Case Summary (G.R. No. 4089)
Loan Agreements and Security Arrangements
In 1997, Lorenze Realty obtained multiple loans and credit accommodations from China Bank, evidenced by promissory notes totaling ₱71,050,000. Each note stipulated a penalty surcharge of one-tenth of one percent per day on the total obligation and an attorney’s fee amounting to ten percent of the total due. To secure these obligations, Lorenze Realty executed real estate mortgages over eleven parcels of land in Valenzuela City.
Default, Extrajudicial Foreclosure, and Public Auction
Following Lorenze Realty’s failure to pay amortizations, China Bank initiated extrajudicial foreclosure after complying with notice and publication requirements. At the public auction, China Bank itself was the highest bidder, bidding ₱85,000,000 for the mortgaged properties.
Computation of Indebtedness and Deficiency Claim
By August 10, 1998, the outstanding indebtedness, including principal, interest, penalties, and foreclosure expenses, had grown to ₱114,258,179.81. After applying the ₱85,000,000 auction proceeds, a deficiency balance of ₱29,258,179.81 remained. China Bank then filed a collection suit for this deficiency against Lorenze Realty and its officers before the Makati RTC.
RTC Decision
On December 29, 2003, the RTC rendered judgment for China Bank, holding defendants jointly and severally liable for ₱29,258,179.81, plus penalties at two percent per month from August 10, 1998 until full payment, attorney’s fees of five percent of the total amount due, and litigation costs.
Court of Appeals Ruling
The Court of Appeals affirmed the RTC decision with modifications: it reduced the penalty surcharge from twenty-four percent per annum (2% per month) to twelve percent per annum and decreased the attorney’s fees award from five percent to two percent of the total amount due. No cost award was made.
Issue Before the Supreme Court
Whether Lorenze Realty’s obligation was fully extinguished by the ₱85,000,000 sale proceeds, given that they exceeded the ₱71,050,000 principal amount.
Supreme Court’s Legal Analysis
- Article 1253 of the Civil Code provides that payment of principal is not deemed made until accrued interest is covered.
- Under Articles 1232 and 1233, payment of an obligation must be complete, and Article 1252 grants the debtor a directory right to designate the application of payment among multiple debts. Failure to exercise this right allows the creditor to apply payment as it chooses.
- Lorenze Realty did not elect
Case Syllabus (G.R. No. 4089)
Facts
- Lorenze Realty and Development Corporation, a Philippine real estate corporation, obtained multiple loans and credit accommodations from China Banking Corporation in 1997, evidenced by sixteen promissory notes totaling ₱71,050,000.00.
- Each promissory note stipulated:
- A penalty surcharge of one-tenth of one percent (0.1%) per day on the total obligation from default until full payment.
- An additional ten percent (10%) of the total amount due, including interest, surcharges, and penalties, as attorney’s fees.
- As collateral, Lorenze Realty executed real estate mortgages over eleven parcels of land (TCT Nos. B-44428, B-44451, B-44452, V-44275 to V-44278, V-44280, V-44281, V-44283, V-44284) registered in Valenzuela City.
- Upon default, China Bank foreclosed the mortgages extra-judicially, complied with notice and publication requirements, and purchased the mortgaged properties at public auction for ₱85,000,000.00.
- A Statement of Account (10 August 1998) showed total indebtedness of ₱114,258,179.81 (principal ₱71,050,000.00; interest ₱13,521,939.31; penalties ₱19,763,257.50; registration expenses ₱9,542,013.00; filing, publication, sheriff’s and posting fees).
- After crediting the ₱85,000,000.00 auction proceeds, a deficiency balance of ₱29,258,179.81 remained.
Trial Court Proceedings
- China Bank filed Civil Case No. 98-3069 in the RTC of Makati City, Branch 142, seeking a deficiency judgment for ₱29,258,179.81, with contractual penalties, attorney’s fees, litigation expenses, and costs.
- Defendants (Lorenze Realty and its officers, including Spouses Tan) admitted signing the notes but alleged:
- Mistake and ignorance of the surety agreements’ true effec