Philippine National Bank vs. Court of Appeals

A real estate mortgage being merely an accessory contract, it is extinguished upon full payment of the principal obligation it secures; consequently, foreclosure of the mortgage is void when the underlying debt has been completely paid prior to the foreclosure sale, and the burden of proving that payments received were applied to other obligations rests upon the creditor who received such payments.

The case involves a dispute over the validity of an extrajudicial foreclosure of real estate mortgages on a property originally owned by Spouses Mateo Cruz and Carlita Ronquillo. The property was subject to successive loans obtained from PNB: a First Loan in 1957, a Second Loan in 1964 obtained by San Nicolas Agricultural Project, Inc. (where Mateo Cruz was Vice-President) with Cruz also signing in his personal capacity, and a Third Loan in 1980. In 1977, prior to the Third Loan, Land Bank remitted bonds and cash to PNB at the instance of Spouses Cruz, resulting in the cancellation of the first two mortgages and release of the titles. In 1983, Spouses Antonio So Hu and Soledad del Rosario purchased the property from Spouses Cruz after paying off the Third Loan. Despite this payment and the prior cancellation of the first two mortgages, PNB foreclosed on the property in 1985, claiming the Second Loan remained unpaid and was covered by an "all-inclusive clause" in the Third Mortgage.

• Spouses Mateo Cruz and Carlita Ronquillo were registered owners of a parcel of land in Cabanatuan City covered by Transfer Certificate of Title No. T-4699.
• In 1957, Spouses Cruz obtained a P70,000.00 loan (First Loan) from PNB, Cabanatuan Branch, secured by a real estate mortgage annotated on TCT No. T-4699.
• On October 16, 1964, San Nicolas Agricultural Project, Inc. (SNAPI), where Mateo Cruz was Vice-President, obtained a P156,000.00 agricultural crop loan (Second Loan) from PNB, Santiago Branch, with Mateo Cruz also signing in his personal capacity; this was secured by a real estate mortgage on the same property annotated on the title, with PNB, Cabanatuan Branch, holding custody of all mortgaged titles.
• In November 1977, Land Bank of the Philippines remitted to PNB, Cabanatuan Branch, P359,500.00 in bonds and P174.43 in cash, and transferred P25,500.00 in bonds to PNB, Santiago Branch, at the instance of Spouses Cruz.
• On December 2, 1977, PNB issued a Deed of Release of Real Estate Mortgage cancelling the first two mortgages on the property, which cancellation was annotated on TCT No. T-4699, and released all titles to Spouses Cruz.
• On March 20, 1980, Spouses Cruz obtained a new P50,000.00 loan from PNB, Cabanatuan Branch, later increased to P200,000.00 (Third Loan), secured by a real estate mortgage annotated on TCT No. T-4699 on March 24, 1980, containing an "all-inclusive clause" stating the mortgage secured "any and all obligations with PNB, whether contracted before, during or after the date of this instrument."
• On March 18, 1983, Spouses Antonio So Hu and Soledad del Rosario, intending to purchase the property, paid PNB P200,000.00 representing full payment of the Third Loan on behalf of Spouses Cruz upon advice of their counsel who found an existing mortgage annotated on the title.
• On March 21, 1983, Spouses Cruz executed a Deed of Absolute Sale in favor of Spouses So Hu covering the property.
• On August 27, 1985, Sheriff Ex-Officio Numeriano Y. Galang sold the property in a public auction sale where PNB was the highest and sole bidder for P514,105.36, and a sheriff's certificate of sale was issued and annotated on the title.
• On April 10, 1987, PNB executed an Affidavit of Consolidation of Ownership, leading to the issuance of TCT No. 51022 in its favor on June 25, 1987.
• In October 1986, PNB discovered Spouses So Hu occupying the property and demanded they vacate, prompting Spouses So Hu to file the action for annulment in November 1986.

• PNB argued that the foreclosure was valid because the "all-inclusive clause" in the Third Mortgage embraced the Second Loan, which allegedly remained unpaid despite the 1977 release.
• PNB contended that the cancellation of the second mortgage was due to inadvertence and mistake, not full payment.
• PNB asserted that Spouses So Hu could not be considered buyers in good faith because the "all-inclusive clause" was clearly annotated on TCT No. T-4699 under Entry No. 47974, giving notice to the whole world that the mortgage secured all obligations, including prior ones.
• PNB maintained that the sale between Spouses Cruz and Spouses So Hu did not bind PNB, and that the mortgage lien and property are inseparable, binding subsequent acquirers regardless of consent.
• PNB claimed that the award of attorney's fees and litigation expenses lacked factual and legal bases.

