DBP vs. West Negros College

In extrajudicial foreclosure of mortgage by the Development Bank of the Philippines, the redemption price is determined under Section 16 of Executive Order No. 81, which requires payment of the mortgagor's total outstanding obligation with interest at the rate agreed upon as of the date of the foreclosure sale, rather than merely the auction price plus one percent interest per month under Act 3135 and Section 30, Rule 39 of the Rules of Court; however, where the mortgagor and the bank's branch office had agreed to a specific compromise redemption price subject to head office approval, and the assignee of the mortgagor has stepped into the latter's shoes, the redemption price cannot be lower than such compromise amount, and the validity of compounded interest, penalties, and other charges must be determined through reception of evidence.

The case arises from a loan obtained by Bacolod Medical Center (BMC) from DBP in 1967, secured by a mortgage on two parcels of land. After BMC defaulted on the loan, DBP foreclosed the mortgage extrajudicially in 1989 and acquired the properties at public auction. Prior to the expiration of the one-year redemption period under Executive Order No. 81, BMC and DBP's Bacolod branch agreed to a compromise redemption price of P21.5 million, subject to head office approval. BMC paid a 20% installment and assigned its redemption rights to West Negros College. When DBP's head office rejected the compromise as inadequate, West Negros sought to redeem the properties based on the lower amount prescribed by Section 30, Rule 39 and Act 3135, precipitating a dispute over the applicable law and the proper computation of the redemption price.

• On December 12, 1967, Bacolod Medical Center (BMC) obtained a loan of P2,400,000.00 from the Development Bank of the Philippines (DBP), secured by a mortgage on two parcels of land (Lots Nos. 1397-A and 1397-B-1, covered by TCT Nos. T-25053 and T-29169), expressly subject to the provisions of Republic Act No. 85 creating the Rehabilitation Finance Corporation, DBP's predecessor.
• For failure to pay the loan, DBP instituted extrajudicial foreclosure proceedings under Act 3135 on January 30, 1989.
• On August 24, 1989, the mortgaged properties were sold at public auction with DBP emerging as the highest and only bidder for P4,090,117.36; the Ex-Officio Provincial Sheriff executed the certificate of sale in favor of DBP on August 25, 1989.
• The sale was registered with the Registry of Deeds on July 11, 1990 (Entry No. 166752) and annotated on the TCTs, making the redemption period expire on July 11, 1991 under Section 16 of Executive Order No. 81.
• Prior to the expiration of the redemption period, BMC and DBP's Bacolod branch office agreed to peg the redemption price at P21,500,000.00 as a compromise settlement of the outstanding account, subject to approval of DBP's head office; BMC committed to pay a 20% installment (P4,300,000.00) on or before August 31, 1991, which was paid in three separate payments after several extensions.
• On July 10, 1991, BMC executed a Deed of Assignment assigning its interests in the foreclosed properties and vesting upon West Negros College the right to redeem them.
• West Negros demanded reduction of the redemption price to P12,768,432.90 allegedly due to excessive interest charges.
• On October 27, 1991, DBP's head office rejected the compromise amount of P21,500,000.00 because it was below the re-appraised value of P28,895,500.00 as of May 31, 1991.
• On November 8, 1991, West Negros requested the Ex-Officio Provincial Sheriff to issue a certificate of redemption based on Section 30, Rule 39 of the Rules of Court and Act 3135 (auction price plus 1% interest), and paid the computed amount including a deficit of P358,128.58 settled on November 12, 1991.
• On November 14, 1991, DBP objected to the issuance of the certificate of redemption, arguing that West Negros had no personality to redeem and that the redemption price must be based on the DBP charter requiring payment of the total indebtedness with interest at the agreed rate; DBP refused to surrender the TCTs and caused the registration of its adverse claim.

