G.R. No. 138292 - Korea Exchange Bank vs. Filkor Business Integrated, Inc.

Case Summary (G.R. No. 138292)

Parties and Setting

The case was filed and litigated before the Regional Trial Court of Cavite City, Branch 88. Petitioner’s theory in the pleadings and prayer was anchored on a mortgage securing respondents’ obligations, while the trial court’s denial of petitioner’s reconsideration rested on the view that petitioner, by filing a collection-type civil action, had abandoned the mortgage lien.

The principal procedural statutes and rules implicated were the 1997 Rules of Civil Procedure, particularly Rule 35 (summary judgment), and Rule 68 (foreclosure of real estate mortgage), including Section 1 (complaint requirements) and Section 2 (judgment on foreclosure for payment or sale). On the appellate side, the Court considered Rule 45 under Section 1, which governs appeals by certiorari to the Supreme Court raising only questions of law.

Loans, Trust Receipts, Letters of Credit, Mortgage, and Suretyships

The trial court’s findings, as adopted and narrated in the decision, established that on January 9, 1997, respondent Filkor borrowed US$140,000 from petitioner, payable on July 9, 1997. Of that loan, only US$40,000 had been paid.

Filkor also executed nine trust receipts in petitioner’s favor from June 26, 1997 to September 11, 1997. The trust receipts required Filkor to either turn over to petitioner the proceeds from the sale of the goods, or the goods themselves if Filkor could not sell them. Filkor failed to do so.

In addition, between June 9, 1997 and October 1, 1997, Filkor negotiated with petitioner the proceeds of seventeen letters of credit issued by the Republic Bank of New York and the Banque Leumi France, S.A. These letters of credit were meant to pay for goods which Filkor sold to Segerman International, Inc. and Davyco, S.A. When petitioner attempted to collect the proceeds by presenting bills of exchange, the bills were dishonored due to discrepancies.

Security for the obligations included a Real Estate Mortgage executed by Filkor on February 9, 1996. The mortgage covered improvements constructed by Filkor on the lot it leased at the Cavite Export Processing Zone Authority, and specifically mortgaged the improvements belonging to Filkor. The individual respondents, Kim Eung Joe and Lee Han Sang, executed Continuing Suretyships, binding themselves jointly and severally with Filkor for payment of Filkor’s obligations to petitioner.

Filing of Civil Case and Petitioner’s Prayer

Because respondents did not make good on their obligations, petitioner filed Civil Case No. N-6689 in the Regional Trial Court of Cavite City. In its complaint, petitioner prayed for payment by respondents under its twenty-seven causes of action, and it additionally prayed that the mortgaged property be foreclosed and sold at public auction in case respondents failed to pay petitioner within ninety days from entry of judgment. Petitioner also sought other equitable reliefs.

Petitioner moved for summary judgment pursuant to Section 1, Rule 35 of the 1997 Rules of Civil Procedure. On March 12, 1999, the trial court granted petitioner’s motion. The trial court reasoned that respondents’ denial of the material allegations was effectively premised on the contention that the attached documents were photocopies and not the originals. It held that Section 7, Rule 8 allows copies of documents as exhibits in pleadings. It further invoked Section 8 of Rule 8, reasoning that respondents, having failed to specifically deny the genuineness and due execution of actionable documents attached to the complaint, were deemed to have admitted them. Finding no genuine issue of fact, the trial court rendered judgment granting petitioner’s prayers under all twenty-seven causes of action.

Trial Court’s March 12, 1999 Judgment and the Omission on Foreclosure

While the trial court’s March 12, 1999 order granted petitioner’s entitlement to sums due under the complaint, it did not include an order directing that the mortgaged property be foreclosed and sold at public auction should respondents fail to pay within the prescribed period. The judgment’s omission became the focal point of petitioner’s subsequent motion.

Denial of Partial Reconsideration on the Theory of Abandonment

Petitioner filed a motion for partial reconsideration, requesting that the trial court add the missing foreclosure and public sale relief. On April 16, 1999, the trial court denied the motion. It ruled that, by opting to file a civil action for the collection of obligations, petitioner had abandoned its mortgage lien on the mortgaged property.

The trial court anchored this ruling on Danao vs. Court of Appeals, 154 SCRA 446, which in turn cited Manila Trading and Supply Co. vs. Co Kim, et al., 71 Phil. 448. The trial court reasoned that a mortgage creditor may elect to waive security and sue for the indebtedness with the right to execute judgment on all properties of the debtor. It further emphasized the qualification that, upon failing in the remedy elected, the creditor cannot pursue the waived remedy.

Issues Raised in the Petition

Petitioner assigned the sole error that the trial court erred in ruling that petitioner had abandoned its real estate mortgage lien merely because it filed a “collection case.” The Supreme Court reframed the resultant issue as whether petitioner’s complaint before the trial court was substantively an action for foreclosure of a real estate mortgage, or merely an action for collection of a sum of money.

A secondary procedural issue was whether the petition was correctly lodged before the Supreme Court instead of the Court of Appeals.

The Nature of the Action: Allegations and Prayer Controlled

The Supreme Court examined the complaint’s allegations and prayer to determine the nature of the action and the relief sought. It observed that paragraph 183 of the complaint alleged, in detail, that to secure payment of Filkor’s obligations under the first to twenty-seventh causes of action, Filkor executed a Real Estate Mortgage on February 9, 1996, mortgaging specified improvements on Filkor’s leased lot in the Cavite Export Processing Zone. The allegations identified the mortgaged property and incorporated the mortgage as an annex.

