G.R. No. 173036 - Agoo Rice Mill Corp. vs. Land Bank of the Philippines

Case Summary (G.R. No. 173036)

Factual Background

Agoo Rice Mill Corporation obtained from LBP a Term Loan of P2,000,000 and two Short-Term Loan Lines totaling P15,000,000, evidenced by promissory notes, and secured by a Real and Chattel Mortgage covering four commercial lots and mill equipment. ARMC made partial interest payments but encountered liquidity problems caused by government rice importation policies and the El Niño phenomenon. ARMC sought an extension and thereafter requested renewal or restructuring of its indebtedness; it proposed a staggered repayment of P5,000,000 every six months for the P15,000,000 obligation. LBP deferred ARMC’s proposal, conditioned any restructuring on a waiver of penalties and the provision of additional collateral, and repeatedly demanded payment and compliance with collateral requirements through correspondence in 1997 and 1998.

Application for Extrajudicial Foreclosure

On July 8, 1998, LBP filed an application for extrajudicial foreclosure with the Office of the Ex-Officio Sheriff of San Fernando City, alleging ARMC’s default and claiming a total unpaid obligation of P23,473,320.83 as of that date (P15,000,000 principal, P7,363,320.83 interest, and P1,110,000 penalties). LBP issued a Final Notice of Payment and set the foreclosure sale for August 26, 1998.

Complaint for Injunction

On August 24, 1998, ARMC filed a complaint for injunction, an application for a writ of preliminary injunction and a temporary restraining order, and a claim for damages. ARMC alleged that foreclosure was premature and violated its contractual and property rights because negotiations for restructuring were allegedly ongoing; it asserted inconsistent statements in LBP’s foreclosure petition, contended that the P2,000,000 Term Loan had been fully paid and that the chattel mortgage should have been released, and alleged unauthorized alteration of the mortgage to include rice inventories.

Temporary Restraining Order and Writ of Preliminary Injunction

The RTC issued a 72-hour TRO on August 24, 1998 and extended it thereafter; the court temporarily suspended foreclosure proceedings on September 8, 1998 to permit amicable settlement discussions, which later failed. The RTC conducted hearings and, on March 18, 1999, issued a writ of preliminary injunction upon ARMC’s posting of a P4,000,000 bond.

Ruling of the Regional Trial Court

In a decision dated August 5, 2004, the RTC denied ARMC’s complaint for injunction. The trial court found that LBP never agreed to ARMC’s proposed restructuring and that no binding agreement was formed because ARMC failed to furnish the additional collateral the bank required. The RTC held that the foreclosure petition was not inconsistent as to the P15,000,000 principal and that the Real and Chattel Mortgage was indivisible so that payment of the P2,000,000 Term Loan did not discharge the mortgaged chattel absent full settlement of the indebtedness. The RTC also ruled that an injunction could not issue against the valid exercise of a creditor-mortgagee’s right to foreclose and that P.D. 385 mandated mandatory foreclosure by government financial institutions and prohibited restraining orders or injunctions against such foreclosure unless the borrower paid twenty percent of the outstanding arrearages after the filing of foreclosure proceedings. The RTC denied ARMC’s motion for reconsideration on February 2, 2005.

Foreclosure Sale and Intermediate Proceedings

The sheriff issued a Notice of Extrajudicial Sale on May 12, 2005 setting the auction for June 3, 2005. ARMC sought injunctive relief from the Court of Appeals to enjoin the sale, which the Court of Appeals denied in a resolution dated June 14, 2005. The foreclosure sale proceeded and LBP became the winning bidder.

Ruling of the Court of Appeals

In its March 28, 2006 decision, the Court of Appeals affirmed the RTC. The CA held that P.D. 385 barred injunctions against mandatory foreclosures instituted by government financial institutions. The CA found that LBP did not promise to approve ARMC’s restructuring proposal and that its May 22, 1998 letter merely indicated evaluation by loan authorities. The CA rejected ARMC’s claim of promissory estoppel and found no bad faith in LBP’s refusal to order an independent reappraisal. The CA also deemed the stipulated interest rates of 15.50% to 18.25% per annum and the 12% per annum penalty reasonable and distinguished them from the usurious rate condemned in Medel v. Court of Appeals.