• West Negros College (Movant for Reconsideration) argued that it is desirous of redeeming the subject properties but challenges the legality of the amount claimed by DBP as the total outstanding obligation.
• It contended that DBP allegedly compounded the interest due and imposed penalties on the principal amount and interest on expenses, which were neither expressly agreed upon by the parties nor imposed from the time of judicial demand in accordance with Article 2212 of the Civil Code, violating due process.
• It alternatively prayed for the remand of the case to the lower court for determination of the exact amount to be paid.
• It attached Promissory Notes dated July 19, 1966 and December 12, 1967 allegedly showing that the agreed interest was only 12% per annum on unpaid interests and amortizations, without authorization for compounding.
• It argued that DBP is estopped by its agreement to reduce the redemption amount to P21,500,000.00, acceptance of the 20% partial payment, and representation that BMC would be allowed to redeem the property.
• It challenged the constitutionality of Executive Order No. 81 for the first time, alleging it violates the non-impairment clause of the Constitution by giving DBP unbridled authority to determine the redemption amount.

• DBP countered that the Promissory Notes attached by West Negros were non-existent or inapplicable: the July 19, 1966 PN referred to an earlier fully paid loan, while the December 12, 1967 PN had been superseded by a supplemental document and another PN dated January 6, 1975 which authorized the imposition of compounded interest, penalties, and other charges.
• It argued that it cannot be deemed in estoppel by its acceptance of the P4,300,000.00 deposit because the deposit was accepted conditionally as part of the redemption price only if approved by DBP's higher management, which was never obtained.
• It stressed that the Motion for Reconsideration raised factual issues regarding the validity of interest impositions which the Supreme Court, not being a trier of facts, cannot pass upon.
• It noted that the constitutionality of E.O. 81 was never raised in the proceedings below and was being raised for the first time in the motion.
• It maintained that the redemption price must be determined under E.O. 81 based on the total outstanding obligation.

• Procedural Issues:
  • Whether the Supreme Court may determine factual issues regarding the validity of compounded interest, penalties, and other charges when these issues were raised for the first time only in the Motion for Reconsideration.
  • Whether the case should be remanded to the Court of Appeals for reception of evidence to determine the exact redemption price.
• Substantive Issues:
  • Whether the redemption price for properties foreclosed by DBP should be determined under Executive Order No. 81 or under Section 30, Rule 39 of the Rules of Court and Act 3135.
  • Whether the imposition of compounded interest, penalties, and other charges by DBP is valid under the terms of the promissory notes and the Civil Code.
  • Whether DBP is estopped from collecting a redemption price higher than the compromise amount of P21,500,000.00 by virtue of its branch office's agreement and acceptance of partial payment.
  • Whether Executive Order No. 81 is unconstitutional for violating the non-impairment clause of the Constitution.

• Procedural: The Supreme Court held that while it is not a trier of facts and generally cannot entertain matters neither alleged in the pleadings nor raised during the proceedings below but ventilated for the first time only in a Motion for Reconsideration, the remand of the case to the Court of Appeals is both necessary and appropriate given compelling legal and equitable considerations. The determination of the validity of compounded interest, penalties, and other charges, and the consequent computation of the total redemption price, requires reception of evidence that is indispensable to the complete adjudication of the case.
• Substantive: The Court reaffirmed that Executive Order No. 81 applies to DBP foreclosures, requiring the redemption price to be the balance of the credit of BMC (as assumed by West Negros) secured by the properties plus expenses and the agreed rate of interest computed as of the date of the public auction on August 24, 1989. The Court held that West Negros, as assignee of BMC, is estopped from claiming a redemption price lower than P21,500,000.00 because it stepped into the shoes of BMC, who had agreed to this compromise amount; conversely, DBP is not estopped because its Bacolod branch's agreement was expressly subject to approval of the head office, which was never obtained. The Court rejected the constitutional challenge to E.O. 81, applying the presumption of constitutionality and the principle that constitutional issues must be the lis mota of the case and properly raised at the earliest opportunity. The Court granted the Motion for Reconsideration only insofar as seeking the determination of the total redemption price, remanding the case to the Court of Appeals for reception of evidence solely for the purpose of determining the basis for or propriety of the imposition of compounded interest, penalties, and other charges, and the computation of the total outstanding obligation, which shall in no case be lower than P21,500,000.00.

