Review
Assignment by way of security
In cases, you'll notice that this was characterized as a "pledge" under chattel mortgage because justices' mindset is tied to what is found in civil code
-but there is NCC provision on freedom to contract, and obscure provision (A1454) which states that an absolute conveyance of property is made to secure an obligation there is an implied trust. If the obligation is fulfilled by the grantor, he may demand conveyance of property. - Article 1454 remains obscure
From Jurisprudence, SC would either characterize "Assignment by way of security" as a pledge or a chattel mortgage, because SC justices probably has their minds set within the 4 corners of the Civil Code: mortgage or a pledge or a trust receipts (under Trust Receipts law)
-when the documentation is replete with words such as "by way of security", "guaranty"… SC would recharacterize the assignment as a pledge or a mortgage
In Sycip, Salazar: "Deed of Assignment without recourse by way of Security"
-elements:
- Avoids security language such as "by way of security" to secure…
---in order to secure the prompt payment of the obligation, assign absolutely the receivables defined below
(so absolute assignment which transfers from day one both legal and beneficial title from the assignor to the assignee)
- Provision that would clarify that no dacion en pago intended from day 1
"notwithstanding the assignment, it is not the intention of the parties to extinguish the obligation. Principal obligation extinguished by the time the proceeds are actually applied to payment"
(avoid argument that there is dacion en pago, therefore extinguishment of the obligation)
- Reconveyance of the receivable
"once the obligation is satisfied, there's an automatic reconveyance from the assignee to the assignor (in accordance with A1454 of NCC)
- "Nothing in this assignment shall be construed as creating a pledge or a chattel mortgage" (so as to clarify the intention of the parties)
Pages 97 and 98 of the book
If assignment is construed as a pledge, foreclosure would extinguish the obligation
If Chattel Mortgage, there is registration requirements. Unless satisfied, the mortgage is not valid as against third persons. There would be no affidavit of good faith in deed of assignments
This kind of document is similar to a deed of assignment…We're goint to take that up in derivative transactions
Vintola vs. IBAA
F: Puca shells case: Vintola spouses who bought Puca shells executed a trust receipt agreement with IBAA. When spouses were unable to sell the sea shell products, they offered to surrender the goods to IBAA instead. IBAA refused to accept the products.
-IBAA filed a crim case for estafa againste Vintola. Dismissed when Vintola SPs consigned the Puca shells to the court.
-IBAA filed another case, this time a civil case for recovery of the amount under the Trust Receipt Agreement. Vintola spouses argued that IBAA is alredy barred: No reservation + res judicata
H: For IBAA
Letter of credit/trust receipt agreement: 2 features
Loan feature + security feature
Trust receipt is a security agreement where the bank acquires a right over the proceeds, not over the property.
_IBAA, by the surrender of the sea shells, can still recover based on BOC of the loan contract, not the trust receipt agreement.
SC made some troubling pronouncements. If you look at your SCRA version, on page 730, 1st two paragraph, last sentence: distinction between loan feature and security feature: It conveys that the trust receipt IS NOT AN ACCESSORY TO THE LOAN TRANSACTION WHEN IN FACT IT IS! It conveys the perception that it is separate and distinct but in reality it is connected with one another. A trust receipt is in the same position as a pledge and mortgage, thus, a security, which cannot exist if there is no principal obligation
*the surrender of the goods extinguishes the Criminal action, but NOT THE CIVIL ACTION!
People vs. Nitafan
-Trust receipt agreement over plastic products. Nitafan assailed the Trust Receipts Law under 2 arguments:
H: No violation of consti right against compelling to pay for nonpayment of debts:
It already serves as protection of public interest.
No need for malice. It is mala prohibitum thus not an element of the crime.
-punishment is a valid exercise of police power.
Dissenting opinion of CJ which proposes criminalization of trust receipt transaction. Took out penalty for trust receipt violations… (clarify mamaya)
Read seriously the different provisions and decisions, SC confused concepts of trust receipts transactions
e.g. in Vintola, court mentioned that Vintola sps hold the property at their own risk - but the bank own it, not the entrustee!
