G.R. No. L-22973 - Mambulao Lumber Co. vs. Philippine National Bank

Case Summary (G.R. No. L-22973)

Factual Background

In 1956 the plaintiff applied for an industrial loan with the Naga Branch of PNB, and the bank approved a loan of P100,000 secured by a real estate mortgage over a parcel covered by Transfer Certificate of Title No. 381 in Jose Panganiban (formerly Mambulao), Camarines Norte, and by a chattel mortgage covering sawmill machinery, rolling units and transportation equipment located in the plaintiff’s compound. The bank released P27,500 on August 2, 1956, evidenced by a promissory note, and P15,500 on October 19, 1956, evidenced by another promissory note, both bearing interest at six percent per annum “until paid.” The plaintiff defaulted on amortizations and ceased operations about late 1957 or early 1958. On September 27, 1961, PNB requested the Provincial Sheriff of Camarines Norte to take possession and sell the real property under Act No. 3135, and notice of sale was set for November 21, 1961. On November 6, 1961, PNB requested possession and sale of the chattels, and the Deputy Sheriff took possession on November 8, 1961, issuing notice of sale for November 21, 1961. The plaintiff protested by registered letters of November 19, 1961, insisting that foreclosure must be in Manila per contract and that an extension would enable settlement. The bank construed one letter as a request for extension and advised deferral of the chattel sale to December 21, 1961. The real property, however, was sold on November 21, 1961, to PNB for P56,908. The plaintiff mailed a bank draft for P738.59 on December 14, 1961, claiming full settlement after application of the real property proceeds. PNB replied December 18, 1961, asserting a balance of P9,161.76 plus guarding fees and that the chattel sale would be stopped only upon remittance of that amount. The chattels were publicly auctioned on December 21, 1961, awarded to PNB for P4,200. Thereafter PNB sold the items to a third party, who with assistance of police and soldiers removed some equipment from the plaintiff’s compound on May 24–25, 1962, after local resistance and the detention of the plaintiff’s security chief. The plaintiff instituted suit claiming illegality of the chattel sale, conversion, overcharge of interest and illegal attorney’s and sale expenses, and sought recovery of the chattels’ value and damages.

Trial Court Proceedings

The Court of First Instance of Manila rendered judgment dated April 2, 1964, dismissing the plaintiff’s complaint against both defendants and awarding PNB P3,582.52 with interest at six percent per annum from December 22, 1961, plus costs. The plaintiff appealed from that judgment.

Issues Presented

The plaintiff advanced multiple grounds on appeal, principally: (1) that its total indebtedness to PNB as of November 21, 1961, was only P56,485.87 and not the larger amount found below, so that proceeds of the real property sale plus P738.59 remitted later fully liquidated the debt and rendered the chattel sale unlawful; (2) that it was not liable for P5,821.35 attorney’s fees and P298.54 sale expenses claimed by PNB; (3) that the chattel sale was void for failure to follow the Chattel Mortgage Law and the contractual venue stipulation requiring sale in the City of Manila; (4) that PNB was liable for the value of the chattels it illegally sold; and (5) that PNB was liable for damages and attorney’s fees for the forcible taking and detention of the plaintiff’s man-in-charge.

Supreme Court’s Disposition

The Supreme Court set aside the judgment appealed from and ordered PNB and Anacleto Heraldo, Deputy Sheriff of Camarines Norte, to pay jointly and severally to Mambulao Lumber Company the total sum of P56,000.73, broken down as follows: P150.73 overpayment to PNB, P42,850.00 as the value of the chattels at the time of sale with interest at six percent per annum from December 21, 1961 until paid, exemplary damages of P10,000.00, and attorney’s fees of P3,000.00. Costs were awarded against both appellees.

Legal Reasoning — Interest and Account of Indebtedness

The Court found that PNB had compounded interest by capitalizing accrued interest at each amortization due and had charged interest on that compounded interest up to the real estate foreclosure. The Court held such practice to be erroneous because Act No. 2655, Section 5, prohibited reckoning compound interest except by agreement or when the debt was judicially claimed, and because Article 2212 and Article 1959 of the Civil Code precluded interest earning interest absent agreement or judicial demand. The Court therefore refused to sustain the trial court’s allowance of interest on accrued interest and recalculated the plaintiff’s obligation as of November 21, 1961, allowing reasonable sheriff’s fees and a reduced attorney’s fee, arriving at a total obligation of P57,495.86. When contrasted with proceeds of the real estate sale of P56,908.00 and the subsequent remittance of P738.59, the Court found an excess payment of P150.73 and concluded that there was no further necessity to foreclose the chattel mortgage.

Legal Reasoning — Sheriff’s Expenses and Attorney’s Fees

The Court held that the award of P298.54 as expenses of the extra-judicial sale was unsupported by evidence and that provisions of the old Rules of Court (Rule 130) governing sheriff’s fees in judicial proceedings did not apply to extra-judicial foreclosure under Act No. 3135. The Court explained that Section 4 of Act No. 3135 entitled the officer conducting the extra-judicial sale to P5.00 per day of actual work plus expenses, and that absent proof of actual days worked or expenses the allowance should be modest; the trial court’s automatic application of Rule 130 fees was erroneous. As to counsel fees, the mortgage contract expressly stipulated attorney’s fees fixed at ten percent of the unpaid indebtedness “in all cases,” and the Court construed that stipulation to encompass extra-judicial as well as judicial foreclosure. The Court nonetheless applied settled authority permitting judicial mitigation of stipulated attorney’s fees when they are unconscionable, and reduced the bank’s claimed attorney’s fees from P5,821.35 to P1,000.00 for the real estate foreclosure, on a quantum meruit basis given the limited services performed.

