Castillo vs. Security Bank Corporation

A real estate mortgage over a property covered by a notarized special power of attorney is valid and binding where the alleged forgery of the SPA is not proved by clear, positive, and convincing evidence, and any defect in notarization merely reduces the instrument to a private document whose validity may be established by preponderance of evidence. A bank may rely on the presumption of regularity of a notarized SPA absent evidence of negligence, and interest and penalty charges are not unconscionable where they are within rates upheld in jurisprudence.

Leonardo C. Castillo and Leon C. Castillo, Jr. are siblings. Leon and Teresita Flores-Castillo operated JRC Poultry Farms and obtained loans from Security Bank Corporation, securing the obligations with a real estate mortgage over several parcels of land belonging to different members of the Castillo family, including a lot registered in Leonardo's name. The dispute concerns the validity of that mortgage and the special power of attorney purportedly authorizing Leon to mortgage Leonardo's property. The governing framework includes Article 2085 of the Civil Code on the requisites of a mortgage, Article 1358 on the form of contracts affecting immovable property, and Section 47 of the General Banking Law of 2000 on foreclosure and redemption.

Petitioner Leonardo C. Castillo and respondent Leon C. Castillo, Jr. are siblings. Leon and Teresita Flores-Castillo, doing business under the name JRC Poultry Farms, obtained a loan from respondent Security Bank Corporation in the amount of ₱45,000,000.00 sometime in 1994. To secure the loan, they executed a real estate mortgage on August 5, 1994 over eleven parcels of land belonging to different members of the Castillo family, all located in San Pablo City. They also procured a second loan amounting to ₱2,500,000.00, covered by a mortgage on a land in Pasay City.

The Spouses Castillo failed to settle the loan, prompting SBC to proceed with the foreclosure of the properties. SBC was adjudged the winning bidder in the foreclosure sale held on July 29, 1999. Thereafter, they were able to redeem the foreclosed properties, except the lots covered by TCT Nos. 28302 and 28297.

On January 30, 2002, Leonardo filed a complaint for partial annulment of the real estate mortgage. He alleged that he owns the property covered by TCT No. 28297 and that the Spouses Castillo used it as one of the collaterals for a loan without his consent. He contested his supposed Special Power of Attorney in Leon's favor, claiming that it is falsified. According to him, the date of issuance of his Community Tax Certificate as indicated on the notarization of the SPA is January 11, 1993, when he only secured the same on May 17, 1993. He also assailed the foreclosure of the lots under TCT Nos. 20030 and 10073, which were still registered in the name of their deceased father. Lastly, Leonardo attacked SBC's imposition of penalty and interest on the loans as arbitrary and unconscionable.

The Spouses Castillo insisted on the validity of Leonardo's SPA. They alleged that they incurred the loan not only for themselves but also for the other members of the Castillo family who needed money at that time. Upon receipt of the proceeds of the loan, they distributed the same to their family members, as agreed upon. However, when the loan became due, their relatives failed to pay their respective shares such that Leon was forced to use his own money until SBC had to finally foreclose the mortgage over the lots.

The CA found several circumstances showing that Leonardo was aware of the mortgage and had executed the SPA: Leon had possession of all titles covering the eleven mortgaged properties, including Leonardo's; Leonardo and the rest of their relatives could not have blindly ceded their respective TCTs to Leon; Leonardo seemed totally oblivious to the status of his property for eight years and only found out about the mortgage and foreclosure from a nephew; and Leonardo admitted on cross-examination that he granted Leon authority to mortgage, only that he thought it was going to be with China Bank, not SBC. The CA also observed that the CTC could have been issued with the space for the date left blank and Leonardo merely filled it up, and that the handwriting on the space for the date of issuance was different from that on the computation of fees but was consistent with the rest of the writings on the document. The Supreme Court adopted these findings in denying the petition.

• Forgery of SPA: Petitioner alleged that his signature in the SPA authorizing his brother, Leon, to mortgage his property covered by TCT No. T-28297 was falsified; he claimed that he was in America at the time of its execution and that his CTC appeared to have been issued on January 11, 1993, although he obtained it only on May 17, 1993.
• Lack of Consent: Petitioner alleged that he owns the property covered by TCT No. 28297 and that the Spouses Castillo used it as one of the collaterals for a loan without his consent.
• Foreclosure of Father's Lots: Petitioner assailed the foreclosure of the lots under TCT Nos. 20030 and 10073, which were still registered in the name of their deceased father.
• Unconscionable Interest and Penalty: Petitioner attacked SBC's imposition of penalty and interest on the loans as arbitrary and unconscionable.
• Extinguishment by Payment: Petitioner claimed that their payment of ₱45,000,000.00 had already extinguished their entire obligation with SBC.

