Via a contract denominated as "CREDIT LINE AND REAL ESTATE MORTGAGE AGREEMENT FOR PROPERTY LINE"^[1] (Credit Line Agreement) executed on March 31, 1997, Leo-Mers Commercial, Inc., as the Client, and its officers spouses Leopoldo and Mercedita Viola (petitioners) obtained a loan through a credit line facility in the maximum amount of P4,700,000.00 from the Philippine Commercial International Bank (PCI Bank), which was later merged with Equitable Bank and became known as Equitable PCI Bank, Inc. (respondent).

The Credit Line Agreement stipulated that the loan would bear interest at the "prevailing PCIBank lending rate" per annum on the principal obligation and a "penalty fee of three percent (3%) per month on the outstanding amount."

To secure the payment of the loan, petitioners executed also on March 31, 1997 a "Real Estate Mortgage"^[2] in favor of PCIBank over their two parcels of land covered by Transfer Certificates of Title No. N-113861 (consisting of 300 square meters, more or less ) and N-129036 (consisting of 446 square meters, more or less) of the Registry of Deeds of Marikina.

Petitioners availed of the full amount of the loan. Subsequently, they made partial payments which totaled P3,669,210.67. By respondent's claim, petitioner had since November 24, 2000 made no further payments and despite demand, they failed to pay their outstanding obligation which, as of September 30, 2002, totaled P14,024,623.22, broken down as follows:

(a)	Principal obligation	P4,783,254.69
(b)	Past due interest from 11/24/00 to 09/30/02 at 15% interest	P1,345,290.38
(c)	Penalty at 3% per month from 03/31/98 to 02/23/02	P7,896,078.15
		_____________________
		P14,024,623.22[3] (Underscoring supplied)

Respondent thus extrajudicially foreclosed the mortgage before the Office of the Clerk of Court & Ex-Officio Provincial Sheriff of the Regional Trial Court (RTC) of Marikina City. The mortgaged properties were sold on April 10, 2003 for P4,284,000.00 at public auction to respondent, after which a Certificate of Sale dated April 21, 2003^[4] was issued.

More than five months later or on October 8, 2003, petitioners filed a complaint^[5] for annulment of foreclosure sale, accounting and damages before the Marikina RTC, docketed as Civil Case No. 2003-905-MK and raffled to Branch 192. Petitioners alleged, inter alia, that they had made substantial payments of P3,669,210.67 receipts of which were issued without respondent specifying "whether the payment was for interest, penalty or the principal obligation;" that based on respondent's statement of account, not a single centavo of their payments was applied to the principal obligation; that every time respondent sent them a statement of account and demand letters, they requested for a proper accounting for the purpose of determining their actual obligation, but all their requests were unjustifiably ignored on account of which they were forced to discontinue payment; that "the foreclosure proceedings and auction sale were not only irregularly and prematurely held but were null and void because the mortgage debt is only P2,224,073.31 on the principal obligation and P1,455,137.36 on the interest, or a total of only P3,679,210.67 as of April 15, 2003, but the mortgaged properties were sold to satisfy an inflated and erroneous principal obligation of P4,783,254.69, plus 3% penalty fee per month or 33% per year and 15% interest per year, which amounted to P14,024,623.22 as of September 30, 2002;" that "the parties never agreed and stipulated in the real estate mortgage contract" that the 15% interest per annum on the principal loan and the 3% penalty fee per month on the outstanding amount would be covered or secured by the mortgage; that assuming respondent could impose such interest and penalty fee, the same are "exorbitant, unreasonable, iniquitous and unconscionable, hence, must be reduced;" and that respondent is only allowed to impose the legal rate of interest of 12% per annum on the principal loan absent any stipulation thereon.^[6]

In its Answer, respondent denied petitioners' assertions, contending, inter alia, that the absence of stipulation in the mortgage contract securing the payment of 15% interest per annum on the principal loan, as well as the 3% penalty fee per month on the outstanding amount, is immaterial since the mortgage contract is "a mere accessory contract which must take its bearings from the principal Credit Line Agreement."^[7]

