PARADIGM DEVELOPMENT CORPORATION OF THE PHILIPPINES, Petitioner

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent
DECISION
REYES, J., J.:
This is a Petition for Review on Certiorari 1 filed under Rule 45 of the Rules of Court assailing the
Decision 2 dated November 25, 2009 and Resolution 3 dated February 2, 2010 of the Court of Ap-
peals (CA) in CA-G.R. CV No. 89755, which granted respondent Bank of the Philippine Islands'
(BPI) appeal and accordingly dismissed the complaint filed by petitioner Paradigm Development
Corporation of the Philippines (PDCP).
The Facts
Sometime in February 1996, Sengkon Trading (Sengkon), a sole proprietorship owned by Anita Go,
obtained a loan from Far East Bank and Trust Company (FEBTC) under a credit facility denominat-
ed as Omnibus Line in the amount of PlOO Million on several sub-facilities with their particular sub-
limits denominated as follows: (i) Discounting Line for P20 Million; (ii) Letter of Credit/Trust Receipt
(LC-TR) Line for P60 Million; and (iii) Bills Purchased Line for PS Million. This was embodied in the
document denominated as "Agreement for Renewal of Omnibus Line." 4
On April 19, 1996, FEBTC again granted Sengkon another credit facility, denominated as Credit
Line, in the amount of ₱60 Million as contained in the "Agreement for Credit Line." Two real estate
mortgage (REM) contracts were executed by PDCP President Anthony L. Go (Go) to partially se-
cure Sengkon's obligations under this Credit Line. One REM, acknowledged on April 22, 1996, was
constituted over Transfer Certificate of Title (TCT) No. RT-55259 (354583) and secured the amount
of P8 Million. The other REM, acknowledged on December 19, 1997, was constituted over TCT
Nos. RT-58281, RT-54993 (348989) and RT-55260 (352956) and secured the amount of
₱42,400,000.00. 5
In a letter dated September 18, 1997, FEB TC informed Sengkon regarding the renewal, increase
and conversion of its ₱l00 Million Omnibus Line to ₱l50 Million LC-TR Line and P20 Million Dis-
counting Line, the renewal of the ₱60 Million Credit Line and P8 Million Bills Purchased Line. 6
In the same letter, FEBTC also approved the request of Sengkon to change the account name from
SENGKON TRADING to SENGKON TRADING, INC. (STI). 7
Eventually, Sengkon defaulted in the payment of its loan obligations.8 Thus, in a letter dated Sep-
tember 8, 1999, FEBTC demanded payment from PDCP of alleged Credit Line and Trust Receipt
availments with a principal balance of ₱244,277, 199 .68 plus interest and other charges which
Sengkon failed to pay. PDCP responded by requesting for segregation of Sengkon's obligations un-
der the Credit Line and for the pertinent statement of account and supporting documents. 9
Negotiations were then held and PDCP proposed to pay approximately ₱50 Million, allegedly corre-
sponding to the obligations secured by its property, for the release of its properties but FEBTC
pressed for a comprehensive repayment scheme for the entirety of Sengkon's obligations. 10
Meanwhile, the negotiations were put on hold because BPI acquired FEB TC and assumed the
rights and obligations of the latter. 11
When negotiations for the payment of Sengkon's outstanding obligations, however, fell, FEBTC, on
April 5, 2000, initiated foreclosure proceedings against the mortgaged properties of PDCP before
the Regional Trial Court (RTC) of Quezon City. 12 In its Bid for the mortgaged properties, FEBTC's
counsel stated that:
On behalf of our client, [FEBTC], we hereby submit its Bid for the Real Properties including all im-
provements existing thereon covered by [TCT] Nos. RT - 55259 (354583), 58281, RT - 54993
(348989) and RT- 55260 (352956) which are the subject of the Auction Sale scheduled on June,
20, 2000 in the amount of:
SEVENTY[-]SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY (₱76,500,000.00), Philip-
pine Currency.
Please note that the aforesaid Bid is only in PARTIAL SETTLEMENT of the obligation of [PDCP], x
x x. 13
Upon verification with the Registry of Deeds, PDCP discovered that FEBTC extra-judicially fore-
closed on June 20, 2000 the first and second mortgage without notice to it as mortgagor and sold
the mortgaged properties to FEBTC as the lone bidder. 14 Thereafter, on August 8, 2000, the corre-
sponding Certificate of Sale was registered. 15
Consequently, on July 19, 2001, PDCP filed a Complaint for Annulment of Mortgage, Foreclosure,
Certificate of Sale and Damages 16 with the RTC of Quezon City, against BPI, successor-in-interest
of FEB TC, alleging that the REMs and their foreclosure were null and void. 17
In its Amended Complaint, 18 PDCP alleged that FEB TC assured it that the mortgaged properties
will only secure the Credit Line sub-facility of the Omnibus Line. With this understanding, PDCP
President Go allegedly agreed to sign on two separate dates a pro-forma and blank REM, securing
the amount of ₱42.4 Million and P8 Million, respectively. PDCP, however, claimed that it had no in-
tent to be bound under the second REM, which was not intended to be a separate contract, but only
a means to reduce registration expenses. 19
Moreover, PDCP averred that sometime in September 1997, FEBTC allegedly requested it to sign a
document which would effectively extend the liability of the properties covered by the mortgage be-
yond the Credit Line. Because of its refusal to sign said document, it surmised that this must have
been the reason why, as it later discovered, FEBTC registered not only the first but also the second
REM, contrary to the parties' agreement. 20
In asking for the nullity of the REMs and the foreclosure proceeding, PDCP alleged:
a.) THAT although the [REM] of April 22, 1996 for Php 8.0 Million was not a separate security but
was merely intended to reduce registration expenses, FEBTC, [BPI's] predecessor-in-interest, frau-
dulently and in violation of the original intent and agreement of the parties, made it appear that said
[REM] of April 22, 1996 was separate and distinct from that of December 18, 1997 and caused the
registration of both mortgages with separate considerations totaling Php 50.4 Million;
b.) THAT the subject [REMs] were foreclosed to answer not only for obligations incurred under
SENGKON's Credit Line but also for other obligations of SENGKON and other companies which
were not secured by said mortgages;
c.) THAT no notice was given to or received by [PDCP] of the projected foreclosure x x x since the
notice of said foreclosure was sent by defendant SHERIFF to an address (333 EDSA, Quezon City)
other than [PDCP's] known address as stated in the [REMs] themselves (333 EDSA Caloocan City)
x x x;
d.) THAT, contrary to the then prevailing Supreme Court Circular AM 99-10-05-0 x x x, only one (1)
bidder was present and participated at the foreclosure sale[; and]
e.) THAT, without the knowledge and consent of [PDCPJ, obligation of SENGKON has been trans-
ferred to STI [,] a juridical personality separate and distinct from SENGKON, a single proprietorship.
