G.R. No. 173864 - Bangko Sentral ng Pilipinas vs. Libo-on

Case Summary (G.R. No. 173864)

Factual Background

The Spouses Libo-on obtained loans from the Rural Bank of Hinigaran, Inc., evidenced by promissory notes dated August 29, 1997 and September 17, 1997 in the amounts of P100,000.00 and P300,000.00, respectively, each for a 360‑day term and secured by a Deed of Real Estate Mortgage over Lot covered by Transfer Certificate of Title No. T-67129 in favor of the Rural Bank. The Rural Bank thereafter obtained rediscounting loans from Bangko Sentral ng Pilipinas on September 19, 1997 and October 17, 1997 in the amounts of P800,000.00 and P640,000.00, respectively, by executing documents denominated “promissory note with trust receipt agreement.” As collateral for its borrowings from BSP, the Rural Bank pledged and deposited with BSP promissory notes and supporting transfer certificates of title, including the Spouses Libo-on promissory notes and TCT. BSP demanded payment from the Spouses Libo-on on May 3, 2000; the Spouses Libo-on and the Rural Bank failed to pay. BSP filed an application for extrajudicial foreclosure against the mortgage securing the Spouses Libo-on’s obligation. Before the extrajudicial sale could be completed, Agustin Libo-on filed Civil Case No. 724 in the RTC praying for damages and injunctive relief, and obtained a writ of preliminary injunction on October 25, 2000.

Trial Court Proceedings

The parties agreed at pre-trial that the central issue was whether Bangko Sentral ng Pilipinas had authority to foreclose the subject mortgage. On February 25, 2004, the RTC rendered judgment for the plaintiff-Respondent and declared BSP’s application for extrajudicial foreclosure and the notice of sale irregular and unlawful. The RTC made the preliminary injunction permanent and ordered BSP to pay attorney’s fees in the amount of P40,000.00, P1,000.00 per court appearance, and litigation expenses of P10,000.00. The RTC denied moral damages for lack of proof that BSP acted in a reckless or abusive manner.

Appellate Proceedings

Petitioner appealed to the Court of Appeals. On March 21, 2006, the Court of Appeals denied the appeal and affirmed the RTC decision in all material respects. Petitioner then filed a petition for review on certiorari under Rule 45, Rules of Court before the Supreme Court.

Issues Presented

Petitioner raised principally whether BSP had authority to foreclose the mortgage. The questions framed included whether BSP could foreclose in the absence of a notarized deed of assignment or other document evidencing transfer of rights from the Rural Bank of Hinigaran; whether there was privity of contract between BSP and the Spouses Libo-on; and whether the trial court erred in ordering BSP to pay attorney’s fees and litigation expenses.

Parties’ Contentions

Bangko Sentral ng Pilipinas contended that the promissory note with trust receipt agreement constituted an assignment of credit by which the Rural Bank transferred its credits and mortgage rights to BSP, thus vesting BSP with authority to enforce and foreclose the mortgage. The Spouses Libo-on maintained that BSP lacked privity of contract, that the Rural Bank neither authorized BSP to act on its behalf nor executed an assignment of the mortgage, and that BSP’s foreclosure attempt sought to satisfy an amount greater than what was due under their contract with the Rural Bank. BSP denied the allegations and sought dismissal of the complaint.

Ruling of the Lower Courts

The RTC found for the Spouses Libo-on and held that BSP’s extrajudicial foreclosure was irregular and unlawful, permanently enjoined the sale, and awarded attorney’s fees and litigation expenses. The Court of Appeals affirmed the RTC decision on March 21, 2006.

Supreme Court Disposition

The Supreme Court denied the petition for review and affirmed the March 21, 2006 Decision and July 18, 2006 Resolution of the Court of Appeals. The petition was dismissed for lack of merit and the rulings below were sustained.

