Marquez vs. Sanchez

P.D. No. 385 mandatorily requires government financial institutions to foreclose collaterals when arrearages reach at least 20% of the total outstanding obligations, and no injunction may issue to restrain such foreclosure unless the borrower establishes payment of 20% of the arrearages, provided the institution did not mismanage or misappropriate the loan proceeds resulting in the borrower's bankruptcy.

Lucena Entrepreneur and Agri-Industrial Development Corporation (LEAD) was incorporated in 1975 for commercial deep-sea fishing. To fund the construction of a fishing vessel, LEAD secured an agricultural loan of PhP 2,105,000.00 from DBP in 1977. DBP required LEAD's principals, including Marcial M. Marquez, to be held jointly and severally liable with the corporation. To secure the loan, other LEAD principals executed a Real Estate Mortgage (REM) over their properties. After delays and cost overruns in the vessel's construction by Trigon Engineering and Shipbuilding Corporation (Trigon), DBP granted LEAD an additional loan of PhP 714,600.00 in 1981, consolidated with the first loan. Marquez and his wife secured the additional loan by executing a second mortgage on their property covered by TCT No. T-24506. The fishing vessel was completed but sank in 1985. DBP collected PhP 1,186,145.00 in insurance proceeds from GSIS and applied them to LEAD's loan account. LEAD subsequently defaulted, and as of September 1992, the loan balance with arrearages amounted to PhP 4,595,450.00. DBP demanded payment and, upon LEAD's inaction, applied for extrajudicial foreclosure of the mortgaged properties.

• The DBP Loans: LEAD obtained a PhP 2,105,000.00 loan from DBP in 1977 for a fishing vessel. DBP required LEAD's principals, including Marcial M. Marquez, to be solidarily liable. Other principals mortgaged their properties to secure this first loan. Due to construction delays and cost overruns by the winning bidder, Trigon, an additional loan of PhP 714,600.00 was granted in 1981 and consolidated with the first.
• The Marquez Mortgage: To secure the additional loan, the Marquez spouses executed a second REM over their property covered by TCT No. T-24506.
• Default and Foreclosure: The fishing vessel sank in 1985. DBP collected PhP 1,186,145.00 in insurance proceeds and applied it to LEAD's account. Despite this, arrearages mounted, reaching PhP 4,595,450.00 by September 1992. DBP demanded payment and subsequently initiated extrajudicial foreclosure proceedings against the mortgaged properties, including the Marquez property.
• Action for Injunction: Marquez filed Civil Case No. 92-150 to enjoin the foreclosure of TCT No. T-24506, alleging that the true relationship between LEAD and DBP was a partnership, not a simple debtor-creditor arrangement. He claimed DBP breached its commitments by failing to deliver a seaworthy vessel, reneging on technical expertise, and acting in bad faith. He further argued that the insurance proceeds extinguished the loan obligation.
• Procedural Posture: The RTC issued a TRO but ultimately denied the writ of preliminary injunction. The Marquez property was sold at public auction to DBP as the highest bidder. The CA affirmed the RTC's denial of the injunction.

• Applicability of P.D. 385: Petitioners argued that P.D. 385 should not apply, relying on Filipinas Marble Corporation v. Court of Appeals, because DBP breached its commitments and mismanaged the project, making the simple debtor-creditor framework inapplicable.
• Denial of Due Process: Petitioners contended that Marquez was denied due process when the trial court dispensed with his testimony during the hearing for the issuance of the injunctive writ on October 14, 1992.
• Extent of the Mortgage and Extinguishment: Petitioners maintained that the loan was extinguished or impaired by the insurance proceeds collected by DBP and that the property covered by TCT No. T-24506 is a family home, precluding its foreclosure.

• Applicability of P.D. 385: Respondent DBP countered that P.D. 385 applies mandatorily because the arrearages indisputably exceeded 20% of the total outstanding obligation and petitioners failed to pay the required 20% of arrearages to warrant an injunction. DBP distinguished Filipinas Marble, emphasizing it never took over the management of LEAD.
• Requisites for Injunction: Respondent argued that petitioners failed to establish the essential requisites for the issuance of a writ of preliminary injunction, particularly the existence of a clear and unmistakable right in esse, given the voluntary execution and notarization of the loan and mortgage contracts.

