FACTS:

The case involves the foreclosure of a mortgage by the Development Bank of the Philippines (DBP) on the properties of Guariña Agricultural and Realty Development Corporation (Guariña Corporation) prior to the debtor-mortgagor's default on its obligations. In July 1976, Guariña Corporation applied for a loan from DBP to finance the development of its resort complex. DBP approved the loan and Guariña Corporation executed a promissory note and real estate mortgage as security for the loan. DBP also required Guariña Corporation to put up cash equity for the construction of the resort complex. The loan was released in several installments, but DBP found that Guariña Corporation had not completed the construction works.

Despite demands for completion, Guariña Corporation did not comply, prompting DBP to initiate extrajudicial foreclosure proceedings. The foreclosure sale was held on January 15, 1979, and the mortgaged properties were sold to DBP. Guariña Corporation then filed a lawsuit against DBP, seeking specific performance of its obligations under the loan agreement and the nullification of the foreclosure proceedings and certificate of sale. The RTC ruled in favor of Guariña Corporation, declaring the foreclosure and sale as null and void and ordering DBP to restore possession of the properties and pay reasonable rent for their use. DBP appealed to the Court of Appeals (CA), but its appeal was denied.

The Development Bank of the Philippines (DBP) challenged the judgment of the Regional Trial Court (RTC) declaring the foreclosure of the mortgaged properties as invalid. DBP argued that the grounds invoked to justify the foreclosure were sufficient under the mortgage contract and the law. On appeal, the Court of Appeals (CA) upheld the RTC's decision but deleted the award of attorney's fees. DBP filed a motion for reconsideration, but the CA denied it. DBP then appealed to the Supreme Court (SC), raising issues on the legality of the CA's decision and whether it adhered to the usual course of judicial proceedings.

DBP claimed that the loan agreement with Guariña Corporation, secured by real estate and chattel mortgages, included conditions for loan releases to ensure proper use of the loan proceeds. It argued that Guariña Corporation had violated these conditions, justifying the foreclosure. However, Guariña Corporation maintained that it did not violate the terms of the loan agreement.

The SC found that the agreement between DBP and Guariña Corporation was a loan. It explained that in a loan, the creditor should release the full loan amount and the debtor repays it when due and demandable. The CA, in its decision, found that Guariña Corporation was not yet in default and that DBP did not make any demand for payment. The SC agreed with the CA's findings and held that DBP's submissions lacked merit and substance.

ISSUES:

1. Whether the appellant was justified in foreclosing the mortgages based on the failure of the appellee to complete the project in accordance with appellant's standards.

2. Whether the appellant's failure to release the full amount of the approved loan justified the foreclosure proceedings.

3. Whether or not Guariña Corporation was in default under the loan agreement.

4. Whether or not the foreclosure of the mortgage by Development Bank of the Philippines (DBP) was premature and ineffectual.

5. Whether or not the doctrine of law of the case applies in this case.

6. Whether the ruling in a previous case, C.A.-G.R. No. 12670-SP, concerning the issuance of a writ of possession, should be regarded as the law of the case and preclude the determination of other issues such as damages.

7. Whether Guariña Corporation is entitled to the restoration of possession of the property and payment of reasonable rentals.

RULING:

1. The appellant was not justified in foreclosing the mortgages based on the appellee's failure to complete the project in accordance with the appellant's standards. It was not established that the appellee was already in default, and the basis for foreclosure was not default on the loan but the appellee's failure to complete the project to the appellant's expectations. The foreclosure proceedings were premature and improper.

2. The appellant's failure to release the full amount of the approved loan justified the foreclosure proceedings. The loan agreement between the parties constituted a reciprocal obligation, and the appellant was obligated to release the full loan amount when it falls due. The appellant's failure to do so rendered the foreclosure premature and unenforceable.

3. Guariña Corporation was not in default under the loan agreement. A demand to pay was necessary to consider a borrower in default, and DBP had yet to make an effective demand for payment before Guariña Corporation could be considered in default under the principal contract.

4. The foreclosure of the mortgage by DBP was premature and ineffectual. DBP had prematurely foreclosed the mortgages and caused the foreclosure sale of the mortgaged properties despite Guariña Corporation not being in default. DBP failed to exercise the highest degree of diligence and relied on a stipulation that was not applicable to Guariña Corporation's loan.

5. The doctrine of law of the case does not apply in this case. The ruling in a previous case did not constitute the law of the case because it concerned a different issue and had no bearing on the legal issues in the current case.

6. The ruling in C.A.-G.R. No. 12670-SP should not be regarded as the law of the case as it pertains to a separate and independent proceeding and did not settle any question of law involved in the current case for specific performance. Therefore, the issue of damages is not precluded by the previous ruling.

7. Guariña Corporation is entitled to the restoration of possession of the resort complex and payment of reasonable rentals. The premature and invalid foreclosure conducted by DBP unjustly dispossessed Guariña Corporation of its properties. The restoration of possession and payment of reasonable rentals are in accordance with Article 561 of the Civil Code, which allows one who recovers possession unjustly lost to be deemed to have enjoyed it without interruption.

PRINCIPLES:

• Loan is a reciprocal obligation where one party is the creditor and the other is the debtor, and the performance should ideally be simultaneous.

• Reciprocal obligations are to be performed simultaneously, with each party being a debtor and a creditor of the other.

• For an obligation to become due, there must generally be a demand. Default generally begins from the moment the creditor demands the performance of the obligation.

• A mortgage remains an accessory contract dependent on the principal contract, and foreclosure is justified only when there is default on the principal obligation.

• Enforcement of a mortgage contract depends on whether or not there has been a violation of the principal obligation.

• A borrower can only be considered in default after a demand to pay has been made and refused.

• Premature foreclosure of a mortgage and the sale of the mortgaged properties are void and ineffectual.

• Banking institutions owe a duty to exercise the highest degree of diligence and observe high standards of integrity and performance in all their transactions.

• The stability and public confidence in the banking system rely on the honesty and efficiency of banks.

• The doctrine of law of the case means that a ruling by an appellate court continues to be the law of the case even on a subsequent appeal.

• The law of the case doctrine only applies to legal questions or issues that have been settled in a previous appeal.

• A party who recovers possession unjustly lost may be entitled to restoration of possession and payment of reasonable rentals in accordance with Article 561 of the Civil Code.