The Court held that these allegations satisfied, at least in part, the requirements of Section 1, Rule 68 on foreclosure complaints, which requires the complaint to set forth key details regarding execution of the mortgage, the parties, description of the mortgaged property, the documentary evidence of the obligation secured, and the amount claimed to be unpaid.

The Court also relied on the complaint’s prayer. The prayer expressly sought, among other reliefs, that the mortgaged property be foreclosed and sold at public auction in case respondents failed to pay within ninety (90) days from entry of judgment. According to the Court, the pleadings and prayer demonstrated that petitioner’s action was one for foreclosure, not a mere collection suit.

The Court reiterated a consistent rule that the nature of an action and the court’s jurisdiction are determined by the allegations in the complaint and the character of the relief sought.

No Waiver Found: Error in the Trial Court’s “Abandonment” Ruling

After reviewing the complaint, the Supreme Court found no indication whatsoever that petitioner had waived its rights under the Real Estate Mortgage. It therefore concluded that the trial court erred in concluding that petitioner abandoned the mortgage lien and that what petitioner filed was purely an action for collection.

Because petitioner’s action was a foreclosure case, the Supreme Court held that the trial court should have ordered foreclosure and public sale upon nonpayment. It grounded this conclusion on Section 2, Rule 68 of the 1997 Rules of Civil Procedure, which directs that, upon trial, if the facts alleged are found true

Case Syllabus (G.R. No. 138292)

Korea Exchange Bank filed a petition assailing an RTC Cavite City, Branch 88 order dated April 16, 1999 in Civil Case No. N-6689.
The assailed order denied Korea Exchange Bank’s partial motion for reconsideration of an earlier RTC order dated March 12, 1999.
The March 12, 1999 order granted Korea Exchange Bank’s motion for summary judgment and ordered the respondents to pay various sums of U.S. dollars based on loans and related instruments.
The March 12, 1999 order omitted an express directive that the mortgaged property would be foreclosed and sold at public auction if respondents failed to pay.
The Supreme Court treated the dispute as involving the correctness of the legal characterization of the action and the proper mode of relief.

Parties and Procedural Posture

Petitioner Korea Exchange Bank was the mortgagee and creditor seeking payment and enforcement of its security.
Respondents were Filkor Business Integrated, Inc., Kim Eung Joe, and Lee Han Sang.
The respondents were sued in Civil Case No. N-6689 for payment of obligations arising from loans, trust receipts, and letters of credit transactions, and for enforcement of a real estate mortgage.
The petitioner moved for summary judgment under Section 1, Rule 35 of the 1997 Rules of Civil Procedure.
The RTC granted summary judgment in an order dated March 12, 1999.
The petitioner filed a partial motion for reconsideration seeking modification to include foreclosure and public auction in the event of nonpayment.
The RTC denied the partial motion in an order dated April 16, 1999.
The petitioner elevated the matter to the Supreme Court through a Rule 45 petition on the ground that only questions of law were involved.
The Supreme Court granted the petition and modified the RTC disposition accordingly.

Key Factual Allegations

On January 9, 1997, Filkor borrowed US$140,000 from Korea Exchange Bank, payable on July 9, 1997.
Of the loan proceeds, only US$40,000 was paid by Filkor.
From June 26, 1997 to September 11, 1997, Filkor executed nine trust receipts in favor of the petitioner.
The trust receipts required Filkor to turn over the proceeds from the sale of goods or the goods themselves if Filkor failed to sell.
Filkor failed to turn over the proceeds or the goods as required by the trust receipts.
Between June 9, 1997 and October 1, 1997, Filkor negotiated to the petitioner the proceeds of seventeen letters of credit issued by Republic Bank of New York and Banque Leumi France, S.A.
When the petitioner attempted to collect the letters of credit proceeds by presenting bills of exchange drawn to collect such proceeds, the bills were dishonored due to discrepancies.
Prior to the foregoing arrangements, Filkor executed a Real Estate Mortgage on February 9, 1996 in favor of the petitioner.
The mortgage covered improvements constructed on land leased by Filkor at the Cavite Export Processing Zone Authority, and included specified warehouse and related buildings.
Kim Eung Joe and Lee Han Sang executed Continuing Suretyships binding themselves jointly and severally with Filkor to pay the petitioner’s obligations.

Claims and Relief Sought

In Civil Case No. N-6689, the petitioner asserted twenty-seven causes of action against respondents for the unpaid loan-related and financing obligations.
The complaint prayed for payment by respondents under the causes of action.
The complaint further prayed that the property covered by the real estate mortgage be foreclosed and sold at public auction if respondents failed to pay within ninety (90) days from entry of judgment.
The petitioner also sought other just and equitable reliefs.

Motion for Summary Judgment

The petitioner moved for summary judgment under Section 1, Rule 35 of the 1997 Rules of Civil Procedure.
The RTC reasoned that the respondents’ denials of material allegations were based on the claim that attached documents were mere photocopies and not originals.
The RTC relied on Section 7, Rule 8 of the Rules of Court, which allows copies of documents to be attached as exhibits.
The RTC deemed the authenticity and due execution of actionable documents attached to the complaint as admitted where the documents were not specifically denied under Section 8, Rule 8.
The RTC concluded that there was no substantial triable issue, and it deemed summary judgment proper.
The RTC held that summary judgment is proper when, from pleadings, depositions, admissions, and affidavits, no important questions or issues of fact exist and the moving party is entitled to judgment