During the pre-trial conference, the parties defined as sole issue in the case whether the mortgage contract also secured the payment of 15% interest per annum on the principal loan of P4,700,000.00 and the 3% penalty fee per month on the outstanding amount, which interest and penalty fee are stipulated only in the Credit Line Agreement.^[8]

By Decision^[9] of September 14, 2005, the trial court sustained respondent's affirmative position on the issue but found the questioned interest and penalty fee "excessive and exorbitant." Thus, it equitably reduced the interest on the principal loan from 15% to 12% per annum and the penalty fee per month on the outstanding amount from 3% to 1.5% per month.

Accordingly, the court nullified the foreclosure proceedings and the Certificate of Sale subsequently issued, "without prejudice" to the holding anew of foreclosure proceedings based on the "re-computed amount" of the indebtedness, "if the circumstances so warrant."

The dispositive portion of the trial court's Decision reads:

WHEREFORE, judgment is hereby rendered as follows:

1) The interest on the principal loan in the amount of Four Million Seven Hundred Thousand (P4,700,000.00) Pesos should be recomputed at 12% per annum;

2) The 3% per month penalty on delinquent account as stipulated by the parties in the Credit Line Contract dated March 31, 1997 is hereby REDUCED to 1.5% per month;

3) The foreclosure sale conducted on April 10, 2003 by the Clerk of Court and Ex-Officio Sheriff of Marikina, to satisfy the plaintiff's mortgage indebtedness, and the Certificate of Sale issued as a consequence of the said proceedings, are declared NULL and VOID, without prejudice to the conduct of another foreclosure proceedings on the basis of the re-computed amount of the plaintiff's indebtedness, if the circumstances so warrant.

No pronouncement as to costs.

SO ORDERED. (Underscoring supplied)

Petitioners filed a Motion for Partial Reconsideration,^[10] contending that the penalty fee per month on the outstanding amount should have been taken out of the coverage of the mortgage contract as it was not stipulated therein. By Order dated December 6, 2005, the trial court denied the motion.

On appeal by petitioners, the Court of Appeals, by Decision^[11] of February 21, 2007, dismissed the same for lack of merit, holding that "the Real Estate Mortgage covers not only the principal amount [of P4,700,000.00] but also the `interest and bank charges,' which [phrase bank charges] refers to the penalty charges stipulated in the Credit Line Agreement."^[12]

Petitioners' Motion for Reconsideration having been denied by Resolution^[13] of May 16, 2007, they filed the present Petition for Review on Certiorari, alleging that -

THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN DECIDING THE CASE NOT IN ACCORD WITH LAW AND APPLICABLE DECISIONS OF THE SUPREME COURT BY RULING THAT THERE IS NO AMBIGUITY IN CONSTRUING TOGETHER THE CREDIT LINE AND MORTGAGE CONTRACTS WHICH PROVIDED CONFLICTING PROVISIONS AS TO INTEREST AND PENALTY.^[14]

The only issue is whether the mortgage contract also secured the penalty fee per month on the outstanding amount as stipulated in the Credit Line Agreement.

The Court holds not.

A mortgage must "sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage.^[15]

In the case at bar, the parties executed two separate documents on March 31, 1997 - the Credit Line Agreement granting the Client a loan through a credit facility in the maximum amount of P4,700,000.00, and the Real Estate Mortgage contract securing the payment thereof. Undisputedly, both contracts were prepared by respondent and written in fine print, single space.