Trust in Civil code: trustor has the legal title, there's a trustee, and a beneficiary. But in a trust receipt arrangement: entrustor has legal title, no passing of title to the entrustee, entrustee would just either sell the goods and deliver the proceeds of the sale to the entruster or just return it if failed to sell it. The buyer from the entrustee is free from the security interest of the entrustee over the good. The terminology in the trust receipts law is different from the concepts of Trust in the Civil Code so the SC might have just been confused...
(j) Set-off/Netting
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195)
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196)
*Banker's Lien: right to set off the deposit of its own borrower. Recognized in case of Dullas vs. PNB (P73 of book)
-it is security in a sense that the bank has protection against the depositor's obligation with it if the depositor has an account with it. As a result, there is netting of the two accounts
-legal compensation elements: See A1279.
This refers to the concept of compensation in the Civil Code. This is a mode of extinguishment of obligations usually used in a hold-out. To be able to use this in a conventional manner, all requisites of legal compensation must exist.
The ISDA Master Agreement is a good example where set-off or netting is used. This has been upheld in our jurisdiction.
(k) Comfort Letter (a.k.a. Letter of awareness, keepwell agreement)
-not really a security interest but Sir placed it under Section 41 because there would be an "unsecured loans"
Comfort letters are usually sent by a parent company for a subsidiary to the would-be lender bank that it will maintain fiscal integrity and/or controlling interest in the subsidiary.
The loan secured by a comfort letter is an unsecured, clean loan. This is not a guarantee but rather more of a moral obligation imposed by parent company unto itself to ensure that subsidiary will not default.
Why issue a comfort letter (and not a straight forward guarantee)?
1. parent company may be prohibited to issue guarantees under contract (Articles of incorporation)
-there would be an issue of WON extension of guarantee is ultra vires or intra vires
-WON the approval of the guarantee needs formalities (refer to Corpo Code)
2. comfort letters do not affect credit standing of parent company since it is not required to be footnoted in statement of assets and liabilities
3. company policy may prohibit the issuance of guarantees
These letters may not be enforced in Philippine courts. But in case subsidiary defaults and parent does not help out, reputation of letter-issuer is affected. Thus, parent company usually make good their moral duties.
-but it really depends on how the letter writer writes the letter. If strongly worded, it may give rise to a COA.
SECTION 41. Unsecured Loans or Other Credit Accommodations. —
The Monetary Board
is hereby authorized
to issue such regulations as it may deem necessary
with respect to unsecured loans or
other credit accommodations that may be granted by banks.
*maybe you would find some comfort if the issuer of the comfort letter is the parent company of a big international financial group
Certain Issues
Typical issue:
Scope of the Mortgage: Obligations and property covered
In Chattel Mortgage Law, AAP and AIC not included because of Section 5 and 7 of Chattel Mortgage Law:
Affidavit of Good Faith is interpreted to cover only Present obligations and only the properties listed therein.
What if the CM provides a contractual stipulation that the CM covers "future obligations"?
Court said that it is an enforceable obligation for the execution of either a new document or amend the existing document
Section 7: covers only PROPERTIES described in the deed.
-so any provision cannot do the trick. No way out but to execute a new contract or amend the existing document. Pag hindi nakalista, wala na!
Floating charge? (vs. Fixed charge)
-in Philippines, fixed charged only. Specific properties are subject to a lien.
- Validity of "AFTER ACQUIRED PROPERTY" AND "AFTER INCURRED OBLIGATION" CLAUSES in a CHATTEL mortgage
Art. 2091. The contract of
pledge
or mortgage
may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition.
-this appears to suggest that even future obligations may be covered by the CM. However, you must be careful in understanding the Civil Code provisions on Mortgage under Chapter 16. When it speaks of a mortgage, it doesn't cover both REM and CM, only REM. Chattel Mortgage is governed by another chapter! A2091 is under Chapter 16 so only concerns REM, not CM! Plus Section 5 & 7 of CM
A stipulation in mortgage documents which seeks to cover properties (obligations) acquired (incurred) by mortgagor after execution of mortgage agreement.