Legal Basis and Reasoning

The Court analyzed the nature of an assignment of credit and the formal requisites for assignments involving real property. Citing the defining characteristics of an assignment, the Court noted that an assignment effects the transfer of the assignor’s credit and accessory rights to an assignee who may enforce them to the same extent as the assignor. The Court observed that when an assignment operates as a dation in payment it extinguishes the principal obligation; but, in all events, an assignment of a mortgage or mortgage credit is a transfer of a real right and therefore must comply with the formalities prescribed by law. The Court relied on Article 1625 of the Civil Code, which provides that an assignment of a credit, right or action produces no effect as against third persons unless it appears in a public instrument or, where the assignment involves real property, the instrument is recorded in the Registry of Property. The Court further observed that a mortgage credit is a real right, citing Garcia v. Villar, and that transfer of such a right requires a public instrument and registration to bind third persons.
The Court found no document denominated as a deed of assignment of the mortgage or other notarized instrument evidencing transfer from the Rural Bank to BSP. The Court further held that the record and the language of the promissory note with trust receipt agreement itself negated an absolute conveyance of title. The instrument expressly described a pledge and lien and conferred on BSP authority to require additional security and, upon default, to sell, assign, deliver or collect the collaterals. The instrument also required the Rural Bank to collect amounts on the rediscounted notes in trust for BSP and to turn over collections within ten days. The Court concluded that these provisions were consistent with a trust receipt and collateral pledge rather than with an absolute assignment of the mortgage.
The Court emphasized that a valid contract of pledge requires that the pledgor be the absolute owner of the thing pledged and have free disposal of the property, citing Article 2085 and Atty. Calibo, Jr. v. Court of Appeals. The Court found that the Rural Bank was not the absolute owner of the mortgaged property or the security documents at the time it purportedly pledged them to BSP because the mortgage in favor of the Rural Bank remained in force. The Rural Bank’s possession of the security documents was limited to collateral security to guarantee the Spouses Libo-on’s obligation and did not confer upon the Rural Bank the authority to transfer ownership or otherwise create a valid pledge that would bind third persons. The Court thus concluded that BSP was not an assignee empowered to foreclose against the Spouses Libo-on

Case Syllabus (G.R. No. 173864)

Parties and Procedural Posture

Bangko Sentral ng Pilipinas (BSP) was the petitioner before the Supreme Court seeking review under Rule 45, Rules of Court of the Court of Appeals' decision affirming the trial court.
Agustin Libo-on and his wife, Mercedes Libo-on (collectively Spouses Libo-on), were respondents in the petition for damages and sought injunctive relief against BSP's extrajudicial foreclosure.
The case originated as Civil Case No. 724 in the Regional Trial Court, Branch 51, 6th Judicial Region, Negros Occidental, where a writ of preliminary injunction was issued on October 25, 2000 and made permanent by decision dated February 25, 2004.
The Court of Appeals, in CA-G.R. CV No. 00098, affirmed the trial court's February 25, 2004 decision by Decision dated March 21, 2006 and by Resolution dated July 18, 2006 denied the BSP's appeal.
The Supreme Court, Third Division, resolved BSP's petition by Decision dated November 23, 2015, denying the petition and affirming the appellate and trial court rulings.

Key Factual Allegations

Spouses Libo-on obtained loans from the Rural Bank of Hinigaran, Inc. in the amounts of P100,000.00 and P300,000.00 with promissory notes payable for 360 days and secured those loans by a real estate mortgage over TCT No. T-67129.
The Rural Bank of Hinigaran secured loans from BSP in the amounts of P800,000.00 and P640,000.00 and executed instruments denominated as a "promissory note with trust receipt agreement."
The Rural Bank pledged and deposited with BSP promissory notes and supporting Transfer Certificates of Title, including the Spouses Libo-on's promissory note and TCT, as security for its indebtedness to BSP.
BSP demanded payment from the Spouses Libo-on on May 3, 2000, then initiated an application for extrajudicial foreclosure against the Spouses Libo-on's mortgaged property when the Rural Bank failed to pay its obligations to BSP.
Agustin Libo-on filed suit to enjoin the extrajudicial foreclosure and successfully obtained a permanent injunction and an award of attorney’s fees and litigation expenses against BSP.

Issues Presented

Whether BSP had the authority to foreclose the real estate mortgage given the absence of a notarized deed of assignment or other formal instrument transferring the mortgage from the Rural Bank to BSP.
Whether there existed privity of contract between the Spouses Libo-on and BSP that would permit BSP to enforce the mortgage directly against the Spouses Libo-on.
Whether the trial court erred in ordering BSP to pay attorney's fees and litigation expenses to the Spouses Libo-on without legal basis.

Parties' Contentions

BSP contended that the "promissory note with trust receipt agreement" and the pledge/deposit of promissory notes and TCTs constituted a valid assignment of credit that conferred authority to foreclose the mortgage.
Spouses Libo-on contended that there was no privity of contract with BSP, that the Rural Bank never assigned or transferred the mortgage by notarized deed or public instrument, and that the foreclosure was irregular and unlawful.
Spouses Libo-on further contended tha