Title
Development Bank of the Philippines vs. Spouses Doyon
Case
G.R. No. 167238
Decision Date
Mar 25, 2009
Spouses Doyon defaulted on restructured loans; DBP foreclosed properties after withdrawing initial application. SC upheld DBP's actions, ruling no bad faith, valid auctions, and lawful mortgage provisions.
bad faith
mortgages
public auctions

Case Summary (G.R. No. 167238)

Factual Background: The Loans, Restructuring, and Initial Foreclosure Attempt

Respondents obtained multiple loans from DBP and mortgaged both their real estate and JD Bus Lines motor vehicles to secure repayment. When respondents failed to fully pay at maturity, they requested restructuring of their past due obligations. DBP acceded and, on June 29, 1994, respondents signed three promissory notes. Despite restructuring, respondents continued to fail to pay the quarterly installments on the notes’ due dates. DBP demanded full payment of the loans’ total value from respondents. When respondents refused, DBP filed an application for extrajudicial foreclosure of the real estate mortgages before the Regional Trial Court (RTC) of Ormoc City.

To prevent the foreclosure, respondents immediately filed an action for nullification in the RTC of Ormoc City, Branch 35, docketed as Civil Case No. 3314-O, asserting that they had already paid the principal amount of the loans. For three years, the RTC did not act on that case. In 1998, DBP withdrew the extrajudicial foreclosure application and moved to dismiss Civil Case No. 3314-O. The RTC granted the motion on March 2, 1998, reasoning that the withdrawal rendered the action moot and academic and noting that respondents did not object.

The Alleged Bad Faith and the Second Foreclosure

After the dismissal of Civil Case No. 3314-O, DBP demanded payment again. Despite the demand, respondents ignored DBP, and the unpaid obligation allegedly ballooned to more than P20 million. DBP then filed a new application for extrajudicial foreclosure with the DBP special sheriff in Makati and thereafter took constructive possession of the foreclosed properties. DBP posted security guards at respondents’ premises in Barangay Cabulihan, Ormoc City, where the foreclosed JD Bus Lines motor vehicles were parked. The special sheriff issued notices of sale for a public auction of the foreclosed real properties and motor vehicles.

The Civil Action for Damages: Claims Against DBP and the Special Sheriff

While the foreclosure activities proceeded, respondents filed a civil complaint for damages against DBP and the DBP special sheriff in the RTC of Ormoc City, Branch 35, docketed as Civil Case No. 3592-O. Respondents claimed that DBP’s withdrawal of the extrajudicial foreclosure application and the dismissal of Civil Case No. 3314-O led them to believe that DBP would no longer pursue satisfaction of its claims. On that premise, they alleged DBP acted contrary to Article 19 of the Civil Code when it foreclosed again.

Respondents further challenged the mortgage provisions that authorized the mortgagee to take constructive possession of the mortgaged properties upon default. They contended that the stipulation was void for being a pactum commissorium, since it allegedly allowed DBP to appropriate the mortgaged properties.

Lastly, respondents assailed the validity of the public auctions conducted by the special sheriff. They argued that the auction notices scheduled the sale for “September 16, 1998 at 10:00 a.m. or soon thereafter” for the real properties and “September 16, 1998 at 2:00 p.m. or soon thereafter” for the motor vehicles. They invoked Act 3135, Sec. 4, which requires public auctions to occur between nine in the morning and four in the afternoon, which they characterized as seven continuous hours.

DBP’s Position

DBP denied bad faith. It asserted that respondents remained in default because, notwithstanding restructuring, they did not pay the amortizations required under the June 29, 1994 promissory notes. DBP also explained that the filing of Civil Case No. 3314-O and the RTC’s delay prevented DBP from collecting earlier. DBP stated that it withdrew the extrajudicial foreclosure application and moved for dismissal only to avail itself of a more efficient remedy—foreclosure through a special sheriff—authorized under DBP’s charter. It maintained that its subsequent actions were rooted in respondents’ persistent nonpayment and the contractual and statutory rights of a mortgagee.

