Development Bank of the Philippines vs. Court of Appeals

A permanent injunction must be tailored to the requirements of the case and should not be more comprehensive or restrictive than justified by the pleadings, evidence, and usages of equity. An injunctive order that perpetually bars a mortgagee from foreclosing its real estate mortgage, when the injunction was issued merely to preserve the status quo pending resolution of the main case, exceeds the bounds of what is necessary and effectively deprives the mortgagee of its lien without due process of law. Furthermore, moral damages cannot be awarded under Article 19 of the New Civil Code absent proof of malice or bad faith, which must be established by clear and convincing evidence, good faith being presumed.

The Spouses Jacinto Gotangco and Charity Bantug were the registered owners of seven parcels of land in Palayan City, covered by TCT Nos. NT-166092 to NT-166098, and were also awardees of a separate parcel, Lot No. 168, under a sales patent from the Bureau of Lands. They obtained a loan from the Development Bank of the Philippines (DBP) for their poultry project, secured by a real estate mortgage over the seven parcels. The DBP, as a government financial institution, was subject to Presidential Decree No. 385, which mandated foreclosure of collaterals when arrearages reached at least twenty percent of the total outstanding obligation.

The Spouses Jacinto Gotangco and Charity Bantug owned seven parcels of land in Palayan City, covered by TCT Nos. NT-166092 to NT-166098, and were also awardees of Lot No. 168 under a sales patent. On August 22, 1980, they secured a P121,400.00 loan from the DBP for their poultry project, executing a real estate mortgage over the seven parcels. On December 16, 1981, they executed a Deed of Undertaking obliging themselves to secure a sales patent over Lot No. 168 within two years and to deliver the owner's duplicate certificate of title to the DBP for annotation of the mortgage.

On July 17, 1982, the Spouses Gotangco executed a contract to sell over the seven mortgaged parcels in favor of Elpidio O. Cucio for P50,000.00, payable in two installments directly to the DBP and applied to the mortgage indebtedness. The contract was known to the DBP. Cucio made remittances of P16,000.00 and P5,000.00, for which the DBP issued Official Receipt No. 2792644 dated February 18, 1983. The DBP informed Jacinto Gotangco of these remittances and requested the turnover of the owner's copy of the title over Lot No. 168 to effect substitution of the collateral.

The Spouses Gotangco secured a sales patent over Lot No. 168, and TCT No. NT-177647 was issued on March 23, 1983. They turned over the owner's duplicate to the DBP, and the mortgage was annotated thereon. The DBP kept the owner's copies of all titles. On July 23, 1983, Jacinto Gotangco remitted P57,097.36 in partial payment of the loan. In 1984, Cucio paid the balance of the purchase price to the DBP. The Spouses Gotangco applied for loan restructuring, which the DBP approved, and in a letter dated October 14, 1983, the DBP informed Cucio of the approval and requested completion of the downpayment so that substitution of collateral and execution of the deed of absolute sale could be effected.

On July 3, 1988, the poultry farm was gutted by fire. The DBP's pool of accredited insurance companies offered to settle the insurance claim for P167,149.14, but the Spouses apparently did not respond. On February 20, 1989, the DBP demanded payment of the loan balance of P408,026.96 within ten days, but the Spouses failed to respond. By September 30, 1989, the outstanding principal amounted to P246,183.74. The DBP reminded the Spouses that the loan would mature on June 30, 1991.

Cucio then filed a complaint for injunction and damages against the Spouses Gotangco and the DBP, alleging that despite his full payment of the purchase price and demands for turnover of the titles, the DBP refused to release them and even demanded interest payments. The Spouses Gotangco answered with a counterclaim, alleging that they could not be faulted for failing to execute the deed of sale because Cucio did not notify them of his complete payment, and that the DBP, having given implied consent to the contract to sell, was obliged to release the titles after complete payment. They also filed a cross-claim against the DBP. The DBP admitted receiving the P50,000.00 but only as deposit, and denied consenting to the transaction.

