Favored by ambiguity

The action to foreclose a real estate mortgage must be limited to the amount mentioned in the mortgage. This is explained in this case of the spouses Pol and Mercy.

To finance their business, Pol and Mercy obtained a loan through a credit line facility from a commercial bank (Bank) in the maximum amount of P4.7 million. The credit line agreement drafted by the Bank stipulated that the loan would bear interest at the prevailing Bank lending rate per annum on the principal obligation and a penalty fee of three percent per month on the outstanding amount.

To secure payment of the loan, the spouses also executed on March 31 1997 a Real Estate Mortgage (REM) likewise drafted by the Bank over two parcels of land consisting of 300 square meters (TCT No. N113861) and 446 square meters (TCT N-129036) both situated in Marikina City. The REM provided among others that it is for the purpose of securing the payment of the principal amount of P4.7 million, including the interest and bank charges.

Pol and Mercy fully used the credit line of P4.7 million and subsequently made partial payments totaling P3,669,210.67. Thereafter, the couple did not make any more payments. And despite demands, they failed to pay their outstanding obligation which according to the bank totaled P14,024, 623.22 including 15 percent interest per annum and three percent per month penalty.

So on April 10, 2003, the mortgaged properties of the couple were sold at public auction with the Bank emerging as highest bidder in the amount of P4,284,000.

On October 8, 2003, Pol and Mercy filed a complaint for annulment of the foreclosure sale, accounting and damages before the Regional Trial Court. They alleged that the foreclosure proceedings and auction sale were null and void because the parties never agreed and stipulated in the REM that the 15 percent interest per annum on the principal loan and the three percent per month penalty would be covered or secured by the mortgage. Moreover, assuming the bank could impose such interest and penalty, the same are exorbitant, unreasonable, iniquitous and unconscionable and should be reduced to only 12 percent.

The RTC ruled that the REM also secured the payment of 15 percent interest per annum on the principal obligation of P4.7 million and the three percent penalty per month on the outstanding obligation since it was executed for purposes of securing payment of the principal including interest and “bank charges” which refers to penalty charges. But the RTC ruled that the said interest and penalty are exorbitant so it reduced them to 12 percent interest per annum and 1.5 percent penalty per month thereby annulling the foreclosure sale without prejudice to another foreclosure at the recomputed amount. This ruling was sustained by the Court of Appeals (CA). Were the RTC and CA correct?

No. Since the action to foreclose must be limited to the amount mentioned in the REM and the penalty fee of three percent per month is not mentioned in the REM it must be excluded from the computation secured by the REM.

Penalty fee is entirely different from “bank charges”. The phrase “bank charges” refers to compensation for services such as the cost of collecting the loan, of taking possession and keeping the mortgaged properties and all other expenses which the mortgagee (the Bank) may be put in connection with or incident to the mortgage. A penalty fee is likened to a compensation for damages in case of breach of the obligation. Being penal in nature such fee must be specific and fixed by the contracting parties unlike in the present case which slaps a three percent penalty on the outstanding obligation.

Indeed a mortgage must sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive and an obligation is not secured by a mortgage unless the same comes fairly within its terms. A penalty charge does not belong to the species of the obligations enumerated in the mortgage hence, the said contract cannot be understood to secure the penalty.

While it is true that the REM is merely an accessory contract that must take its bearings from the Credit Line Agreement where the penalty of three percent is stipulated, the absence of the penalty fee in the REM creates an ambiguity between the two contracts. Such ambiguity must be resolved in favor of Pol and Mercy and against the Bank which drafted the contacts. Construing the ambiguity against the Bank, it follows that no penalty was intended to be covered by the REM. Plainly, the Bank can be as specific as it wants to be, yet it simply did not specify nor even allude to, that the penalty in the Credit Line Agreement would be secured by the REM. This can only be interpreted to mean that the Bank had no design to include the penalty in the amount secured. Hence the ruling of the RTC and the CA should be modified by excluding the penalty fee in the computation of the amount secured by the REM (Spouses Viola vs. Equitable PCI Bank, G.R. 177886, November 27, 2008).

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