G.R. No. 192934 - Security Bank Corp. vs. Spouses Mercado

Case Summary (G.R. No. 192934)

Key Dates and Governing Constitution

Decision under review: June 27, 2018 (Supreme Court). The 1987 Philippine Constitution is the applicable constitutional framework for the decision. Statutory and regulatory instruments central to the dispute include Act No. 3135 (extrajudicial foreclosure), the New Civil Code (notably Articles 1308, 1229, 1956), and Bangko Sentral ng Pilipinas (BSP) regulations and the Manual of Regulations for Banks (MORB) concerning floating interest rates.

Applicable Law and Doctrines Emphasized

Act No. 3135 (as amended): posting and publication requirements for valid extrajudicial foreclosure sales.
Article 1308, New Civil Code: principle of mutuality of contracts; stipulations that leave performance or validity to the will of one party are void.
Article 1956, New Civil Code: interest must be expressly stipulated in writing.
Article 1229, New Civil Code: judicial reduction of penalties when unconscionable.
BSP MORB and Circulars: floating interest rates must be based on market-based reference rates agreed in writing.

Factual Background (credit, securities, defaults)

On September 13, 1996 Security Bank granted the Mercados a revolving credit line of P1,000,000, later secured by multiple real estate mortgages over several parcels in Lipa City, San Jose and Batangas City. Additions to credit secured by subsequent mortgages increased the obligation to P7,000,000 under the same agreement. The revolving credit agreement contained clauses permitting Security Bank to determine prevailing lending rates and a late-payment penalty of 2% per month; an addendum reiterated borrower’s continuing consent to rates computed by the bank. The Mercados defaulted; Security Bank sent a final demand on March 31, 1999 and thereafter initiated extrajudicial foreclosure procedures under Act No. 3135. Foreclosure sales were held in October 1999 and certificates of sale were registered in November 1999. The Mercados later offered to redeem for P10,000,000 (allegedly refused by the bank, which countered with P15,000,000) and filed suit on November 8, 2000 seeking annulment of foreclosure sales, damages, injunction, specific performance and accounting (Civil Case No. 5808). Security Bank sought ex parte writs of possession in a separate proceeding (LRC Case No. N-1685); the cases were consolidated and tried before Branch 84, RTC Batangas City.

Procedural History

RTC (Feb. 26, 2007; amended June 19, 2007): declared the foreclosure sales void and interest rate clauses void as potestative; fixed spouses’ obligation (as amended) at P7,500,000 and imposed cost-of-money interest of 6% p.a. from the date of the amendatory order; ordered permanent injunctions and awarded attorney’s fees to the Mercados in the original decision (later modified).
CA (July 19, 2010): affirmed with modifications — held foreclosure sales of Batangas City and San Jose properties void for defective publication; ruled the interest provisions violative of mutuality; set liability at P7,516,880 with 12% interest from March 30, 1999 and imposed the 2% monthly penalty; deleted award of attorneys’ fees to the Mercados.
Supreme Court consolidated petitions filed by Security Bank and the Mercados and reviewed the CA decision.

Issues Presented to the Supreme Court

Whether the foreclosure sales of the Batangas City and San Jose properties were valid.
Whether the interest-rate provisions in the revolving credit agreement and addendum were void for violating the mutuality of contracts.
Whether interest and penalties are due and demandable from the date of auction sale until finality of the judgment declaring the foreclosure void under the doctrine of operative facts.

Supreme Court Holding — Foreclosure Sales (Act No. 3135 publication requirement)

The Court held the foreclosure sales of the Batangas City and San Jose properties void. Act No. 3135 requires publication of the notice of sale once a week for at least three consecutive weeks in a newspaper of general circulation when property value exceeds a threshold. The Court reiterated that publication is intended to give reasonably wide publicity to secure bidders and avoid sacrifice of the property; statutory requirements for posting and publication are jurisdictional and must be strictly complied with. The published notices contained substantive errors: incorrect lot/TCT particulars (e.g., TCT No. T-33150 misprinted as "Lot 952-C-1" instead of "Lot 952-C-1-B"; TCT No. T-89822 misprinted) and omission of property locations. Those errors were material because they could mislead or deter bidders, impair assessment of size or neighborhood, and affect fair pricing. Publication of a single erratum did not cure the defect because the erratum itself would constitute a new notice subject to the three-week publication requirement; Security Bank published it only once. The Court rejected Security Bank’s reliance on OCA Circular No. 14 as insufficient to validate the defective notices. Estoppel was not applied because it was not pleaded by the bank and the bank denied reliance on any redemption offer.

