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SOLID BUILDERS v. CHINA BANKING CORPORATION

FACTS:

Solid Builders, Inc. (SBI) obtained loans from China Banking Corporation (CBC) secured by surety agreements and contracts of real estate mortgage. SBI proposed a scheme to sell the mortgaged properties and share the proceeds with CBC to pay off the loans. SBI requested for loan restructuring, reduction of interests and penalties, and the implementation of a dacion en pago of one of the properties. CBC responded that the loans had already been restructured and that updating of obligations is necessary. CBC advised SBI to sell the properties themselves.

SBI and Mercury Flour Mills, Inc. (MFII) failed to pay their outstanding loan accounts on time. CBC sent a demand letter and threatened foreclosure proceedings. SBI and MFII filed a complaint in the RTC to compel execution of the loan agreements and prevent foreclosure. They applied for a writ of preliminary injunction, which was granted by the RTC.

The plaintiffs argued that the interest and penalties charged to them were onerous and usurious. They claimed that there were talks to restructure the contracts and proposed plan of action in meetings. The defendant argued that the interest increase was in accordance with the signed promissory notes and that the proposed plan was not binding. The court found the defendant's explanation insufficient and granted the plaintiffs' application for a writ of preliminary injunction, enjoining the defendant from enforcing the contents of its letters and statements of account. The defendant's motions for reconsideration and to dissolve the injunction order were denied by the trial court. The defendant filed a petition for certiorari in the Court of Appeals.

ISSUES:

  1. Whether the trial court erred in granting the application for the issuance of a writ of preliminary injunction.

  2. Whether the Court of Appeals erred in setting aside the trial court's order granting the issuance of a writ of preliminary injunction and in dissolving the injunctive writ.

  3. Whether SBI and MFII have a right to prevent CBC from foreclosing on their mortgaged properties based on alleged usurious interest rates and penalty charges.

  4. Whether the trial court's grant of the application for the issuance of a writ of preliminary injunction was based on a clear legal right.

  5. Whether the issuance of a preliminary injunction is proper in the case of nonpayment of mortgage indebtedness.

  6. Whether the default of the debtors in paying the mortgage indebtedness disqualifies them from availing of the equitable relief of a preliminary injunction.

  7. Whether the accessory obligation of the accommodation mortgagor and surety is tied to the principal obligation and is prejudiced by the principal debtor's default.

  8. Whether Article 1229 of the Civil Code, which allows for equitable reduction of penalties, is applicable in this case.

  9. Whether the grant of the preliminary injunction was an abuse of discretion.

  10. Whether there is a showing of irreparable injury.

  11. Whether a writ of preliminary injunction can be issued on the allegation that the loan secured by the mortgage has been paid or is not delinquent.

  12. Whether a temporary restraining order or writ of preliminary injunction can be issued on the allegation that the interest on the loan is unconscionable.

  13. Whether a status quo order is subject to the same requirements and restrictions as a temporary restraining order or writ of preliminary injunction.

  14. Whether the writ of preliminary injunction issued by the trial court should be lifted and dissolved.

RULING:

  1. Yes, the trial court erred in granting the application for the issuance of a writ of preliminary injunction. The Court of Appeals found that the trial court's order had no basis as there were no findings of fact or law which would indicate the existence of any of the requisites for the grant of an injunctive writ. The trial court simply relied on the imposition by CBC of interest rates to the loans obtained by the plaintiffs without clear and unmistakable right on their part to entitle them to the protection of a writ of preliminary injunction.

  2. No, the Court of Appeals did not err in setting aside the trial court's order granting the issuance of a writ of preliminary injunction and in dissolving the injunctive writ. The Court of Appeals found that the trial court's order had no basis and did not substantiate the prayer for the dissolution of the injunctive writ. Accordingly, the Court of Appeals granted the petition of CBC and dissolved the injunctive writ.

  3. SBI and MFII, as debtor-mortgagors, do not have the right to prevent CBC from foreclosing on the mortgaged properties solely based on alleged usurious interest rates and penalty charges. Even if the interest rate is usurious, it does not affect the lender's right to recover the principal loan or the other terms of the loan. The lender still has the right to foreclose on the mortgage upon the debtor's failure to pay the debt.

