Cruz vs. Metropolitan Bank and Trust Company

The absence of an underlying basis to foreclose — where the mortgage was not violated because the secured loan was fully paid, was not delinquent, or its existence is genuinely uncertain due to the creditor's failure to render a complete and accurate accounting as established by final judgment — constitutes a valid ground to annul the foreclosure sale and deny the writ of possession.

Carmelita C. Cruz and Vilma Low Tay, doing business as Republic Shoes & Handbags Manufacturing, were borrowers of Metropolitan Bank and Trust Company from 1993 to 2004, with their obligation secured by a real estate mortgage over property covered by Transfer Certificate of Title No. PT-66603 of Pasig City. Banking business is imbued with public interest, founded on trust and confidence and bound to observe high standards of integrity in recording payments and handling clients' accounts with extraordinary diligence.

From 1993 to 2004, Carmelita C. Cruz and Vilma Low Tay, doing business as Republic Shoes & Handbags Manufacturing, obtained various loans from Metropolitan Bank and Trust Company secured by a mortgage over property covered by Transfer Certificate of Title No. PT-66603 in Pasig City. After alleged nonpayment, the parties restructured, and Cruz et al. executed a promissory note dated April 15, 2004 for PHP 8,600,000.00. Metrobank alleged the restructured loans remained unpaid, while Cruz et al. denied default, complained of inaccurate records, and, after hiring an accountant to audit receipts, cleared checks and promissory notes, claimed overpayment of PHP 3,540,529.55 as of September 21, 2004 against Metrobank's claim of PHP 8,344,188.55 collectible as of September 30, 2004.

Thereafter, on May 4, 2005, Cruz et al. filed the Accounting case before the Marikina Regional Trial Court. Almost five years after the alleged nonpayment of the restructured loans, on January 6, 2009, Metrobank filed a petition for extrajudicial foreclosure before the Pasig Regional Trial Court. Having emerged as highest bidder, Metrobank obtained a Certificate of Sale, registered it, caused cancellation of TCT No. PT-66603 and issuance of TCT No. 011-2012002076 in its name, then filed an ex parte petition for a writ of possession. Aggrieved, Cruz et al. sued to annul the foreclosure, insisting there was no basis to foreclose without a full accounting and that overpayment should first be resolved; the annulment case and the writ petition were consolidated.

According to petitioners' audit, they had paid a total of PHP 32,648,374.60 from 1993 to 2004 but the bank recorded only PHP 20,507,855.05, leaving PHP 12,140,519.55 unaccounted, so that even deducting the PHP 8,600,000.00 restructured balance an overpayment remained. They attributed the discrepancy to delayed recording increasing interest, failure to account for a dacion en pago, non-issuance of receipts for lump-sum payments, and failure to record some checks. The Marikina court found for petitioners and ordered a complete accounting; the Pasig court likewise found no categorical default, declared the extrajudicial proceedings in EJF File No. 5560 null and void, denied the writ, and awarded moral, exemplary damages and attorney's fees.

• Breach of Trust: Petitioner argued that respondent bank is liable for breach of trust — a ground to annul a foreclosure sale — by foreclosing without awaiting the outcome of the Accounting case despite early notice of overpayment and deficient records.
• Absence of Default and Prematurity: Petitioner maintained that they cannot be deemed in default in the absence of a final and complete accounting of payments, making the 2009 foreclosure premature and without factual and legal basis.
• Nullity of Sale and Writ: Petitioner argued that the foreclosure sale and subsequent writ of possession in the bank's favor must be void for lack of factual and legal basis pending resolution of the true indebtedness.

• Overpayment Not an Irregularity: Respondent countered, echoing the Court of Appeals, that alleged overpayment does not pertain to an irregularity committed during the foreclosure sale itself, and that loan validity and foreclosure validity are different stages not conclusively determinative of each other.
• Breach of Trust Limited to Purchaser's Act: Respondent argued that breach of trust in annulment cases must involve an act committed by a purchaser during the foreclosure sale, not by a creditor-mortgagee before it.
• Ministerial Writ: Respondent maintained that issuance of a writ of possession in its favor as purchaser is merely a ministerial act on the part of the trial court.

