HSBC-SRP and Estacion vs. Spouses Galang

A mortgagee who accepts payment of arrears and continued monthly amortizations from a defaulted mortgagor, and sends updated account reminders reflecting such payments, is estopped from foreclosing the mortgage, notwithstanding that the right to foreclose had already accrued under both the mortgage contract and the retirement plan rules.

Ma. Theresa Ofelia G. Galang was a regular employee of Hongkong and Shanghai Banking Corporation, Ltd. (HSBC), a foreign banking institution duly licensed to do business in the Philippines. HSBC maintained a benefit plan for its employees, including housing loans, administered and managed by the HSBC Staff Retirement Plan (HSBC-SRP), a trust fund HSBC had established. At the time material to this case, HSBC-SRP had not yet been incorporated; it was registered with the Securities and Exchange Commission only in 1998. Employee loans were governed by two sets of instruments: the HSBC Retirement Plan Rules and Regulations, which included an acceleration clause upon separation from service, and the individual Mortgage Agreement executed by each borrowing employee, which provided for extrajudicial foreclosure upon default.

On March 1, 1990, Ma. Theresa Ofelia G. Galang, a regular employee of Hongkong and Shanghai Banking Corporation, Ltd. (HSBC), applied for a P400,000.00 housing loan from the HSBC Staff Retirement Plan (HSBC-SRP), payable monthly for twenty-five years at six percent interest per annum. The loan was approved, and monthly amortizations were collected through deductions from her payroll account. To secure the obligation, Ma. Theresa and her husband Juan I. Galang executed a mortgage over their property in Mandaluyong City, covered by TCT No. 3340, in favor of HSBC-SRP. The Mortgage Agreement provided that HSBC-SRP could foreclose extrajudicially should the mortgagors fail to pay the sums secured by the mortgage or fail to perform any stipulated condition. Separately, the HSBC Retirement Plan Rules and Regulations provided that an employee separated from service for cause would lose all rights to plan benefits, and that should the employee's service be terminated prior to full repayment, the outstanding loan balance would become due in a single payment.

In January 1993, a labor dispute erupted between HSBC and the Hongkong and Shanghai Banking Corporation Employees Union (HSBC-EU), the rank-and-file employees' union of which Ma. Theresa was a member. The tension escalated into a full-blown strike on December 22, 1993, prompting HSBC to dismiss ninety percent of its rank-and-file employees, including Ma. Theresa. Dropped from the payroll, she was unable to pay her monthly loan amortizations from January to November 1994.

On November 28, 1994, HSBC-SRP sent the spouses a formal demand for full payment of the loan. The spouses, however, paid only their arrears and resumed remitting monthly amortizations in December 1994, continuing to do so until October 1996. During this period, HSBC-SRP sent Installment Overdue Reminders dated December 13, 1994, reflecting a total outstanding balance of P338,636.00, and demand letters dated September 25, 1995 and July 19, 1996, demanding payment of P313,290.00 and P347,367.02, respectively, and threatening foreclosure. Ma. Theresa responded by letter dated September 2, 1996, explaining that her account was up-to-date. Nevertheless, HSBC-SRP sent another Installment Overdue Reminder on September 11, 1996, and on October 10, 1996, extrajudicially foreclosed the mortgage for P324,119.59, covering the outstanding loan balance of P294,614.00. Manuel Estacion, Vice President of HSBC and former trustee of HSBC-SRP, emerged as the highest bidder.

On December 20, 1996, the spouses sued HSBC and HSBC-SRP for annulment of sale with damages and preliminary injunction before the RTC of Pasig City. The trial court issued a writ of injunction on April 30, 1997, restraining the registration of the certificate of sale. During trial, the parties stipulated that HSBC-SRP was managed by a Board of Trustees appointed solely by HSBC's Board of Directors, that HSBC was not a signatory to any contract between the spouses and HSBC-SRP, and that HSBC-SRP had its own policies as defined in the Retirement Plan Rules and Regulations. Estacion testified that HSBC-SRP had no staff of its own but used HSBC employees to carry out its functions, and admitted that HSBC-SRP was incorporated only after the foreclosure. HSBC Assistant Vice President for Credit Control Ma. Gina A. De Guzman testified that the mortgage was foreclosed due to Ma. Theresa's separation from HSBC, that loans of some striking employees had been restructured, and that Ma. Theresa was up-to-date in her monthly payments when the foreclosure occurred.