Issue Presented

The central issue was whether ARMC was entitled to injunctive relief to enjoin LBP’s extrajudicial foreclosure of the mortgaged properties.

Legal Basis and Reasoning of the Supreme Court

The Court reiterated that an injunction will issue only where (1) there is a right in esse that is clear and unmistakable and (2) the act sought to be enjoined constitutes a violation of that right. The Court found that ARMC failed to establish a right in esse to have its loans restructured because no enforceable agreement existed when LBP filed for foreclosure; ARMC had not supplied the additional collateral required for approval. Consequently, ARMC failed the first requisite for injunctive relief. The Court further obse

Case Syllabus (G.R. No. 173036)

Parties and Procedural Posture

Agoo Rice Mill Corporation filed a complaint for injunction with application for a writ of preliminary injunction and temporary restraining order against Land Bank of the Philippines to enjoin an extrajudicial foreclosure of mortgaged properties.
The case was tried before the Regional Trial Court, Branch 30, San Fernando City, La Union, which denied the complaint and motion for reconsideration.
The Court of Appeals affirmed the RTC in CA-G.R. CV No. 84458 and denied the petitioner’s motion for reconsideration.
The petitioner brought a petition for review on certiorari under Rule 45, Rules of Court to the Supreme Court.

Key Factual Allegations

The ARMC obtained from LBP a Term Loan of P2,000,000 and two Short-Term Loan Lines totalling P15,000,000 between October 1993 and October 1996.
The loans were evidenced by promissory notes and secured by a Real and Chattel Mortgage covering four commercial lots and mill machinery and generator.
ARMC made partial interest payments but defaulted on full settlement due to liquidity problems, government rice importation in 1996, and El Niño-related losses.
ARMC alleged ongoing negotiations for loan restructuring when LBP filed for extrajudicial foreclosure and asserted that LBP acted in bad faith and that the foreclosure was premature.

Loan Documents and Security

The P2,000,000 Term Loan payment was due on October 29, 1996, and the STLLs of P12,000,000 and P3,000,000 were due on April 28, 1996 and April 8, 1997 respectively.
The Real and Chattel Mortgage was treated by the courts as indivisible such that partial payment of one loan could not discharge the mortgage until total indebtedness was settled.
The LBP alleged in its foreclosure application that ARMC’s unpaid obligation as of July 8, 1998 amounted to P23,473,320.83 broken down into principal P15,000,000, interest P7,363,320.83, and penalties P1,110,000.

Negotiations and Correspondence

ARMC requested an extension to February 28, 1997 and later sought renewal or restructuring of the loans, proposing payments of P5,000,000 every six months to cover the P15,000,000 STLLs.
The LBP advised ARMC to pursue restructuring rather than renewal and conditioned restructuring on waiver of penalty charges and the offering of additional collateral.
The LBP repeatedly demanded additional collateral and refused ARMC’s request for reappraisal, asserting the bank’s valuation was fair and reasonable.
The LBP informed ARMC on May 22, 1998 that the restructuring proposal was under evaluation while concurrently demanding monthly payments.

Extrajudicial Foreclosure

The LBP filed an application for extrajudicial foreclosure with the Office of the Ex-Officio Sheriff of San Fernando City on July 8, 1998 and served a Final Notice of Payment the same date.
The foreclosure sale was initially scheduled for August 26, 1998 and later proceeded with auction notices culminating in a sale in June 2005 in which LBP emerged as the winning bidder.
ARMC denied receipt of the July 8, 1998 Final Notice of Payment and alleged inconsistencies and omissions in LBP’s foreclosure petition regarding the loans and mortgage coverage.

Injunction Proceedings

ARMC filed its complaint for injunction on August 24, 1998 and obtained a 72-hour temporary restraining order the same day which was extended and later suspended to allow settlement negotiations.
Settlement efforts failed, and after hearing, the RTC issued a writ of preliminary injunction on March 18, 1999 conditioned on a bond of P4,000,000.
ARMC sought injunctive relief in the CA to prevent an auction scheduled for June 3, 2005, but the CA denied the application for preliminary injunction in a June 14, 2005 resolution.

Trial Court Decision

The RTC in a decision dated August 5, 2004 found no agreement to rest