Supreme Court Holding — Interest Provisions and Mutuality of Contracts

The Court ruled that the interest-rate provisions in the revolving credit agreement and the addendum violated Article 1308’s mutuality principle and were therefore void. Key legal reasoning: contracts must bind both parties and cannot leave validity or compliance to the will of one party; stipulations that permit unilateral modification of interest by the creditor without the borrower’s written assent are potestative and void. The revolving agreements gave Security Bank sole discretion to set the “prevailing lending rate” and included clauses giving continuing consent “without need of additional confirmation,” lacking a valid, written market-based reference rate as required by BSP regulations. The Court distinguished this case from precedents permitting escalation clauses tied to market reference rates, observing that Security Bank’s “prevailing lending rate” was not clearly pegged to a stated market reference in writing. The Court found the clauses analogous to those invalidated in prior jurisprudence (e.g., Silos, Philippine Savings Bank, Philippine National Bank) because they vested unilateral, indeterminate authority in the bank. Consequently, the stipulated interest provisions were invalidated.

Supreme Court Holding — Interest, Penalty, Default and Operative Facts

The Court held that legal interest and penalty may still attach despite invalidity of the stipulated interest provisions. Because the Mercados did not contest that they defaulted on the principal obligation, default occurred upon extrajudicial demand (March 31, 1999), and legal interest on the principal is proper from that date. The Supreme Court found Andal inapplicable because Andal involved situations where default could not be declared due to illegal interest/penalty imposition

Case Syllabus (G.R. No. 192934)

Facts

On September 13, 1996, Security Bank granted spouses Rodrigo and Erlinda Mercado a revolving credit line of P1,000,000.00 under a revolving credit line agreement containing, among others, the following provisions:
- Clause 7 (Interest on Availments): interest to be paid "at a per annum rate determined from time to time, by Security Bank and advised through my Statement of Account every month," based on "Security Bank's prevailing lending rate at the date of availment," computed daily.
- Clause 17 (Late Payment Charges): payment penalty of 2% per month computed on the amount due and unpaid or in excess of the Credit Limit for delinquent accounts.
An addendum to the revolving credit agreement stated borrowers "agree to pay ... interest on outstanding availments based on annual rate computed and billed monthly by SBC on the basis of its prevailing monthly rate," adding that "the annual rate shall in no case exceed the total monthly prevailing rate as computed by SBC" and that the borrower gives "continuing consent without need of additional confirmation to the interests stipulated as computed by SBC."
To secure the credit line, the Mercados executed:
- A Real Estate Mortgage dated July 3, 1996 over properties with TCT No. T-103519 (Lipa City) and TCT No. T-89822 (San Jose, Batangas).
- A subsequent Real Estate Mortgage dated September 13, 1996 over properties in Batangas City covered by TCT Nos. T-33150, T-34288, and T-34289 to secure an additional P7,000,000.00 under the same revolving credit agreement.
The Mercados defaulted. Security Bank requested account updating, sent an extrajudicial demand/final demand letter on March 31, 1999, and thereafter filed petitions for extrajudicial foreclosure under Act No. 3135, as amended, in the RTCs of Lipa City (for the Lipa parcel) and Batangas City (for the San Jose and Batangas City parcels).
Notices of foreclosure sale were published once a week for three consecutive weeks as required by Act No. 3135. The notices for the Batangas City and San Jose properties contained errors in the technical descriptions (TCT No. 33150 misdescribed as "Lot 952-C-1" instead of "Lot 952-C-1-B"; TCT No. 89822 misdescribed as "Lot 1931 Cadm-164-D" instead of "Lot 1931 Cadm 464-D") and omitted indication of location. Security Bank published an erratum once to correct these errors; the erratum did not satisfy the three-week publication requirement for a corrected notice.
Foreclosure sales:
- Lipa City parcel auctioned October 19, 1999; Security Bank the winning bidder; Certificate of Sale issued November 3, 1999; registered with Lipa City Registry of Deeds on November 11, 1999.
- Batangas City and San Jose parcels auctioned (sale held) and Certificate of Sale issued October 29, 1999; registered with the Registry of Deeds of Batangas City on November 17, 1999.
On September 18, 2000, the Mercados offered to redeem the foreclosed properties for P10,000,000.00; Security Bank allegedly refused and counter-offered P15,000,000.00.
On November 8, 2000, the Mercados filed a complaint for annulment of foreclosure sale, damages, injunction, specific performance, and accounting with application for TRO/preliminary injunction in RTC Batangas City, docketed Civil Case No. 5808 (assigned to Branch 84).
On June 9, 2005, Security Bank filed an ex parte petition for issuance of a writ of possession over the Batangas City and San Jose parcels in RTC Batangas City, docketed LRC Case No. N-1685. Both cases were consolidated before Branch 84.