• Validity of SPA: The Spouses Castillo insisted on the validity of Leonardo's SPA.
• Purpose of Loan and Distribution: The Spouses Castillo alleged that they incurred the loan not only for themselves, but also for the other members of the Castillo family who needed money at that time; upon receipt of the proceeds, they distributed the same to their family members, as agreed upon.
• Cause of Foreclosure: The Spouses Castillo alleged that when the loan became due, their relatives failed to pay their respective shares such that Leon was forced to use his own money until SBC had to finally foreclose the mortgage over the lots.

• Validity of Real Estate Mortgage: Whether the real estate mortgage constituted over the property under TCT No. T-28297 is valid and binding.
• Forgery of SPA: Whether Leonardo's signature in the SPA authorizing Leon to mortgage his property was falsified.
• Effect of Defective Notarization: Whether the alleged discrepancy in the date of issuance of Leonardo's CTC in the notarization of the SPA invalidates the SPA or reduces it to a private instrument, and whether its validity is established by preponderance of evidence.
• Bank's Due Diligence: Whether SBC was remiss in exercising the due diligence required of banks in accepting the mortgage.
• Interest and Penalty Charges: Whether SBC's interest and penalty charges are excessive or unconscionable.
• Extinguishment of Obligation: Whether payment of ₱45,000,000.00 extinguished the entire obligation with SBC.

• Validity of Real Estate Mortgage: Yes. The real estate mortgage over TCT No. T-28297 is valid and binding; the CA's ruling was affirmed.
• Forgery of SPA: No. Allegations of forgery must be proved by clear, positive, and convincing evidence; Leonardo relied on self-serving declarations and did not compare the alleged forged signature with genuine signatures.
• Effect of Defective Notarization: No. Defective notarization merely strips the document of its public character and reduces it to a private instrument; validity may be established by preponderance of evidence, which favored respondents.
• Bank's Due Diligence: No. No evidence showed that SBC was remiss or negligent; it could rely on the presumption of regularity of the notarized SPA.
• Interest and Penalty Charges: No. The 16% interest per annum, or 1.33% per month, and the 24% per annum, or 2% per month, penalty are not excessive or unconscionable.
• Extinguishment of Obligation: No. Payment of ₱45,000,000.00 did not extinguish the entire obligation; the redemption price includes interest and foreclosure expenses.