AFTER-ACQUIRED PROPERTY (AAP)
-properties acquired/bought by the debtor after the conclusion of a chattel mortgage agreement
Is AAP valid in REM/ Chattel Mortgage?
REM: Yes, in view of Article 2085, CC.
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. (1857)
CM: No, in view of Section 7 of Chattel Mortgage Law. However, there are exceptions to this.
-Chattel Mortgage Law provides that ONLY SUCH PERSONAL PROPERTY AS STATED IN THE MORTGAGE DOCUMENT SHALL BE COVERED BY THE SAME MORTGAGE.
X:
- Torres vs. Limjap: revolving stock or goods which are for retail sale
- (accdg to Prof. Catindig): perishable goods, subjet to wear-and-tear
- When the Mortgage Agreement provides that after-acquired properties may be included as securities to the obligation, and a new contract or amendment of the contract is executed (as required in ACME Shoe, Rubber & Plastic Corp vs. CA)
*it is still necessary to include a supplement of REM to cover after acquired properties and register it with the Registrar of deeds so that at foreclosure time, there would be no issue as to the scope of the REM.
AFTER INCURRED OBLIGATION (AIO)
Is AIO valid in REM/ chattel mortgage?
REM: Article 2091, CC ("all kinds of obligations") suggests that even future properties are subject to mortgages.
Note: Belgian Missionary Case (see the case na lang)
CM: No, in view of Section 5, Chattel Mortgage Law re affidavit of good faith.
-Section 5, CML requires that the mortgage be made for the purpose of securing the obligation SPECIFIED IN THE CONDITIONS THEREOF, AND FOR NO OTHER PURPOSE. As held in Acme Shoe, Rubber & Plastic Corp, the said provision contemplates the obligation existing at the time the mortgage was executed AND NOT SUBSEQUENT ONES. If the mortgage contract provides for AIO, there should still be either a new contract or an amended contract containing the new obligation.
*Note: The Affidavit of Good Faith which specifies the properties subject to the agreement and the obligations incurred therefor. If not listed, not included in the Chattel Mortgage
Torres v. Limjap (1931)
F: Henson allegedly obtained Loans from Torres which were secured by two chattel mortgages on the drug store. Henson failed to pay the loan so the Plaintiffs wanted to take possession of the chattels and foreclose their mortgages thereon (the drugstores dito).
-Henson's heirs (patay na si Henson) alleged the following defenses:
(1) chattel mortgages VOID for lack of sufficient particularity in the description of the property mortgage
(2) chattels sought to be recovered by the plaintiffs were not the same property described in the mortgage
*NOTE: THERE WAS A STIPULATION IN THE MORTGAGE AUTHORIZING HENSON TO SELL THE GOODS COVERED BY THE MORTGAGE AND REPLACE THEM WITH THE OTHER GOODS THEREAFTER ACQUIRED
TC:
(1) Hensons defaulted in payment
(2) mortgages became due
(3) plaintiffs, as mortgagees, were entitled to the possession of the DRUG STORES
*question: If it was the drugstores, bakit revolving stock ang focus?
HELD: Affirm. Allowed AAP to be included in the mortgage; the provision of the last paragraph of section 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the nature of a revolving and floating business
INTENT OF CML: to promote business and trade in these Islands and to give impetus to the economic development of the country
...it could not have been the intention of the Philippine Commission to apply the provision of section 7 above quoted to stores open to the public for retail business, where the goods are constantly sold and substituted with new stock, such as drug stores, grocery stores, dry-goods stores, etc. If said provision were intended to apply to this class of business, it would be practically impossible to constitute a mortgage on such stores without closing them, contrary to the very spirit about a handicap to trade and business, would restrain the circulation of capital, and would defeat the purpose for which the law was enacted, to wit, the promotion of business and the economic development of the country.
STIPULATION VALID AND BINDING: where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods, etc. Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of stipulations relating to after-acquired and substituted chattels.