This substitution of SENGKON as debtor by STI x x x effectively novated the obligation of [PDCP] to
FEBTC. x x x. 21 (Underlining ours)
Ruling of the RTC
On April 16, 2007, the R TC rendered its Decision22 nullifying the REMs and the foreclosure pro-
ceedings. It also awarded damages to PDCP. The dispositive portion of the decision reads:
WHEREFORE, premises considered the Court renders judgment in favor of [PDCP] and against
defendants [BPI], Sheriff and the Register of Deeds of Quezon City in the following manner:
1) Declaring null and void and of no further force and effect the following:
(a) the [REMs] (Annexes "F" and "F-1" hereof);
(b) the foreclosure thereof;
(c) the Certificate of Sale; and
(d) the entries relating to said [REMs] and Certificate of Sale annotated on TCT Nos. 58281, RT-
54993 (348989), RT-55260 (352956) and RT-55259 (354583) covering the mortgaged properties;
2) Ordering defendant Registrar of Deeds to cancel all the annotations of the [REMs] and the Certif-
icate of Sale on the above stated TCTs covering the mortgaged properties and otherwise to clear
said TCTs of any liens and encumbrances annotated thereon relating to the invalid [REMs] afore-
said;
3) Ordering defendant [BPI] to return to [PDCP] the owner's duplicate copies of the TCTs covering
the mortgaged properties free from any and all liens and encumbrances; and,
4) Ordering the defendant BPI to pay [PDCP] the following sums:
(a) Php 150,000.00 as attorney's fees; and,
(b) Php 50,000.00 as litigation expenses.
The Writ of Preliminary Injunction is hereby made FINAL and PERMANENT.
Costs against defendant [BPI].
SO ORDERED. 23
The RTC observed that the availments under the Credit Line, secured by PDCP's properties, may
be made only within one year, or from April 19, 1996 to April 30, 1997. While BPI claimed that the
period of said credit line was extended up to July 31, 1997, PDCP was not notified of the extension
and thus could not have consented to the extension. Anyhow, said the RTC, "no evidence had been
adduced to show that Sengkon availed of any loan under the credit line up to July 31, 1997." Thus,
in the absence of any monetary obligation that needed to be secured, the REM cannot be said to
subsist. 24
Further, the RTC agreed with PDCP that novation took place in this case, which resulted in dis-
charging the latter from its obligations as third-party mortgagor. In addition, it also nullified the fore-
closure proceedings because the original copies of the promissory notes (PN s ), which were the
basis of FEBTC's Petition for Extrajudicial Foreclosure of Mortgage, were not presented in court
and no notice of the extrajudicial foreclosure sale was given to PDCP. 25
Lastly, the RTC ruled that the shorter period of redemption under Republic Act No. 8791 26 cannot
apply to PDCP considering that the REMs were executed prior to the effectivity of said law. As
such, the longer period of redemption under Act No. 3135 27 applies. 28
Aggrieved, BPI appealed to the CA. 29
Ruling of the CA
In its Decision 30 dated November 25, 2009, the CA reversed the RTC's ruling on all points. The CA
found PDCP's contentions incredible for the following reasons: (i) the fact that PDCP surrendered
the titles to the mortgaged properties to FEBTC only shows that PDCP intended to mortgage all of
these properties; (ii) if it were true that FEBTC assured PDCP that it would be registering only one
of the two REMs in order to reduce registration expenses, then each of the two REMs should have
covered the four properties but it was not. On the contrary, the four properties were spread out with
one REM covering one of the four properties and the other REMs covering the remaining three
properties; and (iii) PDCP never complained to FEB TC regarding the registration of the two REMs
even after it discovered the same. 31
Also, the CA ruled that novation could not have taken place from FEBTC's mere act of approving
Sengkon's request to change account name from Sengkon to STI. 32
Moreover, it held that the fact that FEBTC failed to submit the original copies of the PN s that
formed the basis of its Petition for Extra judicial Foreclosure of Mortgage cannot affect the validity of
foreclosure because the validity of the obligations represented in those PNs was never denied by
Sengkon nor by PDCP. 33
The CA added that even if the obligations of Sengkon in credit facilities (other than the Credit Line)
were included, since the REMs contain a dragnet clause, these other obligations were still covered
by PDCP's REMs. 34 Lastly, the CA ruled that the failure to send a notice of extrajudicial foreclosure
sale to PDCP did not affect the validity of the foreclosure sale because personal notice to the mort-
gagor is not even generally required. 35
Hence, this present petition,, .where PDCP presented the following arguments:
I. THE FINDINGS IN THE CA DECISION WlllCH DEVIATED ON ALMOST ALL POINTS FROM
THOSE OF THE RTC ARE NOT IN ACCORD WITH THE RULES ON THE ASSESSMENT OF THE
CREDIBILITY AND WEIGHT OF THE EVIDENCE;
II. THE VALIDITY OF THE REMs, AS UPHELD BY THE CA, IS VITIATED BY THE FACT THAT
BPI'S PREDECESSOR-IN-INTEREST VIOLATED THE TRUE INTENT AND AGREEMENT OF
THE PARTIES THERETO;
III. THE CA DECISION'S REJECTION OF PDCP'S NOVATION THEORY BASED ON THE AB-
SENCE OF AN EXPRESS RELEASE OF THE OLD DEBTOR AND THE SUBSTITUTION IN ITS
PLACE OF A NEW DEBTOR IS MISPLACED AND ERRONEOUS;
IV. THE FORECLOSURE OF THE REMs WAS VITIATED NOT ONLY BY THE INADMISSIBILITY
OF THE PNs UPON WHICH IT IS BASED BUT ALSO BECAUSE IT VIOLATED THE THERETO
APPLICABLE RULES; and
V. THE APPLICATION BY THE CA OF THE SHORTENED PERIOD OF REDEMPTION IN THIS
CASE VIOLATED THE NON-IMPAIRMENT AND EQUAL PROTECTION CLAUSES OF THE CON-
STITUTION. 36
Ruling of the Court
The Court finds the petition meritorious. The registration of the REMs, even if contrary to the sup-
posed intent of the parties, did not affect the validity of the mortgage contracts
According to PDCP, when FEBTC registered both REMs, even ifthe intent was only to register one,
the validity of both REMs was vitiated by lack of consent. PDCP claims that said intent is supported
by the fact that the REMs were constituted merely as "partial security" for Sengkon's obligations
and therefore there was really no intent to be bound under both - but only in one - REM.
The Court cannot see its way clear through PDCP's argument. To begin with, the registration of the
REM contract is not essential to its validity. Article 2085 of the Civil Code provides:
Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their property,
and in the absence thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property. In relation thereto, Article 2125 of the Civil Code reads:
Article 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a
mortgage may be validly constituted, that the document in which it appears be recorded in the Reg-
istry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between
the parties.
x x x x (Emphasis ours)
In Mobil Oil Philippines, Inc. v. Diocares, et al., 37 the trial court refused to order the foreclosure of
the mortgaged properties on the ground that while an unregistered REM contract created a person-
al obligation between the parties, the same did not validly establish a REM. In reversing the trial
court, the Court said:
The lower court predicated its inability to order the foreclosure in view of the categorical nature of
the opening sentence of [Article 2125] that it is indispensable, "in order that a mortgage may be val-
idly constituted, that the document in which it appears be recorded in the Registry of Property."
Not[e] that it ignored the succeeding sentence: "If the instrument is not recorded, the mortgage is
nevertheless binding between the parties." Its conclusion, however, is that what was thus created
was merely "a personal obligation but did not establish a [REM]."