RTC Ruling: Liability for Damages Based on Bad Faith

In its decision dated January 25, 2002, the RTC ruled in favor of respondents. It found that by withdrawing its application for extrajudicial foreclosure and moving to dismiss Civil Case No. 3314-O, DBP led respondents to believe that the loans had been extinguished. The RTC therefore concluded that DBP acted in bad faith when it foreclosed anew. It ordered DBP to stop posting security guards and to vacate respondents’ premises, and it awarded actual, compensatory, exemplary, and moral damages, as well as attorney’s fees and litigation expenses, including specified daily actual damages for the buses during the period of continued guard presence.

CA Ruling: Modification and Ministerial Duty of the Special Sheriff

DBP appealed. In its decision dated November 23, 2004, the CA affirmed the RTC decision but modified the allocation of liability. The CA held that the DBP special sheriff merely performed ministerial duties when he foreclosed and issued notices of sale. Accordingly, DBP alone was liable for the damages awarded against the bank. DBP’s motion for reconsideration was denied on February 18, 2005, prompting this petition.

Issues Presented to the Supreme Court

The Supreme Court was tasked to determine whether DBP acted with bad faith under Article 19 of the Civil Code when it foreclosed the real and chattel mortgages anew after the withdrawal and dismissal of Civil Case No. 3314-O, and whether respondents could recover damages based on the alleged invalidity of constructive possession provisions and the alleged defects in the auction timing.

Legal Basis and Reasoning: No Bad Faith Under Article 19

The Court reiterated that it was not a trier of facts and generally entertained only questions of law in a petition for review on certiorari. Still, it recognized an exception when the assailed decisions were based on misapprehension of facts.

Applying Article 19, the Court held that for an action for damages to prosper, the complainant must prove that: (a) the defendant had a legal right or duty; (b) the defendant exercised that right or performed that duty with bad faith; and (c) the complainant was prejudiced or injured as a result. The Court focused on the absence of bad faith.

First, the Court found that DBP had a legal right to foreclose. Respondents had not assailed the due execution of the June 29, 1994 promissory notes nor presented proof of payment. Under the promissory notes, failure to pay an installment (or interest) on the due date constituted an event of default. The Court held that respondents were therefore in default when they failed to pay the quarterly amortizations on the designated due dates. It further stated that when the principal obligation becomes due and the debtor fails to perform, the creditor may foreclose for the purpose of alienating the mortgaged property to satisfy the credit.

Second, the Court addressed bad faith. It explained that bad faith imports a dishonest purpose, moral obliquity, or a conscious doing of a wrong akin to fraud. It disagreed with the RTC and CA findings by emphasizing the factual context and the conduct of the parties. The Court noted that the RTC “sat” on Civil Case No. 3314-O for three years, and it viewed that inordinate delay as prejudicial to DBP. It also reasoned that, as a lending institution, DBP could be expected to resort to a more efficient remedy against a defaulting debtor.

The Court also considered the content and effect of the RTC’s March 2, 1998 order dismissing Civil Case No. 3314-O. The Court held that the order merely stated that the withdrawal of the extrajudicial foreclosure application rendered the case moot and academic. It observed that the order did not state or even hint that respondents’ obligations had in fact been extinguished, nor did it indicate that DBP had waived its claims.

Further, the Court reasoned that DBP demanded payment from respondents right after the dismissal of Civil Case No. 3314-O. Thus, respondents could not reasonably presume a waiver. Finally, the Court held that the demand for payment negated bad faith. DBP had given respondents an opportunity to pay their long overdue obligations and avoid foreclosure. Respondents still refused to pay. The Court therefore concluded that respondents had no cause of action against DBP, and that the RTC and CA erred in granting damages.

Validity of Possession Stipulations and the Alleged Pactum Commissorium

The Court then rejected respondents’ challenge to the mortgage contract provisions allowing the mortgagee to take constructive possession up

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