Case Summary (G.R. No. 183987)
Factual Background
Carmelo H. Tuble, then vice-president of ASIATRUST DEVELOPMENT BANK, acquired a Nissan Vanette under the bank’s car incentive plan and availed himself of several loan facilities and entitlement to the bank’s Senior Managers Deferred Incentive Plan (DIP). He obtained three loans: a real estate loan evidenced by Promissory Note No. 0142 dated 18 January 1993 secured by a mortgage on T-145794 with maturity 1 January 1999 and no stated interest; a consumption loan evidenced by Promissory Note No. 0143 dated 10 January 1994 with 18% per annum interest and maturity 31 January 1995; and an alleged salary loan. Upon his resignation on 30 March 1995, his outstanding liabilities to the bank included the option obligation on the Nissan Vanette and the three loans, while the bank owed him his pro rata share in the DIP and final salary and thirteenth month pay.
Pre-foreclosure Events and Redemption
After Tuble requested that his receivables be offset against his liabilities, the bank demanded payment and sought the return of the vehicle; it later allowed offsetting on 13 October 1995 which reduced liabilities but left the bank proceeding to replevin and extrajudicial foreclosure. The bank foreclosed only on the mortgage securing the real estate loan of P421,800 and ultimately became purchaser at the foreclosure sale. Tuble redeemed the foreclosed property on 17 March 1997 by paying P1,318,401.91, a figure the respondent contested as excessive because it included additional interest, penalty charges, litigation expenses, the vehicle’s book value, salary loan and insurance charges that he alleged were not properly part of the redemption price.
Trial Court Proceedings
Tuble filed a Complaint for recovery of a sum of money and damages before the RTC claiming P896,602.02 as excess charges on the redemption price and seeking moral and exemplary damages. The RTC characterized the redemption price as excessive and arbitrary, excluded the vehicle value, salary loan, car insurance, undocumented litigation expenses, and interest and penalty charges not stipulated in Promissory Note No. 0142, and ruled that only the lawful redemption components should be charged. Invoking solutio indebiti, the trial court ordered the refund of the excess charges and awarded moral damages of P200,000 and exemplary damages of P50,000.
Court of Appeals Disposition
The Court of Appeals affirmed the RTC. It elaborated the rule that at the time of redemption the redemptioner is liable only for one percent per month interest plus taxes, as provided in the foreclosure law then applicable, and found no basis for the bank’s additional charges, including the imposition of an 18% annual interest on the bid price of P421,800.
Issues Presented to the Supreme Court
The principal issues before the Supreme Court were whether the bank was entitled to include in the redemption price: (1) the interest charges allegedly due under Promissory Note No. 0142; and (2) an annual interest of 18% based on Promissory Note No. 0143 applied to the bid price of P421,800 by virtue of a dragnet clause in the Real Estate Mortgage Contract. Petitioner also raised for the first time on certiorari an asserted car rental fee, which the Court refused to entertain.
Petitioner’s Contentions
ASIATRUST DEVELOPMENT BANK argued that the redemption computation should be governed by the General Banking Act, which allows redemption at the rate specified in the mortgage when the mortgagee is a bank, and that the bank’s mortgage and its dragnet clause permitted inclusion of the consumption loan and its 18% interest and other charges in computing the redemption price. The bank also urged that legal interest under Article 2209 or Central Bank Circular No. 416 should apply to Promissory Note No. 0142 despite its silence on interest.
Respondent’s Contentions
Carmelo H. Tuble maintained that the redemption amount was improperly inflated by charges not permissible under foreclosure law and the mortgage terms, that the bank could not rely on the mortgage to collect obligations it did not include in the foreclosure, that DIP computation and offsets had been sought and mishandled, and that he suffered humiliation and other injury warranting moral and exemplary damages.
Ruling of the Supreme Court
The Supreme Court affirmed the Court of Appeals Decision dated 28 March 2008 and Resolution dated 30 July 2008. The Court held that the bank could not collect the additional charges and interest complained of, that the 18% per annum interest was not properly collectible against the redemption price, that compensatory legal interest under Article 2209 did not apply in the absence of proven default, and that the awards of moral and exemplary damages to Tuble were justified.
Legal Reasoning — Foreclosure and Extinguishment of Mortgage
The Court explained that when the bank instituted foreclosure solely on the real estate loan of P421,800 and gained the property, the mortgage indebtedness was extinguished by foreclosure and sale, leaving only the statutory right of redemption. Consequently, the Real Estate Mortgage Contract ceased to operate as a continuing security for obligations not included in the foreclosure; the bank could not revive the contract to collect excluded loans or to use the same security twice. Thus the bank could not rely on the mortgage, including its dragnet clause, to include the consumption loan or its interest in the redemption computation.