Such a conclusion does not commend itself for approval. The codal provision is clear and explicit.
Even if the instrument were not recorded, "the mortgage is nevertheless binding between the par-
ties." The law cannot be any clearer. Effect must be given to it as written. The mortgage subsists;
the parties are bound. As between them, the mere fact that there is as yet no compliance with the
requirement that it be recorded cannot be a bar to foreclosure.
xxxx
Moreover to rule as the lower court did would be to show less than fealty to the purpose that ani-
mated the legislators in giving expression to their will that the failure of the instrument to be record-
ed does not result in the mortgage being any the less "binding between the parties." In the lan-
guage of the Report of the Code Commission: "In Article [2125] an additional provision is made that
if the instrument of mortgage is not recorded, the mortgage, is nevertheless binding between the
parties." We are not free to adopt then an interpretation, even assuming that the codal provision
lacks the forthrightness and clarity that this particular norm does and therefore requires construc-
tion, that would frustrate or nullify such legislative objective. 38 (Citation omitted and emphasis and
underlining ours)
Hence, even assuming that the parties indeed agreed to register only one of the two REMs, the
subsequent registration of both REMs did not affect an already validly executed REM if there was
no other basis for the declaration of its nullity. That the REMs were intended merely as "partial se-
curity" does not make PDCP's argument more plausible because as aptly observed by the CA, the
PDCP's act of surrendering all the titles to the properties to FEBTC clearly establishes PDCP' s in-
tent to mortgage all of the four properties in favor of FEBTC to secure Sengkon's obligation under
the Credit Line. The Court notes that the principal debtor, Sengkon, has several obligations under
its Omnibus Line corresponding to the several credit sub-facilities made available to it by FEBTC.
As found by the trial court, PDCP intended to be bound only for Sengkon' s availments under the
Credit Line sub-facility and not for just any of Sengkon's availments. Hence, it is in this sense that
the phrase "partial security" should be logically understood.
In this regard, PDCP argued that what its President signed is a pro-forma REM whose important
details were still left in blank at the time of its execution. But notably, nowhere in PDCP's Amended
Complaint did it anchor its cause of action for the nullity of the REMs on this ground. While it indeed
alleged this circumstance, PDCP's Amended Complaint is essentially premised on the supposed
fraud employed on it by FEBTC consisting of the latter's assurances that the REMs it already sign-
ed would not be registered. In Solidbank Corporation v. Mindanao Ferroalloy Corporation, 39 the
Court discussed the nature of fraud that would annul or avoid a contract, thus:
Fraud refers to all kinds of deception - whether through insidious machination, manipulation, con-
cealment or misrepresentation- that would lead an ordinarily prudent person into error after taking
the circumstances into account. In contracts, a fraud known as dolo causante or causal fraud is ba-
sically a deception used by one party prior to or simultaneous with the contract, in order to secure
the consent of the other. Needless to say, the deceit employed must be serious. In contradistinction,
only some particular or accident of the obligation is referred to by incidental fraud or dolo inci-
dente, or that which is not serious in character and without which the other party would have en-
tered into the contract anyway. 40 (Citations omitted)
Under Article 1344 of the Civil Code, the fraud must be serious to annul or avoid a contract and ren-
der it voidable. This fraud or deception must be so material that had it not been present, the de-
frauded party would not have entered into the contract.
In the present case, even if FEB TC represented that it will not register one of the REMs, PDCP
cannot disown the REMs it executed after FEB TC reneged on its alleged promise. As earlier stat-
ed, with or without the registration of the REMs, as between the parties thereto, the same is valid
and PDCP is already bound thereby. The signature of PDCP's President coupled with its act of sur-
rendering the titles to the four properties to FEBTC is proof that no fraud existed in the execution of
the contract. Arguably at most, FEBTC's act of registering the mortgage only amounted to dolo inci-
dente which is not the kind of fraud that avoids a contract.
No novation took place
The Court likewise agrees with the CA that no novation took place in the present case. Novation is
a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting
a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor.
Article 1293 of the Civil Code defines novation as "consists in substituting a new debtor in the place
of the original one, [which] may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor." However, while the consent of the creditor need not be
expressed but may be inferred from the creditor's clear and unmistakable acts,41 to change the per-
son of the debtor, the former debtor must be expressly released from the obligation, and the third
person or new debtor must assume the former's place in the contractual 42 relation.
Thus, in Ajax Marketing and Development Corporation v. CA, 43 the Court had already ruled that:
The well-settled rule is that novation is never presumed. Novation will not be allowed unless it is
clearly shown by express agreement, or by acts of equal import. Thus, to effect an objective nova-
tion it is imperative that the new obligation expressly declare that the old obligation is thereby extin-
guished, or that the new obligation be on every point incompatible with the new one. In the same
vein, to effect a subjective novation by a change in the person of the debtor it is necessary that the
old debtor be released expressly from the obligation, and the third person or new debtor assumes
his place in the relation. There is no novation without such release as the third person who has as-
sumed the debtor's obligation becomes merely a co-debtor or surety. 44 (Emphasis ours)
In the present case, PDCP failed to prove by preponderance of evidence that Sengkon was already
expressly released from the obligation and that STI assumed the former's obligation. Again, as cor-
rectly pointed out by the CA, the Deed of Assumption of Line/Loan with Mortgage (Deed of As-
sumption) which was supposed to embody STI's assumption of all the obligations of Sengkon under
the line, including but not necessarily limited to the repayment of all the outstanding availments
thereon, as well as all applicable interests and other charges, was not signed by the parties.
Contrary to PDCP's claim, the CA's rejection of its claim ofnovation is not based on the absence of
the mortgagor's conformity to the Deed of Assumption. The CA's rejection is based on the fact that
the non-execution of the Deed of Assumption by Sengkon, STI and FEBTC rendered the existence
of novation doubtful because of lack of clear proof that Sengkon is being expressly released from
its obligation; that STI was already assuming Sengkon's former place in the contractual relation;
and that FEBTC is giving its conformity to this arrangement. While FEBTC indeed approved Seng-
kon's request for the "change in account name" from Sengkon to STI, such mere change in account
name alone does not meet the required degree of certainty to establish novation absent any other
circumstance to bolster said conclusion.
The trial court's finding that Sengkon did not avail under the Credit Line taints the foreclo-
sure of the mortgage
PDCP also claims that the foreclosure of the mortgage was invalid because the PNs that formed
the basis of FEBTC's Petition for Extrajudicial Foreclosure of Mortgage were inadmissible in evi-
dence. Rejecting this argument, the CA ruled that the admissibility of the PNs is a non-issue in this
case because in questioning the validity of the REMs and the foreclosure proceedings, PDCP did
not actually assail the validity or existence of said PNs; what it raised as an issue was whether the
foreclosure covered obligations other than Sengkon's availment under the Credit Line. As the CA
puts it:
[W]hat should have been the focal and critical question to be answered on the issue of whether the
subject [REMs] were validly foreclosed should have been whether the [REMs] executed by [PDCP]
covered the obligations of [Sengkon] as represented in those [PNs] or, stated in another way, were
the [PNs] used by defendant BPI in its foreclosure proceedings over [PDCP's] mortgages avail-
ments by [Sengkon] under its Credit Line?
