G.R. No. 169846 - Spouses Borromeo vs. Court of Appeals

Case Summary (G.R. No. 169846)

Applicable Law and Constitutional Basis

The 1987 Philippine Constitution governs the decision (case decided after 1990). Procedural and substantive authorities invoked include Rule 58, Section 3 of the Rules of Court (grounds for issuance of preliminary injunction), Civil Code provisions cited (Art. 1311 on relativity of contracts; Art. 2087 on the essence of mortgage/pledge as security), and relevant jurisprudence cited in the record.

Core Factual Background — Loan Documents and Mortgage

Petitioners applied under EPCIB’s Own-a-Home Loan Program in 1999 for P4,000,000.00 and signed loan documents (Loan Agreement, four Promissory Notes, Real Estate Mortgage (REM), and Disclosure Statements) in early 2000, some initially signed in blank. The REM covered petitioners’ lot (TCT No. N-203923, Loyola Grand Villas, Quezon City, 303 sq. m.) and the proposed house. Respondent ESB is a domestic savings bank and, at the time, a subsidiary of EPCIB.

Disbursement, Payments, and Document Requests

Respondent (or EPCIB) released P3,600,000.00 in four tranches between April 2001 and September 2002; the remaining P400,000.00 was not drawn. Petitioners began amortization payments on 21 April 2001 and made approximately P500,000.00 in total before stopping payments as a protest against alleged failure to receive loan documents and alleged imposition of higher interest rates than agreed.

Dispute over Identity of Lender and Interest Rates

Petitioners repeatedly requested copies of the loan documents and sent a letter to EPCIB’s president (6 August 2003). When copies were finally delivered on 3 October 2003, petitioners discovered the Loan Agreement and REM named ESB as lender/mortgagee, while the four Promissory Notes named EPCIB as lender. The notes reflected varying higher interest rates (9%–16%) that petitioners disputed against their claimed agreed rates (variously asserted as 8%–11.5% in different statements).

Extrajudicial Foreclosure Proceedings and RTC Filing

Respondent initiated extrajudicial foreclosure, with the Office of the Ex-Officio Sheriff issuing a Notice of Extrajudicial Sale dated 16 October 2003 (mortgage debt set at P5,114,601.00). Petitioners filed a Complaint for Injunction, Annulment of Mortgage with Damages and a prayer for temporary restraining order and preliminary injunction on 20 November 2003 (Civil Case No. Q-03-51184) to halt the scheduled extrajudicial sale. The foreclosure sale originally set for 26 November 2003 did not proceed because it fell on Eid-el-Fitr; respondent re-filed foreclosure and set a new auction.

RTC Ruling on Preliminary Injunction

On motion for reconsideration after the sale was rescheduled, the RTC granted a writ of preliminary injunction on 3 March 2004, finding the validity of the REM yet to be determined and that petitioners would suffer grave injustice if deprived of the property before resolution. The RTC noted the property’s valuation at P12,000,000.00, and petitioners posted a bond of P3,500,000.00. The RTC denied respondent’s motion for reconsideration on 29 April 2004.

Court of Appeals Decision

The Court of Appeals, on special civil action, reversed the RTC orders (Decision dated 29 April 2005; Resolution denying reconsideration dated 16 September 2005). The CA held that, pending trial, the REM’s validity should be presumed and that foreclosure by the mortgagee (ESB) was a proper exercise of its rights after petitioners stopped payments. The CA concluded the foreclosure would not cause grave or irreparable damage because petitioners could redeem the property or seek damages/nullify the sale after foreclosure.

Issues Framed in the Supreme Court Petition

The Supreme Court identified the principal issues: (1) whether ESB is the real party-in-interest (creditor-mortgagee); (2) whether foreclosure and public auction pending litigation would probably work an injustice to petitioners making judgment ineffectual; and (3) whether the RTC correctly granted the writ of preliminary injunction, i.e., whether requisites for injunctive relief were present.

