Cuyco vs. Cuyco

Interest due on a loan shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point, pursuant to Article 2212 of the Civil Code. A real estate mortgage does not secure future loans or advancements unless such future debts are sufficiently described in the mortgage contract, and a mere acknowledgment receipt indicating an intention to secure additional loans is insufficient in law to bind the realty, as a legal mortgage must be executed in a public document and recorded.

Petitioners, spouses Adelina and Feliciano Cuyco, obtained a loan of P1,500,000.00 from respondents, spouses Renato and Filipina Cuyco, payable within one year at 18% interest per annum, secured by a Real Estate Mortgage over a parcel of land with improvements in Cubao, Quezon City covered by TCT No. RT-43723 (188321). The parties were related by surname, suggesting a familial connection, though the decision does not elaborate on the precise relationship. The mortgage contract, dated November 26, 1991, contained no stipulation that the mortgaged realty would also secure future loans and advancements.

Petitioners, spouses Adelina and Feliciano Cuyco, obtained a loan of P1,500,000.00 from respondents, spouses Renato and Filipina Cuyco, payable within one year at 18% interest per annum, secured by a Real Estate Mortgage over a parcel of land with improvements in Cubao, Quezon City covered by TCT No. RT-43723 (188321). Subsequently, petitioners obtained additional loans from respondents in the aggregate amount of P1,250,000.00, broken down as follows: (1) P150,000.00 on May 30, 1992; (2) P150,000.00 on July 1, 1992; (3) P500,000.00 on September 5, 1992; (4) P200,000.00 on October 29, 1992; and (5) P250,000.00 on January 13, 1993.

Petitioners made payments amounting to P291,700.00 but failed to settle their outstanding loan obligations. On September 10, 1997, respondents filed a complaint for foreclosure of mortgage with the RTC of Quezon City, alleging that petitioners' loans were secured by the real estate mortgage; that as of August 31, 1997, their indebtedness amounted to P6,967,241.14, inclusive of the 18% interest compounded monthly; and that petitioners' refusal to settle the same entitled respondents to foreclose the real estate mortgage. Petitioners filed a motion to dismiss on the ground that the complaint states no cause of action, which was denied by the RTC for lack of merit. In their answer, petitioners admitted their loan obligations but argued that only the original loan of P1,500,000.00 was secured by the real estate mortgage at 18% per annum and that there was no agreement that the same would be compounded monthly.

The RTC rendered judgment in favor of respondents, ordering petitioners to pay P6,332,019.84 plus interest until fully paid, P25,000.00 as attorney's fees, and costs of suit. The RTC held that all the additional loans were secured by the real estate mortgage, reasoning that it was unlikely that plaintiffs required a mortgage on the first loan and thereafter failed to do so on succeeding loans. Petitioners appealed to the CA, reiterating that only the amount of P1,500,000.00 was secured by the real estate mortgage and contending that the RTC erred in imposing legal interest of 12% per annum on the stipulated interest of 18% from the filing of the case until fully paid.

The CA partially granted the appeal, holding that by express intention of the parties, the real estate mortgage secured the original P1,500,000.00 loan and the subsequent loans of P150,000.00 and P500,000.00 obtained on July 1, 1992 and September 5, 1992, respectively, as evidenced by acknowledgment receipts stating "as additional loan against mortgaged property TCT No. RT-43723 (188321) Q.C." and "as additional loan from mortgage property TCT RT-43723." As regards the loans obtained on May 31, 1992, October 29, 1992, and January 13, 1993, the appellate tribunal held that the parties never intended the same to be secured by the real estate mortgage. The CA also found that the trial court properly imposed 12% legal interest on the stipulated interest from the date of filing of the complaint.

• Legal Interest on Stipulated Interest: Petitioners contended that the imposition of the 12% legal interest per annum on the stipulated interest of 18% per annum computed from the filing of the complaint until fully paid was not provided in the real estate mortgage contract, thus, the same has no legal basis.
• Scope of Mortgage: Petitioners reiterated their claim that only the amount of P1,500,000.00 was secured by the real estate mortgage.
• Waiver of Cross-Assignment: Petitioners alleged that since their petition only raised the sole issue of interest on the interest due, respondents, by not filing their own petition for review, waived their privilege to bring matters for the Court's review that do not deal with the sole issue raised.

