Philippine National Bank vs. Chan

A deposit of funds in a non-drawing savings account does not constitute valid consignation, and a mortgagee's right to recover a deficiency claim requires proper evidentiary determination of the outstanding obligation at the time of the foreclosure sale, not mere assumption based on the bid price.

Respondent Lilibeth S. Chan owned a commercial building which she leased to petitioner Philippine National Bank (PNB). Concurrently, Chan obtained a loan from PNB, secured initially by a mortgage over the leased property and a deed of assignment of rental proceeds. The mortgage was later substituted to a different property. When the lease expired, PNB continued occupying the property on a month-to-month basis but stopped paying rentals directly to Chan after a third party claimed ownership of the property.

• Original Filing: Complaint for Unlawful Detainer before the MeTC, Branch 7, Manila.
• Lower Court Decision: MeTC (Aug 9, 2006) ordered PNB to pay accrued rentals with 6% interest and attorney's fees.
• Appeal: PNB appealed to the RTC, Branch 14, Manila. RTC (Dec 7, 2006) affirmed the MeTC, ruling the loan was fully paid by the foreclosure sale and PNB was in delay. Writ of execution issued and rentals turned over to Chan.
• CA Action: PNB filed a Petition for Review under Rule 42 to the CA. CA (May 28, 2012) remanded the case to the MeTC to determine the deficiency, held PNB liable for 6% legal interest due to invalid consignation, and deleted attorney's fees.
• SC Action: PNB filed a Petition for Review on Certiorari under Rule 45, assailing the CA Decision and Resolution.

• Lease and Loan Agreement: Chan leased her commercial building to PNB for 5 years (Dec 1999 to Dec 2004) at P76,160/month. Chan later obtained a P1.5M loan from PNB, secured by a Real Estate Mortgage over the leased property and a Deed of Assignment over the rental payments. The loan eventually increased to P7.5M, and the mortgage was substituted to a different property.
• Unpaid Rentals: When the lease expired, PNB stayed on a month-to-month basis at P116,788.44/month. PNB applied the rentals from Oct 2004 to Jan 15, 2005 to Chan's outstanding loan per the Deed of Assignment.
• Third-Party Claim: PNB received a demand letter from Lamberto Chua, who claimed to be the new owner, requesting rentals be paid to him starting Jan 15, 2005. PNB did not pay Chan or Chua, but instead deposited the rentals from Jan 16, 2005 to Feb 2006 in a non-drawing savings account.
• Unlawful Detainer Suit: Chan filed an Unlawful Detainer case. PNB vacated the premises on March 23, 2006. During the MeTC hearing, PNB consigned the P1,348,643.92 rental amount (covering Jan 16, 2005 to Feb 2006) with the court on May 31, 2006.
• Foreclosure and Deficiency Claim: While the appeal was pending before the RTC, PNB foreclosed the substituted mortgaged property, buying it at auction for P15,311,000 on Oct 31, 2006. PNB claimed Chan's outstanding obligation was P18,016,300.71, resulting in a P2.7M deficiency that the consigned rentals should offset. Chan argued the loan was fully paid since the bid price exceeded the P11.2M debt stated in the Notice of Sale.

• PNB properly consigned the disputed rental payments with the Office of the Clerk of Court of the MeTC of Manila.
• PNB did not incur delay in the payment of rentals to Chan, and therefore should not be liable for legal interest.
• PNB is entitled to the disputed rental proceeds to cover the deficiency in payment of Chan's liability after the foreclosure proceedings, invoking the Deed of Assignment.

• PNB had no right to retain the consigned rentals because the loan obligation was fully paid by the foreclosure sale, given that the P15.3M bid price exceeded the P11.2M indebtedness stated in the Notice of Sale.
• PNB's deposit of rentals in a savings account was not valid consignation, making PNB liable for delay and legal interest.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether PNB properly consigned the disputed rental payments with the MeTC.
  • Whether PNB incurred delay in the payment of rentals, making it liable to pay legal interest.
  • Whether PNB is entitled to the disputed rental proceeds to cover the alleged deficiency after the foreclosure sale.

• Procedural: N/A
• Substantive:
  • On Consignation: PNB did not properly consign the rental payments. Depositing the funds in a non-drawing savings account does not constitute valid consignation because it does not place the funds at the disposal of the court. Consignation is necessarily judicial. PNB's judicial consignation only occurred on May 31, 2006, which was well after the rentals fell due.
  • On Delay and Legal Interest: PNB incurred delay in paying the rentals. Because the savings account deposit was invalid, PNB's obligation remained subsisting. Since the valid consignation only happened on May 31, 2006, PNB was in default from Jan 16, 2005 up to May 30, 2006. Under Article 2209 of the Civil Code, PNB is liable to pay legal interest of 6% per annum for this period, there being no stipulated interest.
  • On Deficiency Claim: PNB is not immediately entitled to the rental proceeds to cover the deficiency because there is insufficient evidence to prove a deficiency exists. The RTC erred in assuming the loan was fully paid just because the bid price exceeded the debt stated in the Notice of Sale. The outstanding obligation grows over time, and the exact amount as of the foreclosure sale date (Oct 31, 2006) must be computed. The SC upheld the CA's remand to the MeTC for proper reception of evidence to determine the existence and amount of the deficiency.

• Consignation — The act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment. It generally requires a prior tender of payment, except under Article 1256 of the Civil Code (creditor absent/unknown, incapacitated, refuses receipt, two or more persons claim the right to collect, or title lost). For consignation to be valid, the debtor must comply with these requisites: (1) there was a debt due; (2) valid prior tender of payment, unless made because of some legal cause; (3) previous notice of consignation given to persons interested; (4) the amount due was placed at the disposal of the court; (5) interested persons were notified after consignation. Failure in any requirement renders consignation ineffective. Applied: PNB failed requisite no. 4 by depositing in a savings account instead of with the court.
• Deficiency Claim after Foreclosure — A mortgagee has the right to recover the deficiency resulting from the difference between the auction sale price and the outstanding obligation of the mortgagor at the time of the foreclosure proceedings. The existence and amount of the deficiency must be proven by evidence; courts cannot merely assume that the bid price covers the entire debt plus penalties and charges.

• Article 1256, Civil Code — Enumerates instances when consignation alone is sufficient without prior tender of payment. Applied: PNB claimed a third party demanded payment, potentially falling under "two or more persons claim the same right to collect," but PNB still failed to validly consign judicially.
• Article 2209, Civil Code — Provides that if the debtor incurs delay in the payment of a sum of money, he shall be liable for the agreed interest, or in the absence of stipulation, the legal interest of 6% per annum. Applied: PNB was held liable for 6% per annum legal interest from Jan 16, 2005 to May 30, 2006 due to its invalid consignation and resulting delay.