G.R. No. 118552 - Philippine Bank of Communications vs. Court of Appeals

The spouses Alejandro and Amparo Casafranca were the original owners of a lot in Cebu City (Lot 802-B-2-B-2-F-1, subdivision plan Psd-698545, covered by TCT No. 32769).
On December 3, 1976, the spouses sold the lot to Carlos Po, who paid part of the agreed price.
Carlos Po secured title to the lot (TCT No. 66446) and subsequently mortgaged it to the Philippine Bank of Communications (PBCom) to secure a loan amounting to P330,000.
A civil action ensued between the parties, resulting in a favorable judgment for the spouses against Carlos Po, and eventually, the spouses acquired the lot by auction (as evidenced by the Certificate of Sale).

On September 9, 1980, PBCom initiated extrajudicial foreclosure proceedings on the mortgage executed by Carlos Po.
At the succeeding auction held on November 4, 1980, PBCom acquired the lot for P1,006,540.56, as confirmed by the execution of a Certificate of Sale in its favor.
In 1981, Amparo Casafranca, having stepped into the role of mortgagor, attempted to redeem the property by tendering a check for P500,000, believing that sum would settle Carlos Po’s account.
PBCom rejected the redemption offer, insisting that redemption be made at the purchase price it obtained at auction, leading the spouses to file Civil Case No. R-21700 in the RTC of Cebu for nullification of the foreclosure and auction sale.

The RTC, in its judgment on September 17, 1986, set aside the extrajudicial foreclosure and auction sale, declaring that the obligation secured by the mortgage was limited to P330,000 plus stipulated interest and charges.
On December 4, 1986, PBCom advised the spouses to pay a statement of account amounting to P884,281.38, purportedly representing principal, interest, attorney’s fees, and realty taxes.
The account remained unpaid, prompting PBCom to apply once again for extrajudicial foreclosure, culminating in an auction sale on April 2, 1987, wherein the lot was sold to Natalie Limchio for P1,184,000 (with net proceeds of P1,183,293 after deducting publication and other expenses).

The mortgage contract explicitly provided for interest at 12% per annum (subject to an authorized increase to 14% as of December 1, 1979), appointment of attorney’s fees of 10%, and reimbursement for realty taxes paid by PBCom.
The trial court computed the secured debt by adding the principal (P330,000), accrued compound interests (P77,660 for the period 1977–1979 at 12% and P343,805 from December 1979 to the auction date at 14%), attorney’s fees (P75,146.50), and realty taxes (P83,028.18) to arrive at a total account of P909,639.68.
Deducting the total secured debt from the net auction proceeds resulted in a residue of P273,653.32, which the trial court awarded to the spouses.

The promissory notes, executed by Carlos Po and secured by the mortgage, contained a stipulation for penalty charges at 12% per annum for non-payment.
The petitioner (PBCom) argued that the penalties should be included in the secured amount by virtue of a “dragnet” clause in the mortgage contract, which purportedly covered all present and future obligations evidenced by promissory notes.
The spouses (respondents) contended that since the mortgage contract itself did not mention or incorporate the penalty charges, these could not be recovered in the foreclosure sale.
The Court of Appeals affirmed the trial court’s ruling, rejecting the petitioner’s attempt to include the penal charges, and upheld that only amounts specifically stipulated in the mortgage contract could be secured.

Both parties appealed the RTC’s decision; the petitioner (PBCom) challenged the inclusion of the penalty and other computational issues, while the respondents raised additional points regarding interest and damages.
The Court of Appeals affirmed the RTC ruling in toto and subsequently denied motions for reconsideration.
The petitioner and respondents then filed separate petitions for certiorari before the Supreme Court; although the private respondents’ petition (G.R. No. 118809) was dismissed by the Second Division, the issues raised in the petitioner’s case (G.R. No. 118552) remained before the Court.

Whether, in a foreclosure of a real estate mortgage, the penalty stipulated in the promissory notes (at 12% per annum) may be charged against the mortgagors as part of the secured sums, even though the mortgage contract itself is silent on the inclusion of such penalty.
Whether the “dragnet” clause contained in the mortgage contract, which seeks to cover all obligations evidenced by instruments such as promissory notes, extends to the penalty charges, despite the explicit omission of penalties within the mortgage document.
How the competing computations of the mortgage debt should be interpreted, particularly with respect to the proper application of compound versus simple interest and the handling of additional charges not expressly foreseen in the mortgage contract.