• Scope of Mortgage: Respondents contended that all five additional loans were intended by the parties to be secured by the real estate mortgage, and that the CA erred in ruling that only two of the five additional loans were secured by the real estate mortgage when the documents evidencing said loans would show at least three loans were secured by the real estate mortgage, namely: (1) P150,000.00 obtained on May 31, 1992; (2) P150,000.00 obtained on July 1, 1992; and (3) P500,000.00 obtained on September 5, 1992.

• Interest on Interest: Whether petitioners must pay respondents legal interest of 12% per annum on the stipulated interest of 18% per annum, computed from the filing of the complaint until fully paid.
• Loans Secured by the Mortgage: Whether the additional loans obtained by petitioners were secured by the real estate mortgage.
• Discharge of Mortgage: Whether payment of only the principal and the stipulated interest of 18% per annum is sufficient to discharge the real estate mortgage.

• Interest on Interest: Yes. The 12% legal interest on the stipulated interest of 18% per annum was correctly imposed from the filing of the complaint, pursuant to Article 2212 of the Civil Code, which provides that interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.
• Loans Secured by the Mortgage: Partially. Only the original loan of P1,500,000.00 and the additional loans of P150,000.00 (July 1, 1992) and P500,000.00 (September 5, 1992) were secured by the real estate mortgage. The other additional loans were not secured because the mortgage contract contained no dragnet clause, and the acknowledgment receipts were insufficient in law to bind the realty.
• Discharge of Mortgage: No. To discharge the real estate mortgage, petitioners must pay the total amount due, the 12% legal interest on the total amount due from finality until fully satisfied, the attorney's fees of P25,000.00, and the costs of suit, pursuant to Section 2, Rule 68 of the Rules of Court.

• Interest on Interest: The Court held that while a contract is the law between the parties, an existing law enters into and forms part of a valid contract without the need for the parties expressly making reference to it. Thus, the lower courts correctly applied Article 2212 of the Civil Code as the basis for the imposition of the legal interest on the stipulated interest due. The Court applied the rules in Eastern Shipping Lines, Inc. vs. Court of Appeals, which state that when an obligation consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing, and the interest due shall itself earn legal interest from the time it is judicially demanded. The Court derived a formula for the RTC's guidance: TOTAL AMOUNT DUE = [principal + interest + interest on interest] - partial payments made; Interest = principal x 18% per annum x no. of years from due date until finality of judgment; Interest on interest = Interest computed as of the filing of the complaint (September 10, 1997) x 12% x no. of years until finality of judgment; Total amount due as of the date of finality of judgment will earn an interest of 12% per annum until fully paid. The Court cited Rizal Commercial Banking Corporation vs. Alfa RTW Manufacturing Corporation for the proposition that the total amount due may be determined by the trial court through simple mathematical computation, as mathematics is an exact science.

• Loans Secured by the Mortgage: The Court noted that as a general rule, a mortgage liability is usually limited to the amount mentioned in the contract. However, the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. This stipulation is known as a "blanket mortgage clause" or "dragnet clause." While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract. The Court examined the pertinent provisions of the November 26, 1991 real estate mortgage and found that there was no stipulation that the mortgaged realty shall also secure future loans and advancements. Thus, the general rule applies. Even if the parties intended the additional loans to be secured by the same real estate mortgage, as shown in the acknowledgment receipts, it is not sufficient in law to bind the realty for it was not made substantially in the form prescribed by law. In order to constitute a legal mortgage, it must be executed in a public document, besides being recorded. A provision in a private document, although denominating the agreement as one of mortgage, cannot be considered as it is not susceptible of inscription in the property registry. By express provisions of Section 127 of Act No. 496, a mortgage affecting land is not deemed to be sufficient in law nor may it be effective to encumber or bind the land unless made substantially in the form therein prescribed, requiring, among other things, that the document be signed by the mortgagor in the presence of two witnesses and acknowledged before a notary public. What the parties could have done was to execute a new real estate mortgage or to amend the old mortgage conformably with the form prescribed by law. Failing to do so, the realty cannot be bound by such additional loans, which may be recovered by the respondents in an ordinary action for collection of sums of money.

• Discharge of Mortgage: The Court disagreed with the CA's holding that to discharge the real estate mortgage, payment only of the principal and the stipulated interest of 18% per annum is sufficient. Section 2, Rule 68 of the Rules of Court provides that the court shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due. Thus, the mortgaged property may be charged not only for the mortgage debt or obligation but also for the interest, other charges, and costs approved by the court. To discharge the real estate mortgage, petitioners must pay the total amount due, the 12% legal interest on the total amount due from finality until fully satisfied, the attorney's fees of P25,000.00, and the costs of suit.