While the case was pending, the DBP sent letters dated February 20, 1990 and May 24, 1990 warning the Spouses of foreclosure proceedings, the latter stating the obligation amounted to P737,474.33 as of April 30, 1990. On June 8, 1990, the DBP filed an application for extrajudicial foreclosure, and Deputy Sheriff Rubentito Elonia issued a Notice of Sale set for June 28, 1990. The Spouses Gotangco filed a petition for a writ of preliminary injunction, which the trial court granted on October 4, 1990 on a bond of P50,000.00, the writ being issued on November 12, 1990. The trial court issued a subpoena duces tecum to the DBP cashier for production of bank records, but the cashier failed to comply. Jacinto Gotangco testified that he suffered mental anguish and serious anxieties due to the threatened foreclosure. He died on February 8, 1992, survived by his wife and children.

The RTC rendered judgment on April 14, 1992, ordering the DBP to release the owner's duplicate certificates of title, declaring the preliminary injunction permanent, ordering the Gotangcos to execute a deed of absolute sale in favor of Cucio, and awarding P250,000.00 moral damages. The trial court found that the DBP was legally bound to release the titles, that the foreclosure was premature and made in bad faith to harass the Spouses, and that the DBP failed to prove the exact balance of the account. On appeal, the CA affirmed with modification, reducing moral damages to P50,000.00, and later modified its decision to provide that the DBP shall be entitled to possession of the new certificates of title until the mortgage indebtedness is fully satisfied.

• Permanent Injunction Nullifying Mortgage Lien: The DBP argued that the permanent injunction issued by the trial court and affirmed by the CA effectively nullified its mortgage lien over the properties and contravened the mandatory provisions of P.D. No. 385, which requires government financial institutions to foreclose collaterals when arrearages reach at least twenty percent of the total outstanding obligation.

• No Basis for Moral Damages: The DBP contended that there was neither factual nor legal basis for the grant of moral damages in favor of the Gotangcos, as it cannot be held liable for exercising its right under the real estate mortgage and the law, and any mental anguish suffered qualified as damnum absque injuria. The DBP further argued that the foreclosure did not push through because of the injunction, so no damage was done.

• DBP's Obligation to Release Titles: The Spouses Gotangco argued that they could not be faulted for failing to execute the deed of sale because Cucio did not notify them of his complete payment, and that the DBP, having given implied consent to the contract to sell, was obliged to release the titles after complete payment was made, following the submission of the substitute collateral.

• Premature Foreclosure: The Spouses Gotangco maintained that the DBP prematurely sought extrajudicial foreclosure during the pendency of the case, which would render the main case moot and academic, and that the DBP failed to prove the exact balance of their account.

• Scope of Permanent Injunction: Whether the permanent injunction issued by the RTC and affirmed by the CA, which perpetually barred the DBP from foreclosing the real estate mortgage, was valid and proper under the circumstances.

• Moral Damages: Whether the award of moral damages in favor of the Spouses Gotangco was supported by sufficient factual and legal basis.

• Scope of Permanent Injunction: No. The permanent injunction was deleted as overly broad. The injunction should have been limited to enjoining the specific foreclosure application filed on May 24, 1990, and the sale at public auction, not perpetually barring the DBP from foreclosing under any and all circumstances. The trial court's purpose in issuing the writ was to preserve the status quo pending resolution of the main case, and once the main case was decided, the writ became functus officio.

• Moral Damages: No. The award of moral damages was deleted for lack of factual and legal basis. The Spouses Gotangco failed to prove malice or bad faith on the part of the DBP in seeking extrajudicial foreclosure, which is the core element of abuse of rights under Article 19 of the New Civil Code. Charity Bantug Gotangco did not testify, and there was no factual basis for the award in her favor.