Legal Reasoning — Venue, Form of Sale and Conversion

The Court rejected the trial court’s view that the mortgagee could disregard a contractual stipulation fixing the place of sale. It held that the parties’ agreement to have foreclosure proceedings filed with the courts or sheriff of the City of Manila operated as a valid waiver of the statutory venues and bound the mortgagee and mortgagor inter se. Accordingly, the sale of the chattels in Jose Panganiban, Camarines Norte, over the plaintiff’s timely objection, contravened the contractual venue. The Court further held that Act No. 1508, Section 14, required the officer to sell chattels article by article and to make a return identifying each article and the price received; the Deputy Sheriff’s sale in bulk violated that statutory mandate. A sale in gross without mortgagor consent was therefore manifestly objectionable and constituted conversion when the mortgagee disposed of the property other than in accordance with statute and the mortgage terms. The bank’s subsequent sale and active cooperation in having the goods removed by the buyer, employing police and soldiers and detaining the plaintiff’s security officer, did not exculpate PNB; the mortgagee remained liable for conversion by parting with its interest in the mortgaged goods.

Valuation, Damages and Attorney’s Fees

Because the trial court made no finding on th

Case Syllabus (G.R. No. L-22973)

Parties and Procedural Posture

Mambulao Lumber Company was the plaintiff-appellant who sought recovery and annulment of an extra-judicial foreclosure sale of mortgaged chattels and other reliefs.
Philippine National Bank was the defendant-appellee and mortgagee which foreclosed the real estate and later the chattels and claimed indebtedness, attorney's fees, and sale expenses.
Anacleto Heraldo, Deputy Provincial Sheriff of Camarines Norte was the defendant-appellee who executed the extra-judicial foreclosures and issued certificates and bill of sale.
The trial court, Court of First Instance of Manila, Civil Case No. 52089, rendered decision dated April 2, 1964, dismissing the complaint and awarding PNB P3,582.52 with interest from December 22, 1961 and costs.
The plaintiff appealed the trial court's decision to this Court and the appeal presented questions of accounting, legality of extra-judicial procedures, venue of sale, conversion, damages, and attorneys' fees.

Key Facts

The plaintiff obtained an approved loan of P100,000 from the PNB in 1956 secured by a real estate mortgage on TCT No. 381 and by a chattel mortgage covering sawmill equipment, rolling units and other fixed assets.
The PNB released P27,500 on August 2, 1956 and P15,500 on October 19, 1956, evidenced by two promissory notes payable in five yearly installments and bearing interest at six percent per annum until paid.
The plaintiff stopped operations about late 1957 or early 1958 and defaulted on amortizations despite repeated demands.
PNB requested extra-judicial foreclosure of the real estate under Act No. 3135 and the property was sold on November 21, 1961 to PNB for P56,908.00 subject to one-year redemption.
The plaintiff remitted a bank draft of P738.59 on December 14, 1961 and notified the sheriff on December 16, 1961 that it had fully paid its obligation.
PNB insisted additional sums were due, including attorney's fees and guarding expenses, and the chattels were sold on December 21, 1961 for P4,200.00 in a single lot in Jose Panganiban, Camarines Norte.
Employees of PNB and the purchaser subsequently removed chattels from plaintiff's compound with police and military assistance after local resistance and temporary detention of the plaintiff’s security officer.

Issues Presented

Whether the PNB properly computed and was entitled to compound interest on the indebtedness prior to judicial demand.
Whether PNB was entitled to the amounts claimed as expenses of the extra-judicial sale and attorney's fees in the amounts awarded by the trial court.
Whether the extra-judicial foreclosure and sale of the chattels was lawful in light of the proceeds of the real estate sale and the plaintiff's later remittance.
Whether the sale of the chattels complied with the contractual venue clause in the chattel mortgage and with the statutory requirement to sell article by article.
Whether PNB and the Deputy Sheriff were liable for conversion, damages, and attorneys' fees to the plaintiff for proceeding with the chattel sale and dispossession.

Contentions of Parties

Mambulao Lumber Company contended that its indebtedness as of November 21, 1961 was P56,485.87, that the real estate sale proceeds plus its remittance extinguished the debt, that the chattel sale violated the mortgage venue clause and statutory procedure, and that PNB was liable for conversion, damages and attorneys' fees.
PNB contended that the outstanding indebtedness was higher due to compounded interest and that attorney's fees and sale expenses were recoverable under the mortgage stipulation and as incurred for foreclosure.
The Deputy Sheriff defended the conduct of the sales and issuance of the certificate and bill of sale.

Applicable Law

Section 5 of Act No. 2655 forbids reckoning compound interest in computing interest except by agreement or when the debt is judicially claimed.