G.R. No. 217356 - Gaerlan vs. Philippine National Bank

Case Digest (G.R. No. 217356)
Expanded Legal Reasoning Model

Facts:

Loan Transactions and Security Arrangements

In March 1997, Supreme Marine Company, Inc. (SMCI) and MGG Marine Services, Inc. (MGG) secured a 5-year Foreign Currency Deposit Unit (FCDU) term loan of up to US$4,000,000.00 and a domestic bills purchase line (DBP line) not exceeding P10,000,000.00 from Philippine National Bank (PNB).
The agreement was memorialized in a Credit Agreement executed by:

Robert S. Jaworski, President of SMCI;
Doroteo C. Gaerlan, President and General Manager of MGG; and
Inocencio Deza, Jr., Executive Vice-President of PNB.

Essential security instruments included:

A Chattel Mortgage with Power of Attorney over the vessel Arabian Horse II;
A Deed of Assignment in favor of PNB concerning the monthly income from a Consecutive Voyage Charter Party between Petron Corporation and MGG; and
A Joint and Solidary Agreement (JSA) where both spouses Jaworski and spouses Gaerlan personally guaranteed the loan.

Subsequent Loan Augmentations and Additional Security

On May 29, 1998, SMCI and MGG obtained an omnibus line loan of P40,000,000.00 with a six-month grace period.
To further secure the loan, spouses Gaerlan executed a Real Estate Mortgage over their parcel of land in Sta. Mesa, Manila.
On January 4, 1999, an additional term loan of P10,000,000.00 was secured by continuing the existing Real Estate Mortgage, the JSA, and the Consecutive Voyage Contract.

Default, Foreclosure, and Earlier Litigations

Following the default in loan payments, PNB issued a demand letter that went unheeded.
PNB instituted an extrajudicial foreclosure sale of the mortgaged property on February 20, 2001; the sale resulted in a winning bid of P35,875,000.00 which was applied toward the outstanding loan obligation amounting to over P520 million.
Subsequent to the sale, a Certificate of Sale was issued and recorded on February 13, 2002.

Initiation of Litigation and Contentions by Gaerlan

On January 3, 2002, Gaerlan filed a complaint before RTC Quezon City (Civil Case No. Q-02-45873) seeking nullification of:

The contracts of loan;
The Real Estate Mortgage; and
The extrajudicial foreclosure sale.

In his complaint, Gaerlan alleged:

That the auction did not cover the accrued interests and penalties;
That the interest and penalty rates were excessively high (beyond 12% per annum);
Violation of the Usury Law; and
Procedural irregularities in the foreclosure process (e.g., improper notice, improper venue of publication).

PNB, in its Answer with Compulsory Counterclaim, insisted on:

The validity of the executed documents and the borrower’s obligations;
That the suspension of the Usury Law allowed the interest rate agreed upon; and
The acceptability of the publication in a newspaper of general circulation.

Related Litigation Involving the Joint and Solidary Agreement (JSA)

Spouses Jaworski filed a separate action for declaratory relief before RTC Manila (Civil Case No. 02-104294), arguing:

A Memorandum of Agreement (MOA) effected a “business divorce” between Jaworski and Gaerlan in August 1998; and
That this agreement, approved by PNB via a Board Resolution dated May 13, 1999, extinguished their personal liabilities under the JSA.

RTC Manila granted relief by releasing the Jaworskis from their obligations under the JSA, a decision later affirmed in its entirety by the Court of Appeals (CA) on June 23, 2005.
Gaerlan subsequently filed a Supplemental Complaint contending that the nullification of the JSA in that separate case nullified the Real Estate Mortgage—since it was accessory to the JSA.

Developments on Appeal and Petition for Review

On April 16, 2013, RTC Quezon City declared the contracts of loan, the Real Estate Mortgage, and the extrajudicial foreclosure sale null and void, releasing Gaerlan from liability on the ground that the nullification of the JSA rendered the accessory documents void.
The Court of Appeals reversed the RTC decision, holding that:

The JSA remained valid and enforceable because only specific clauses affecting the Jaworskis were nullified; and
Gaerlan’s liability persisted as he substituted SMCI as the principal borrower after the “business divorce.”

Petitioner, after being substituted by his son Raymond G. Gaerlan following Gaerlan’s death, elevated the case via a Petition for Review on Certiorari under Rule 45.

Controversies Raised by the Parties

Petitioner’s Contentions:

That the prior declaratory relief releasing the Jaworskis (thus nullifying the JSA) should extend to him by res judicata;
That the CA erred in considering documents not raised in the trial (e.g., the May 13, 1999 Board Resolution and the Omnibus Agreement); and
That the imposition of an allegedly usurious interest rate led to excessive financial harm.

PNB’s Defense:

Argued that the JSA was only an accessory security instrument, not the principal contract; and
Maintained that only selected provisions affecting the Jaworskis were nullified, leaving the obligations of Gaerlan intact.

Issues:

Whether the Real Estate Mortgage is to be deemed an accessory contract to the Joint and Solidary Agreement (JSA) executed on March 5, 1997.
Whether the decision of the RTC of Manila, Branch 24, which nullified the JSA in part (as to the Jaworskis) renders the entire JSA null and void.
Whether the nullification of the JSA in the RTC decision confers a beneficial res judicata effect to the petitioner (Raymond G. Gaerlan) despite his involvement as a signatory.
Whether documents and issues not presented or raised in the trial court may be introduced for resolution by the appellate court.
Whether the interest rate agreed upon by the parties is usurious and should therefore be invalidated.

Ruling:

(Subscriber-Only)

Ratio:

(Subscriber-Only)

Doctrine:

(Subscriber-Only)

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Case Digest (G.R. No. 217356) Core Legal Reasoning Model Expanded

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Case Digest (G.R. No. 217356) Expanded Legal Reasoning Model

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Case Digest (G.R. No. 217356)
Core Legal Reasoning Model

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Case Digest (G.R. No. 217356)
Expanded Legal Reasoning Model