• Scope of Permanent Injunction: The Court held that an injunction order must be as definite, clear, and precise as possible, and should inform the defendant of the act he is refrained from doing without calling for inferences or conclusions. A permanent injunction should not be more comprehensive or restrictive than justified by the pleadings, evidence, and usages of equity, and should be tailored to each case. The trial court issued the permanent injunction to enjoin the DBP from pursuing its application for extrajudicial foreclosure dated May 24, 1990 and the sale at public auction, on its finding that the DBP failed to prove the balance of the account. The RTC did not intend to perpetually foreclose the DBP's right to file another application for foreclosure under any and all circumstances. Otherwise, the DBP would be deprived of its right to foreclose the real estate mortgage, to cause the sale of the property at public auction, and to collect the balance of the account as provided under the Real Estate Mortgage and the New Civil Code. The mortgage lien is a right in rem, a vested interest affording specific security for the satisfaction of the debt, and the lien subsists until destroyed by sale of the property. The trial court's order dated October 4, 1990 granting the preliminary injunction explicitly stated that it was issued "pending resolution on the matters raised in the main case." Once the trial court resolved the main case, the writ of preliminary injunction became functus officio, and there was no longer a valid justification for a permanent injunction. The CA erred in affirming the permanent injunction on the ground that the trial court failed to determine the exact amount of the balance, since the Spouses themselves adduced in evidence the statement of account issued by the DBP showing the balance, and the trial court itself stated that the injunction was issued not because of the failure to pay 20% of the account but because foreclosure would render the main case moot and academic.

• Moral Damages: The Court agreed with the trial court and the CA that the initiation of extrajudicial foreclosure pendente lite was premature and inappropriate, as the DBP should have waited until the trial court had decided the case on its merits. However, the Court found no sufficient basis for the award of moral damages based on Article 19 of the New Civil Code. The elements of abuse of rights are: (a) the existence of a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another. Malice or bad faith is at the core of the provision. Good faith is presumed, and he who alleges bad faith has the duty to prove it. The Spouses Gotangco failed to prove malice on the part of the DBP. There was a divergence of opinion between the parties regarding whether Cucio's payments were mere deposits or partial payments and whether the Spouses had agreed to the insurance settlement offer, but the bare fact that the DBP filed its application for extrajudicial foreclosure notwithstanding those differences cannot give rise to the conclusion that it did so with malice to harass the Spouses. The records show that the DBP repeatedly sent notices and demanded payment, but the Spouses failed to comply, and interests and penalties accrued. Under the terms of the real estate mortgage and its charter, the DBP had the right to foreclose extrajudicially. The Spouses filed for a preliminary injunction instead of settling their account, and the foreclosure was aborted because of the injunction. Under the circumstances, the DBP did not act in bad faith or with malice in seeking extrajudicial foreclosure.

• Scope of Injunctive Relief — An injunction order must be as definite, clear, and precise as possible and should inform the defendant of the act he is refrained from doing, without calling on him for inferences or conclusions about which persons might well differ. A permanent injunction should not be more comprehensive or restrictive than justified by the pleadings, evidence, and usages of equity, and should be limited to the requirements of the case. The Court applied this doctrine to delete the permanent injunction, holding that it was broader than necessary because it perpetually barred the DBP from foreclosing the mortgage under any circumstances, when the trial court's purpose was merely to preserve the status quo pending resolution of the main case.

• Abuse of Rights (Article 19, New Civil Code) — The elements of abuse of rights are: (a) the existence of a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another. Malice or bad faith is at the core of the provision. Good faith is presumed, and he who alleges bad faith has the duty to prove the same. The Court applied this doctrine to delete the award of moral damages, holding that the Spouses Gotangco failed to prove malice or bad faith on the DBP's part in seeking extrajudicial foreclosure, as the DBP had the right to foreclose under the mortgage and its charter, and the Spouses failed to settle their account despite repeated demands.

• Mortgage Lien as a Right In Rem — A mortgage lien is a right in rem, a lien on the property, a vested interest affording specific security for the satisfaction of the debt, which constitutes a cloud on the legal title. The lien subsists until the destruction thereof by sale of the property. The Court applied this doctrine to emphasize that the permanent injunction effectively deprived the DBP of its lien over the property without due process of law, as it perpetually barred the DBP from foreclosing the mortgage.