• Prematurity of Foreclosure: Whether respondent bank prematurely foreclosed the mortgage pending accounting of petitioners' total payments.
• Annulment of Sale and Writ: Whether the foreclosure sale and the writ of possession issued in respondent bank's favor should be annulled.

• Prematurity of Foreclosure: Yes. Foreclosure was premature where a final judgment established the bank's failure to render a complete accounting, leaving genuine uncertainty whether the secured obligation was unpaid or extinguished.
• Annulment of Sale and Writ: Yes. The extrajudicial proceedings were null and void for lack of underlying basis, and the writ of possession, being dependent on a valid foreclosure, was properly denied.

• Prematurity of Foreclosure: Annulment is not confined to fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser, unfair conduct of sale, or shocking inadequacy of price, as those specific grounds address irregularities during the sale. A distinct, fundamental ground exists where there was no basis to foreclose because the mortgage was not violated — the secured debt being fully paid, not delinquent, or extinguished under Article 1231 of the New Civil Code. A mortgage being accessory to the principal mutuum, complete payment terminates the accessory obligation. Foreclosure being valid only upon default and as a consequence of non-payment of mortgage indebtedness when due, Section 8 of Act No. 3135, as amended, likewise allows setting aside the sale where the mortgage was not violated. Ordinarily, failure to render an accounting is not a ground for annulment, but the final and executory judgment in Metropolitan Bank and Trust Company vs. Cruz ordering remand for complete accounting required a nuanced approach.
• Annulment of Sale and Writ: The final accounting judgment operates as res judicata by conclusiveness of judgment: final, rendered by courts with jurisdiction over subject matter and parties, on the merits, with identity of parties though different causes of action, conclusively settling the bank's remissness and the ambiguity of the records. To allow foreclosure without resolving discrepancies would dilute the essence of payment and contradict that immutable judgment, which may no longer be modified in any respect. Guided by fairness, the banks' fiduciary duty and extraordinary diligence, sanctioning foreclosure on proven deficient records was unjustified and would burden petitioners with relitigation to reclaim the property if full payment is later found. The writ of possession being merely a consequence dependent on the validity of foreclosure and auction, any flaw in the preceding stages defeats its issuance.

• Accessory Nature of Mortgage — A real estate mortgage is an accessory contract to the principal loan or mutuum, whose validity flows from the principal contract. Complete payment of the restructured loans extinguishes the principal obligation and effectively terminates the accessory mortgage, removing any basis to foreclose.
• Foreclosure Only Upon Default — Foreclosure is valid only when the debtor is in default, being simply a consequence of non-payment of mortgage indebtedness. As a rule, the mortgage can only be foreclosed when the debt remains unpaid at the time it is due.
• Grounds to Annul Foreclosure Sale — The settled specific grounds are (1) fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser, (2) unfair or irregular conduct of sale, or (3) inadequacy of price so great as to shock conscience. Beyond these sale-stage irregularities, absence of underlying basis — mortgage not violated because loan fully paid or not delinquent — is a fundamental ground for annulment, consistent with Section 8 of Act No. 3135, as amended.
• Res Judicata by Conclusiveness of Judgment — Any right, fact, or matter directly adjudicated or necessarily involved in a prior action before a competent court is conclusively settled and cannot be relitigated between the same parties and privies even if causes of action differ. Requisites are (1) final judgment sought to bar the new action, (2) rendered by a court with jurisdiction over subject matter and parties, (3) judgment on the merits, and (4) identity of parties. Applied to bar reliance on the bank's claim of default in light of the final accounting judgment.
• Immutability of Judgment — A judgment that has acquired finality becomes immutable and unalterable and may no longer be modified in any respect. Applied to preserve the final finding that the bank failed its accounting duty and that the true indebtedness remained undetermined.
• Extraordinary Diligence and Fiduciary Duty of Banks — Banking business is imbued with public interest; the bank-client relationship rests on trust and confidence, obliging banks to accurately record payments, conduct precise accounting, furnish loan documents, and exercise extraordinary diligence with utmost fidelity and care. Breach of this duty justified annulling foreclosure pending proper accounting.
• Writ of Possession Dependent on Valid Foreclosure — Issuance of a writ of possession is merely a consequence of, and dependent on, the validity of the foreclosure and public auction. A flaw affecting preceding stages affects its validity, so a creditor-purchaser cannot insist on possession pending determination of the extrajudicial foreclosure's validity.

