Biaco vs. Philippine Countryside Rural Bank

In a judicial foreclosure proceeding which is an action quasi in rem, while jurisdiction over the person of the defendant is not required for the court to validly render judgment against the mortgaged property (res), the court's authority is limited to the res and cannot extend to rendering a personal judgment for deficiency against the defendant without first acquiring jurisdiction over the defendant's person through valid service of summons or voluntary appearance; moreover, substituted service of summons without prior attempt at personal service violates due process and warrants annulment of the judgment.

The case involves a judicial foreclosure proceeding initiated by Philippine Countryside Rural Bank (PCRB) against spouses Ernesto and Ma. Teresa Biaco due to unpaid loans obtained by Ernesto Biaco while serving as branch manager of the respondent bank. The loans, evidenced by several promissory notes executed in 1998 totaling over P800,000.00, were secured by a real estate mortgage executed by both spouses over a parcel of land covered by Original Certificate of Title No. P-14423. When Ernesto failed to pay the loans, the bank filed a complaint for foreclosure of mortgage before the Regional Trial Court of Misamis Oriental.

• Ernesto Biaco, husband of petitioner Ma. Teresa Chaves Biaco, was employed as branch manager of Philippine Countryside Rural Bank (PCRB).
• While employed at PCRB, Ernesto obtained several loans from the respondent bank evidenced by promissory notes dated February 17, 1998 (P65,000.00), March 18, 1998 (P30,000.00), May 6, 1998 (P60,000.00), May 20, 1998 (P350,000.00), July 30, 1998 (P155,000.00), and September 8, 1998 (P40,000.00 and P120,000.00).
• As security for the loans, Ernesto executed a real estate mortgage in favor of the bank covering a parcel of land described in Original Certificate of Title No. P-1443, which bore the signatures of both spouses Biaco.
• When Ernesto failed to settle the loans on their due dates, the respondent bank sent a written demand on September 28, 1999, with the amount due reaching P1,080,676.50 as of September 30, 1999.
• On February 22, 2000, the respondent bank filed a complaint for foreclosure of mortgage against the spouses Biaco before the RTC of Misamis Oriental.
• Summons was served to the spouses Biaco through Ernesto at his office at Export and Industry Bank located at Jofelmor Building, Mortola Street, Cagayan de Oro City.
• Ernesto received the summons but failed to file an answer, resulting in the spouses being declared in default upon motion of the respondent bank.
• The respondent bank was allowed to present its evidence ex parte before the Branch Clerk of Court appointed as Commissioner.
• Arturo Toring, branch manager of respondent bank, testified that the loans for 1996-1997 had been paid, leaving a balance of P1,260,304.33 representing the 1998 loans, inclusive of interests, penalties, and service charges.
• On July 11, 2000, the RTC rendered judgment ordering the spouses to pay P1,260,304.33 plus litigation expenses of P7,640.00 and attorney's fees of P252,030.43, with the mortgaged lot to be sold at public auction in case of non-payment.
• The judgment was personally served on Ernesto Biaco at his office on July 12, 2000, but the spouses did not appeal.
• On October 13, 2000, the respondent bank filed an ex parte motion for execution, which was granted on October 20, 2000.
• On October 31, 2000, the writ of execution was served at the spouses' residence and personally received by Ernesto.
• The mortgaged property was sold at public auction to the respondent bank for P150,000.00.
• The respondent bank filed an ex parte motion for deficiency judgment for the remaining balance of P1,369,974.70, which the court granted.
• The sheriff executed notices of levy against properties registered under the name of petitioner Ma. Teresa Chaves Biaco, but these were denied registration because she had already sold the properties to her daughters on April 11, 2001.
• Petitioner claimed she only learned of the judgment after more than six months from its finality and alleged that extrinsic fraud prevented her from participating in the proceedings.

• Extrinsic fraud was perpetrated against petitioner because the bank failed to verify the authenticity of her signature on the real estate mortgage and did not inquire into the reason for the absence of her signature on the promissory notes.
• The trial court failed to acquire jurisdiction because summons were served on her through her husband without any explanation as to why personal service could not be made upon her.
• Even if the action is quasi in rem, personal service of summons is essential to afford her due process, and the substituted service made by the sheriff at her husband's office cannot be deemed proper service absent any showing of efforts to personally serve summons upon her.
• The deficiency judgment is a personal judgment which should be deemed void for lack of jurisdiction over her person.
• The sheriff allegedly connived with her husband to just leave a copy of the summons intended for her at the latter's office, preventing her from having her day in court.

• Service of summons upon the defendant is not necessary in actions quasi in rem, it being sufficient that the court acquires jurisdiction over the res.
• Judicial foreclosure proceedings are actions quasi in rem, and jurisdiction over the person of the defendant is not essential as long as the court acquires jurisdiction over the res.
• The spouses Biaco were not opposing parties in the case, and the fraud committed by the husband against the wife (concealment of proceedings) cannot be considered extrinsic fraud attributable to the bank.
• The allegation that the sheriff connived with petitioner's husband is a new argument which cannot be raised for the first time in the instant petition.
• The appellate court correctly ruled that there was no fraud perpetrated by the respondent bank upon the petitioner.

• Procedural Issues:
  • Whether the Court of Appeals erred in denying the petition for annulment of judgment based on the grounds of extrinsic fraud and lack of jurisdiction or denial of due process.
• Substantive Issues:
  • Whether extrinsic fraud was committed by the respondent bank against the petitioner sufficient to warrant annulment of judgment.
  • Whether the trial court acquired jurisdiction over the person of the petitioner through the service of summons made upon her husband at his office.
  • Whether the deficiency judgment rendered by the trial court is valid despite the lack of jurisdiction over the petitioner's person.

