity.

  • A dragnet clause in a contract cannot be presumed to include interest charges specified in another loan agreement.

  • Compensation can only be granted when it is clearly established by sufficient legal basis.