• Right to Foreclose (Mortgage Agreement): HSBC-SRP and Estacion argued that the spouses' failure to pay amortizations for nearly all of 1994 constituted default, automatically accruing HSBC-SRP's right to foreclose under the Mortgage Agreement, and that subsequent payment of arrears did not cure the default already incurred.
• Right to Foreclose (Rules and Regulations): HSBC-SRP and Estacion maintained that Ma. Theresa's eligibility for the loan was predicated on her status as a regular employee, and that the Retirement Plan Rules expressly accelerated the loan upon termination of employment.
• Irrelevance of Illegal Dismissal Case: HSBC-SRP and Estacion argued that the validity or invalidity of Ma. Theresa's termination did not bear on the spouses' civil obligation to HSBC-SRP, which was not a party to the labor dispute, citing Nestle Philippines Inc. vs. NLRC and NDC Guthrie Plantations vs. NLRC.
• Absence of Estoppel: HSBC-SRP and Estacion maintained that none of the elements of estoppel were present, as HSBC-SRP made no false representation, concealed no material facts, did not mislead the spouses into believing there would be no foreclosure, was consistent in requiring full payment, and did not act in bad faith.
• Precedential Support: HSBC-SRP and Estacion cited HSBC Ltd. Staff Retirement Plan vs. Spouses Broqueza and Spouses Tamonte vs. HSBC Ltd., where the Court ruled in favor of HSBC-SRP in cases involving co-employees terminated for the same illegal strike.
• Separate Corporate Personality: HSBC argued that it and HSBC-SRP are separate and distinct entities, pointing to the Trust Agreement between HSBC as trustor and HSBC-SRP as trustee, and that HSBC had no control over the funds administered by HSBC-SRP.
• Privity of Contracts: HSBC maintained that under Article 1311 of the Civil Code, contracts take effect only between parties, their assigns, and heirs, and that HSBC was not a party to the loan or mortgage contracts, which were executed solely with HSBC-SRP.
• Conjectural Findings: HSBC argued that the Court of Appeals' finding that HSBC failed to exercise the high degree of diligence required of banks was not based on evidence but on mere speculation, Estacion having testified that acceptance of late payments was due to human error, not wanton carelessness or malice.

• No Legal Basis for Foreclosure: Spouses Galang argued that HSBC-SRP had no legal basis to foreclose, as they were not in arrears and were up-to-date with their payments.
• Estoppel: Spouses Galang maintained that HSBC-SRP's acceptance of arrears and continued monthly amortizations constituted estoppel, and that such acceptance should be deemed a waiver of the right to foreclose.
• Prejudicial Question: Spouses Galang argued that the Retirement Plan Rules imposed a condition—separation for cause—before an employee loses loan benefits, creating a prejudicial question regarding the validity of Ma. Theresa's termination that had to be resolved before foreclosure.
• Contract of Adhesion: Spouses Galang contended that the Retirement Plan Rules constituted a contract of adhesion, that they were not furnished a copy or apprised of its contents, and that there was no mutuality of contract.
• Non-Incorporation in Mortgage Agreement: Spouses Galang argued that the acceleration clause was not incorporated in the Mortgage Agreement itself, which limited default to failure to pay or failure to perform stipulated conditions.
• Privity of HSBC: Spouses Galang maintained that HSBC was privy to the loan and mortgage contracts because HSBC-SRP had no staff of its own, HSBC issued statements and collected payments, HSBC-SRP was included in the loan restructuring under the Memorandum of Understanding with striking employees, and HSBC-SRP did not have corporate personality when the mortgage was foreclosed.

• Prejudicial Question: Whether the foreclosure of the subject mortgage was dependent on the final resolution of the illegal dismissal case filed by Ma. Theresa Galang against HSBC.
• Estoppel: Whether HSBC-SRP was estopped from demanding full payment of the obligation from Spouses Galang and from subsequently foreclosing the mortgage on their property.
• Damages: Whether Spouses Galang were entitled to damages.
• Corporate Personality: Whether HSBC-SRP and HSBC were distinct from each other.