-DAPAT BY EXPRESS STIPULATION: the mortgage must expressly provide that such future acquisitions shall be held as included in the mortgage
This case presents exception to validity of AAP. It is practicable and sound. Joke about mortgage stamped on your sardines. "There goes your breakfast"
PEOPLE'S BANK AND TRUST CO. VS DAHICAN
F: AG&P sold and assigned all its rights to Dahican Lumber Concession to DALCO for $500k (but only $50k was paid).
-1ST MORTGAGE: DALCO thereafter obtained loans from PBTC amounting to P200k. In addition, DALCO obtained from Export-Import Bank a loan of $250k evidenced by 5 PNs of $50k each. As security, DALCO executed in favor of PBTC (also as trustee for Export-Import Bank) a deed of mortgage covering 5 parcels of land in Camarines Norte + all the buildings, improvements and other personal property in DALCO's place of business.
*DALCO and DAMCO pledged to bank 7,296 shares of stock of DALCO and 9,286 of DAMCO to secure same obligations.
-2ND MORTGAGE: DALCO also executed on the same date ANOTHER DEED OF MORTGAGE ON THE SAME PROPERTIES in favor of AG&P
*both deeds of mortgage contained a provision EXTENDING THE MORTGAGE LIEN TO PROPERTIES TO BE SUBSEQUENTLY ACQUIRED (AFTER ACQUIRED PROPERTIES) BY DALCO.
*both mortgages were registered in the Office of the Register of Deeds of Camarines Norte
-DEFAULT: DALCO & DAMCO failed to pay the 5th PN - but was given by PBTC up extension to pay the overdue PN
-before the deadline given by PBTC, DALCO purchased various machines, equipment, and spare parts and supplies in addition to or in replacement of some of those already owned and used by it. PURSUANT TO THE AFTER ACQUIRED PROPERTIES PROVISION IN THE MORTGAGE, PBTC requested DALCO to submit the complete list of properties acquired.
-DALCO failed to provide PBTC the list requested. It subsequently decided (through Board of directors) to rescind the alleged sales of property recently acquired and corresponding agreements of rescission of sale were executed.
-PBTC (in its own behalf and that of AG&P) DEMANDED THE CANCELLATION OF THE RESCISSION AGREEMENTS. DAMCO refused.
-PBTC & AG&P commenced foreclosure proceedings in CFI over the machineries, equipment and supplies of DALCO. The proceeds of the sale were agreed to be divided between "UNDEBATED PROPERTIES" AND "AFTER ACQUIRED PROPERTIES" and were deposited with the TC pending litigation. TC ruled in favor of PBTC & AG&P.
- WON AFTER ACQUIRED PROPERTIES ARE INCLUDED IN THE DEED OF MORTGAGE?
YES
-it is clear from the provision in both deeds of mortgage that the Lumber concession "shall immediately be and become subject to the lien" of both mortgages as if already included therein at the time of execution.
- It is common and logical in cases where
- the properties given as collateral are perishable
- or subject to inevitable wear and tear
- or were intended to be sold
- or were intended to be used thus becoming inevitable to wear and tear
-purpose: to maintain, to the extent allowed by circumstances, the original value of the properties given as security.
- WON the mortgage of the after acquired properties is void because they were not registered in accordance with the Chattel Mortgage Law
CML DOES NOT APPLY TO THIS CASE. THIS CONCERNS REAL ESTATE MORTGAGE!
-The Mortgages were executed when the OLD CIVIL CODE was still in force. Still, BOTH old and new civil codes recognize that machinery, receptacles, instruments or replacements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and shall tend directly to meet the needs of the said industry or works. SO, the properties in dispute should be deemed as real estate and the mortgages executed are REMs not CMs!
*So does not need to be registered a second time as chattel mortgages in order to bind the "after acquired properties" and affect third parties.
*DAVAO SAW MILL CASE not applicable because in this case both parties recognized the after acquired properties as REAL PROPERTIES and not as chattel.
