METROBANK VS CHUY LU TAN

G.R. No. 202176

01 August 2016
J. Peralta
Doctrine: Creditors may claim a deficiency in case the foreclosure of the
mortgage is insufficient to cover the amount. The bid price does not need to be
governed by the appraisal value; there is no provision of the law that requires
this.

Penal clauses and attorney’s fees may be reduced where the Court finds these
rates to be iniquitous and unconscionable given the circumstances.

Facts:
Chuy and Tanco obtained five loans from Metrobank in the aggregate amount of
Php19,900,000.00, which was evidenced by promissory notes. The loans were all
secured by a Real Estate Mortgage over a parcel of land in Quezon City, as well as by a
Continuing Surety Agreement executed by Sy and Tan.
Chuy and Tanco ultimately failed to settle their loans in spite of repeated
demands for payment, leading Metrobank to extrajudicially foreclose the mortgage.
Metrobank was the highest bidder in the auction sale.
However, Metrobank claimed that after the application of the bid price to the
outstanding obligation and other costs, there remained a deficiency of Php1,641,842.00
as of 15 January 2000. Since Chuy and Tanco did not pay the deficiency, Metrobank
filed a suit for collection of a sum of money with the RTC of Makati.
The RTC ruled in favour of Metrobank. The CA reversed.

Issue: Whether or not Metrobank may still claim for a deficiency amount in spite
of the foreclosure of the mortgage.

Held: Yes

Ratio:
A creditor is not precluded from recovering any unpaid balance on the principal
obligation if the extrajudicial foreclosure sale of the property subject of the real estate
mortgage results in a deficiency. The fact that mortgaged property was sold at an
amount less than its market value should not militate against the right to such recovery.
A mortgage is a security, and as such, should not be considered as payment of an
outstanding obligation. Therefore, a creditor is not barred from recovering the deficiency
even if it bought the mortgaged property at the extrajudicial foreclosure sale at a lower
price than its market value.

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Issue: Whether or not the inadequacy of the price of the mortgaged property is
basis to nullify the deficiency

Held: No.

Ratio:

There is no requirement under the law that requires that the appraisal value of
the property shall be the basis of the bid price, nor is there any rule or guideline
prescribing that the minimum amount of the bid should at least equal the value.

The Court has previously ruled that inadequacy of the price at a forced sale is
immaterial and does not nullify a sale since a low price is more beneficial to the
mortgage debtor for it makes redemption of the property easier.

Issue: Whether or not the liability should be tempered on the ground of equity

Held: No.

Ratio:
Contrary to the ruling of the CA, the SC rules that the Court should not temper
the liability on the ground of equity. Equity should only be applied in the absence of, and
never against, statutory law or judicial rules of procedure.

NCC 1159 expressly provides that the obligations arising from contracts have the
force of law between the contracting parties and should be complied with in good faith –
in this case, it is clear that the Promissory Notes, Real Estate Mortgage and the
Continuing Surety Agreement executed by the respondents all attest that they bound
themselves to pay the amounts being claimed by the petitioner.

Furthermore, there is no convincing evidence to show that Metrobank is not

entitled to the amounts being claimed. The CA failed to point out any evidence that
would clearly show unjust enrichment, which would arise only if a person retains a
benefit to the loss of another, or when a person retains money or property of another
against the fundamental principles of justice, equity and good governance. The SC
notes that there is strong legal basis for Metrobank’s claim against the respondents for
the balance of their loan obligation.

Issue: Whether or not the penalty provisions are fair

Held: Yes and No

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Ratio:
The Court finds that the interest rates pegged at 16% per annum on the
Promissory Notes are fair since jurisprudence has shown 24% to not be
unconscionable.

There is also a penalty clause which is separate and distinct from interest
payment. The Court notes that these clauses may co-exist with the interest provisions
and has basis in NCC 2226. However, NCC 2227 provides that liquidated damages can
be equitably reduced if they are iniquitous or unconscionable.

Here, the rate of 18% is too high and should be reduced to 12%.

Attorney’s fees may be recovered under a written agreement. However, these

may also be reduced if found to be iniquitous. At 10% of the total amount due, the rate
is too high since the petitioner has already recovered the principal amount, has already
recovered a sizeable portion of the interest and penalty charges, the attorney’s fees
aren’t an integral part of the cost of borrowing but a mere incident of collection, and the
attorney’s fees are intended as a penal clause which is similar to the imposition of the
penalty charge. Instead, 10% of the deficiency claim is more reasonable.