An examination of the subject [PNs] vis-a-vis the Agreement for Credit Line would yield an affirma-
tive answer.
In the case at bar, a close look at the Agreement for Credit Line would reveal that the said credit fa-
cility for Php60 Million was granted in favor of [Sengkon] for the purpose of "Additional Working
Capital" and that it would be "available by way of short term [PN]." In the same manner, an exami-
nation of [PNs] PN Nos. 2-002-028618, 2-002-029436 and 2-002-029437 would reveal that the said
[PNs] were availed of by [Sengkon] for the purpose of "Additional Working Capital." 45 (Citations
omitted and emphasis in the original)
The Court cannot agree with the CA. In order to determine whether the obligations sought to be sat-
isfied by the foreclosure proceedings were only Sengkon's availments under the Credit Line, the
court necessarily needs to refer to the PNs themselves, as what the CA in fact did. Thus, it is ac-
tually the contents of these PNs that are in issue and the trial court did not err in applying the best
evidence rule.
But even if the Court disregards the best evidence rule, the circumstances in this case militate
against the CA's conclusion. The trial court made a factual finding that Sengkon's availment under
the Credit Line, which is the one secured by PDCP's properties, may be made only within one year,
or from April 19, 1996 to April 30, 1997. While FEBTC claimed that the period of said credit line was
extended up to July 31, 1997, PDCP was not notified of the extension. At any rate, the RTC found
that "no evidence had been adduced to show that Sengkon availed of any loan under the credit line
up to July 31, 1997," which was the period of the extension.
Notably, while PDCP demanded from FEBTC for the segregation of Sengkon's availments under
the Credit Line, FEBTC failed to heed PDCP's valid request and instead demanded for a compre-
hensive payment of Sengkon's entire obligation, unmindful of the fact of PDCP's status as a mere
third-party mortgagor and not a principal debtor. As a third-party mortgagor, the limitation on its lia-
bility pertains not only to the properties it mortgaged but also to the obligations specifically secured
thereby. It is well settled that while a REM may exceptionally secure future loans or advancements,
these future debts must be specifically described in the mortgage contract. An obligation is not se-
cured by a mortgage unless it comes fairly within the terms of the mortgage contract. 46
In this case, there was simply no evidence to support the conclusion that the PNs were in fact avail-
ments under the Credit Line secured by PDCP's properties. The PNs that were used by FEBTC in
its Petition for Extrajudicial Foreclosure of Mortgage were all executed beyond the extended dura-
tion of Sengkon's Credit Line (or until July 1997). While FEBTC wrote a letter 47 dated September
18, 1997, which is a few days short of the date of the earliest PN (September 23, 1997), addressed
to STI, approving the renewal of the debtor's Credit Line subject to the condition that the Line "shall
be partially secured" by the PDCP's mortgaged properties, it is worthy to note that this letter did not
bear the conforme of the debtor, lending credence to the trial court's observation. In this light,
FEBTC's failure to heed PDCP's request for the segregation of the amounts secured by its proper-
ties assumes critical significance. The lack of proof that the availments subject of the foreclosure
proceedings were within the coverage of PDCP's REMs explains FEBTC's omission.
Despite the foregoing, however, particularly the variance between the duration of Sengkon's Credit
Line and the dates appearing on the face of the PNs, the CA upheld the validity of the foreclosure
based merely on the similarity in the purpose for which the Credit Line was granted and the pur-
pose for which the PNs were executed.
On the implied premise that what is material is only the identity of the debtor whose obligation the
mortgagor secures, the CA cited Prudential Bank v. Alviar 48 and applied the dragnet clause in
PDCP's REMs. According to the CA, since the REMs contain a dragnet clause, then PDCP's prop-
erties can be made to answer even if the PNs supporting the Petition for Extrajudicial Foreclosure
of Mortgage refer to Sengkon's obligations in its other credit facilities. 49
The CA unfortunately misapplied the ruling in Prudential Bank. In that case, the Court's discussion
on the application of the blanket mortgage clause or dragnet clause was not as much as critically
important as the Court's novel application of the doctrine of reliance on security test.
A dragnet clause is a stipulation in a REM contract that extends the coverage of a mortgage to ad-
vances or loans other than those already obtained or specified in the contract. Where there are sev-
eral advances, however, a mortgage containing a dragnet clause will not be extended to cover fu-
ture advances, unless the document evidencing the subsequent advance refers to the mortgage as
providing security therefor or unless there are clear and supportive evidence to the contrary. 50 This
is especially true in this case where the advances were not only several but were covered by differ-
ent sub-facilities. Thus, in Prudential Bank, the Court stated:
In the case at bar, the subsequent loans obtained by respondents were secured by other securities,
thus: PN BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his foreign currency
savings account, while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was
secured by "Clean-Phase out TOD CA 3923" and eventually by a deed of assignment on two [PNs]
executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co.,
and by a chattel mortgage on various heavy and transportation equipment. The matter of PN
BD#76/C-430 has already been discussed. Thus, the critical issue is whether the "blanket mort-
gage" clause applies even to subsequent advancements for which other securities were intended,
or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged on this question. One school
advocates that a "dragnet clause" so worded as to be broad enough to cover all other debts in addi-
tion to the one specifically secured will be construed to cover a different debt, although such other
debt is secured by another mortgage. The contrary thinking maintains that a mortgage with such a
clause will not secure a note that expresses on its face that it is otherwise secured as to its entirety,
at least to anything other than a deficiency after exhausting the security specified therein, such defi-
ciency being an indebtedness within the meaning of the mortgage, in the absence of a special con-
tract excluding it from the arrangement.
The latter school represents the better position. The parties having conformed to the "blanket mort-
gage clause" or "dragnet clause," it is reasonable to conclude that they also agreed to an implied
understanding that subsequent loans need not be secured by other securities, as the subsequent
loans will be secured by the first mortgage. In other words, the sufficiency of the first security is a
corollary component of the "dragnet clause." But of course, there is no prohibition, as in the mort-
gage contract in issue, against contractually requiring other securities for the subsequent loans.
Thus, when the mortgagor takes another loan for which another security was given it could not be
inferred that such loan was made in reliance solely on the original security with the "dragnet
clause," but rather, on the new security given. This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California court in the cited case made an
inquiry whether the second loan was made in reliance on the original security containing a "dragnet
clause." Accordingly, finding a different security was taken for the second loan no intent that the
parties relied on the security of the first loan could be inferred, so it was held. The rationale in-
volved, the court said, was that the "dragnet clause" in the first security instrument constituted a
continuing offer by the borrower to secure further loans under the security of the first security instru-
ment, and that when the lender accepted a different security he did not accept the offer.
xxxx
Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a
contrary intention, a mortgage containing a "dragnet clause" will not be extended to cover future ad-
vances unless the document evidencing the subsequent advance refers to the mortgage as provid-
ing security therefor. 51 (Citations omitted and emphasis and underlining ours)
In the present case, PDCP's REMs indeed contain a blanket mortgage clause in the following lan-
guage:
That, for and in consideration of credit accommodations obtained from the [FEBTC], and to secure
the payment of the same and those that may hereafter be obtained, the principal of all of which is
hereby fixed at x x x PESOS x x x, Philippine Currency, as well as those that the [FEBTC] may ex-
tend to the [PDCP], including interest and expenses or any other obligation owing to the [FEBTC],
whether direct or indirect, principal or secondary, as appears in the accounts, books and records of
the [FEBTC] x x x. 52
Nonetheless, the parties do not dispute that what the REMs secured were only Sengkon's avail-
ments under the Credit Line and not all of Sengkon's availments under other sub-facilities which are
also secured by other collaterals.53 Since the liability of PDCP's properties was not unqualified, the
PNs, used as basis of the Petition for Extrajudicial
Foreclosure of Mortgage should sufficiently indicate that it is within the terms of PDCP's limited lia-
bility. In this case, the PNs failed to make any reference to PDCP's availments, if any, under its
Credit Line. In fact, it did not even mention Sengkon's securities under the Credit Line. Notably, the
Disclosure Statements, which were "certified correct" by FEBTC's authorized representative, Ma.