• Procedural:
  • The Supreme Court granted the petition for review and set aside the Decision dated August 27, 2003 and Resolution dated December 15, 2003 of the Court of Appeals in CA-G.R. SP No. 67489.
  • The Judgment dated July 11, 2000 and Order dated February 9, 2001 of the Regional Trial Court of Cagayan de Oro City, Branch 20, were likewise set aside.
  • The Court held that the violation of petitioner's constitutional right to due process arising from want of valid service of summons on her warrants the annulment of the judgment of the trial court.
• Substantive:
  • The Court ruled that there was no extrinsic fraud committed by the respondent bank because the spouses were co-defendants in the case and shared the same interest; whatever fact or circumstance was concealed by the husband from the wife could not be attributed to the respondent bank.
  • The Court held that the use of forged instruments during trial (alleged forged signature on mortgage) does not constitute extrinsic fraud because such evidence does not preclude the participation of any party in the proceedings; this is intrinsic fraud.
  • The Court affirmed that judicial foreclosure is an action quasi in rem where jurisdiction over the person of the defendant is not required provided the court acquires jurisdiction over the res; however, summons must still be served to satisfy due process requirements.
  • The Court found that petitioner was denied due process because she was not personally served with summons, and the substituted service at her husband's office was improper absent any explanation that efforts had been made to personally serve her within a reasonable time.
  • The Court declared the deficiency judgment void because in quasi in rem proceedings, the court's jurisdiction is limited to the res and cannot extend to rendering a personal judgment enforcing the defendant's personal liability without first acquiring jurisdiction over the defendant's person.

• Actions Quasi in Rem — Defined as actions wherein an individual is named as defendant and the purpose of the proceeding is to subject his interest in property to the obligation or lien burdening the property; jurisdiction over the person of the defendant is not a prerequisite to confer jurisdiction on the court provided that the court acquires jurisdiction over the res.
• Extrinsic Fraud — Exists when there is a fraudulent act committed by the prevailing party outside of the trial of the case, whereby the defeated party was prevented from presenting fully his side of the case by fraud or deception practiced on him by the prevailing party; it is present where the unsuccessful party had been prevented from exhibiting fully his case by fraud or deception practiced on him by his opponent.
• Intrinsic Fraud — Refers to fraudulent acts committed during the trial, such as the use of forged instruments or perjured testimony; distinguished from extrinsic fraud in that it does not preclude the participation of the party in the proceedings but rather affects the evidence presented.
• Limitation of Relief in Quasi in Rem Proceedings — In a proceeding in rem or quasi in rem, the only relief that may be granted by the court against a defendant over whose person it has not acquired jurisdiction either by valid service of summons or by voluntary submission to its jurisdiction is limited to the res.
• Service of Summons in Quasi in Rem Actions — Required not for the purpose of vesting the court with jurisdiction but merely for satisfying the due process requirements; substituted service may only be resorted to if personal service cannot be made within a reasonable time.

• "Extrinsic fraud exists when there is a fraudulent act committed by the prevailing party outside of the trial of the case, whereby the defeated party was prevented from presenting fully his side of the case by fraud or deception practiced on him by the prevailing party."
• "The overriding consideration is that the fraudulent scheme of the prevailing litigant prevented a party from having his day in court."
• "In a proceeding in rem or quasi in rem, the only relief that may be granted by the court against a defendant over whose person it has not acquired jurisdiction either by valid service of summons or by voluntary submission to its jurisdiction, is limited to the res."
• "The violation of petitioner's constitutional right to due process arising from want of valid service of summons on her warrants the annulment of the judgment of the trial court."
• "While the trial court acquired jurisdiction over the res, its jurisdiction is limited to a rendition of judgment on the res. It cannot extend its jurisdiction beyond the res and issue a judgment enforcing petitioner's personal liability."

• Sahagun v. Court of Appeals — Cited for the principle that in quasi in rem proceedings, the court's jurisdiction is limited to the res where jurisdiction over the person is lacking, and that foreclosure and attachment proceedings are actions quasi in rem.
• El Banco Español-Filipino v. Palanca — Cited to establish that foreclosure proceedings are actions quasi in rem and that service of summons on a non-resident defendant is required not for acquiring jurisdiction but for satisfying requirements of fair play.
• De Midgely v. Ferandos — Cited for the principle that in quasi in rem proceedings, relief is limited to the res where jurisdiction over the person is absent.
• Perkins v. Dizon — Cited for the same principle regarding limitation of relief in quasi in rem actions to the res only.
• Alba v. Court of Appeals — Cited for the definition of extrinsic fraud and the distinction between extrinsic and intrinsic fraud.
• Strait Times, Inc. v. Court of Appeals — Cited for the definition and examples of extrinsic fraud, emphasizing that it must prevent a party from having his day in court.
• Asiavest Limited v. Court of Appeals — Cited for definitions of actions in personam, in rem, and quasi in rem.
• National Housing Authority v. Evangelista — Cited for the grounds for annulment of judgment under Section 2, Rule 47 of the Rules of Court.

• Section 2, Rule 47 of the 1997 Rules of Civil Procedure — Provides that judgments may be annulled only on grounds of extrinsic fraud and lack of jurisdiction or denial of due process.
• Section 6, Rule 14 of the Rules of Court — Provides for personal service of summons upon resident defendants.
• Section 7, Rule 14 of the Rules of Court — Provides for substituted service of summons when personal service cannot be made within a reasonable time, either by leaving copies at the defendant's residence with a person of suitable age and discretion or at the defendant's office with a competent person in charge.