Legal Standard for Granting Preliminary Injunction

Under Section 3, Rule 58, a preliminary injunction may be granted when the applicant is entitled to the relief sought that consists in restraining an act, when continuance of the act would probably work injustice to the applicant, or when acts threaten to render judgment ineffectual. The twin requirements are (a) an existing right to be protected and (b) actual or threatened violation of that right. Evidence at the preliminary injunction stage need not be conclusive; plaintiffs must show an ostensible right to final relief based on initial and incomplete evidence.

Relativity of Contracts and Privity of Parties

The Court emphasized the Civil Code principle (Art. 1311) that contracts take effect only between the parties, their assigns and heirs, and that absent privity there is generally no obligation. Thus an extrajudicial foreclosure by a third party not a creditor-mortgagee would violate the mortgagor’s property rights.

Evaluation of Evidence on the True Creditor-Mortgagee

The Supreme Court analyzed documentary and circumstantial evidence concerning the identity of the true creditor-mortgagee. The four Promissory Notes designated EPCIB as lender. EPCIB correspondence (including a 19 December 2002 letter to Home Guaranty Corporation listing petitioners’ loan among EPCIB’s housing loans) and EPCIB officers’ communications (e.g., Gary Vargas’ letters) showed petitioners’ repeated dealings with EPCIB. Most installment checks were issued in the name of EPCIB except for five, and petitioners addressed complaints to EPCIB’s president. ESB did not categorically establish that it, rather than EPCIB, was the creditor-mortgagee in the loan and mortgage transaction.

Corporate Separateness and Its Legal Effect

Although ESB was a wholly-owned subsidiary of EPCIB, the Court reiterated the corporate separateness doctrine: a subsidiary and parent have distinct juridical personalities and claims of the parent cannot be pursued by the subsidiary merely because of ownership. Prior jurisprudence cited by the Court supports treating parent and subs

Case Syllabus (G.R. No. 169846)

Procedural Posture

Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Court of Appeals Decision dated 29 April 2005 and its Resolution dated 16 September 2005 in CA-G.R. SP No. 85114.
The Court of Appeals had annulled the RTC Orders dated 3 March 2004 and 29 April 2004 in Civil Case No. Q-03-51184 (Branch 215, RTC Quezon City) which had granted a writ of preliminary injunction enjoining respondent Equitable Savings Bank (ESB) from extrajudicially foreclosing the mortgaged property of petitioners.
The Supreme Court granted the present Petition, reversed the Court of Appeals Decision dated 29 April 2005, and reinstated the RTC Order dated 3 March 2004 ordering issuance of a writ of preliminary injunction.

Parties and Corporate Identities

Petitioners: Spouses Nestor and Ma. Nona Borromeo, mortgagors and borrowers.
Respondents: (1) Honorable Court of Appeals (as respondent in the certiorari proceeding below); (2) Equitable Savings Bank (ESB), domestic savings bank corporation, principal office at EPCIB Tower 2, Makati Avenue, Salcedo Village, Makati City.
Parent/related entity: Equitable PCI Bank (EPCIB), a domestic universal banking corporation (principal office at Makati Avenue, Salcedo Village, Makati City), of which ESB was a subsidiary at the time the dispute began; after a later merger of EPCIB and Banco De Oro, the corporate name became Banco De Oro.
Corporate separateness emphasized: ESB was a wholly-owned subsidiary of EPCIB but possessed an independent and separate juridical personality distinct from its parent.