Luisa C. Ellescas, and which accompanied the PNs, failed to disclose whether the loan secured
thereby was actually secured or not.
Thus, even if the Court brushes aside the Best Evidence Rule, the foregoing observations clearly
support the trial court's observation that FEBTC's foreclosure did not actually cover the specific obli-
gations secured by PDCP's properties.
FEBTC's failure to send personal notice to the mortgagor is fatal to the validity of the fore-
closure proceedings
Indeed, FEBTC's failure to comply with its contractual obligation to send notice to PDCP of the fore-
closure sale is fatal to the validity of the foreclosure proceedings. In Metropolitan Bank v.
Wong,54 the Court ruled that while as a rule, personal notice to the mortgagor is not required, such
notice may be subject of a contractual stipulation, the breach of which is sufficient to nullify the fore-
closure sale, thus:
In resolving the first query, we resort to the fundamental principle that a contract is the law between
the parties and, that absent any showing that its provisions are wholly or in part contrary to law, mo-
rals, good customs, public order, or public policy, it shall be enforced to the letter by the courts. Sec-
tion 3, Act No. 3135 reads:
xxxx
The Act only requires (1) the posting of notices of sale in three public places, and (2) the publication
of the same in a newspaper of general circulation. Personal notice to the mortgagor is not necessa-
ry. Nevertheless, the parties to the mortgage contract are not precluded from exacting additional re-
quirements. In this case, petitioner and respondent in entering into a contract of [REM], agreed inter
alia:
"all correspondence relative to this mortgage, including demand letters, summonses, subpoenas, or
notifications of any judicial or extra-judicial action shall be sent to the MORTGAGOR at 40-42 Alde-
guer St. Iloilo City, or at the address that may hereafter be given in writing by the MORTGAGOR to
the MORTGAGEE."
Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action which peti-
tioner might take on the subject property, thus according him the opportunity to safeguard his rights.
When petitioner failed to send the notice of foreclosure sale to respondent, he committed a contrac-
tual breach sufficient to render the foreclosure sale on November 23, 1981 null and void. 55 (Citation
omitted and italics in the original)
In trivializing FEBTC's failure to send personal notice to PDCP however, the CA, citing Philippine
National Bank v. Nepomuceno Productions, Inc., 56 ruled that since the principal object of a notice of
sale is not so much to notify the mortgagor but to inform the public in general of the particularities of
the foreclosure, then personal notice to the mortgagor may be disregarded.57 The cited case, how-
ever, is inapplicable because that case did not in fact involve stipulations on personal notice to
mortgagor nor the sending of notice to a wrong address. The issue involved in that case is whether
the parties to the mortgage can validly waive the statutory requirements of posting and publication
and not whether the bank can ignore a contractual stipulation for personal notice. Neither
is PNB v. Spouses Rabat 58 likewise cited by the CA applicable because the trial court therein found
that the mortgage contract did not in fact require that personal service of notice of foreclosure sale
be given to the mortgagors. The CA's cavalier disregard of the mortgagor's contractual right to no-
tice of the foreclosure sale runs contrary to jurisprudence. In Wong, 59 the Court already had the oc-
casion to observe:
It is bad enough that the mortgagor has no choice but to yield his property in a foreclosure proceed-
ing. It is infinitely worse, if prior thereto, he was denied of his basic right to be informed of the im-
pending loss of his property. x x x. 60
While the CA acknowledged that there was indeed a contractual stipulation for notice to PDCP as
mortgagor, it considered the absence of a particular address in the space provided therefor in the
mortgage contract as merely evincing an expression of "general intent" between the parties and
that this cannot prevail against their "specific intent" that Act No. 3135 be the controlling law be-
tween them, citing Cortes v. Intermediate Appellate Court. 61
The Court cannot agree with the CA. To begin with, the value of the doctrine enunciated
in Cortes has long been considered questionable by this Court. Thus, in Global Holiday Ownership
Corporation v. Metropolitan Bank and Trust Company, 62 the Court held:
But what is stated in Cortes no longer applies in light of the Court's rulings in Wong and all the sub-
sequent cases, which have been consistent. Cortes has never been cited in subsequent rulings of
the Court, nor has the doctrine therein ever been reiterated. Its doctrinal value has been diminished
by the policy enunciated in Wong and the subsequent cases; that is, that in addition to Section 3 of
Act 3135, the parties may stipulate that personal notice of foreclosure proceedings may be re-
quired. Act 3135 remains the controlling law, but the parties may agree, in addition to posting and
publication, to include personal notice to the mortgagor, the non-observance of which renders the
foreclosure proceedings null and void, since the foreclosure proceedings become an illegal attempt
by the mortgagee to appropriate the property for itself.
Thus, we restate: the general rule is that personal notice to the mortgagor in extrajudicial foreclo-
sure proceedings is not necessary, and posting and publication will suffice. Sec. 3 of Act 3135 gov-
erning extra-judicial foreclosure of [REMs], as amended by Act 4118, requires only posting of the
notice of sale in three public places and the publication of that notice in a newspaper of general cir-
culation. The exception is when the parties stipulate that personal notice is additionally required to
be given the mortgagor. Failure to abide by the general rule, or its exception, renders the foreclo-
sure proceedings null and void. 63 (Citation omitted, italics ours, and emphasis and underlining in
the original deleted)
In fact, the 2002 case of Nepomuceno Productions,64 cited by the CA, already made it clear that
while personal notice to the mortgagor in extrajudicial foreclosure proceedings is not necessary, this
holds true only if the parties did not stipulate therefor. Stated differently, personal notice is necessa-
ry if the parties so agreed in their mortgage contract. In the present case, the parties provided in
their REMs that:
12. All correspondence relative to this mortgage, including demand letters, summonses, subpoe-
nas, or notifications of any judicial or extrajudicial action shall be sent to the [PDCP] at or at the ad-
dress that may hereafter be given in writing by the [PDCP] to the [FEBTC]. x x x. 65
This provision clearly establishes the agreement between the parties that personal notice is re-
quired before FEBTC may proceed with the foreclosure of the property and thus, FEBTC's act of
proceeding with the foreclosure despite the absence of personal notice to the mortgagor was its
own lookout.
