G.R. No. 226272 - Panacan Lumber Co. vs. Solidbank Corp.

Case Summary (G.R. No. 226272)

Factual Background

On March 7, 1997, Solidbank issued a Foreign Letter of Credit (FLC) for US$168,000 in favor of Panacan Lumber Co. to finance an importation of lumber. Panacan Lumber Co. allegedly provided a Domestic Letter of Credit (DLC) issued by Philippine Commercial and Industrial Bank (PCIB) as collateral. In April 1997, Panacan Lumber Co. made partial payment of US$60,000 under the FLC. On March 27, 1997, Panacan Lumber Co. obtained a peso loan of P700,000 under Promissory Note No. 96000251, secured by a Deed of Real Estate Mortgage (REM) executed by Antonio and Ma. Teresa over the property covered by TCT No. T-217531. The REM contained a clause requiring that all correspondence, including demand letters and notices of judicial or extrajudicial action, be sent to the mortgagor at its address.

Extrajudicial Foreclosure and Sale

After petitioners failed to pay the outstanding balances, Solidbank filed an Application for Extra-Judicial Foreclosure and later filed two amendments to that petition which materially increased the bank’s claimed indebtedness, culminating in a Second Amended Petition that incorporated the FLC obligation and alleged a total indebtedness of P9,151,667.89. A notice of extrajudicial sale issued September 7, 1999 led to a public auction on October 4, 1999 where Solidbank was the highest bidder at P2,637,600.00. Title consolidation eventually placed the title in the name of Metropolitan Bank & Trust Company.

Trial Court Proceedings

Petitioners filed a complaint on November 22, 1999 praying for temporary restraining order and writ of preliminary injunction and alleging unlawful foreclosure, wrongful consolidation of title that included the FLC obligation, and damages for unrealized profits due to Solidbank’s withholding of shipping documents. The RTC issued a writ of preliminary injunction on October 31, 2000 enjoining Solidbank from consolidating ownership. During trial, procedural disputes arose over the admissibility of Solidbank’s evidence and the participation of a presiding judge; the case was the subject of interlocutory petitions, a Rule 65 petition to the Court of Appeals, and related proceedings in the Supreme Court concerning the submission of evidence.

Ruling of the Regional Trial Court

On February 13, 2012, the trial court rendered judgment in favor of petitioners. The RTC nullified the foreclosure proceedings and the sale of the subject property and TCT No. T-251604 registered under MBTC. The RTC ordered Solidbank to pay petitioners P400,000 as temperate damages and P100,000 as attorney’s fees, and it dismissed Solidbank’s counterclaims for lack of merit.

Ruling of the Court of Appeals

The Court of Appeals, by its July 31, 2015 Decision, reversed and set aside the RTC Decision in part. The CA affirmed that Panacan Lumber Co. remained liable for US$108,000 under the FLC and for P700,000 under the renewal promissory note, applying interest at six percent per annum for specified periods and current exchange rates at payment. The CA declared the consolidation of title in MBTC null and void for violating the writ of preliminary injunction, granted the mortgagors one year from finality of the decision to redeem the property by paying the redemption price with one percent per month interest from foreclosure until redemption, deleted the RTC award of temperate damages and attorney’s fees for lack of basis, and affirmed dismissal of Solidbank’s counterclaims. The CA denied reconsideration by Resolution dated August 12, 2016.

Issues Presented

The parties presented multiple contested questions: whether the extrajudicial foreclosure was null and void because Solidbank failed to give personal notice of its two amended petitions for foreclosure in contravention of the REM; whether the PCIB DLC secured the FLC issued by Solidbank; whether the REM covered the FLC and other debts by virtue of a blanket or dragnet clause; whether Solidbank breached contract by including the FLC in the foreclosure; whether the CA erred in adjudicating monetary obligations despite alleged lack of evidence and in deciding matters not pleaded or litigated.