• Validity of Real Estate Mortgage: The Court began with the rule that review of appealed cases from the CA is limited to errors of law, as the CA's findings of fact are conclusive, except when the CA's findings are contrary to those of the trial court. The legal requisites for a mortgage under Article 2085 of the Civil Code are: (1) it must be constituted to secure the fulfillment of a principal obligation; (2) the mortgagor must be the absolute owner of the thing mortgaged; and (3) the persons constituting the mortgage must have the free disposal of their property, or, in the absence thereof, must be legally authorized for the purpose. The mortgage over TCT No. T-28297 was executed by Leon under an SPA purportedly from Leonardo. Because forgery was not established and the SPA remained binding, the mortgage was valid and binding.
• Forgery of SPA: Allegations of forgery, like all other allegations, must be proved by clear, positive, and convincing evidence by the party alleging it; forgery should not be presumed but must be established by comparing the alleged forged signature with genuine signatures. Leonardo relied on self-serving declarations and refused to present further corroborative evidence, saying that the falsified document itself is the best evidence. He did not compare the alleged forged signature on the SPA with samples of his real and actual signature. His lone support was the supposed discrepancy in the date of issuance of his CTC as reflected in the SPA's notarial acknowledgment. The Court noted the ease with which CTCs are obtained and found reasonable ground to believe that the CTC could have been issued with the space for the date left blank and Leonardo merely filled it up. The handwriting on the space for the date of issuance was different from that on the computation of fees, which was consistent with the rest of the writings on the document. Leonardo also did not show evidence that he was in America at the time of the execution of the SPA on May 5, 1993.
• Effect of Defective Notarization: Even assuming that Leonardo secured his CTC only on May 17, 1993, this did not automatically render the SPA invalid. Defective notarization simply strips the document of its public character and reduces it to a private instrument, but it remains binding provided its validity is established by preponderance of evidence. Article 1358 of the Civil Code requires that the form of a contract that transmits or extinguishes real rights over immovable property should be in a public document, yet failure to observe the proper form does not render the transaction invalid. The necessity of a public document is only for convenience; it is not essential for validity or enforceability. Even a sale of real property not contained in a public instrument or formal writing is valid and binding, and even a verbal contract of sale of real estate produces legal effects between the parties. When there is a defect in the notarization of a document, the clear and convincing evidentiary standard originally attached to a duly notarized document is dispensed with, and the measure to test validity is preponderance of evidence. The preponderance of evidence tilted in favor of respondents. Several circumstances showed Leonardo was aware of the mortgage and executed the SPA: Leon had possession of all titles covering the eleven properties, including Leonardo's; Leonardo and relatives could not have blindly ceded their TCTs; Leonardo was oblivious to the status of his property for eight years and found out only from a nephew; the lapse of time from the alleged forgery to the mortgage, foreclosure, and supposed discovery suggested an afterthought; and Leonardo admitted on cross-examination that he granted Leon authority to mortgage, only that he thought it would be with China Bank, not SBC. The SPA did not mention any bank, so Leon acted within the bounds of its authority when he mortgaged the lot to SBC.
• Bank's Due Diligence: Banks and other financing institutions are expected to exercise due diligence, and ascertainment of the status or condition of a property offered as security for a loan must be a standard and indispensable part of their operations. In this case, however, no evidence was presented to show that SBC was remiss in the exercise of the standard care and prudence required of it or that it was negligent in accepting the mortgage. SBC could not be faulted for relying on the presumption of regularity of the notarized SPA when it entered into the mortgage agreement.
• Interest and Penalty Charges: Section 47 of the General Banking Law of 2000 provides for foreclosure of real estate mortgage and redemption. The redemption price comprises not only the total amount due under the mortgage deed, but also interest at the rate specified in the mortgage and all foreclosure expenses incurred by the mortgagee bank. To sustain Leonardo's claim that their payment of ₱45,000,000.00 had already extinguished their entire obligation with SBC would mean that no interest ever accrued from 1994, when the loan was availed, up to the time the payment of ₱45,000,000.00 was made in 2000-2001. SBC's 16% rate of interest is not computed per month, but per annum, or only 1.33% per month. In Spouses Bacolor vs. Banco Filipino Savings and Mortgage Bank, Dagupan City Branch, the Court held that an interest rate of 24% per annum on a loan of ₱244,000.00 is not unconscionable and excessive; debtors cannot renege on their obligation to comply with what is incumbent upon them under the contract of loan. The 24% per annum rate, or 2% per month, for penalty charges on account of default cannot be considered skyrocketing. The enforcement of penalty can be demanded by the creditor in case of non-performance due to the debtor's fault or fraud; non-performance gives rise to the presumption of fault, and to avoid the penalty, the debtor has the burden of proving that the failure of performance was due to either force majeure or the creditor's own acts. Petitioner failed to discharge that burden and cannot avoid the penalty charge agreed upon.
• Extinguishment of Obligation: The redemption price comprises not only the total amount due under the mortgage deed, but also interest at the rate specified in the mortgage and all foreclosure expenses incurred by the mortgagee bank. Payment of ₱45,000,000.00 could not have extinguished the entire obligation, because that would mean no interest ever accrued from 1994 to the time of payment in 2000-2001. Thus, the claim of extinguishment was rejected.

• Requisites of a valid mortgage — Article 2085 of the Civil Code requires: (1) the mortgage must be constituted to secure the fulfillment of a principal obligation; (2) the mortgagor must be the absolute owner of the thing mortgaged; and (3) the persons constituting the mortgage must have the free disposal of their property, or, in the absence thereof, must be legally authorized for the purpose. The Court applied these requisites in testing the validity of the mortgage over TCT No. T-28297.
• Forgery must be proved by clear, positive, and convincing evidence — Allegations of forgery are not presumed; the party alleging forgery must establish it by clear, positive, and convincing evidence, ordinarily by comparing the alleged forged signature with genuine signatures. Leonardo's failure to compare signatures and his reliance on the CTC date discrepancy defeated his forgery claim.
• Defective notarization reduces an instrument to a private document — Defective notarization strips a document of its public character and reduces it to a private instrument, but does not invalidate it; its validity may be established by preponderance of evidence. Article 1358 of the Civil Code requires public form for contracts transmitting or extinguishing real rights over immovable property, but failure to observe that form does not invalidate the transaction, because the public document is only for convenience and not essential for validity or enforceability.
• Presumption of regularity of a notarized document and bank due diligence — Banks are expected to exercise due diligence, and ascertainment of the status or condition of property offered as security is a standard and indispensable part of their operations. However, a bank may rely on the presumption of regularity of a notarized SPA absent evidence that it was remiss or negligent. SBC was not faulted on this ground.
• Redemption price under Section 47, General Banking Law of 2000 — The redemption price comprises not only the total amount due under the mortgage deed, but also interest at the rate specified in the mortgage and all foreclosure expenses incurred by the mortgagee bank. This rule defeated Leonardo's claim that payment of ₱45,000,000.00 extinguished the entire obligation.
• Interest and penalty rates not unconscionable — A 16% interest rate per annum, or 1.33% per month, and a 24% per annum penalty, or 2% per month, are not excessive or unconscionable. Penalty may be enforced upon non-performance due to the debtor's fault or fraud; non-performance gives rise to the presumption of fault, and the debtor bears the burden of proving force majeure or the creditor's own acts to avoid the penalty.