• Applicability of P.D. 385: Whether P.D. 385 applies to mandate the extrajudicial foreclosure and prohibit the issuance of an injunction despite petitioners' claims of bad faith and a partnership relationship.
• Right in Esse: Whether petitioners demonstrated a clear and unmistakable right (right in esse) to justify the issuance of a writ of preliminary injunction.
• Due Process: Whether Marquez was denied due process during the hearing for the injunctive writ.
• Family Home: Whether the characterization of the mortgaged property as a family home precludes its extrajudicial foreclosure.

• Applicability of P.D. 385: P.D. 385 applies mandatorily. The arrearages indisputably exceeded 20% of the total outstanding obligation, and petitioners failed to show that 20% of the arrearages had been paid. The exception in Filipinas Marble—where injunction was allowed due to the financial institution's mismanagement and misappropriation of loan proceeds after taking over the corporation—does not apply. LEAD directly contracted with Trigon for the vessel's construction, and DBP did not take over LEAD's management.
• Right in Esse: No right in esse was demonstrated. The loan and mortgage contracts were voluntarily executed, acknowledged before a notary public, and appeared to be at arm's length. The bare averments of a "partnership" are belied by the clear terms of the loan and mortgage documents. Any action to annul the contracts for defect or lack of consideration was unreasonably delayed until foreclosure was imminent.
• Due Process: No denial of due process occurred. Marquez was present and able to argue his case during the October 14, 1992 hearing. The trial court properly dispensed with his testimony because it already touched upon the merits of the main case; a preliminary injunction hearing is an ancillary remedy and cannot be used to prematurely resolve the main action.
• Family Home: The family home argument was rejected. The subject property was already a second mortgage, and the Marquez spouses were solidarily liable for the corporate loan, allowing DBP to go after their other properties to satisfy the outstanding obligation.

• Requisites for Preliminary Injunction — The issuance of a writ of preliminary injunction requires: (1) the applicant must have a clear and unmistakable right, that is, a right in esse; (2) there is a material and substantial invasion of such right; (3) there is an urgent need for the writ to prevent irreparable injury to the applicant; and (4) no other ordinary, speedy, and adequate remedy exists to prevent the infliction of irreparable injury. The right must be actual, clear, and positive especially calling for judicial protection; an injunction will not issue to protect a right not in esse and which may never arise.
• Mandatory Foreclosure under P.D. 385 — It is mandatory for government financial institutions to foreclose collaterals for any loan whenever arrearages amount to at least 20% of the total outstanding obligations. No restraining order or injunction shall be issued against such foreclosure, except after due hearing where it is established and admitted that 20% of the outstanding arrearages had been paid. The exception arises when the government financial institution took over the management of the borrower corporation and mismanaged or misappropriated its funds, leading to bankruptcy.

• "P.D. 385 was never meant to protect officials of government lending institutions who take over the management of a borrower corporation, lead that corporation to bankruptcy through mismanagement or misappropriation of its funds, and who, after ruining it, use the mandatory provisions of the decree to avoid the consequences of their misdeeds." — Quoting Filipinas Marble to delineate the exception where P.D. 385 cannot be used as a shield for the financial institution's own mismanagement.
• "The grant of an injunctive writ, being an ancillary remedy, which could result in a premature resolution of the case—or will grant the principal objectives of the parties—before the merits can be passed upon, is proscribed, and the prayer for the relief will be properly denied." — Emphasizing the limited scope of a preliminary injunction hearing and the prohibition against resolving the main case therein.

• Filipinas Marble Corporation v. Court of Appeals, 136 SCRA 38 (1985) — Distinguished. In Filipinas Marble, the Court allowed an injunction against foreclosure because DBP took over the management of the borrower corporation and was alleged to have misappropriated the loan, making the true liability unsettled. In the present case, DBP did not take over LEAD's management, and the borrower dealt directly with the boat-builder, rendering the exception inapplicable.

• P.D. No. 385, Sections 1 and 2 — Mandates government financial institutions to foreclose collaterals when arrearages reach at least 20% of the total outstanding obligation. Prohibits the issuance of any restraining order or injunction against such foreclosure, except after due hearing where 20% of the outstanding arrearages have been paid. Applied strictly to uphold the extrajudicial foreclosure of the Marquez property, as arrearages exceeded the 20% threshold and no payment of arrearages was shown.
• Rule 58, Section 3 of the 1997 Revised Rules of Civil Procedure — Enumerates the grounds for the issuance of a writ of preliminary injunction. Relied upon to emphasize that the extraordinary remedy of injunction requires a clear and positive right of the applicant and must be exercised with extreme caution.

Leonardo A. Quisumbing (Chairperson), Antonio T. Carpio, Conchita Carpio Morales, Dante O. Tinga