G.R. No. L-46658 - Philippine National Bank vs. Pineda

Case Summary (G.R. No. L-46658)

Factual Background

In 1963, Ignacio Arroyo and Lourdes Tuason Arroyo obtained a P580,000 loan from PNB to acquire control of Tayabas Cement Company, Inc. The Arroyo spouses mortgaged the La Vista property (TCT No. 55323) as security. TCC opened an eight-year deferred L/C for $7,000,000 with PNB to import a cement plant. The Arroyo spouses executed a surety agreement dated August 5, 1964 and a covenant dated August 6, 1964 to secure obligations arising from the L/C. Imported machinery arrived and was released to TCC under a trust receipt agreement. TCC failed to pay drawings under the L/C, and on May 19, 1968 PNB repossessed the machinery pursuant to the trust receipt.

Foreclosure and Pre-Auction Events

The Arroyo spouses’ personal account, including a separate P160,000 loan secured by Hacienda Bacon in Negros Occidental, fell into arrears. PNB initiated extra-judicial foreclosure under Act No. 3138, as amended, and under P.D. No. 385, filing petitions with the City Sheriffs of Quezon City and Bacolod. The La Vista property was auctioned August 11, 1975, with PNB as highest bidder at P1,000,001.00. An objection by the mortgagors’ representative prompted PNB to file a supplemental petition on August 13, 1975 to apply the foreclosure to both the Arroyo spouses’ personal indebtedness and their liabilities as sureties for TCC amounting to P35,019,901.49.

Initial Judicial Proceedings

The Acting Clerk of Court and Ex-Officio Sheriff resolved on September 12, 1975 that factual questions required court adjudication and suspended the sheriff’s sale. PNB filed a petition for mandamus in May 1976 in the Court of First Instance, Quezon City, Branch V, to compel the sheriff to proceed with foreclosure. That petition was granted on September 6, 1976, directing the sheriff to proceed under Act No. 3135 and to issue the corresponding certificate of sale. Before that judgment attained finality, TCC filed Civil Case No. 24422 in the Court of First Instance of Rizal, Branch XXI, seeking among other reliefs a writ of preliminary injunction to restrain foreclosure of the La Vista property and Hacienda Bacon and a declaration that its obligations had been satisfied by PNB’s repossession of the machinery.

Orders Challenged and Supreme Court Petition

The trial court, through respondent Judge Gregorio G. Pineda, issued a restraining order on October 5, 1976 and subsequently granted a writ of preliminary injunction on March 4, 1977, an order whose denial of reconsideration was dated May 31, 1977. PNB petitioned the Supreme Court by certiorari to annul and set aside those orders. The petition advanced multiple grounds challenging the injunction and the trial court’s jurisdiction.

Issues Presented

The principal issues were whether TCC’s liability under the L/C had been extinguished by PNB’s repossession of the imported machinery and equipment, whether the trial court erred in issuing a writ of preliminary injunction in contravention of P.D. No. 385, whether the injunction improperly countermanded a final decision of a coordinate court, whether the trial court exceeded territorial jurisdiction in issuing injunctions against a provincial sheriff, and whether TCC established a clear legal right warranting injunctive relief.

Petitioner’s Contentions

PNB contended that the court below acted in excess of jurisdiction in issuing an injunction expressly proscribed by P.D. No. 385, which forbids restraining orders against government financial institutions in actions taken in compliance with mandatory foreclosure. PNB also argued that the injunction contravened a final order of Branch V, which had jurisdiction over the foreclosure, that the injunction attempted to bind acts outside the issuing court’s territorial jurisdiction, and that TCC failed to demonstrate a clear legal right justifying preliminary injunctive relief.

Respondent’s Contentions

TCC maintained that P.D. No. 385 did not apply because no foreclosure proceeding had been instituted against TCC itself and because, it asserted, its obligations under the L/C had been fully satisfied by PNB’s repossession of the imported machinery and equipment.