The Credit Line Agreement contains the following stipulations on interest and delinquency charges:

A. CREDIT FACILITY

9. INTEREST ON AVAILMENTS

The CLIENT shall pay the BANK interest on each availment against the Credit Facility at the rate of:

PREVAILING PCIBANK LENDING RATE

for the first interest period as defined in A(10) hereof. x x x.

x x x x

15. DELINQUENCY

CLIENT's account shall be considered delinquent if the availments exceed the amount of the line and/or in case the Account is debited for unpaid interest and the Available Balance is insufficient to cover the amount debited. In such cases, the Available Balance shall become negative and the CLIENT shall pay the deficiency immediately in addition to collection expenses incurred by the BANK and a penalty fee of three percent (3%) per month of the outstanding amount to be computed from the day deficiency is incurred up to the date of full payment thereon.

x x x x.^[16] (Underscoring supplied)

The Real Estate Mortgage contract states its coverage, thus:

That for and in consideration of certain loans, credit and other banking facilities obtained x x x from the Mortgagee, the principal amount of which is PESOS FOUR MILLION SEVEN HUNDERED THOUSAND ONLY (P4,700,000.00) Philippine Currency, and for the purpose of securing the payment thereof, including the interest and bank charges accruing thereon, the costs of collecting the same and of taking possession of and keeping the mortgaged propert[ies], and all other expenses to which the Mortgagee may be put in connection with or as an incident to this mortgage, as well as the faithful compliance with the terms and conditions of this agreement and of the separate instruments under which the credits hereby secured were obtained, the Mortgagor does hereby constitute in favor of the Mortgagee, its successors or assigns, a mortgage on the real property particularly described, and the location of which is set forth, in the list appearing at the back hereof and/or appended hereto, of which the Mortgagor declare that he is the absolute owner and the one in possession thereof, free and clear of any liens, encumbrances and adverse claims.^[17] (Emphasis and underscoring supplied)

The immediately-quoted provision of the mortgage contract does not specifically mention that, aside from the principal loan obligation, it also secures the payment of "a penalty fee of three percent (3%) per month of the outstanding amount to be computed from the day deficiency is incurred up to the date of full payment thereon," which penalty as the above-quoted portion of the Credit Line Agreement expressly stipulates.

Since an action to foreclose "must be limited to the amount mentioned in the mortgage"^[18] and the penalty fee of 3% per month of the outstanding obligation is not mentioned in the mortgage, it must be excluded from the computation of the amount secured by the mortgage.

The ruling of the Court of Appeals in its assailed Decision that the phrase "including the interest and bank charges" in the mortgage contract "refers to the penalty charges stipulated in the Credit Line Agreement" is unavailing.

"Penalty fee" is entirely different from "bank charges." The phrase "bank charges" is normally understood to refer to compensation for services. A "penalty fee" is likened to a compensation for damages in case of breach of the obligation. Being penal in nature, such fee must be specific and fixed by the contracting parties, unlike in the present case which slaps a 3% penalty fee per month of the outstanding amount of the obligation.

Moreover, the "penalty fee" does not belong to the species of obligation enumerated in the mortgage contract, namely: "loans, credit and other banking facilities obtained x x x from the Mortgagee, . . . including the interest and bank charges, . . . the costs of collecting the same and of taking possession of and keeping the mortgaged properties, and all other expenses to which the Mortgagee may be put in connection with or as an incident to this mortgage . . ."

In Philippine Bank of Communications v. Court of Appeals^[19] which raised a similar issue, this Court held:

The sole issue in this case is whether, in the foreclosure of a real estate mortgage, the penalties stipulated in two promissory notes secured by the mortgage may be charged against the mortgagors as part of the sums secured, although the mortgage contract does not mention the said penalties.

x x x x

We immediately discern that the mortgage contract does not at all mention the penalties stipulated in the promissory notes. However, the petitioner insists that the penalties are covered by the following provision of the mortgage contract:

This mortgage is given as security for the payment to the MORTGAGEE on demand or at maturity, as the case may be, of all promissory notes, letters of credit, trust receipts, bills of exchange, drafts, overdrafts and all other obligations of every kind already incurred or which hereafter may be incurred....

x x x x

The Court is unconvinced, for the cases relied upon by the petitioner are inapplicable. x x x.

x x x x

The mortgage contract is also one of adhesion as it was prepared solely by the petitioner and the only participation of the other party was the affixing of his signature or "adhesion" thereto. Being a contract of adhesion, the mortgage is to be strictly construed against the petitioner, the party which prepared the agreement.

