China Bank Savings, Inc. vs. Heirs of Nilo P. Delos Santos

An express waiver of demand in a promissory note is valid and renders a prior demand unnecessary for the debtor to be considered in default, thereby allowing the creditor to exercise remedies such as extrajudicial foreclosure. A contractual stipulation in a mortgage requiring notice of "any judicial or extra-judicial action" is satisfied by furnishing the debtor with a copy of the petition for extrajudicial foreclosure prior to the auction sale.

Spouses Nilo and Nenita Delos Santos obtained a loan from Planters Development Bank (PDB), secured by a real estate mortgage over their properties. They later executed a promissory note for the same loan amount. Upon the spouses' default, PDB extrajudicially foreclosed the mortgage. The heirs of the spouses (respondents) filed a complaint to annul the mortgage and foreclosure, alleging, among others, that no prior demand was made.

• Filed in RTC (Makati City, Branch 66) as Civil Case No. 12-1049 (Complaint for Annulment of Mortgage, Foreclosure Sale, and Damages).
• RTC dismissed the complaint for lack of merit.
• Respondents appealed to the CA.
• CA granted the appeal, reversed the RTC, and nullified the foreclosure sale.
• PDB elevated the case to the SC via a Petition for Review on Certiorari (Rule 45).

• On November 9, 1995, Spouses Delos Santos executed a Real Estate Mortgage in favor of PDB.
• On May 28, 1998, the Spouses executed Promissory Note No. 98-044-910 for a PHP 1,000,000.00 loan, payable on November 24, 1998. The note contained an acceleration clause and an express waiver of demand.
• The Spouses failed to pay the loan.
• PDB filed a Petition for Extra-Judicial Foreclosure on January 16, 2001. A copy was furnished to the Spouses.
• The foreclosure sale was held on May 2, 2001, with PDB as the highest bidder.
• The Spouses filed a complaint in RTC Davao City on the same day (May 2, 2001) to nullify the sale, which was later dismissed for improper venue.
• After Nilo's death, his heirs (respondents) re-filed the complaint in RTC Makati City in 2012.

• The promissory note expressly waived the requirement for demand; thus, demand was not necessary to declare the debtors in default.
• The provision in the Real Estate Mortgage regarding sending correspondence (including demand letters) pertains only to the address for such notices, not to the necessity of demand itself.
• The foreclosure was valid because the debtors were in default due to non-payment, and the bank had complied with the personal notice requirement by furnishing the foreclosure petition.

• The Real Estate Mortgage expressly required the sending of demand letters before any action. The bank's failure to send a valid demand letter rendered the foreclosure proceedings null and void and the sale premature.
• The waiver of demand in the promissory note cannot override the specific notice requirement in the mortgage contract.
• The bank failed to provide a detailed accounting of the loan obligation prior to foreclosure.

• Procedural Issues: Whether prescription or laches barred the respondents' action.
• Substantive Issues:
  1. Whether the CA erred in nullifying the foreclosure sale on the ground that no demand was made by the petitioner prior to foreclosure.
  2. Whether the petitioner complied with the contractual requirement of personal notice of the extrajudicial foreclosure.

• Procedural: The SC ruled that prescription had not set in. The action was based on a constructive trust (Art. 1456, Civil Code), which prescribes in 10 years (Art. 1144). The filing of the first complaint in 2001 interrupted the prescriptive period. The re-filing in 2012 was within the renewed 10-year period. Laches was also inapplicable as the action was filed within the statutory period.
• Substantive:
  1. On Demand: The SC found for the petitioner. The promissory note contained an express waiver of demand. This waiver is valid under Article 1169 of the Civil Code, which states demand is not necessary when expressly waived. The general correspondence clause in the mortgage (requiring demand letters be sent to a specific address) did not negate this specific waiver in the note, which governed the principal loan obligation.
  2. On Personal Notice: The SC found that the petitioner complied. Furnishing the Spouses with a copy of the Petition for Extra-Judicial Foreclosure prior to the auction sale satisfied the contractual stipulation (Paragraph 12 of the Real Estate Mortgage) requiring notification of "any judicial or extra-judicial action." This afforded the debtors due process and an opportunity to protect their rights.