• Prejudicial Question: No. The rule on prejudicial questions applies only to criminal cases, and the pendency of the illegal dismissal case did not warrant nullification of the foreclosure sale.
• Estoppel: Yes. HSBC-SRP was estopped from foreclosing the mortgage after accepting the spouses' arrears and continued monthly amortizations and sending updated account reminders reflecting such payments.
• Damages: No. Spouses Galang failed to allege and prove moral suffering, mental anguish, or other injury required for an award of moral damages under Article 2219 of the Civil Code.
• Corporate Personality: Yes. HSBC and HSBC-SRP are separate and distinct entities, and the spouses' claim that their interests were identical constituted a prohibited collateral attack on HSBC-SRP's corporate personality.

• Prejudicial Question: The right to foreclose accrued under both the Mortgage Agreement, by reason of the spouses' default from January to November 1994, and the Retirement Plan Rules, by reason of Ma. Theresa's valid termination for cause. The Court took judicial notice of its ruling in Hongkong & Shanghai Banking Corp. Employees Union vs. NLRC (G.R. No. 156635, January 11, 2016), which held that Ma. Theresa and her co-employees were validly dismissed for staging an illegal strike characterized by obstruction, violence, and intimidation in violation of Article 264(e) of the Labor Code. The acceleration clause under the Rules and Regulations was thus triggered. The rule on prejudicial questions, however, finds application only in criminal cases under Section 7, Rule 111 of the 2000 Rules of Criminal Procedure, which requires that the civil action involve an issue similar or intimately related to the issue in a subsequent criminal prosecution, and that the resolution of such issue determines whether the criminal action may proceed. Since the present case was for annulment of foreclosure sale and did not involve a criminal complaint, the concept was inapplicable. Even assuming the illegal dismissal case could be treated as analogous to a prejudicial question, it would at most have warranted suspension of the annulment proceedings, not nullification of the foreclosure sale. In any event, G.R. No. 156635 had already been resolved with finality against Ma. Theresa, eliminating any legal impediment to resolving the case on the merits.

• Estoppel: The Court applied Article 1431 of the Civil Code and relied on Spouses Loquellano vs. HSBC, HSBC-SRP, and Manuel Estacion (G.R. No. 200553, December 10, 2018), which was "almost on all fours" with the present case. In Loquellano, the Court held that HSBC-SRP's continuous sending of monthly Installment Due Reminders and acceptance of monthly amortization payments, despite an earlier demand for full payment, made the debtor's default immaterial and estopped HSBC-SRP from enforcing its right to foreclose. The Court also invoked Article 1235, which provides that when the creditor accepts performance knowing its incompleteness and irregularity without protest or objection, the obligation is deemed complied with. Here, HSBC-SRP sent Installment Due Reminders on December 13, 1994 and September 11, 1996—the latter sent two months after the last demand letter—while unconditionally accepting twenty-two monthly amortizations. These acts induced the spouses to believe their default had become immaterial and that their payments had stalled the foreclosure. The Court acknowledged that the spouses were already in default, as in Loquellano, but the default had become immaterial due to estoppel. The Court stressed, however, that in light of G.R. No. 156635, the spouses were now obligated to pay the entire outstanding balance in a single payment under the Rules and Regulations, and HSBC-SRP could institute either a personal action for collection or a real action to extrajudicially foreclose, which remedies are alternative, not cumulative or successive.

• Damages: The Court agreed with the lower courts that the spouses were not entitled to damages. Citing Spouses Estrada vs. Philippine Bus Rabbit Lines, Inc. (813 Phil. 950, 2017), the Court reiterated the requisites for moral damages: (1) injury clearly sustained by the claimant, whether physical, mental, or psychological; (2) a culpable act or omission factually established; (3) the wrongful act or omission is the proximate cause of the injury; and (4) the award is predicated on any of the cases stated in Article 2219 of the Civil Code. While the spouses alleged bad faith, grave abuse, and illegality, they utterly failed to substantiate these claims. Moreover, HSBC-SRP had basis to foreclose under the Mortgage Agreement, were it not for its actions placing it in estoppel. Consequently, they were also not entitled to exemplary damages.

