Comprehensive

Can a property mortgaged as collateral for the loan of a borrower from a bank be foreclosed for the other unpaid obligation of the said borrower from the same bank? This is the issue raised and answered in this case of a manufacturer and exporter of fuel products (EII).

In the operation of its business, EII obtained a P500,000 credit accommodation from a bank (PBP) secured by a real estate mortgage of its six properties in Marikina covered by TCT Nos. N-68661 to N-68666. The Real Estate Mortgage provides that said lands are transferred and conveyed by way of mortgage “to secure the payment of certain loans, overdrafts and/or other credit accommodations all of which is hereby fixed at P500,000 as well as those that the mortgagee may hereafter extend to the mortgagor including interests and expenses or any other obligation owing to the mortgagee”.  From this credit line EII availed of P200,000, out of which P110,000 was still unpaid  

 Thereafter EII also obtained a credit export advance of $23,000 supported by a Letter of Credit issued by a Korean Bank through its local correspondent bank (BPI) for the account of a Korean commercial company which purchased EII’s fuel products.

Pursuant to this credit export advance, EII was able to draw a total of $10,325.55 from PBP upon its presentation of the drafts drawn under the L/C and the corresponding export documents. Thereafter however, the Korean Bank notified PBP that the Korean importer of EII’s fuel products refused to honor EII’s export documents because of typographical discrepancies. Despite EII’s demands, the Korean importer still refused to honor the documents, so the Korean Bank had to return said documents to PBP and to deny payment of the drafts drawn by EII on the L/C.

Hence PBP demanded from EII the payment of the peso equivalent of said credit export advances covered by the dishonored documents totaling P573, 225.60 as well as the P110,000 still outstanding out of the P200,000 line it has availed, all amounting to a total of P752, 074.63 including interest.

When EII failed to pay them, PBP foreclosed on the mortgage for the total bid price of P752,074.63 and emerged as the highest bidder. So it was able to consolidate ownership and obtain title to the mortgaged properties of EII.

As a consequence, EII filed an action against PBP for the annulment of the extrajudicial foreclosure and cancellation of titles obtained by PBP contending that the real estate mortgage only secured the loans obtained up to P500,000 and does not include the export advances. Was EII correct?

No. The Real Estate Mortgage executed by EII contains a blanket mortgage clause also known as a dragnet clause. It has been settled in a long line of cases that mortgages given to secure future advancements are valid and legal contracts and the amounts named as consideration in said contract 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 is clear.

A dragnet clause is one which is specifically phrased to subsume all debts of past and future origins. Mortgage of this character enable the parties to provide continuous dealings, the nature and extent of which may not be known or anticipated at the time, and they avoid the expense and inconveniences of executing a new security on each transaction. It 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 on costs, extra legal services, registration fees etc (Producers Bank vs. Excelsa Industries Inc. G.R. 1532071, May 8, 2009).

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