(ruling on other issues deleted)
This is a mortgage-trust indenture since the bank is a trustee for the foreign bank. You could actually cite this case …
On the discussion of perishable collateral…then goes on to say that it is not immoral, etc. poor judgment on the creditor not to include such provision in the agreement. BUT THERE's SECTION 7 WHICH PROHIBITS PRECISELY INCLUSION OF AFTER-ACQUIRED PROPERTY CLAUSE!!! How can it be poor judgment????
Plus sweeping pronouncement on exclusion of collaterals subject to wear and tear. BUT ALL PROPERTIES ARE SUBJECT TO WEAR AND TEAR!!! No need even to discuss the said exception since this involves property which was considered REAL ESTATE MORTGAGE, NOT CHATTEL MORTGAGE!!!
BELGIAN CATHOLIC MISSIONARIES VS. MAGALLANES PRESS
F: Magallanes Press obtained two loans:
1st loan: from JP Heilbronn for P14k. CHATTEL MORTGAGE on all its printing machinery and accessories was executed in favor of HEILBRONN
2nd Loan: from Belgian Catholic Missionaries for P30k. CHATTEL MORTGAGE on the same properties executed in favor of Belgian Catholic Missionaries
-Heilbronn transferred all its mortgage credit to Memije
Extension of 1st loan: Memije, as successor in interest of Heilbronn, extended an additional P5k loan, and the chattel mortgage executed before was made to cover the new P5k loan
-fire occurred. Properties covered by the CM were burned. Since it was covered by an insurance policy, Memije could have recovered the amount due from the insurance policy but Belgian Catholic Missionaries filed a petition for writ of injunction to stop the award of the proceeds of the insurance to Memije with the action to cancel the document of transfer of mortgage
WON Mortgage extension made by Memije (so that the CM would cover after incurred obligation) is void?
YES
-increase made by Memije in the mortgage credit and the extension made by Magallanes press of the mortgage to the additional credit, w/o the knowledge or consent of Belgian Catholic as 2nd mortgagee, prejudices the credit of the 2nd mortgagee inasmuch as the security for the payment of said credit was reduced = fraud that vitiates the contract of extension of the mortgage, VOID
"The increase of P5,895.59 made by the defendant Jose Ma. Memije of the mortgage thereto, are not only subordinate to the mortgage credit of the plaintiff company, being subsequent in time and in registration, but said increase in the security is also void."
*NOTE: court recognized that the mortgage in favor of JP Heilbronn was preferenced vs. the mortgage in favor of Belgian Catholic. But as to the extension granted by Memije, Belgian Catholic would be preferred, as the said extension is void (plus prefer Belgian because the after incurred obligation was executed after the mortgage in favor of Belgian Catholic, and thus, subordinate to it.
The increase of the mortgage security becomes a new mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the mortgage credit, and even if it did, said increase would take effect only from the date of the increase. A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage.
In accordance with the provisions of section 5 of Act No. 1508, known as the Chattle Mortgage Law, the parties to the original deeds swore that the same was mortgaged "to secure the obligations specified therein and for no other purpose." Neither the increase in question, nor the extension of the mortgage to secure the payment of the same is specified in the deed, consequently said extension is void. "Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contacted."
On SC statement on p655 of SCRA: "The increase of the mortgage security becomes a new mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the mortgage credit, and even if it did, said increase would take effect only from the date of the increase". BUT THE INCREASE IN THE FINANCIAL CREDIT ACCOMODATION WOULD NOT BE COVERED BY THE CM IF NO ADDITIONAL DOCUMENTATION! This statement by the SC gives rise to the mistaken notion that we could do away with the documentation requirements!
Remember this because this case is cited in the next case!
ACME SHOE, RUBBER & PLASTIC CORP VS. CA
F: ACME SHOE obtained a loan for P3M from Producer's Bank. ACME also executed a CM which provides that the mortgage shall also stand as security for any subsequent loans extended by the bank (Producer's Bank) to ACME SHOE.
-initial P3M Loan was paid by ACME SHOE (therefore at this point, the CM was extinguished).