  4. The trial court's grant of the application for the issuance of a writ of preliminary injunction was not based on a clear legal right. The alleged lack of "fairness of the increase in interests and penalties" is disputed and needs to be determined during the trial on the merits. Since the right claimed by SBI and MFII is controversial and disputable, the issuance of the injunctive writ constitutes grave abuse of discretion.

  5. The issuance of a preliminary injunction is improper in case of nonpayment of mortgage indebtedness.

  6. The default of the debtors in paying the mortgage indebtedness disqualifies them from availing of the equitable relief of a preliminary injunction.

  7. The accessory obligation of the accommodation mortgagor and surety is tied to the principal obligation and is prejudiced by the principal debtor's default.

  8. Article 1229 of the Civil Code, which allows for equitable reduction of penalties, is not applicable at this stage of the case.

  9. The grant of the preliminary injunction was an abuse of discretion.

  10. There is no showing of irreparable injury.

  11. No, a writ of preliminary injunction cannot be issued on the allegation that the loan secured by the mortgage has been paid or is not delinquent unless the application is verified and supported by evidence of payment.

  12. No, a temporary restraining order or writ of preliminary injunction cannot be issued on the allegation that the interest on the loan is unconscionable, unless the debtor pays the mortgagee at least twelve percent per annum interest on the principal obligation as stated in the application for foreclosure sale, which should be updated monthly while the case is pending.

  13. Yes, a status quo order is subject to the same requirements and restrictions as a temporary restraining order or writ of preliminary injunction.

  14. Yes, the writ of preliminary injunction issued by the trial court should be lifted and dissolved.

PRINCIPLES:

  • A preliminary injunction is an order granted at any stage of an action prior to judgment or final order, requiring a party to refrain from a particular act or acts. It is a preservative remedy to ensure the protection of a party's substantive rights or interests pending the final judgment in the principal action.

  • In order to grant a writ of preliminary injunction, there must be findings of fact or law which indicate the existence of the requisites for the grant of an injunctive writ. The party seeking the injunction must have a clear and unmistakable right to entitle them to the protection of a writ of preliminary injunction.

  • A writ of preliminary injunction is an extraordinary event that should only be granted when actual and existing substantial rights are at stake.

  • A writ of preliminary injunction is issued to preserve the status quo ante and must be based on the applicant's showing that: (a) the right to be protected exists prima facie, and (b) the acts sought to be enjoined are violative of that right.

  • The nullity of a stipulation of usurious interest does not affect the lender's right to recover the principal loan or the other terms thereof, including the right to foreclose on a mortgage.

  • The grant of an injunctive writ is not proper when the complainant-movant's right is doubtful or disputed.

  • The alleged lack of fairness or unconscionability of interest rates and penalty charges must be determined during the trial on the merits.

  • The issuance of a writ of preliminary injunction is not proper in cases of nonpayment of mortgage indebtedness.

  • Default of the debtor in paying the mortgage indebtedness disqualifies them from availing of the equitable relief of a preliminary injunction.

  • The accessory obligation of an accommodation mortgagor and surety is tied to the principal obligation and is prejudiced by the principal debtor's default.

  • Article 1229 of the Civil Code, which allows for equitable reduction of penalties, is applicable only when the court finds the penalty to be unconscionable or iniquitous.

  • The grant of a preliminary injunction may be considered an abuse of discretion when there is no clear right to be protected.

  • Irreparable injury refers to an injury that cannot be remedied under any standard of compensation and cannot be measured with reasonable accuracy. Foreclosure of mortgaged property is not considered an irreparable injury as the debtors still have the right of redemption and the possibility of receiving any surplus from the sale.

  • A writ of preliminary injunction cannot be issued on the allegation that the loan secured by the mortgage has been paid or is not delinquent unless supported by evidence of payment.

  • A temporary restraining order or writ of preliminary injunction cannot be issued on the allegation that the interest on the loan is unconscionable unless the debtor pays at least twelve percent per annum interest on the principal obligation.

  • A status quo order is subject to the same requirements and restrictions as a temporary restraining order or writ of preliminary injunction.