• Waiver of Demand — Under Article 1169 of the Civil Code, demand is not necessary to put a debtor in default when the obligation or the law expressly so states. A stipulation in a promissory note where the debtor "expressly waive[s] any requirement for... demand" is a valid express waiver, making prior demand unnecessary for default and the exercise of remedies like foreclosure.
• Dragnet Clause — A clause in a mortgage contract stipulating that it shall also secure future loans or credit accommodations. The SC noted the 1995 mortgage contained such a clause, making it security for the 1998 promissory note.
• Personal Notice in Extrajudicial Foreclosure — While Act No. 3135 only requires posting and publication, parties may contractually stipulate for additional requirements, such as personal notice to the mortgagor. A clause requiring notice of "any judicial or extra-judicial action" obligates the mortgagee to personally notify the mortgagor of the foreclosure proceedings. Furnishing a copy of the foreclosure petition prior to the sale satisfies this obligation.

• "Based on the foregoing, Spouses Delos Santos expressly stipulated that in the event that they commit a violation of the terms of the Promissory Note... then all the amortizations shall become immediately due and payable. They also authorized PDB to apply any security... at anytime and without prior notice... In addition, Spouses Delos Santos expressly waived any requirement for demand..."
• "The requirement of demand to be deemed in default is distinct and separate from the requirement of personal notice in the event of mortgage foreclosure. Demand refers to the principal obligation... while personal notice refers to the accessory obligation or security for the loan..."
• "The records show that a copy of the Petition for Extra-Judicial Foreclosure of Mortgage was furnished to Spouses Delos Santos on January 16, 2001... Importantly, Spouses Delos Santos admitted that they received from petitioner a copy... on April 28, 2001, before the extrajudicial foreclosure sale was held on May 2, 2001."

• Premiere Development Bank v. Central Surety & Insurance Company, Inc. — Cited to show that a waiver clause in a promissory note (authorizing the bank to apply payments without notice and waiving presentment, demand, protest) renders an obligation past due and demandable without further notice.
• Bank of the Philippine Islands v. Court of Appeals — Cited for the ruling that a co-signor's express waiver of demand in a promissory note makes demand unnecessary for default.
• Global Holiday Ownership Corp. v. Metropolitan Bank & Trust Co. — Distinguished. In Global Holiday, the waiver was in a separate debt settlement agreement, not in the mortgage or promissory note itself, so it did not waive the personal notice requirement in the mortgage. Here, the waiver was in the promissory note governing the principal obligation.
• Planters Development Bank v. Lubiya Agro Industrial Corp. and Philippine Savings Bank v. Co — Cited to establish that a contractual clause requiring all correspondence, including notification of any action, be sent to the mortgagor's address creates a binding obligation for personal notice of foreclosure, the violation of which nullifies the sale.
• Heirs of Espiritu v. Spouses Landrito — Cited for the rule that an action to recover property improperly foreclosed is based on a constructive trust and prescribes in 10 years from the date of registration of the certificate of sale (or from actual notice).

• Civil Code, Art. 1169 — Defines when a debtor incurs in delay (default). Demand is required unless expressly waived.
• Civil Code, Art. 1144(2) — Provides a 10-year prescriptive period for obligations created by law (e.g., constructive trust).
• Civil Code, Art. 1155 — Provides that prescription is interrupted when an action is filed in court.
• Civil Code, Art. 1456 — Provides that property acquired through mistake or fraud is held in implied trust for the benefit of the person from whom it comes.
• Act No. 3135 (as amended) — Governs extrajudicial foreclosure of real estate mortgages. Requires posting and publication of notice of sale.

• Justice Alfredo Benjamin S. Caguioa (Concurring) — Agreed with the main decision but emphasized key points:
  1. The waiver clause in the promissory note was substantially identical to one previously upheld in BPI v. CA.
  2. Since demand was expressly waived, the bank was not even required to prove that a demand letter was sent.
  3. The debtors were in default based on the acceleration clause in both the promissory note and the mortgage, triggered by non-payment.

• N/A. The decision was unanimous, with one Justice concurring and one on leave.