-subsequently, ACME Shoe obtained another loan from Producer's Bank for P1M (note: NO new CM was executed)
-ACME shoe defaulted on their P1M obligation so Producer's Bank sought the EXTRAJUDICIAL FORECLOSURE OF THE CHATTEL MORTGAGE
WON a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred is valid
NO. Rule in favor of ACME
-VOID. Should
- execute a new CM over the new debt OR
- Amend the old contract conformably with the form prescribed in the CML
*Refusal to execute a new agreement by the borrower = default
*the remedy of foreclosure can only cover debts extent at the time of constitution and during the life of the CM sought to be foreclosed.
*SEC5, CML: Affidavit of GF: the parties must execute an oath that the mortgage is made for the purpose of SECURING THE OBLIGATION SPECIFIED IN THE CONDITIONS THEREOF, AND FOR NO OTHER PURPOSE…
…the debt referred to in the law is a current, not an obligation that is yet merely contemplated.
DECISION IN ACME SHOE COULD HAVE BEEN ALRIGHT WITHOUT CITING THE BELGIAN CATHOLIC CASE. BY JUST CITING SECTION 5, IT’S CLEAR. Belgian contradicts the early position. Section 5 still requires documentation but the Belgian case doesn't!!!
NOTE: SIR INTENDS TO CHANGE HIS QUESTIONS! HIS STUDENTS TEND TO CITE ACME SHOE AND BELGIAN IN REM!!!!!! ACME and BELGIAN concerns CM!!!!!
ONG LIONG TIAK VS. LUNETA MOTOR CO.
F: Chao Siong purchased a Chrysler Sedan from Luneta Motors co for P1.8k, secured by 18 PNs for P100 each and a CM in favor of Luneta. CM included a clause as follows:
. . it being expressly agreed further that this mortgage shall also serve as security for the payment to the said mortgagee in addition to the aforesaid notes of the purchase price or cost of any and all gasoline, tires, automobile accessories or parts, and repairs furnished or made by the said mortgagee at any time up to the date this mortgage is completely satisfied as and when the same becomes due, and of any other indebtedness of the mortgagor in favor of the mortgagee incurred in any other manner whatever.
-Choa Siong acted as surety for P300 for a certain Angeles for paints and accessories the latter obtained from Macondray. Macondray assigned its credit to Luneta, as Choa Siong still had P140 balance. Chao Siong paid P40 so there was P100 left unpaid.
-Choa Siong was able to pay all the PNs though. But since there is still P100 left unpaid arising from the surety made by Choa Siong, the credit of which was assigned to Luneta, Luneta refused to extinguish the CM.
-Chao Siong sold the auto to Ong Liong Tiak.
-For the nonpayment of the P100, Luneta sought the forclosure of the CM. Sheriff attached the auto (ppor Ong Liong Tiak :( )
-Ong Liong Tiak filed petition for writ of injunction and damages vs. Luneta. CFI ruled against him
WON the surety secured by Ong Liong Tiak is included in the CM executed by Ong Liong Tiak in favor of Luneta Motor Co?
YES
Instruments of mortgage, as said Exhibit 2, are binding, while they subsist, not only upon the parties executing them but also upon those who later, by purchase or otherwise, acquire the properties referred to therein.
The right of those who so acquire said properties should not and can not be superior to that of the creditor who has in his favor an instrument of mortgage executed for the formalities of the law, in good faith, and without the least indication of fraud. This is all the more true in the present case, because, when the plaintiff purchased the automobile in question on august 22, 1933, he knew, or at least, it is presumed that he knew, by the mere fact that the instrument of mortgage, Exhibit 2, was registered in the office of the register of deeds of Manila, that said automobile was subject to a mortgage lien. In purchasing it, with full knowledge that such circumstances existed, it should be presumed that he did so, very much willing to respect the lien existing thereon, since he should not have expected that with the purchase, he would acquire a better right than that which the vendor then had.
Kawawa naman si OLT! Walang napunta sa kanya. May COA ba sha against Chao Siong?