A reading, not only of the earlier quoted provision, but of the entire mortgage contract yields no mention of penalty charges. Construing this silence strictly against the petitioner, it can fairly be concluded that the petitioner did not intend to include the penalties on the promissory notes in the secured amount. This explains the finding by the trial court, as affirmed by the Court of Appeals, that "penalties and charges are not due for want of stipulation in the mortgage contract."

Indeed, a mortgage must sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage. In this case, the mortgage contract provides that it secures notes and other evidences of indebtedness. Under the rule of ejusdem generis, where a description of things of a particular class or kind is "accompanied by words of a generic character, the generic words will usually be limited to things of a kindred nature with those particularly enumerated . . . " A penalty charge does not belong to the species of obligations enumerated in the mortgage, hence, the said contract cannot be understood to secure the penalty.^[20] (Emphasis and underscoring supplied)

Respondent's contention that the absence in the mortgage contract of a stipulation securing the payment of the 3% penalty fee per month on the outstanding amount is of no consequence, the deed of mortgage being merely an "accessory contract" that "must take its bearings from the principal Credit Line Agreement,"^[21] fails. Such absence is significant as it
creates an ambiguity between the two contracts, which ambiguity must be resolved in favor of petitioners and against respondent who drafted the contracts. Again, as stressed by the Court in Philippine Bank of Communications:

There is also sufficient authority to declare that any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it.

A mortgage and a note secured by it are deemed parts of one transaction and are construed together, thus, an ambiguity is created when the notes provide for the payment of a penalty but the mortgage contract does not. Construing the ambiguity against the petitioner, it follows that no penalty was intended to be covered by the mortgage. The mortgage contract consisted of three pages with no less than seventeen conditions in fine print; it included provisions for interest and attorney's fees similar to those in the promissory notes; and it even provided for the payment of taxes and insurance charges. Plainly, the petitioner can be as specific as it wants to be, yet it simply did not specify nor even allude to, that the penalty in the promissory notes would be secured by the mortgage. This can then only be interpreted to mean that the petitioner had no design of including the penalty in the amount secured.^[22] (Emphasis and underscoring supplied)

WHEREFORE, the assailed Court of Appeals Decision of February 21, 2007 and Resolution of May 16, 2007 in CA-G.R. SP No. CA-G.R. CV No. 86412 affirming the trial court's decision are, in light of the foregoing disquisition, AFFIRMED with MODIFICATION in that the "penalty fee" per month of the outstanding obligation is excluded in the computation of the amount secured by the Real Estate Mortgage executed by petitioners in respondent's favor.

SO ORDERED.

Quisumbing, (Chairperson), Tinga, Velasco, Jr., and Brion, JJ., Concur.

---

^[1] Annex "A," Petition; rollo, pp. 28-41.

^[2] Annex "B," id. at 42-45.

^[3] RTC Decision dated September 14, 2005, id. at.108-110.

^[4] Annex "F," id. at. 51.

^[5] Annex "G," id. at 52-57.

^[6] Id. at 53-55.

^[7] Respondent's Answer with Counterclaims, id. at 58, 61-62.

^[8] Order dated June 16, 2005, id. at 107.

^[9] Annex "N," id. at 108-115.

^[10] Annex "O," id. at 116-126.

^[11] Penned by Associate Justice Renato C. Dacudao and concurred in by Associate Justices Hakim S. Abdulwahid and Arturo G. Tayag; rollo, pp. 182-189.

^[12] Rollo, p. 188.

^[13] Annex "AA," Petition, id. at 202.

^[14] Petition, id. at 7, 13.

^[15] Philippine Bank of Communications v. Court of Appeals, 323 Phil. 297, 312-313 (1996).

^[16] CA records (Folder I), pp. 7, 9-10.

^[17] Rollo, p. 42.

^[18] Supra note 15 at 312.

^[19] Supra note 15.

^[20] Id. at 301, 310-313.

^[21] Vide note 7.

^[22] Id. at 314.