China Banking Corporation vs. Court of Appeals

A real estate mortgage can secure future loans and obligations beyond the specific amount stated in the contract if the instrument, as a whole, reveals the parties' intent to create a continuing, "all-embracing" security. Accordingly, the mortgagee may validly pursue extrajudicial foreclosure under Act No. 3135 when the debtor defaults on any obligation covered by the mortgage, and a preliminary injunction to stop such foreclosure is improper where the debtor's default is admitted.

China Banking Corporation (China Bank) extended loans to Native West International Trading Corp. (Native West) and its president, So Ching. To secure these obligations, So Ching, with marital consent, executed two real estate mortgage contracts over properties in Quezon City and Mandaluyong. The promissory notes matured without payment. China Bank initiated extrajudicial foreclosure proceedings through notaries public. Eight days before the scheduled auction sale, the debtors (private respondents) filed a complaint for accounting and damages, securing a temporary restraining order and later a preliminary injunction from the Regional Trial Court (RTC) to halt the foreclosure.

• Nature of the Obligation: China Bank extended several loans to Native West and its president, So Ching. These were evidenced by promissory notes.
• The Mortgage Contracts: As security, So Ching and his wife executed two real estate mortgage contracts on July 27, 1989 (P6.5M) and August 10, 1989 (P3.5M). The contracts contained clauses describing the mortgage as security for "any and all obligations heretofore contracted/incurred and which may thereafter be contracted/incurred."
• Default and Foreclosure Initiation: The promissory notes matured. Despite demand, private respondents failed to pay. China Bank filed petitions for extrajudicial foreclosure with notaries public and scheduled an auction sale for April 13, 1993.
• Debtors' Complaint and Injunction: On April 5, 1993, private respondents filed a complaint alleging, among others, failure to comply with Administrative Order No. 3 and P.D. No. 1079 on foreclosure procedures, variance in the amounts claimed versus the mortgage stipulations, and violation of the Truth in Lending Act. The RTC issued a TRO and later a preliminary injunction, reasoning that an accounting issue required a full trial.
• Admission of Default: In their complaint, private respondents admitted they were "unable to settle to the fullest their obligation," pleading to pay in installments which the bank refused.

• Scope of Mortgage Security: Petitioner argued that the mortgage contracts, particularly the "whereas" clause and operative paragraphs, intended the properties as continuing security for all loans, including those exceeding the stated amounts.
• Right to Foreclose: Petitioner maintained that the debtors' admitted default triggered the right to foreclose under the mortgage contracts and the law.
• Governing Law for Foreclosure: Petitioner contended that Act No. 3135, as expressly stipulated in the contracts, governed the extrajudicial foreclosure, not Administrative Order No. 3.
• Validity of Injunction: Petitioner argued that the preliminary injunction was issued with grave abuse of discretion because there was no clear right to be protected, given the admitted default.

• Limited Mortgage Liability: Respondents countered that the mortgages secured only the specific amounts stated (P6.5M and P3.5M), and additional loans were "clean loans" not covered by the collateral.
• Procedural Defects in Foreclosure: Respondents argued that petitioners failed to comply with Administrative Order No. 3 (supervision by Executive Judges) and P.D. No. 1079 (publication requirements), invalidating the foreclosure.
• Other Violations: Respondents alleged violations of the Truth in Lending Act (failure to furnish disclosure statements) and charging of excessive interest.
• Propriety of Injunction: Respondents argued the injunction was necessary to prevent irreparable injury and to allow the court to resolve the accounting and other substantive issues.

• Scope of Mortgage Security: Whether the real estate mortgages secured loans and obligations beyond the specific amounts stated in the contracts.
• Right to Foreclose: Whether petitioners were entitled to extrajudicially foreclose the mortgaged properties.
• Governing Foreclosure Procedure: Whether Administrative Order No. 3, rather than Act No. 3135, should govern the extrajudicial foreclosure.
• Validity of Preliminary Injunction: Whether the trial court's issuance of a writ of preliminary injunction was valid.

• Scope of Mortgage Security: Yes. The contracts, interpreted as a whole per Article 1374 of the Civil Code, revealed the intent to create a continuing, "all-embracing" security for future advancements. Stipulations authorizing further advances and securing "all indebtedness... at any and all times outstanding" qualified the stated amounts.
• Right to Foreclose: Yes. Foreclosure is a valid remedy when the debtor is in default. Private respondents' judicial admission of inability to pay fully established default, entitling petitioner to enforce its security.
• Governing Foreclosure Procedure: Act No. 3135 governs. The mortgage contracts expressly stipulated that foreclosure would be "in accordance with the provisions of Act No. 3135." This contractual stipulation is the law between the parties. Administrative Order No. 3 is a directive for court personnel and cannot override a statute.
• Validity of Preliminary Injunction: No. A preliminary injunction requires a clear legal right to be protected. Here, petitioner's right to foreclose was clear due to admitted default. The injunction thus had no legal basis and was issued with grave abuse of discretion.

• Continuing Security Doctrine — A mortgage given to secure future advancements is a valid and legal contract. The amount stated as consideration does not limit the mortgage's liability if the instrument, on its face, shows an intent to secure future and other indebtedness. The Court applied this by interpreting the mortgage clauses as creating a comprehensive security for all obligations, present and future.
• Contracts as the Law Between the Parties — Stipulations in a contract have the force of law between the parties and must be complied with in good faith, provided they are not contrary to law, morals, good customs, public policy, or public order. The Court relied on this to enforce the parties' agreement to use Act No. 3135 for foreclosure.
• Requirements for a Preliminary Injunction — A writ of preliminary injunction is a preservative remedy to protect a clear and existing right threatened by an act violative of that right. It cannot be issued where the applicant's right is doubtful or disputed. The Court found no clear right to stop foreclosure where default was admitted.

• "The idea being to make this deed a comprehensive and all embracing security that it is." — This phrase from the mortgage contract was pivotal in the Court's interpretation that the parties intended a continuing security beyond the stated amounts.
• "A mortgage given to secure advancements... is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid." — This succinctly states the continuing security doctrine applied by the Court.

• Mojica v. Court of Appeals, 201 SCRA 517 — Cited as controlling authority that mortgages securing future advancements are valid and that the stated amount does not limit the security if a broader intent is shown.
• Caltex Philippines, Inc. v. Intermediate Appellate Court, 176 SCRA 741 — Cited for the rule that a mortgagee has a choice of remedies upon default: to foreclose the mortgage or to file a personal action for collection, but not both.
• Cortes v. Intermediate Appellate Court, 175 SCRA 545 — Cited for the principle that foreclosure is proper when the debtor is in default and that Act No. 3135 governs the manner of sale.
• Fiestan v. Court of Appeals, 185 SCRA 751 — Cited for the definition of a mortgage as a security for debt.

• Article 1374, Civil Code — Provides that the various stipulations of a contract shall be interpreted together. Used to justify reading the mortgage contract as a whole to discern the intent for a continuing security.
• Act No. 3135 (An Act to Regulate the Sale of Property Under Special Powers Inserted in or Annexed to Real-Estate Mortgages) — Stipulated by the parties as the governing law for the extrajudicial foreclosure sale. The Court held it prevails over administrative circulars.
• Rule 1, Section 2, Rules of Court — Cited generally for the objective of securing a just, speedy, and inexpensive determination of actions, as a reason for the Supreme Court to resolve the core issues.

Chief Justice Andres R. Narvasa, Justices Hilario G. Davide, Jr., Jose A.R. Melo, and Artemio V. Panganiban.

N/A (The decision does not note any dissent.)