Petitioners’ Contentions

Petitioners contended that the REM’s paragraph 14 required personal notice of all correspondence and judicial or extrajudicial actions and that Solidbank failed to notify them of the two amended petitions and the foreclosure sale. Petitioners asserted that this omission was a judicially admitted fact and warranted annulment of the foreclosure and sale. They maintained that the PCIB DLC was delivered as security for the FLC and that Solidbank breached its duty by refusing to release shipping documents despite such collateral. Petitioners also argued that the REM secured only the P700,000 loan and renewal, and did not cover the FLC, which was a past obligation not referenced in the REM. Finally, petitioners asserted that the CA improperly awarded liabilities on matters that were not litigated or supported by evidence.

Respondent’s Contentions

Solidbank argued that personal notice was not required under Act No. 3135 as amended by Act No. 4118 and that petitioners failed to raise the lack of personal notice at trial; accordingly, the CA correctly declined to entertain the issue on appeal. The bank contended that the PCIB DLC related to a separate transaction and did not compel release of shipping documents or preclude resort to the FLC remedy. Solidbank maintained that the REM contained a valid blanket or dragnet clause that covered all existing and future indebtedness and that it legitimately amended its foreclosure petitions and pursued foreclosure without bad faith. The bank further maintained that petitioners had judicially admitted their outstanding obligations and that the CA correctly affirmed liability despite alleged deficiencies in Solidbank’s proof at trial.

The Supreme Court’s Ruling

The Supreme Court partly granted the petition. The Court held that while personal notice to a mortgagor in extrajudicial foreclosure is not generally required by statute, the parties may stipulate to require personal notice; failure to comply with such a stipulation renders the foreclosure null and void. The Court found that paragraph 14 of the Deed of REM contractually required that all correspondence, including notices of judicial or extrajudicial action, be sent to petitioners, and that Solidbank did not give personal notice of the two amended petitions which increased the claimed indebtedness to P9,151,667.89. The Court declared the foreclosure proceedings as to that indebtedness null and void and ordered the consolidated title in the name of MBTC to be nullified for having been issued in violation of the trial court’s injunction and the nullity of the foreclosure. The Court affirmed, however, that the REM validly secured the P700,000 obligation under the renewal promissory note and that Panacan Lumber Co. remained liable for the FLC obligation reduced to US$108,000 after partial payment. The Court deleted the CA’s grant of a one-year redemption period to the mortgagors in light of the declaration of nullity of the entire foreclosure proceedings.

Legal Basis and Reasoning

The Court applied the settled rule that extrajudicial foreclosure requires posting and publication under Act No. 3135, as amended by Act No. 4118, absent any additional contractual requirement. The REM’s paragraph 14 imposed such an additional contractual requirement of personal notice, and the bank’s failure to comply rendered the foreclosure void insofar as it relied on the amended petitions that materially increased indebtedness. On the scope of the REM, the Court treated the pertinent provision as a blanket mortgage or dragnet clause and applied controlling authority that such clauses are valid but must be strictly construed; they secure only debts that fairly fall within the terms of the instrument. The Court found the REM plainly covered the original P700,000 PN and its renewal because the REM expressly covered extensions or renewals and other promissory notes. Conversely, the REM contained no reference to the prior FLC obligation and its P2,000,000 ceiling precluded inclusion of the US$168,000 FLC given prevailing exchange rates; thus the FLC was not secured by the REM. On the FLC itself, the Court explained the independence principle of letters of credit: the issuing bank undertakes to pay the seller upon presentation of conforming documents and to surrender documents to the buyer upon reimbursement; the bank may properly refuse surrender where the buyer fails to reimburse. The Court held that Solidbank was not obliged to draw on PCIB’s DLC before demanding payment from Panacan Lumber Co. and that the bank validly withheld the shipping documents in the absence of reimbursement. The

Case Syllabus (G.R. No. 226272)