That the portion on the mortgagor's address was left in blank cannot be simply swept under the rug
as "an expression of general intent" that cannot prevail of the parties' specific intent not to require
personal notice. Apart from the fact that this reasoning is based on a questionable doctrine, the
CA's ruling completely ignored the fact that the mortgage contract containing said stipulation was a
standard contract prepared by FEBTC itself. If the latter did not intend to require personal notice, on
top of the statutory requirements of posting and publication, then said provision should not have at
all been included in the mortgage contract. In other words, the REMs in this case are contracts of
adhesion, and in case of doubt, the doubt should be resolved against the party who prepared it. 66
Accordingly, the CA should have considered the "doubt" created by the blank space in the mort-
gage contract against FEBTC and not in its favor. Nonetheless, even if the Court ignores this partic-
ular rule of interpretation, the fact that FEBTC caused the sending of a notice, albeit at a wrong ad-
dress, to PDCP is itself a clear proof that the parties did intend to impose a contractual requirement
of personal notice, FEBTC's undisputed breach of which sufficiently nullifies the foreclosure pro-
ceeding.
With the foregoing, the Court finds it unnecessary to discuss PDCP's argument based on the al-
leged violation of its constitutional right against impairment of obligations and contract.
WHEREFORE, premises considered, the petition is GRANTED. The Decision dated November 25,
2009 and Resolution dated February 2, 2010 of the Court of Appeals in CA-G.R. CV No. 89755 are
hereby ANNULLED and SET ASIDE. The Decision dated April 16, 2007 of the Regional Trial Court
of Quezon City, Branch 222, in Civil Case No. QOl-44630 is REINSTATED and AFFIRMED.

SO ORDERED.
G.R. No. 173183 November 18, 2013
SYCAMORE VENTURES CORPORATION and SPOUSES SIMON D. PAZ AND LENG LENG
PAZ, Petitioners,
vs.
METROPOLITAN BANK AND TRUST COMPANY, Respondent.
DECISION
BRION, J.:
We are once more faced by a petition filed by debtors who could not pay their indebtedness and
who, at the point of foreclosure, sought judicial recourse to delay the inevitable. In this case, the is-
sue used as anchor is the valuation of the mortgage property s appraised value – an issue that
hardly carries any significant consequence in extrajudicial foreclosure proceedings. How the delay
in the foreclosure has affected the parties is a matter that is not in the record before us, but delay, if
it had been the objective sought, came as it has come in many other similar cases. To be sure, the
Judiciary has been affected by these cases as they have unnecessarily clogged the dockets of our
courts, to the detriment of more important cases equally crying for attention.
The petitioners, Sycamore Ventures Corporation (Sycamore) and the spouses Simon D. Paz and
Leng Leng Paz, challenge the decision1 dated May 3, 2006 and the resolution2 dated June 19, 2006
of the Court of Appeals (CA) in CA-G.R. SP No. 88463. The CA reversed and set aside the or-
ders3 dated August 5, 2004 and November 22, 2004 of the Regional Trial Court (RTC), Branch 43,
San Fernando, Pampanga, in Civil Case No. 12569.
The Factual Antecedents
Sixteen years ago (or sometime in 1997), Sycamore and the spouses Paz obtained from respond-
ent Metropolitan Bank and Trust Company (Metrobank) a credit line of ₱180,000,000.00, secured
by 10 real estate mortgages4 over Sycamore’s 11 parcels of land,5 together with their improve-
ments.6 Sycamore and the spouses Paz withdrew from the credit line the total amount of
₱65,694,914.26, evidenced by 13 promissory notes.7
Because the petitioners failed to pay their loan obligations and for violations of the terms and condi-
tions of their 13 promissory notes, Metrobank instituted extrajudicial foreclosure proceedings over
the six real estate mortgages, pursuant to Act No. 3135, as amended.8 The public auction sale was
set for various dates – March 22, 2000, April 23, 2000 and May 23, 2000 – but the sale did not take
place because Sycamore and the spouses Paz asked for postponements.
Metrobank subsequently restructured Sycamore and the spouses Paz’s loan, resulting in the issu-
ance of one promissory note denominated as PN No. 751622 736864.92508.000.99, in lieu of the
13 promissory notes9 previously issued, and the execution of a single real estate mortgage covering
the 12 parcels of land.10
Application for Extrajudicial
Foreclosure
Despite reminders, Sycamore and the spouses Paz still failed to settle their loan obligations, com-
pelling Metrobank to file a second petition for auction sale, which was set for October 25, 2002.
On October 16, 2002, Sycamore and the spouses Paz once again asked for the postponement of
the October 25, 2002 public auction sale; they asked that the sale be moved to November 26,
2002, but this time Metrobank refused to give in.11
Civil Case No. 12569 for Annulment of
Contract and Real Estate Mortgage with
Temporary Restraining Order and
Injunction
Decision G.R. No. 173183 3
Application for Extrajudicial Foreclosure
Despite reminders, Sycamore and the spouses Paz still failed to settle their loan obligations, com-
pelling Metrobank to file a second petition for auction sale, which was set for October 25, 2002. On
October 16, 2002, Sycamore and the spouses Paz once again asked for the postponement of the
October 25, 2002 public auction sale; they asked that the sale be moved to November 26, 2002,
but this time Metrobank refused to give in.11
Civil Case No. 12569 for Annulment of
Contract and Real Estate Mortgage with
Temporary Restraining Order and
Injunction
On November 25, 2002, Sycamore and the spouses Paz filed before the RTC, Branch 43, San Fer-
nando Pampanga, a complaint for the annulment of the contract and of the real estate mortgage.
They likewise asked for the issuance of a temporary restraining order (TRO).
The petitioners disputed Metrobank’s alleged unilateral and arbitrary reduction of the mortgaged
properties’ appraisal value from ₱1,200.00 to ₱300.00-₱400.00 per square meter. They likewise
sought the maintenance of the status quo, to enjoin Metrobank, and to prevent it from proceeding
with the extrajudicial foreclosure.
On the same day, the Executive Judge issued a 72-hour TRO, directing the sheriff to cease and de-
sist from proceeding with the scheduled public auction.12 After summary hearing, Judge Carmelita
S. Gutierrez-Fruelda, RTC, San Fernando Pampanga, ordered the extension of the TRO to its full
20-day term.13
On December 17, 2002, Judge Fruelda issued a writ of preliminary injunction which Metrobank un-
successfully resisted through a motion for reconsideration that was denied.14 Thus, Metrobank ran
to the CA on a petition for certiorari15 to question the RTC orders for grave abuse of discretion.
The CA dismissed Metrobank’s petition for lack of merit and upheld the RTC’s issued injunction.
Order for Appointment of
Independent Commissioners
Meanwhile, the proceedings in the main case continued. At the trial, Sycamore and the spouses
Paz moved for the appointment of independent commissioners to determine the mortgaged proper-
ties’ appraisal value.16 They mainly alleged that Metrobank arbitrarily and unilaterally reduced the
mortgaged properties’ appraisal value; hence, the need for their reappraisal to determine their true
value.
In an order dated August 5, 2004, the RTC granted the petitioners’ motion, and again Metrobank
was unsuccessful in securing a reconsideration.