• "The foreclosure is simply a consequence of the non-payment of mortgage indebtedness." — States the default prerequisite for valid foreclosure, supporting annulment where no categorical default was shown.
• "All told, a circumspect scrutiny of the loan documents and a proper accounting of the payments remitted will finally settle the question of whether or not there was an overpayment of the loan." — Defines why remand for full accounting was affirmed in the prior accounting case and why foreclosure could not proceed beforehand.
• "Indeed, Metrobank's business is imbued with public interest. Its relationship with the respondents was based on trust and confidence." — Anchors the bank's fiduciary duty to accurately record payments and render a thorough accounting.
• "Finally, the issuance of a writ of possession is merely a consequence of, and is dependent on the validity of the foreclosure and the public auction." — States the dependency rule that defeats the writ once the foreclosure is voided.

• Rizal Commercial Banking Corporation vs. Buenaventura, 646 Phil. 673 (2010) — Controlling on the rule that foreclosure is valid only upon default and as a consequence of unpaid mortgage indebtedness when due.
• Metropolitan Bank and Trust Company vs. Cruz, 894 Phil. 177 (2021) — Prior final judgment between the same parties affirming remand for complete accounting; given conclusive and immutable effect on the issue of uncertainty of indebtedness.
• Philippine National Bank vs. Spouses Roque, 681 Phil. 58 (2012); United Coconut Planters Bank vs. Spouses Beluso, 557 Phil. 326 (2007) — Source of the settled specific grounds for annulment of foreclosure sale, clarified as specific rather than exclusive.
• Selegna Management and Development Corporation vs. United Coconut Planters Bank, 522 Phil. 671 (2006) — Cited for complete payment under Article 1233 and for the ordinary rule that failure to render an accounting is not a ground to annul, distinguished here by the intervening final accounting judgment.
• Heirs of Eutiquio Elliot vs. Corcuera, 880 Phil. 232 (2020) — Authority for the elements of res judicata by conclusiveness of judgment applied to the accounting judgment.
• Cometa vs. Intermediate Appellate Court, 265 Phil. 569 (1987) — Authority that the writ of possession depends on the validity of foreclosure and auction.
• Montehermoso vs. Batuto, 891 Phil. 532 (2020) — Authority for immutability of final judgments.
• Luntao vs. BAP Credit Guaranty Corporation, 818 Phil. 545 (2017) — Authority that mortgage validity flows from the principal loan as accessory contract.

• Article 1231, New Civil Code — Enumerates modes of extinguishing obligations including payment or performance, loss, condonation, confusion, compensation, and novation; applied to show full payment terminates the principal loan and thus the accessory mortgage.
• Article 1233, New Civil Code — Provides a debt is not understood paid unless the thing or service has been completely delivered or rendered; underlies the need to determine complete payment before foreclosing.
• Section 8, Act No. 3135, as amended by Act No. 4118 — Allows the debtor, within the stated period after the purchaser is given possession, to petition to set aside the sale and cancel the writ of possession because the mortgage was not violated or the sale was not made per law; applied as statutory basis for annulment where the mortgage was not violated or indebtedness was uncertain.
• Rule 38, Section 47(c), Rules of Court — Cited as basis for res judicata by conclusiveness of judgment barring relitigation of matters adjudicated in the final accounting case.

Leonen, SAJ. (Chairperson), Lazaro-Javier, Kho, Jr., and Singh, JJ., concur. Singh, J., designated additional member in lieu of Associate Justice Jhosep Y. Lopez per Raffle dated October 25, 2022.