SC validated an AIP w/o even explaining why. Sir included this case so that you would know that there's a SC that contradicts what is provided in law. This case supports the wrong position. But since it is also supported by SC, "legal practice becomes more interesting…"
F: (loan 1) Sps. Alviar obtained a P250k loan from Prudential Bank and as a security, they executed a REM over their parcels of land in San Juan. The REM contained a "blanket clause/dragnet clause" (see below in the decision)
(loan 2) Don Alviar executed a PN for P2,640,000 in favor of Prudential Bank secured by a "hold-out" on the mortgagor's (Alviar's) foreign currency savings account with Prudential Bank and Alviar's passbook is to be surrendered to Prudential Bank until the amount secured by the holdout is settled.
(loan 3) Another PN for P545,000 was executed by Don Alviar, this time in behalf of DONALCO trading (the spouses are the Chairman and the VP of the company), in favor of Prudential Bank. This was secured by "Clean Phase out of TOD CA 3923: meaning that the temporary overdraft incurred by DONALCO trading is to be converted into an ordinary loan. Prudential bank approved the straight loan. Securities were deed of assignment on 2 PNs executed by Bancom Realty Corp….and chattel mortgage on various heavy and transpo equipment
Alviars paid Prudential Bank P2M to be applied to the obligations of Alviars (as GB Alviar Realty and Development Inc) and for the release of the REM for P450k (cf P250k at the start) which covered their 2 San Juan lots. Payment was acknowledged and Prudential Bank released the mortgage over the 2 properties. STILL, PRUDENTIAL BANK MOVED FOR EXTRAJUDICIAL FORECLOSURE OF THE MORTGAGE ON THE PROPERTY, arguing that the Alviars had the total obligation of P1,608,256.68 covering 3 PNs (the first loan + another loan + 3rd loan).
Alviars filed for DAMAGES + prayer for issuance of writ of preliminary injunction: claimed to have paid principal loan secured by the 2 San Juan properties by payment of P2M
Vs. Prudential Bank: Payment of P2M was for the obligations of GB ALVIAR REALTY & DEV'T CORP under a separate loan secured by a separate mortgage (and not by the spouses! themselves)
TC: proceed with foreclosure; MFR: reverse - even awarded damages in favor of Alviars. The REM only covers the 1st loan and not the subsequent loans.
The “blanket mortgage clause” relied upon by Prudential Bank applies only to future loans obtained by the mortgagors, and not by parties other than the said mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as officers thereof.
CA: Affirmed: while a continuing loan or credit accommodation based on only one security or mortgage is a common practice in financial and commercial institutions, such agreement must be clear and unequivocal. In the instant case, the parties executed different promissory notes agreeing to a particular security for each loan. Thus, the appellate court ruled that the extrajudicial foreclosure sale of the property for the three loans is improper.
-However, it found that the spouses has not paid under the 1st obligation as the P2M payment was for the obligation of the GB Alviar Realty and Development Inc and not in their personal capacity
WON The "Blanket mortgage clause" or the "dragnet mortgage clause" expressly covers not only the 1st loan but also the 2 subsequent loans? And if it is valid?
-Court held that the 3rd loan was clearly not covered by the "blanket mortgage clause" because the said loan was undertaken by the spouses in behalf of DONALCO and not in their personal capacity. No piercing of corporate veil as no evidence of evasion and fraud was shown.
“blanket mortgage clause/dragnet clause”:
-one which is specifically phrased to subsume all debts of past or future origins.
-should be carefully scrutinized and strictly construed
-Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction
-operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera.
-mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.
In this case:
That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .
SC: ALL OTHER LOANS INCLUDED! Parties intended the real estate mortgage to secure not only the P250,000.00 loan from the petitioner, but also future credit facilities and advancements that may be obtained by the respondents. The terms of the above provision being clear and unambiguous, there is neither need nor excuse to construe it otherwise.
The problem: Would the "blanket Mortgage clause/dragnet clause" apply when the subsequent loans are covered by separate securities?