Metrobank thus again went to the CA on a petition for certiorari under Rule 65, imputing grave
abuse of discretion on the RTC for issuing the questioned order. The bank alleged that the apprais-
al value of the mortgaged properties is not an issue in the proceedings because their value is al-
ready a matter of record.
On May 3, 2006, the CA this time granted Metrobank’s petition for certiorari and set aside the
RTC’s orders. It found that the appraisal value of the mortgaged properties was not an issue since
the real estate mortgage and the promissory note already indicated with certainty the amount of the
loan obligation.
It was Sycamore and the spouses Paz this time who filed their motion for reconsideration which the
CA denied. Significantly, the CA noted that the determination of the properties’ appraisal value has
nothing to do with the question of whether the foreclosure proceeding will proceed.
The CA’s denial gave rise to the present petition for review on certiorari.
The Petition
Sycamore and the spouses Paz contend that the CA erred in setting aside the RTC’s order granting
their motion for appointment of independent commissioners. They argue that it had the effect of pre-
venting the RTC’s determination of a critical question of fact – i.e., the determination of the mortgag-
ed properties’ true valuation – which, they insist, is an issue that needs to be resolved prior to the
determination of the foreclosure’s validity.
They claim that before resolving the said issue, the RTC has to decide the following prejudicial
questions, namely:
(1) Whether Metrobank validly reduced the mortgaged properties’ valuation; and
(2) Whether Metrobank can validly foreclose the mortgaged properties at a further reduced valua-
tion.17
Lastly, Sycamore and the spouses Paz invoke this Court’s intervention to prevent an unfair situation
where the mortgage foreclosure, based on Metrobank’s arbitrary and unilateral reduction of the
properties’ appraisal value, would deprive them of all their properties and, at the same time, leave a
deficiency of ₱500,000,000.00.
The Issue
The core issue for our determination is whether the determination of the mortgaged properties’ ap-
praisal value constitutes a prejudicial question that warrants the suspension of the foreclosure pro-
ceedings.
Simply put, is the appraisal value of the mortgaged properties material in the mortgage foreclo-
sure’s validity?
The Court’s Ruling
We deny the petition for lack of merit. The CA did not err when it set aside the RTC’s order granting
the motion for appointment of independent commissioners.
Remedies of a secured creditor
A secured creditor may institute against the mortgage debtor either a personal action for the collec-
tion of the debt, a real action to judicially foreclose the real estate mortgage, or an extrajudicial judi-
cial foreclosure of the mortgage. The remedies, however, are alternative, not cumulative, and the
election or use of one remedy operate as a waiver of the others.18
We discussed these legal points in Bachrach Motor Co., Inc. v. Icarangal19 and ruled that:
[I]n the absence of express statutory provisions, a mortgage creditor may institute against the mort-
gage debtor either a personal action for debt or a real action to foreclose the mortgage. In other
words, he may pursue either of the two remedies, but not both. By such election, his cause of ac-
tion can by no means be impaired, for each of the two remedies is complete in itself. Thus, an elec-
tion to bring a personal action will leave open to him all the properties of the debtor for attachment
and execution, even including the mortgaged property itself. And, if he waives such personal action
and pursues his remedy against the mortgaged property, an unsatisfied judgment thereon would
still give him the right to sue for a deficiency judgment, in which case, all the properties of the de-
fendant, other than the mortgaged property, are again open to him for the satisfaction of the defi-
ciency. In either case, his remedy is complete, his cause of action undiminished, and any advantag-
es attendant to the pursuit of one or the other remedy are purely accidental and are all under his
right of election.
In the present case, Metrobank elected the third remedy – the extrajudicial foreclosure of the real
estate mortgage.
Extrajudicial foreclosure under Act No. 3135
Extrajudicial foreclosure is governed by Act No. 3135, as amended by Act No. 4118.
It provides in its Section 1 that:
SECTION 1. When a sale is made under a special power inserted in or attached to any real-estate
mortgage hereafter made as security for the payment of money or the fulfillment of any other obliga-
tion, the provisions of the following election shall govern as to the manner in which the sale and re-
demption shall be effected, whether or not provision for the same is made in the power.
In brief, Act No. 3135 recognizes the right of a creditor to foreclose a mortgage upon the mortga-
gor’s failure to pay his/her obligation. In choosing this remedy, the creditor enforces his lien through
the sale on foreclosure of the mortgaged property. The proceeds of the sale will then be applied to
the satisfaction of the debt. In case of a deficiency, the mortgagee has the right to recover the defi-
ciency resulting from the difference between the amount obtained in the sale at public auction, and
the outstanding obligation at the time of the foreclosure proceedings.20
Certain requisites must be established before a creditor can proceed to an extrajudicial foreclosure,
namely: first, there must have been the failure to pay the loan obtained from the mortgagee-cred-
itor; second, the loan obligation must be secured by a real estate mortgage; and
third, the mortgagee-creditor has the right to foreclose the real estate mortgage either judicially or
extrajudicially.
Act No. 3135 outlines the notice and publication requirements and the procedure for the extrajudi-
cial foreclosure which constitute a condition sine qua non for its validity. Specifically, Sections 2, 3
and 4 of the law prescribe the formalities of the extrajudicial foreclosure proceeding, which we
quote:
SECTION 2. Said sale cannot be made legally outside of the province in which the property sold is
situated; and in case the place within said province in which the sale is to be made is subject to
stipulation, such sale shall be made in said place or in the municipal building of the municipality in
which the property or part thereof is situated.
SECTION 3. Notice shall be given by posting notices of the sale for not less than twenty days in at
least three public places of the municipality or city where the property is situated, and if such prop-
erty is worth more than four hundred pesos, such notice shall also be published once a week for at
least three consecutive weeks in a newspaper of general circulation in the municipality or city.
SECTION 4. The sale shall be made at public auction, between the hours or nine in the morning
and four in the afternoon; and shall be under the direction of the sheriff of the province, the justice
or auxiliary justice of the peace of the municipality in which such sale has to be made, or a notary
public of said municipality, who shall be entitled to collect a fee of five pesos each day of actual
work performed, in addition to his expenses.
Act No. 3135 does not require
determination of appraised value
All the above provisions are quoted verbatim to stress that Act No. 3135 has no requirement for the
determination of the mortgaged properties’ appraisal value. Nothing in the law likewise indicates
that the mortgagee-creditor’s appraisal value shall be the basis for the bid price. Neither is there
any rule nor any guideline prescribing the minimum amount of bid, nor that the bid should be at
least equal to the properties’ current appraised value. What the law only provides are the require-
ments, procedure, venue and the mortgagor’s right to redeem the property. When the law does not
provide for the determination of the property’s valuation, neither should the courts so require, for
our duty limits us to the interpretation of the law, not to its augmentation.
Under the circumstances, we fail to see the necessity of determining the mortgaged properties’ cur-
rent appraised value. We likewise do not discern the existence of any prejudicial question, anch-
1âwphi1

ored on the mortgaged properties’ appraised value, that would warrant the suspension of the fore-
closure proceedings.
