Case Summary (G.R. No. 76303)
Loan Agreement and Mortgage Security
LCK Industries obtained a loan of ₱3,000,000.00 from Planters Development Bank, evidenced by two promissory notes. To secure the loan, the spouses Lim executed two real estate mortgages over parcels of land: one in Quezon City (68 sq. meters) and another in Baguio City (71 sq. meters), both titled in their names.
Default and Foreclosure Proceedings
Petitioner LCK defaulted on the loan, making the full amount due and demandable. Despite several demands, including a final letter-demand dated October 13, 1997 for ₱2,962,500.00, payment was not made. Consequently, respondent bank conducted extrajudicial foreclosure of the Baguio City property, sold at auction for ₱2,625,000.00. Since the proceeds were insufficient, the Quezon City property was also foreclosed and sold for ₱2,231,416.67. The respondent bank was the highest bidder in both auctions.
Initiation of Legal Action
Before the auction sale of the Quezon City property, petitioners filed an action for annulment of the foreclosure and auction sale along with restraining order and damages against the respondent bank and the notary public, alleging non-compliance with posting, publication, and filing requirements under Act No. 3135 (the act regulating sale of property under special powers in real estate mortgages).
RTC Proceedings and Pre-Trial Stipulations
During pre-trial, parties stipulated that (i) the loan obligation was secured by two mortgages covering the two properties; (ii) two promissory notes totaling ₱3,000,000.00 were executed; (iii) demand was made for ₱2,962,500.00; (iv) certificates of sale for both properties and amounts bid by the bank were established; (v) petitioners failed to pay the loan despite demands. The RTC framed issues:
- Whether the petition for extrajudicial foreclosure was filed with the Clerk of Court;
- Whether the foreclosure conformed to Act No. 3135;
- Entitlement to attorney’s fees and damages.
The parties waived attorney’s fees claims and agreed to submit the case based on stipulations.
Petitioners’ Additional Claim of Overpayment
In their memorandum, petitioners raised a new issue alleging overpayment amounting to ₱1,856,416.67, arguing that the total auction proceeds (₱4,856,416.67) exceeded their loan obligation (₱2,962,500.00). The respondent bank contended that this issue was not raised during pre-trial and thus was barred from adjudication for failure to raise it earlier.
RTC Decision and Court of Appeals Reversal
The RTC ruled the foreclosure and auction valid but ordered the bank to reimburse the overpayment of ₱1,856,416.67. The respondent bank’s motion for reconsideration was denied. The bank appealed, and the Court of Appeals reversed the RTC’s award of overpayment, stating that the issue was not properly raised at pre-trial and adjudication thereof would violate due process.
Supreme Court’s Legal Analysis on Pre-Trial and Overpayment Issue
The Supreme Court emphasized the purpose of pre-trial under the 1987 Constitution and the 1997 Revised Rules of Court to clarify and limit the issues for trial, promote expediency, avoid surprise, and facilitate settlement. The Court reiterated that undisclosed issues generally cannot be raised post pre-trial unless the issue is implied, integral, or necessarily inferable from the stipulated facts.
In this case, the Court found that the overpayment issue, while not explicitly stated as a separate issue in the pre-trial order, could be reasonably inferred from the admissions that the combined auction proceeds exceeded the loan balance by ₱1,893,916.67. The pre-trial order’s stipulations on amounts due and auction sale prices logically entail an issue regarding surplus proceeds.
Legal Obligation to Return Surplus Proceeds
The Court cited Rule 68, Section 4 of the Revised Rules of Court, which mandates that proceeds from foreclosure sale, after deducting costs and mortgage debt, must be paid to junior encumbrancers or, in their absence, returned to the mortgagor. Jurisprudence establishes the mortgagee’s duty as a custodian of proceeds and obligates the return of surplus funds to mortgagors.
The Court underscored the principle against unjust enrichment, anchored on Civil Code Article 22, which prohibits a party from retaining benefits at another’s
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Case Syllabus (G.R. No. 76303)
Case Background and Parties Involved
- Petitioners LCK Industries Inc. (LCK), and spouses Chiko Lim and Elizabeth T. Lim, filed a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking reversal of the Court of Appeals’ decision and resolution.
- The respondent is Planters Development Bank, a duly authorized Philippine banking institution.
- On 1 September 1995, LCK obtained a loan from Planters Development Bank in the amount of P3,000,000.00 evidenced by two promissory notes.
- To secure the loan, petitioners, spouses Lim, executed two real estate mortgages: one over a Quezon City property (68 sqm), and later another over a Baguio City property (71 sqm), both registered under their names.
- LCK defaulted in payment, causing the obligation to become due and demandable.
- Despite several demands and a final letter-demand dated 13 October 1997 for payment of P2,962,500.00, LCK failed to pay.
Extrajudicial Foreclosure and Auction Sales
- Respondent bank foreclosed first the Baguio City property by extrajudicial foreclosure, which was sold at public auction for P2,625,000.00 on 29 January 1998.
- Proceeds from this sale were insufficient to cover LCK’s outstanding loan balance.
- Consequently, the respondent bank foreclosed the Quezon City property, sold at public auction on 18 March 1998 for P2,231,416.67.
- The respondent bank was the highest bidder on both auction sales.
- Prior to the Quezon City auction, petitioners filed an action before the RTC seeking annulment of the foreclosure and auction sale, restraining orders, and damages against respondent bank and the notary public, Atty. Allene Anigan.
Trial Court Proceedings and Pre-Trial Stipulations
- The complaint alleged non-compliance by respondent bank with posting and publication requirements, and the failure to file the required petition for extrajudicial foreclosure with the Clerk of Court under Act No. 3135.
- Respondent denied allegations and claimed compliance with statutory posting, publication, and filing requirements.
- Due to failure of both parties’ counsels to appear, the court deemed the motion for TRO abandoned.
- During pre-trial, parties stipulated material facts including:
- The loan obligation amount and amount due as of 13 October 1997 (P2,962,500.00).
- Execution of two promissory notes totaling P3,000,000.00.
- Foreclosure and auction of both mortgaged properties with corresponding bid amounts.
- Foreclosure was conducted by a notary public.
- The petition for foreclosure was not filed with the Clerk of Court.
- Petitioners failed to pay their obligations despite demands.
- The court identified three fundamental issues:
- Filing of the foreclosure petition with the Clerk of Court.
- Compliance with Act No. 3135 in foreclosure.
- Claims for attorney’s fees and damages.
- Parties agreed to waive attorney’s fees claims, and the trial court ordered submission of memoranda.
Issues Raised in Memoranda and Trial Court Decision
- Petitioners raised an additional claim of overpayment amounting to P1,856,416.67, based on the combined auction proceeds exceeding the loan balance.
- Respondent bank contested this claim, arguing overpayment was not an issue properly raised during pre-trial and therefore not subject to adjudication.
- The trial court declared the foreclosure and auction sale legal and valid but ordered the respondent bank to return the overpayment.
- The RTC dismissed claims for attorney’s fees, and dismissed the case against the