Legal Reasoning — The Applicable Law on Redemption
The Court recognized that when the mortgagee is a bank the General Banking Act controls redemption terms and that Section 47 of that Act prescribes that redemptioners pay the amount due under the mortgage deed with interest at the rate specified in the mortgage and costs and expenses incurred by the bank from sale and custody less income derived therefrom. The Court held that the bank could not unilaterally alter the statutory right of redemption by imposing additional charges that were not lawfully included.
Legal Reasoning — The Dragnet Clause and Ambiguity
Addressing the dragnet clause, the Court observed that while such clause may exceptionally secure future advances, an obligation is secured only if it fairly falls within the mortgage’s terms. The mortgage deed was silent on computation of redemption interest and did not specify that interest on redemption must be that in the promissory notes. The promissory instruments reflected inconsistent terms: Promissory Note No. 0142 contained no interest stipulation, whereas Promissory Note No. 0143 provided for 18% per annum. The Court applied the contra proferentem principle and construed the ambiguity against the bank as drafter. The Court also applied the reliance on the security test from prior decisions (for example, Prudential Bank v. Alviar and Philippine Bank of Communications v. Court of Appeals) and found no proof the bank relied on the real estate mortgage in granting the consumption loan. Accordingly, the dragnet clause did not justify charging the 18% annual interest on the redemption price.
Legal Reasoning — Compensatory Legal Interest under Article 2209
Concerning the bank’s claim of legal interest on Promissory Note No. 0142
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Case Syllabus (G.R. No. 183987)
Parties and Procedural Posture
- Petitioner Asiatrust Development Bank filed a Petition for Review on Certiorari under Rule 45 seeking reversal of the Court of Appeals' 28 March 2008 Decision and 30 July 2008 Resolution in CA-G.R. CV No. 87410.
- Respondent Carmelo H. Tuble was the appellee in the courts below and the former vice-president of petitioner who sought recovery of excess charges in a redemption price and damages.
- The Regional Trial Court in Civil Case No. 67973 rendered a Decision dated 15 May 2006 ordering refund of P845,805.49 and awarding moral and exemplary damages to respondent.
- The Court of Appeals affirmed the RTC Decision and Resolution and the Supreme Court affirmed the CA decision in the present Petition.
Key Factual Allegations
- Respondent Carmelo H. Tuble availed of petitioner’s car incentive plan and loan privileges and acquired a Nissan Vanette under an arrangement made to appear as a lease.
- Respondent obtained three loans including Promissory Note No. 0142 dated 18 January 1993 secured by a mortgage and containing no interest stipulation, and Promissory Note No. 0143 dated 10 January 1994 carrying 18% per annum interest.
- Respondent resigned on 30 March 1995 and had outstanding obligations including the Vanette, a consumption loan of P100,000, a real estate loan of P421,800, and a salary loan of P16,250, while petitioner owed him DIP share and P25,797.35 for final salary and 13th month pay.
- Petitioner initially demanded payment and sought return of the vehicle, later allowed offset of claims on 13 October 1995 reducing liabilities to P970,691.46 plus the unreturned vehicle, and successfully recovered the Vanette by replevin.
- Petitioner instituted extrajudicial foreclosure only on the real estate loan of P421,800, purchased the secured property at sale, and respondent redeemed the property on 17 March 1997 by paying P1,318,401.91.
- Respondent received a Clearance and later a Manager’s Check for P166,049.73 representing his DIP share and thereafter sued for recovery of excess charges in the redemption price amounting to P896,602.02 and for moral and exemplary damages.
Issues Presented
- Whether petitioner was entitled to include the interest charges on Promissory Note No. 0142 in the redemption price.
- Whether petitioner was entitled to impose the 18% annual interest allegedly applicable to Promissory Note No. 0143 on the bid price of P421,800 in computing the redemption price.
- Whether the award of moral and exemplary damages to respondent was proper.
Statutory Framework
- Act 3135 and Section 28, Rule 39 of the Rules of Court provided that a redemptioner may redeem by paying the purchaser the amount of his purchase with one percent per month interest thereon.
- The General Banking Act, as applied to banks, governed redemption in foreclosures involving banks and specified that redemption was by paying the amount fixed by the court with interest at the rate specified in the mortgage.
- Article 1279 of the Civil Code prescribed requisites for legal compensation including that debts be liquidated and deman