• Redemption Price in DBP Foreclosures — Under Section 16 of Executive Order No. 81, the redemption price for properties extrajudicially foreclosed by DBP is the mortgagor's total outstanding obligation with interest at the rate agreed upon as of the date of foreclosure sale, not merely the auction price plus 1% monthly interest under Section 30, Rule 39 of the Rules of Court and Act 3135 which apply to ordinary extrajudicial foreclosures.
• Estoppel Through Assignment (Stepping into the Shoes) — An assignee of redemption rights steps into the shoes of the assignor and is bound by the assignor's agreements and commitments, including prior agreements on redemption price made before the assignment.
• Condition Precedent in Agency Relations — An agreement made by a branch office subject to approval of the head office does not bind the principal until such approval is obtained; hence, no estoppel arises against the principal for actions taken by the branch pending approval, nor can the principal be bound by unauthorized representations.
• Extension of Redemption Period by Agreement — The statutory one-year redemption period under E.O. 81 may be extended by agreement of the parties, as evidenced by the mortgagee's acceptance of installment payments of the redemption price beyond the expiration of the statutory period.
• Presumption of Constitutionality — All presumptions are indulged in favor of the constitutionality of statutes; one who attacks a statute alleging unconstitutionality must prove its invalidity beyond a reasonable doubt.
• Lis Mota Principle — The Supreme Court does not decide questions of a constitutional nature unless the issue is properly raised in appropriate cases and is necessary to the determination of the case, meaning the issue must be the very lis mota presented and not raised belatedly.
• Compounded Interest under the Civil Code — Interest due and unpaid shall not earn interest (compounded) unless expressly stipulated by the parties (Article 1959) or judicially demanded (Article 2212).

• "in redeeming the foreclosed property respondent West Negros College as assignee of Bacolod Medical Center should pay the balance of the amount owed by the latter to petitioner DBP with interest thereon at the rate agreed upon as of the date of the public auction on 24 August 1989."
• "The right of legal redemption must be exercised within specified time limits. However, the statutory period of redemption can be extended by agreement of the parties."
• "West Negros, therefore, is estopped from claiming that the redemption price may be reduced to an amount lower than P21,500,000.00."
• "It is well-settled that all presumptions are indulged in favor of constitutionality, such that one who attacks a statute, alleging unconstitutionality must prove its invalidity beyond a reasonable doubt."
• "This Court does not decide questions of a constitutional nature unless that question is properly raised and presented in appropriate cases and is necessary to a determination of the case, i.e., the issue of constitutionality must be the very lis mota presented."

• Spouses Estanislao, Jr. v. Court of Appeals — Cited for the principle that the right of legal redemption must be exercised within specified time limits.
• Ibaan Rural Bank, Inc. v. Court of Appeals — Cited for the principle that the statutory period of redemption can be extended by agreement of the parties.
• Mirasol v. CA and Suan v. NLRC — Cited to emphasize that the Supreme Court is not a trier of facts.
• Solid Homes, Inc. v. CA — Cited for the rule that higher courts are precluded from entertaining matters neither alleged in the pleadings nor raised during the proceedings below but ventilated for the first time only in a motion for reconsideration or on appeal.
• Caleon v. Agus Development Corporation — Cited for the doctrine of presumption of constitutionality.
• Tropical Homes, Inc. v. National Housing Authority — Cited for the lis mota principle regarding constitutional challenges.

• Executive Order No. 81, Section 16 — Governs the right of redemption for mortgagors whose properties were extrajudicially sold at public auction by DBP, requiring payment of all of the Bank's claims against the mortgagor as determined by the Bank.
• Act 3135 — The Extrajudicial Foreclosure Law, specifically cited in contrast to E.O. 81 regarding the determination of redemption price.
• Section 30, Rule 39 of the Rules of Court — Provides for redemption within one year from registration of sale by paying the purchase price plus 1% interest per month, cited as inapplicable to DBP foreclosures covered by E.O. 81.
• Article 1959 of the Civil Code — Provides that interest due and unpaid shall not earn interest unless expressly stipulated by the parties that it be capitalized.
• Article 2212 of the Civil Code — Provides that interest due shall earn legal interest from the time it is judicially demanded.
• Section 7, Rule 51 of the Rules of Court — Provides that only errors specifically assigned and properly argued in the brief will be considered on appeal.