Court’s Analysis and Reasoning

The Court found that PNB took possession of the machinery pursuant to the trust receipt agreement, which served as security for advances under the L/C, and that possession alone did not extinguish the debt. Relying on Vintola v. Insular Bank of Asia and America, G.R. No. 73271, May 29, 1987, 150 SCRA 578, the Court explained that a trust receipt creates a security interest and that the bank remained a lender, not the factual owner of the goods. The Court held that payment would result only upon foreclosure and sale of the security and application of proceeds; mere repossession was insufficient. The Court further held that the repossession did not constitute dacion en pago. Because the Arroyo spouses stood as sureties, their liabilities were coextensive with the principal debtor’s obligations and thus subject to foreclosure. The Court concluded that the foreclosure instituted by PNB complied with P.D. No. 385, which mandates foreclosure when arrearages reach twenty percent and bars courts from issuing restraining orders against government financial institutions acting in compliance with Section 1. The Court also determined that the injunction improperly interfered with a judgment and jurisdiction previously acquired by Branch V, invoking the doctrine that courts of concurrent jurisdiction may not open, modify, or vacate the judgments of co-equal courts, as exemplified in De Leon v. Salvador, G.R. No. L-31603, December 28, 1970, 36 SCRA 567. Finally, the Court observed that an injunction issued by a Court of First Instance cannot be enforced beyond its territorial jurisdiction and that directing relief against the Provincial Sheriff of Negros Occidental and ex-officio Sheriff of Bacolod City exceeded the issuing court’s territorial competence.

Ruling and Disposition

The Supreme Court granted the petition for certiorari. The Court set aside t

Case Syllabus (G.R. No. L-46658)

Parties and Procedural Posture

Philippine National Bank (PNB) filed a petition for certiorari to annul and set aside the orders dated March 4, 1977 and May 31, 1977 rendered in Civil Case No. 24422 of the Court of First Instance of Rizal, Branch XXI.
Hon. Gregorio G. Pineda, in his capacity as Presiding Judge of the Court of First Instance of Rizal, Branch XXI, issued a restraining order on October 5, 1976 and granted a writ of preliminary injunction on March 4, 1977, with reconsideration denied on May 31, 1977.
Tayabas Cement Company, Inc. (TCC) was the private respondent who sought the writ of preliminary injunction in Civil Case No. 24422 to enjoin foreclosure sales of mortgaged properties.
The petition challenged the injunctions as unlawful, beyond jurisdiction, and contrary to P.D. No. 385 and related doctrines of non-interference among co-equal courts.

Key Factual Allegations

In 1963 Ignacio Arroyo and Lourdes Tuason Arroyo obtained a P580,000 loan from PNB to acquire a controlling interest in TCC, secured by a real estate mortgage over the La Vista property covered by TCT No. 55323.
TCC applied for and opened an eight-year deferred Letter of Credit for USD 7,000,000 in favor of Toyo Menka Kaisha, Ltd., and the Arroyo spouses executed a Surety Agreement dated August 5, 1964 and a Covenant dated August 6, 1964 to secure the L/C.
The imported cement plant machinery and equipment arrived from Japan, were released to TCC under a trust receipt agreement, and were later repossessed by PNB on May 19, 1968 for failure of TCC to pay drawings under the L/C.
The personal accounts of the Arroyo spouses, including a separate P160,000 loan secured by mortgage over Hacienda Bacon, Isabela, Negros Occidental, likewise became due and unpaid, prompting PNB to institute extra-judicial foreclosure proceedings in July 1975.
At the August 11, 1975 auction of the La Vista property, PNB was the highest bidder at P1,000,001, and PNB subsequently sought to apply the sale to satisfy both the Arroyo spouses' personal indebtedness of P499,060.25 and the spouses' liability as sureties of TCC totalling P35,019,901.49.
Acting Clerk of Court and Ex-Officio Sheriff Diana L. Dungca suspended the foreclosure sale on September 12, 1975 pending court determination of disputed issues, prompting PNB to seek and obtain a writ of mandamus from Branch V of the CFI of Quezon City on September 6, 1976.
TCC filed suit in Branch XXI of the CFI of Rizal on September 14, 1976 to enjoin foreclosure and to assert that its obligations had been satisfied by PNB's repossession of the machinery and equipment.

Procedural History

PNB filed extra-judicial foreclosure petitions with the City Sheriff of Quezon City and with the City Sheriff of Bacolod, Negros Occidental in July 1975.
Acting Sheriff Dungca ruled on September 12, 1975 that evidentiary questions required judicial adjudication, thereby suspending the foreclosure sale.
PNB instituted a petition for mandamus in Branch V, CFI of Quezon City, docketed Civil Case No. Q-21505, which was granted on September 6, 1976 ordering the Sheriff to proceed with the sale.
TCC then filed Civil Case No. 24422 in Branch XXI, CFI of Rizal, where a temporary restraining order issued on October 5, 1976 and a writ of preliminary injunction issued on March 4, 1977, with reconsideration denied May 31, 1977.
PNB elevated the matter by petition for certiorari to annul the injunction orders rendered by Branch XXI.

Issues Presented

Whether PNB's repossession of the imported machinery and equipment under the trust receipt agreement extinguished TCC's obligation under the Letter of Credit.
Whether issuance of a writ of preliminary injunction against PNB contravened P.D. No. 385 which prohibits restraining orders against government financial institutions acting in compliance with mand