General Milling Corporation vs. Ramos

Extrajudicial foreclosure of a real estate mortgage is valid only when the debtor is in default; demand is necessary to place the debtor in default unless the obligation or the law expressly declares otherwise, and the absence of such demand makes the foreclosure premature and void.

General Milling Corporation (GMC) entered into a Growers Contract with Spouses Librado and Remedios Ramos for poultry raising, secured by a Deed of Real Estate Mortgage over the spouses' conjugal home with an indefinite payment term and a maximum credit line of PhP 215,000. When the spouses failed to settle their account, GMC proceeded with extrajudicial foreclosure without making a prior demand for payment, leading the spouses to file a suit for annulment of the foreclosure sale.

• On August 24, 1989, General Milling Corporation (GMC) entered into a Growers Contract with Spouses Librado and Remedios Ramos, under which GMC supplied broiler chickens for the spouses to raise on their land in Barangay Banaybanay, Lipa City, Batangas.
• To guarantee compliance, the parties executed a Deed of Real Estate Mortgage over the spouses' conjugal home and land, with a maximum credit line of PhP 215,000 payable within an indefinite period with interest of twelve percent (12%) per annum.
• The spouses agreed to put up a surety bond at the rate of PhP 20,000 per 1,000 chicks delivered.
• The spouses eventually failed to settle their account, alleging business losses due to GMC's negligence and violation of the Growers Contract.
• On March 31, 1997, GMC's counsel notified the spouses that GMC would institute foreclosure proceedings.
• On May 7, 1997, GMC filed a Petition for Extrajudicial Foreclosure of Mortgage.
• On June 10, 1997, the property was sold at public auction to GMC for PhP 935,882,075, representing losses on chicks and feeds exclusive of interest and attorney's fees.
• On October 27, 1997, GMC informed the spouses that its Agribusiness Division had closed its poultry operations.
• On March 3, 2000, Spouses Ramos filed a Complaint for Annulment and/or Declaration of Nullity of the Extrajudicial Foreclosure Sale, contending that the foreclosure was void for non-compliance with posting and publication requirements under Act No. 3135 and for lack of a sheriff's affidavit.
• The spouses also alleged that the mortgage had no fixed term and that they were not notified of the foreclosure.
• During trial, the parties agreed to limit the issues to: (1) the validity of the Deed of Real Estate Mortgage; (2) the validity of the extrajudicial foreclosure; and (3) the party liable for damages.

• GMC argued that the Court of Appeals violated basic requirements of fair play, justice, and due process by considering the issue of whether demand was made, when this issue was not raised in the trial court.
• GMC asserted that its March 31, 1997 letter constituted a final demand to pay the obligation, and that the Court of Appeals erred in finding otherwise.
• GMC contended that it had observed all requirements of posting and publication under Act No. 3135.
• GMC argued that it was compelled to foreclose because of the spouses' failure to pay their obligation under the Growers Contract.

• Spouses Ramos argued that the Court of Appeals has ample authority to rule on matters not assigned as errors on appeal if these are indispensable or necessary to the just resolution of the pleaded issues.
• They maintained that the March 31, 1997 letter merely requested them to discuss settlement of their account and did not constitute a demand for payment.
• They contended that the extrajudicial foreclosure was null and void due to non-compliance with the requirements of posting and publication of notices under Act No. 3135.
• They argued that the mortgage had no fixed term and that the obligation was not yet due and demandable when foreclosure was initiated.

• Procedural Issues:
  • Whether the Court of Appeals may consider issues not alleged and discussed in the lower court and not raised by the parties on appeal.
• Substantive Issues:
  • Whether the Court of Appeals erred in ruling that GMC made no demand upon the spouses for full payment of their obligation, considering that the March 31, 1997 letter was tantamount to a final demand to pay.

• Procedural:
  • The Court held that the Court of Appeals has authority to rule on matters not assigned as errors on appeal if consideration of such matters is necessary in arriving at a just decision and complete resolution of the case.
  • Citing paragraph (c) of the exceptions in Diamonon v. Department of Labor and Employment, the Court ruled that the demand issue was properly considered because there would be a just and complete resolution of the appeal only if there was a ruling on whether the Spouses Ramos were actually in default of their obligation.
• Substantive:
  • The Court affirmed the Court of Appeals' finding that no sufficient demand was made upon the spouses.
  • The March 31, 1997 letter merely requested the spouses to go to GMC's office to discuss settlement of their account and did not constitute a demand for payment.
  • Under Article 1169 of the Civil Code, demand is necessary for delay to exist unless the obligation or the law expressly declares otherwise; the Deed of Real Estate Mortgage contained no provision allowing foreclosure without demand.
  • The three requisites for default were not met: (1) the obligation must be demandable and liquidated; (2) the debtor delays performance; and (3) the creditor judicially or extrajudicially requires the debtor's performance.
  • Foreclosure is valid only when the debtor is in default; absent demand, the foreclosure was premature and void.
  • Whether demand was made is a question of fact, which is not reviewable under Rule 45 where the Court is not a trier of facts.

• Exceptions to the Rule on Assignment of Errors — Appellate courts may waive the lack of assignment of errors when consideration of the matter is necessary to arrive at a just decision and complete resolution of the case, to serve the interests of justice, or to avoid dispensing piecemeal justice.
• Requisites for Delay/Default — For a finding of default, three requisites must concur: (1) the obligation is demandable and liquidated; (2) the debtor delays performance; and (3) the creditor judicially or extrajudicially requires the debtor's performance.
• Validity of Foreclosure — Foreclosure is valid only when the debtor is in default in the payment of his obligation; absent a demand (unless waived by contract or law), the debtor cannot be considered in default, making the foreclosure premature.

• "Foreclosure is valid only when the debtor is in default in the payment of his obligation."
• "There are three requisites necessary for a finding of default. First, the obligation is demandable and liquidated; second, the debtor delays performance; and third, the creditor judicially or extrajudicially requires the debtor's performance."
• "As the contract in the instant case carries no such provision on demand not being necessary for delay to exist, We agree with the appellate court that GMC should have first made a demand on the spouses before proceeding to foreclose the real estate mortgage."

• Diamonon v. Department of Labor and Employment — Cited for the proposition that appellate courts have broad discretionary power to waive lack of assignment of errors when necessary for a just and complete resolution of the case.
• Development Bank of the Philippines v. Licuanan — Cited for the rule that foreclosure is valid only when the debtor is in default, and that the issue of whether demand was made is essential to determine the validity of foreclosure.
• Selegna Management and Development Corporation v. United Coconut Planters Bank — Cited for the three requisites necessary for a finding of default.
• Tirazona v. Court of Appeals — Cited for the distinction between questions of law and questions of fact in relation to Rule 45 petitions.
• Heirs of Completo & Abiad v. Sgt. Albayda — Cited for the rule that the Supreme Court is not a trier of facts.

• Article 1169 of the Civil Code — Provides that obligors incur delay from the time the obligee judicially or extrajudicially demands fulfillment of the obligation, except when the obligation or the law expressly declares that demand is not necessary.
• Act No. 3135, as amended — The law regulating the sale of property under special powers inserted in or annexed to real estate mortgages, requiring posting and publication of notices for extrajudicial foreclosure.
• Rule 45 of the Rules of Court — Provides that petitions for review shall raise only questions of law, not questions of fact.