• Corporate Personality: The Court disagreed with the Court of Appeals' application of the doctrine of piercing the veil of corporate fiction. While a subsidiary's separate corporate personality may be disregarded when the evidence shows that such personality was used to perpetrate fraud or evade an existing obligation, none of these circumstances were alleged or proved by the spouses. Their insistence that HSBC was privy to the Mortgage Agreement because their interests were so intertwined as to become identical constituted a collateral attack on the corporate personality of HSBC-SRP, which is prohibited by the Corporation Code of the Philippines; such inquiry may only be made by the Solicitor General in a quo warranto proceeding. The parties had stipulated during pre-trial that HSBC was not a signatory to any contract between the spouses and HSBC-SRP, and HSBC's role was limited to determining employee eligibility for housing loans, with processing and approval left to HSBC-SRP's discretion. Since the spouses were not entitled to damages, there was no reason to pierce the corporate veil, as they would have nothing to collect or regain from HSBC. The spouses therefore had no cause of action against HSBC.

• Doctrine of Estoppel (Article 1431, Civil Code) — Through estoppel, an admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon. Estoppel prevents a person from adopting an inconsistent position, attitude, or action if it will result in injury to another. One who, by acts, representations, or admissions, or by silence when one ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, can no longer deny the existence of such fact. Applied here: HSBC-SRP's acceptance of twenty-two monthly amortizations and sending of Installment Due Reminders after its demand letters estopped it from foreclosing, as these acts induced the spouses to believe their default had become immaterial.

• Prejudicial Question — A prejudicial question is one that arises in a case the resolution of which is a logical antecedent of the issue involved therein, and the cognizance of which pertains to another tribunal. The rule applies only to criminal cases. The requisites are: (a) the previously instituted civil action involves an issue similar or intimately related to the issue raised in the subsequent criminal action, and (b) the resolution of such issue determines whether or not the criminal action may proceed. Applied here: the concept was inapplicable because the case was for annulment of foreclosure sale, not a criminal complaint.

• Acceptance of Incomplete Performance (Article 1235, Civil Code) — When the creditor accepts performance, knowing its incompleteness and irregularity without protest or objection, the obligation is deemed complied with. Applied in conjunction with estoppel: HSBC-SRP accepted the spouses' payments for almost two years without objection, rendering their default immaterial.

• Piercing the Veil of Corporate Fiction — A subsidiary company's separate corporate personality may be disregarded when the evidence shows that such separate personality was used by its parent or holding corporation to perpetrate a fraud or evade an existing obligation. Absent such circumstances, the doctrine cannot be invoked. A collateral attack on corporate personality is prohibited; such inquiry may only be made by the Solicitor General in a quo warranto proceeding. Applied here: the spouses failed to allege or prove fraud or evasion, and their claim constituted a prohibited collateral attack.

• Alternative Remedies of Mortgagee — A mortgagee may institute either a personal action for collection or a real action to extrajudicially foreclose the mortgage. These remedies are alternative, not cumulative or successive, and the election or use of one remedy operates as a waiver of the others. Applied here: HSBC-SRP, if the spouses fail to pay the accelerated balance, may pursue either remedy but not both.

• "Here, too, HSBC-SRP sent Spouses Galang Installment Due Reminders, particularly in December 13, 1994 and September 11, 1996; this, despite the fact that it earlier sent Spouses Galang demand letters in November 28, 1994, September 25 1995 and July 19, 1996. Interestingly, the final Installment Due Reminder was sent two (2) months after the last demand letter was sent by HSBC-SRP The Court is therefore convinced that by sending the Instalment Due Reminder after accepting unconditionally twenty-two (22) monthly amortizations and after the last demand, HSBC-SRP made Spouses Galang believe that they were up-to-date with their account and that their default with HSBC-SRP had become immaterial." — This passage articulates the ratio decidendi on estoppel, explaining why HSBC-SRP's conduct of accepting payments and sending reminders after demand letters estopped it from foreclosing.

• "Since the present case is for annulment of the foreclosure sale and does not in any way involve a criminal complaint, the concept of prejudicial question becomes inapplicable here." — This defines the limitation of the prejudicial question doctrine to criminal cases, a point the lower courts had misconstrued by treating the pending illegal dismissal case as a prejudicial question to the foreclosure.

• "Though a subsidiary company's separate corporate personality may be disregarded when the evidence shows that such separate personality was being used by its parent or holding corporation to perpetrate a fraud or evade an existing obligation, none of these circumstances were alleged or proved by Spouses Galang." — This states the controlling rule on piercing the veil of corporate fiction and its inapplicability where no fraud or evasion is shown, reinforcing the separate juridical personalities of HSBC and HSBC-SRP.