For greater certainty, a prejudicial question is a prior issue whose resolution rests with another tribu-
nal, but at the same time is necessary in the resolution of another issue in the same case.21 For ex-
ample, there is a prejudicial question where there is a civil action involving an issue similar or inti-
mately related to the issue raised in a criminal action, and the resolution of the issue in the civil ac-
tion is determinative of the outcome of the criminal action.
As so defined, we do not see how the motion for the appointment of independent commissioners
can serve as a prejudicial question. It is not a main action but a mere incident of the main proceed-
ings; it does not involve an issue that is intimately related to the foreclosure proceedings; and lastly,
the motion’s resolution is not determinative of the foreclosure’s outcome.
On this point alone, the petition should be denied. But even if Metrobank’s reduced appraised value
were lesser than the mortgaged properties’ current valuation, the petition would still fail. There is no
question in this case that Sycamore and the spouses Paz failed to settle their loan obligations to
Metrobank as they fell due. (In fact, there were multiple or repeated failures to pay.) There is like-
wise no dispute on the total amount of their outstanding loan obligation. Sycamore and the spouses
Paz also acknowledged Metrobank’s right to foreclose when they asked for the sale’s postpone-
ment, to quote:The undersigned mortgagor(s) hereby acknowledged(s) that the publication and
posting of the Notice of Auction Sale have been completely and regularly complied with the re-
quest(s) that republication and reposting of the same be dispensed with at the discretion of the
mortgagee bank and agreed that all expenses incurred by the said mortgagee bank in connection
herewith shall be chargeable to his/her/their account(s) and secured by the said mortgage(s).
The undersigned mortgagor(s) likewise stipulate(s) that, in consideration of the mortgagee’s having
acceded and agreed to this postponement, he/she/they hereby waive(s), forego(es), quitclaim(s)
and set(s) over unto the said mortgagee any and all his/her/their cause or causes of action, claims
or demands arising out of or necessarily connected with the Promissory Note(s),
Real Estate Mortgage Contract(s) and other credit documents mentioned in the above entitled Peti-
tion for Foreclosure of Real Estate Mortgage.22 [emphases supplied]
What Sycamore and the spouses Paz only assail in the present petition is the validity of Metro-
bank’s appraisal of the mortgaged properties. Even that issue, if the quoted terms above were to be
considered, appears to have been waived "in consideration of the mortgagee’s having acceded and
agreed to this postponement."23
Under these facts, how and why to petitioners would still insist on the appraisal valuation as an is-
sue boggles the mind and this is a puzzle that only they have a key to. But whatever may that key
or answer be, it is not one that is material to the case below or to the present petition.
Determination of mortgaged
properties’ appraisal value is not
material to the foreclosure’s validity
We have held in a long line of cases that mere inadequacy of price per se will not invalidate a judi-
cial sale of real property. It is only when the inadequacy of the price is grossly shocking to the con-
science or revolting to the mind, such that a reasonable man would neither directly nor indirectly be
likely to consent to it, that the sale shall be declared null and void. This rule, however, does not
strictly apply in the case of extrajudicial foreclosure sales where the right of redemption is available.
In Bank of the Philippine Islands v. Reyes,24 involving a similar question arising from the correct-
ness of the mortgaged properties’ valuation, we held that the inadequacy of the price at which the
mortgaged property was sold does not invalidate the foreclosure sale.
In that case, the winning bid price was ₱9,032,960.00 or merely 19% of the alleged current apprais-
al value of the property pegged at ₱47,536,000.00. Despite the relatively sizeable discrepancy, the
Court ruled that the level of the bid price is immaterial in a forced sale because a low price is more
beneficial to the mortgage debtor.
We quote from the relevant portion of this decision:
In the case at bar, the winning bid price of ₱9,032,960.00 is nineteen percent (19%) of the ap-
praised value of the property subject of the extrajudicial foreclosure sale that is pegged at
₱47,536,000.00 which amount, notably, is only an arbitrary valuation made by the appraising offi-
cers of petitioner’s predecessor-in-interest ostensibly for loan purposes only. Unsettled questions
arise over the correctness of this valuation in light of conflicting evidence on record. xxxx
xxx. In the case at bar, other than the mere inadequacy of the bid price at the foreclosure sale, re-
spondent did not allege any irregularity in the foreclosure proceedings nor did she prove that a bet-
ter price could be had for her property under the circumstances.
Thus, even if we assume that the valuation of the property at issue is correct, we still hold that the
inadequacy of the price at which it was sold at public auction does not invalidate the foreclosure
sale."25 (emphasis ours)
In Hulst v. PR Builders, Inc.,26 we explained that when there is a right of redemption, the inad-
equacy of the price becomes immaterial because the judgment debtor may still re-acquire the prop-
erty or even sell his right to redeem and thus recover the loss he might have suffered by reason of
the "inadequate price" obtained at the execution sale. In this case, the judgment debtor even stands
to gain rather than be harmed. 1âwphi1

These rulings were also applied in Rabat v. Philippine National Bank,27 where the Court used the
same reasoning and arrived at the same conclusion:
It bears also to stress that the mode of forced sale utilized by petitioner was an extrajudicial foreclo-
sure of real estate mortgage which is governed by Act No. 3135, as amended.
An examination of the said law reveals nothing to the effect that there should be a minimum bid
price or that the winning bid should be equal to the appraised value of the foreclosed property or to
the amount owed by the mortgage debtor. What is clearly provided, however, is that a mortgage
debtor is given the opportunity to redeem the foreclosed property "within the term of one year from
and after the date of sale." In the case at bar, other than the mere inadequacy of the bid price at the
foreclosure sale, respondent did not allege any irregularity in the foreclosure proceedings nor did
she prove that a better price could be had for her property under the circumstances.
At any rate, we consider it notable enough that PNB’s bid price of ₱3,874,800.00 might not even be
said to be outrageously low as to be shocking to the conscience. As the CA cogently noted in the
second amended decision,20 that bid price was almost equal to both the ₱4,000,000.00 applied for
by the Spouses Rabat as loan, and to the total sum of ₱3,517,380.00 of their actual availment from
PNB. [emphasis ours]
We find no reason to depart from these sound and established rulings. We also need not rule on
the validity of Metrobank’s valuation. Whether Metrobank’s reduced valuation is valid or not, or
whether the valuation is outrageously lower than its current value, has nothing to do with the fore-
closure proceedings. From this perspective, we cannot but conclude that that the recourses sought
in this case have been intended solely to delay the inevitable – the foreclosure sale and the closure
of the collection action -and are an abuse of the processes of this Court. Under these circumstan-
ces the maximum allowable triple costs should be imposed on the petitioners for this abuse in ac-
cordance with Section 3 Rule 142 of the Rules of Court to be paid by counsel for the petitioners. Let
counsel also be warned that what happened in this case is a practice that in a proper administrative
proceeding may be found violative of their duties to the Court. WHEREFORE, the petition is DE-
NIED for lack of merit; the appealed decision of the Court of Appeals dated May 3, 2006 is AF-
FIRMED. Let a copy of this Decision be furnished the Board of Governors Integrated Bar of the Phil-
ippines for its information. Triple costs against the petitioners Sycamore Ventures Corporation and
the spouses Simon D. Paz and Leng Leng Paz to be paid by their counsel of record.
SO ORDERED.