Parties and Procedural Posture

Petitioners Panacan Lumber Co., Antonio B. Go, Ma. Teresa C. Go and Dorotea B. Go filed a complaint seeking nullification of an extra-judicial foreclosure and damages against Solidbank Corp., now Metropolitan Bank & Trust Company (MBTC).
The Regional Trial Court, Branch 42 of Manila rendered the February 13, 2012 Decision ordering nullity of the foreclosure sale and awarding temperate damages and attorney’s fees in favor of petitioners.
The Court of Appeals reversed in part and affirmed in part by its July 31, 2015 Decision and August 12, 2016 Resolution in CA-G.R. CV No. 99342 consistent with the appellate disposition described in the records.
The petitioners elevated the matter to the Supreme Court by a petition for review on certiorari under Rule 45, Rules of Court contesting the CA’s rulings on foreclosure validity, inclusion of the FLC, scope of the Deed of REM, and the appellate adjudication of obligations.
The Supreme Court issued the present decision partially granting the petition with modifications to the CA judgment and definitive directions regarding obligations and nullity of foreclosure.

Key Factual Allegations

Solidbank issued a Foreign Letter of Credit (FLC) dated March 7, 1997 worth US$168,000.00 in favor of Panacan Lumber Co. (PLC) to finance an importation of lumber.
PLC allegedly furnished a Domestic Letter of Credit (DLC) dated February 14, 1997 issued by Philippine Commercial and Industrial Bank (PCIB) as collateral for the FLC.
PLC obtained a loan of P700,000.00 on March 27, 1997 under PN No. 96000251, secured by a Deed of Real Estate Mortgage (Deed of REM) executed by Antonio and Teresa over the property covered by TCT No. T-217531.
PLC made partial payment of US$60,000.00 on the FLC, but Solidbank allegedly refused to release shipping documents when PLC failed to pay the FLC balance.
Solidbank amended its extra-judicial foreclosure petition twice, culminating in inclusion of the FLC obligation and an asserted total mortgage indebtedness of P9,151,667.89, and it was adjudged highest bidder at public auction on October 4, 1999.
The trial court issued a writ of preliminary injunction enjoining consolidation of title, but Solidbank consolidated title in violation of the injunction, and petitioners subsequently filed suit to annul the foreclosure and consolidation.

Issues Presented

Whether the extra-judicial foreclosure proceedings were null and void due to Solidbank’s failure to give personal notice of the two amended petitions for extra-judicial foreclosure.
Whether the PCIB DLC secured the obligation under the FLC issued by Solidbank to PLC.
Whether the Deed of REM covered PLC’s other obligations including the FLC, the original PN No. 96000251, and the renewal PN.
Whether Solidbank breached its contractual duties by withholding shipping documents and by amending the foreclosure petition to include other obligations.
Whether the appellate court erred in adjudicating and affirming certain monetary obligations despite Solidbank’s limited presentation of evidence at trial.

Parties’ Contentions

Petitioners contended that the Deed of REM required personal notice of amended foreclosure petitions under paragraph 14 and that Solidbank failed to give such notice, warranting annulment of the foreclosure sale.
Petitioners further contended that the PCIB DLC served as collateral securing the FLC and that Solidbank breached the parties’ agreements by withholding shipping documents and wrongfully including the FLC in the foreclosure.
Petitioners asserted that the Deed of REM secured only the P700,000.00 loan and its renewal but not the FLC, and that the CA erred in awarding Solidbank obligations that were not litigated or proved.
Solidbank asserted that personal notice was not required as statutory posting and publication sufficed under Section 3, Act No. 3135, as amended by Act No. 4118, and that petitioners had not timely raised lack of personal notice at trial.
Solidbank maintained that the Deed of REM contained a valid blanket or dragnet clause covering existing and future indebtedness, that the PCIB DLC related to a separate transaction, and that it had the right under the FLC agreement to refuse release of s