• "Also, Article 1235 of the Civil Code provides that when the creditor accepts performance, knowing its incompleteness and irregularity without protest or objection, the obligation is deemed complied with. Respondent HSBC-SRP accepted Rosalina's payment of her housing loan account for almost one year without any objection." — This quotation from Loquellano, adopted by the Court, defines the interplay between Article 1235 and the doctrine of estoppel in the context of mortgage foreclosure, and was applied directly to the present facts.

• Spouses Loquellano vs. HSBC, HSBC-SRP, and Manuel Estacion, G.R. No. 200553, December 10, 2018 — Controlling precedent on estoppel. The Court found it "almost on all fours" with the present case and applied its ruling that HSBC-SRP's acceptance of payments and sending of updated reminders, despite an earlier demand for full payment, estopped it from foreclosing.

• HSBC Ltd. Staff Retirement Plan (now HSBC Retirement Trust Fund, Inc.) vs. Spouses Broqueza, 649 Phil. 511 (2010) — Cited by petitioners for the proposition that enforcement of a loan agreement involves debtor-creditor relations independent of employer-employee relations. The Court acknowledged the parallel but distinguished the cases on the ground that the Galang spouses had updated their accounts and continued paying, unlike the Broqueza petitioners who admitted to not paying any installment at all.

• Spouses Tamonte vs. HSBC Ltd., et al., 671 Phil. 377 (2011) — Similarly cited by petitioners and distinguished on the same ground as Broqueza.

• Hongkong & Shanghai Banking Corp. Employees Union vs. National Labor Relations Commission, G.R. No. 156635, January 11, 2016 — Judicially noticed by the Court to establish that Ma. Theresa and her co-employees were validly dismissed for staging an illegal strike, thereby triggering the acceleration clause under the Retirement Plan Rules.

• Nestle Philippines Inc. vs. NLRC, 272-A Phil. 305 (1991) — Cited by petitioners for the principle that enforcement of a loan agreement involves debtor-creditor relations founded on contract and does not concern employer-employee relations.

• NDC Guthrie Plantations vs. NLRC, 414 Phil. 714 (2001) — Cited alongside Nestle Philippines for the same principle.

• Spouses Estrada vs. Philippine Bus Rabbit Lines, Inc., 813 Phil. 950 (2017) — Cited for the requisites of an award of moral damages under Article 2219 of the Civil Code, supporting the denial of the spouses' damages claim.

• Article 1431, Civil Code — Defines estoppel: through estoppel, an admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon. Applied to hold HSBC-SRP estopped from foreclosing after accepting payments and sending updated reminders.

• Article 1235, Civil Code — Provides that when the creditor accepts performance, knowing its incompleteness and irregularity without protest or objection, the obligation is deemed complied with. Applied in conjunction with estoppel to support nullification of the foreclosure.

• Article 1311, Civil Code — Contracts take effect only between the parties, their assigns, and heirs. Applied to hold that HSBC, not being a signatory to the loan or mortgage contracts, was not a party to the transaction and could not be held liable.

• Article 2219, Civil Code — Enumerates the cases in which moral damages may be recovered. Applied to deny the spouses' claim for damages for failure to prove the requisite injury and culpable act.

• Section 7, Rule 111, 2000 Rules of Criminal Procedure — Defines the elements of a prejudicial question, applicable only in criminal cases. Applied to hold that the concept of prejudicial question was inapplicable to the annulment of foreclosure sale.

• Section 19, Corporation Code of the Philippines — Prohibits collateral inquiry into the due incorporation of a corporation in any private suit; such inquiry may only be made by the Solicitor General in a quo warranto proceeding. Applied to bar the spouses' attempt to pierce HSBC-SRP's corporate personality.

• Article 264(e), Labor Code — Prohibits striking workers from committing acts of violence, coercion, or intimidation, or from obstructing free ingress into or egress from the employer's premises. Cited in the judicially noticed G.R. No. 156635 ruling that the strike was illegal, which triggered the acceleration clause.

Perlas-Bernabe (Chairperson), Lazaro-Javier, Inting, Rosario, and Lopez, J.Y., JJ. All concurred in the decision. No separate concurring opinions were noted.