Procedural History

RTC (Branch 84) Decision dated February 26, 2007 (as amended by Amendatory Order dated June 19, 2007):
- Initially declared foreclosure sales of five listed parcels void, declared interest rates in the addendum void as potestative and contrary to Article 1308 and Article 1956, and held the Mercados' obligation to be P8,000,000.00; awarded attorney’s fees and permanent injunction against enforcement.
- On reconsideration via the June 19, 2007 Amendatory Order, the RTC modified its ruling to: invalidate only the foreclosure sales concerning the Batangas City and San Jose properties (finding lack of jurisdiction over Lipa City property), declare the Mercados’ obligation as P7,500,000.00 (after deducting P500,000 from the P1,000,000 principal), and impose a "cost of money" interest rate of 6% per annum from the date of the Amendatory Order until paid.
Court of Appeals (CA) Decision dated July 19, 2010:
- Affirmed with modifications the RTC Amended Decision: held defective notices invalidated the foreclosure sales; found interest-rate provisos that gave Security Bank sole discretion violative of mutuality of contracts; modified the outstanding liability to P7,516,880.00 (P8,000,000 less P483,120 proceeds from sale of Lipa property); imposed 12% interest per annum from March 30, 1999 (date of extrajudicial demand) until paid; imposed the stipulated 2% monthly penalty; deleted award of attorney's fees; affirmed other dispositions.
Consolidated petitions for certiorari to the Supreme Court:
- G.R. No. 192934 (Security Bank) and G.R. No. 197010 (Spouses Mercado); petitions consolidated by the Court in a Resolution dated January 18, 2012.
- Initial denial of the Mercados' petition (G.R. No. 197010) on July 27, 2011; later reinstated on April 18, 2012 after motion for reconsideration.
Supreme Court Decision dated June 27, 2018 (J. Jardeleza):
- Denied the petitions; modified the CA decision and issued the final disposition described below.

Issues Presented to the Supreme Court

Whether the foreclosure sales of the parcels of land in Batangas City and San Jose, Batangas were valid.
Whether the revolving credit line agreement and its addendum’s provisions on interest rate are void for violating the principle of mutuality of contracts.
Whether interest and penalty are due and demandable from date of auction sale until finality of judgment declaring the foreclosure void under the doctrine of operative facts (i.e., whether interest and penalty were considered paid by the auction sale).

RTC's Findings and Reasoning (as reflected in the record)

Declared foreclosure sales void because only one corrective publication (erratum) was made instead of satisfying the statutory requirement for publication of the corrected notice once a week for three consecutive weeks — the RTC termed this "a fatal omission committed by the mortgagee bank."
Held that grouping the San Jose parcel with the Batangas City parcels in a single foreclosure sale was improper given separate mortgages, made redemption onerous, and contravened Sections 1 and 5 of Act No. 3135.
Found interest-rate stipulation in the revolving credit agreement to be potestative and void under Article 1308 of the New Civil Code; also found violation of Central Bank Circular No. 1191 (requiring mutual agreement on repricing) and Article 1956 (no interest due unless expressly stipulated in writing).
Held that because the Mercados offered to pay P10,000,000 and the bank unjustifiably refused, no interest would be due and demandable after that offer (original RTC view).

Court of Appeals' Findings and Reasoning

Agreed that defects in the technical descriptions in the notices rendered the notices of foreclosure sale defective; the single erratum did not cure the defective notice as it effectively meant there was no valid publication of the required notice.
Agreed that the interest proviso giving Security Bank sole discretion to determine the annual interest rate violated the principle of mutuality because there was no adequate reference rate to peg the rate.
Disagreed with the RTC's computation as to the outstanding obligation