2 SCHOOLS OF THOUGHT:
- Dragnet clause covers ALL OTHER DEBTS, EVEN IF THE OTHER DEBT IS SECURED BY ANOTHER MORTGAGE
- Dragnet clause would not secure a note that is otherwise secured as to its entirety. Would only cover the deficiency after exhausting the security specified therein. (so pag may natira pang obligation, yun ung under ng dragnet clause
SC: 2nd school of thought!
RELIANCE ON THE SECURITY TEST: 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
Ratio: 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 instrument, and that when the lender accepted a different security he did not accept the offer
*Where deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently become due, a balance due on a note, after exhausting the special security given for the payment of such note, was in the absence of a special agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of the special security.This is recognition that while the “dragnet clause” subsists, the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be resorted to.
*any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it, Prudential Bank.
*BUT PRUDENTIAL BANK could still subject the properties to foreclosure proceedings for the unpaid P250k, which both TC and CA found to have not yet been paid. If there are deficiencies for the second loan, could also apply the proceeds as to the second loan.
Qualification to the validity of the AIO clause: Dragnet Clause
Even if there is a Dragnet Clause in REM which might have secured future obligations, when the future obligations are secured separately,
GR: mortgagee cannot foreclose the REM to satisfy the unpaid subsequent obligations. Exhaust first the specified collateral for the loan, not the property under the Dragnet clause!
X: unless there's an explicit stipulation to the contrary!
Justice Tinga, who loves to cite American jurisprudence, is saying that dragnet clause is used in mortgages to allow….he is actually describing a Mortgage Trust Indenture (the Philippine Equivalent)!
F: Petitioners obtained a P1.5M loan from respondents, secured by REM over their Cubao property.
REM provides:
PROVIDED HOWEVER, that should the MORTGAGOR duly pay or cause to be paid unto the MORTGAGEE or his heirs and assigns, the said indebtedness of ONE MILLION FIVE HUNDRED THOUSAND PESOS (1,500,000.00), Philippine Currency, together with the agreed interest thereon, within the agreed term of one year on a monthly basis then this MORTGAGE shall be discharged, and rendered of no force and effect, otherwise it shall subsist and be subject to foreclosure in the manner and form provided by law.
-Subsequently, petitioners obtained additional loans from the respondents in the aggregate amount of P1,250,000.
-Petitioners only paid P291,700 but defaulted as to the rest.
-Respondents filed a complaint for foreclosure of mortgage, alleging that the loans (all of them) were secured by the REM and as of August 31, 1997, the debt amounted to P6,967,241.14 (with interest of 18% mo)
Vs. Petitioners: REM only covers P1.5M loan, no agreement that the 18% interest was to be compounded mo as it was per annum!
RTC: For respondents
CA: REM was expressly intended to cover only the original P1.5M loan and the subsequent P150k and P500k loans, not the P150k loan, the P200k loan and P250k loan. 12% interest imposed by TC also proper
WON the 12% interest rate imposed by TC Proper
YES. As was held in Eastern shipping lines and in the law. Interest on judicial awards until paid.
WON all five additional loans were intended to be secured by the real estate mortgage
NO.
(eto ang na-gets ko…ung P1.5M loan lang ang kasama)
GR: a mortgage liability is usually limited to the amount mentioned in the contract.
X: However, the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. This stipulation is valid and binding between the parties and is known in American Jurisprudence as the “blanket mortgage clause,” also known as a “dragnet clause.”
A “dragnet clause” operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera.
While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract. HOWEVER, it is clear from a perusal of the real estate mortgage that there is no stipulation that the mortgaged realty shall also secure future loans and advancements. Thus, what applies is the general rule above stated.
What the parties could have done in order to bind the realty for the additional loans was
- to execute a new real estate mortgage or
- to amend the old mortgage conformably with the form prescribed by the law.
Failing to do so, the realty cannot be bound by such additional loans, which may be recovered by the respondents in an ordinary action for collection of sums of money.
WON the amount of obligation should include interest?
YES. Rule 68.2 provides so.
No dragnet clause involved here!
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