• "As a rule, the jurisdiction of the Court over appealed cases from the CA is limited to the review and revision of errors of law it allegedly committed, as its findings of fact are deemed conclusive." — The Court states the standard of review and explains the exception when the CA's findings of fact are contrary to those of the trial court.
• "But it is a settled rule that allegations of forgery, like all other allegations, must be proved by clear, positive, and convincing evidence by the party alleging it. It should not be presumed, but must beestablished by comparing the alleged forged signature with the genuine signatures." — This is the ratio for rejecting Leonardo's forgery claim; it fixes the evidentiary standard and the usual method of proof for forgery.
• "The appellate court aptly held that defective notarization will simply strip the document of its public character and reduce it to a private instrument, but nonetheless, binding, provided its validity is established by preponderance of evidence." — This passage defines the effect of defective notarization and the lower evidentiary threshold that applies once the document loses its public character.
• "Verily, the redemption price comprises not only the total amount due under the mortgage deed, but also with interest at the rate specified in the mortgage, and all the foreclosure expenses incurred by the mortgagee bank." — This statement supports the rejection of Leonardo's claim that payment of ₱45,000,000.00 had extinguished the entire obligation.

• Meneses vs. Venturozo, G.R. No. 172196, October 19, 2011, 659 SCRA 577 — Cited for the rule that the CA's factual findings are conclusive and for the effect of defective notarization, including the preponderance of evidence standard.
• Francisco Lim vs. Equitable PCI Bank (now known as Banco de Oro Unibank, Inc.), G.R. No. 183918, January 15, 2014 — Cited for the clear and convincing evidence standard for forgery and for the due diligence expected of banks in mortgage transactions.
• The Heirs of Victorino Sarili vs. Pedro F. Lagrosa, represented in this act by his attorney-in-fact, Lourdes Labios Mojica, G.R. No. 193517, January 15, 2014 — Cited for the rule that defective notarization reduces a document to a private instrument but does not invalidate it if validity is shown by preponderance of evidence.
• Tigno vs. Spouses Aquino, 486 Phil. 254, 268 (2004) — Cited for the rule that failure to observe the public-document form under Article 1358 does not invalidate the transaction, and that even a verbal sale of real estate is valid and binding.
• Spouses Bacolor vs. Banco Filipino Savings and Mortgage Bank, Dagupan City Branch, 544 Phil. 18, 27 (2007) — Cited for the ruling that a 24% per annum interest rate is not unconscionable or excessive.
• Development Bank of the Philippines vs. Family Foods Manufacturing Co. Ltd., 611 Phil. 843, 855 (2009) — Cited for the enforceability of penalty charges and the debtor's burden to prove force majeure or the creditor's acts to avoid penalty.
• PNB vs. Jumamoy, G.R. No. 169901, August 3, 2011, 655 SCRA 55, 63 — Cited for the standard that ascertainment of the status or condition of property offered as security is a standard and indispensable part of bank operations.
• Baylon vs. Atty. Almo, 578 Phil. 238, 242 (2008) — Cited for the observation that CTCs are easily obtained, supporting the CA's finding on the CTC date discrepancy.

• Article 2085, Civil Code — Lists the requisites of a mortgage: (1) it must be constituted to secure the fulfillment of a principal obligation; (2) the mortgagor must be the absolute owner of the thing mortgaged; and (3) the persons constituting the mortgage must have the free disposal of their property, or, in the absence thereof, must be legally authorized for the purpose. The Court used these requisites to test the validity of the mortgage over TCT No. T-28297.
• Article 1358, Civil Code — Requires that the form of a contract that transmits or extinguishes real rights over immovable property should be in a public document, but failure to observe the proper form does not render the transaction invalid; the public document is only for convenience and is not essential for validity or enforceability. The Court applied this in holding that the alleged notarization defect did not invalidate the SPA.
• Section 47, General Banking Law of 2000 (Republic Act No. 8791) — Governs foreclosure of real estate mortgage and redemption. The redemption price comprises not only the total amount due under the mortgage deed, but also interest at the rate specified in the mortgage and all foreclosure expenses incurred by the mortgagee bank. The Court applied this provision to reject the claim that payment of ₱45,000,000.00 had extinguished the entire obligation.

Presbitero J. Velasco, Jr. (Chairperson); Martin S. Villarama, Jr.; Jose Catral Mendoza; Marvic Mario Victor F. Leonen.