Factual Background

Petitioners were client-depositors of EPCIB for more than 12 years.
Mid‑1999: Branch manager of EPCIB, J.P. Rizal Branch, offered petitioners a loan under its "Own-a-Home Loan Program."
Petitioners applied for a P4,000,000.00 loan and were informed of approval around October 1999.
Early 2000: Petitioners signed loan documents in blank—Loan Agreement, Promissory Notes, Real Estate Mortgage (REM), and Disclosure Statements.
Security: REM constituted over land registered as TCT No. N-203923 (Loyola Grand Villas, Quezon City), 303 square meters, including the proposed house to be built thereon.
Loan disbursement: From April 2001 to September 2002 respondent (or lender) released P3,600,000.00 in four installments; the remaining P400,000.00 was not drawn by petitioners.
Amortizations: Petitioners commenced monthly amortization payments on 21 April 2001 and made total payments of approximately P500,000.00 before they stopped.
Repeated requests: Petitioners made repeated verbal requests to EPCIB for copies of loan documents and sent a formal letter dated 6 August 2003 to the president of EPCIB reiterating the request and complaining of higher interest rates charged (allegedly 14%–17% versus the interest rate they claimed was agreed upon—11%–11.5%, with additional inconsistency in pleadings claiming 8%–10%).
EPCIB response: Letter dated 27 August 2003 from EPCIB Vice President Gary Vargas explained the bank’s practice of giving originals only upon full release of loan proceeds, and stated that applicable interest was set at time of release; prevailing rates when the first four installments were released ranged from 9.5% to 16%.
Demand and foreclosure notices: Respondent’s counsel sent a demand letter dated 13 August 2003 showing total obligation as of 15 August 2003 at P4,097,261.04 (inclusive of interest and charges); a reiteration was sent 18 September 2003 demanding full settlement on or before 30 September 2003.
Petitioners received copies of the previously-signed blank loan documents on 3 October 2003 and found the Loan Agreement and REM designated ESB as lender and mortgagor while the four Promissory Notes designated EPCIB as lender.
Promissory Notes’ interest rates (as reflected in the four notes):
- 25 April 2001 — P1,200,000.00 — 16%
- 29 June 2001 — P800,000.00 — 15%
- 18 January 2002 — P800,000.00 — 14%
- 19 September 2002 — P800,000.00 — 9%
Petitioners deliberately did not draw the remaining P400,000.00 and stopped paying to protest non‑receipt of originals and alleged excessive interest charges.

Events Leading to Litigation

Failure to pay by 30 September 2003: Respondent sought extrajudicial foreclosure.
Notice of Extrajudicial Sale issued by the Office of the Ex-Officio Sheriff of Quezon City dated 16 October 2003 set the mortgage debt at P5,114,601.00; extrajudicial sale scheduled for 26 November 2003.
Petitioners received Notice of Extrajudicial Sale on 14 November 2003.
Complaint filed 20 November 2003 in RTC (Civil Case No. Q-03-51184): Complaint for Injunction, Annulment of Mortgage with Damages, and Prayer for TRO, Preliminary and Mandatory Injunction against EPCIB and ESB.
Allegations in Complaint: Loan documents did not reflect the true agreement; the agreement was with EPCIB (not ESB); interest rates in Promissory Notes were not those agreed upon; EPCIB breached contract by failing to release the fifth installment.
The scheduled 26 November 2003 sale fell on the holiday Eid‑el‑Fitr and did not push through.
RTC Order dated 5 December 2003 found no longer necessity for TRO/preliminary injunction.
Respondent refiled extrajudicial foreclosure on 14 December 2003; auction set for 14 January 2004.
Petitioners filed Motion for Reconsideration of RTC’s 5 December 2003 Order and prayed for injunction to forestall 14 January 2004 sale.

RTC Ruling (Branch 215, Quezon City)

RTC Order dated 3 March 2004 granted petitioners' Motion for Reconsideration and ordered issuance of a writ of preliminary injunction upon posting of bond in the amount of P3,500,000.00.
RTC’s reasoning:
- Validity of the REM was yet to be determined; petitioners would suffer grave injustice if deprived of property before RTC could rule on validity of REM.
- Respondent’s interest was considered amply protected: the mortgaged property valued at P12,000,000.00, exceeding petitioners’ obligation (pegged at P4,097,261.00).
Petitioners posted the P3,500,000.00 surety bond.
Respondent’s Motion for Reconsideration of the RTC Order was denied on 29 April 2004.

Court of Appeals Ruling

Court of Appeals, in Decision dated 29 April 2005 (CA-G.R. SP No. 85114), annulled and set aside the RTC Orders dated 3 March 2004 and 29 April 2004.
CA’s rationale:
- Pending the RTC’s determination of validity of the REM, the REM’s validity should be presumed.
- Foreclosure by respondent was a proper exercise of its right after petitioners admittedly stopped paying amortizations.
- Foreclosure would not cause grave or irreparable da