• "An injunction order must be as definite, clear and precise as possible and, when practicable, it should inform the defendant of the act he is refrained from doing, without calling on him for inferences or conclusions about which persons might well differ. A permanent injunction should not be more comprehensive or restrictive than justified by the pleadings, evidence and usages of equity." — This passage articulates the controlling doctrine on the scope of injunctive relief, which the Court applied to delete the permanent injunction as overly broad.

• "The elements of abuse of rights are the following: (a) the existence of a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another. Malice or bad faith is at the core of said provision." — This passage defines the canonical formulation of abuse of rights under Article 19 of the New Civil Code, which the Court applied to delete the award of moral damages.

• "The bare fact that the petitioner filed its application of the extrajudicial foreclosure of the mortgage, notwithstanding those differences, cannot thereby give rise to the conclusion that the petitioner did so with malice, to harass the Spouses Gotangco." — This passage states the Court's reasoning for finding no bad faith on the DBP's part, as the DBP had repeatedly demanded payment and the Spouses failed to comply, and the DBP had the right to foreclose under the mortgage and its charter.

• Valenzuela vs. Court of Appeals, 253 SCRA 303 (1996) — Cited for the rule that under Rule 45 of the Rules of Civil Procedure, only questions of law may be raised in a petition for review on certiorari, but the Court may delve into questions of fact if grave abuse is shown or findings are contrary to the evidence on record.

• Ganzon vs. Inserto, 123 SCRA 713 (1983) — Cited for the doctrine that a mortgage lien is a right in rem, a lien on the property.

• The Government of the Philippine Islands vs. Mercado, 67 Phil. 400 (1939) — Cited for the doctrine that a mortgage lien, like an attachment lien, is a vested interest, an actual and substantial security, affording specific security for the satisfaction of the debt, which constitutes a cloud on the legal title.

• ABS-CBN Broadcasting Corporation vs. Court of Appeals, 301 SCRA 572 (1999) — Cited for the elements of abuse of rights under Article 19 of the New Civil Code.

• Chua vs. Court of Appeals, 242 SCRA 341 (1995) — Cited for the rule that good faith is presumed and he who alleges bad faith has the duty to prove the same.

• Cojuangco, Jr. vs. Court of Appeals, 309 SCRA 602 (1999) — Cited for the definition of bad faith as dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of known duty due to some motives or interest or ill-will that partakes of the nature of fraud.

• Borjal vs. Court of Appeals, 301 SCRA 1 (1999) — Cited for the definition of malice as ill-will or spite, implying an intention to do ulterior and unjustifiable harm.

• Section 1, P.D. No. 385 — Mandates government financial institutions to foreclose collaterals for any loan whenever arrearages amount to at least twenty percent of the total outstanding obligations, without prejudice to the exercise of other rights and remedies available under their contracts, including the right to foreclose on loans where arrearages are less than twenty percent. The Court applied this provision to emphasize that the DBP had the right to foreclose the mortgage, and the permanent injunction contravened this right.

• Section 2, P.D. No. 385 — Prohibits courts from issuing restraining orders, temporary or permanent injunctions against government financial institutions in actions taken in compliance with the mandatory foreclosure provision, except after due hearing in which it is established by the borrower and admitted by the financial institution that twenty percent of the outstanding arrearages has been paid after the filing of foreclosure proceedings. The Court applied this provision to underscore that the permanent injunction against the DBP was improper.

• Article 19, New Civil Code — Provides that every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. The Court applied this provision to determine whether the DBP abused its right to foreclose, requiring proof of malice or bad faith, which the Spouses failed to establish.

• Article 2126, New Civil Code — Provides that the mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. The Court cited this provision to emphasize the DBP's mortgage lien over the properties.

• Article 2127, New Civil Code — Provides that the mortgage extends to natural accessions, improvements, growing fruits, rents or income not yet received when the obligation becomes due, and the amount of indemnity granted or owing to the proprietor from the insurers of the property mortgaged. The Court cited this provision to illustrate the scope of the mortgage lien.

Puno (Chairman), Tinga, and Chico-Nazario, JJ., concurred. Austria-Martinez, J., took no part.