• Interest on Interest (Anatocism) — Under Article 2212 of the Civil Code, interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. The Court applied this doctrine to hold that the stipulated 18% interest on the loans, as long as unpaid, also earns legal interest of 12% per annum computed from the date of the filing of the complaint until finality of the decision, such interest being due not to stipulation but to the mandate of the law.
• Dragnet Clause — A "dragnet clause" or "blanket mortgage clause" is a stipulation in a mortgage contract that secures future and other indebtedness beyond the amount named as consideration. While valid and binding between the parties, future debts must be sufficiently described in the mortgage contract; an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract. The Court held that the real estate mortgage in this case contained no such clause, and the acknowledgment receipts were insufficient to bind the realty.
• Formal Requirements of a Legal Mortgage — In order to constitute a legal mortgage, it must be executed in a public document, besides being recorded. A provision in a private document, although denominating the agreement as one of mortgage, cannot be considered as it is not susceptible of inscription in the property registry. Under Section 127 of Act No. 496, a mortgage affecting land must be made substantially in the form therein prescribed, requiring the document to be signed by the mortgagor in the presence of two witnesses and acknowledged before a notary public.

• "Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point." — This is the verbatim text of Article 2212 of the Civil Code, which the Court applied as the controlling provision for imposing legal interest on the stipulated interest from the filing of the complaint.
• "While a contract is the law between the parties, it is also settled that an existing law enters into and forms part of a valid contract without the need for the parties expressly making reference to it." — This passage articulates the principle that statutory provisions are deemed incorporated into contracts, justifying the imposition of legal interest even absent stipulation.
• "While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract." — This passage defines the limits of a dragnet clause and the requirement that future debts be sufficiently described in the mortgage contract.
• "In order to constitute a legal mortgage, it must be executed in a public document, besides being recorded. A provision in a private document, although denominating the agreement as one of mortgage, cannot be considered as it is not susceptible of inscription in the property registry." — This passage states the formal requirements of a legal mortgage and explains why the acknowledgment receipts were insufficient to bind the realty.

• Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78 — Controlling precedent establishing the comprehensive summary of rules on the computation of legal interest, which the Court applied to derive the formula for computing the total amount due.
• Rizal Commercial Banking Corporation vs. Alfa RTW Manufacturing Corporation, 420 Phil. 702 (2001) — Followed for the proposition that the total amount due on contracts of loan may be determined by the trial court through simple mathematical computation based on the formula specified, as mathematics is an exact science.
• Union Bank of the Philippines vs. Court of Appeals, G.R. No. 164910, September 30, 2005, 471 SCRA 751 — Cited for the general rule that a mortgage liability is usually limited to the amount mentioned in the contract, and for the definition of the "blanket mortgage clause" or "dragnet clause."
• Philippine Bank of Communications vs. Court of Appeals, 323 Phil. 297 (1996) — Cited for the principle that an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract.
• Dela Torre vs. Bicol University, G.R. No. 148632, August 31, 2005, 468 SCRA 542 — Cited for the principle that a contract is the law between the parties.
• Escorpizo vs. University of Baguio, 366 Phil. 166 (1999) — Cited for the principle that an existing law enters into and forms part of a valid contract without the need for the parties expressly making reference to it.

• Article 2212, Civil Code — Provides that interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. The Court applied this provision to impose 12% legal interest on the stipulated 18% interest from the filing of the complaint.
• Article 1169, Civil Code — Referenced in the Eastern Shipping Lines rules for the computation of interest from default, i.e., from judicial or extrajudicial demand.
• Article 2125, Civil Code — Cited by the RTC for the proposition that if the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the parties.
• Section 127, Act No. 496 — Provides that a mortgage affecting land is not deemed to be sufficient in law nor may it be effective to encumber or bind the land unless made substantially in the form therein prescribed, requiring the document to be signed by the mortgagor in the presence of two witnesses and acknowledged before a notary public.
• Section 2, Rule 68, Rules of Court — Provides that in a foreclosure action, the court shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due. The Court applied this provision to hold that the mortgaged property may be charged not only for the mortgage debt but also for interest, other charges, and costs.

• Panganiban, C.J. (Chairperson)
• Austria-Martinez, J.
• Callejo, Sr., J.
• Chico-Nazario, J.