• Spouses So Hu argued that they were buyers in good faith entitled to rely on the face of the title showing prior mortgages had been cancelled; they were not privy to the contract containing the "all-inclusive clause" and could not be charged with knowledge thereof.
• Spouses So Hu contended that they had paid the Third Loan in full before the foreclosure, extinguishing the mortgage obligation.
• Spouses Cruz argued that they had fully paid the Second Loan on December 2, 1977, as evidenced by the release of the mortgage and return of titles, rendering the foreclosure baseless.
• Spouses Cruz asserted that the "all-inclusive clause" was illegal and improper for being too general.
• Spouses Cruz alternatively argued that assuming the Second Loan was unpaid, extinctive prescription and laches had already set in, barring PNB's cross-claim.

• Procedural: Whether the Supreme Court may review factual findings of the trial court and Court of Appeals regarding the payment of the Second Loan.
• Substantive Issues:
  • Whether the extrajudicial foreclosure of the Third Mortgage was valid despite full payment of the Third Loan prior to the foreclosure.
  • Whether the Second Loan obtained by SNAPI/Mateo Cruz had been fully paid, thereby extinguishing the mortgage obligation.
  • Whether the "all-inclusive clause" in the Third Mortgage validly secured the Second Loan.
  • Whether Spouses So Hu were buyers in good faith for value.
  • Whether the award of attorney's fees, moral damages, and exemplary damages was proper.

• Procedural: The Supreme Court held that it is not a trier of facts and will not analyze or weigh evidence already considered in the proceedings below; it respects the trial court's factual findings in the absence of exceptional circumstances, which were not present in this case.
• Substantive:
  • The Court ruled that the foreclosure was void because a mortgage is merely an accessory contract that cannot exist independently of the principal obligation; since the Third Loan was fully paid on March 18, 1983, the mortgage was extinguished, and foreclosure to satisfy an extinguished obligation is legally baseless.
  • The Court found that the Second Loan had been fully paid in 1977 through remittances by Land Bank of the Philippines (P359,500.00 in bonds and P174.43 in cash to PNB Cabanatuan, and P25,500.00 in bonds to PNB Santiago), as evidenced by the Deed of Release and cancellation of mortgages annotated on the title.
  • The Court held that PNB failed to discharge its burden of proving that the payments received were applied to other loans; having indisputably received the payments, it was PNB's burden to show how it applied these payments, not the debtors' burden to show how PNB applied them.
  • The Court deemed moot the issue of whether the "all-inclusive clause" covered the Second Loan, since both the Second and Third Loans had been paid.
  • The Court deleted the award of moral and exemplary damages because there was no proof that PNB acted maliciously or in bad faith; PNB believed, albeit mistakenly, that it had an unpaid claim.
  • The Court deleted the award of attorney's fees and litigation expenses because the text of the decisions of the courts below did not state the factual and legal bases for such award, violating the requirement that reasons for the award must be set forth in the decision.
  • The Court dismissed PNB's cross-claim against Spouses Cruz for lack of merit, as the Second Loan had been paid.

• Accessory Contract of Mortgage — A mortgage is an accessory contract whose consideration is the same as the principal contract it secures; it cannot exist as an independent contract and is extinguished upon full payment of the principal obligation. The Court applied this doctrine to hold that foreclosure is void when the underlying debt has been paid.
• Burden of Proof on Application of Payments — When a creditor has indisputably received payments, the burden shifts to the creditor to show how such payments were applied, rather than compelling the debtor to prove the application. The Court applied this to reject PNB's claim that the Land Bank remittances were applied to other loans without proof thereof.
• Requirements for Award of Attorney's Fees — The factual and legal bases for an award of attorney's fees must be stated in the body of the court's decision, not merely in the dispositive portion. The Court cited this to delete the award of attorney's fees.
• Good Faith of Buyers — Buyers may rely on the correctness of annotations on the face of the title and cannot be charged with knowledge of contractual clauses to which they were not privy, especially when prior encumbrances have been cancelled.

• "A mortgage is but an accessory contract, the consideration of which is the same consideration of the principal contract without which it cannot exist as an independent contract."
• "Foreclosure is valid where the debtor is in default in the payment of his obligation. In the instant case, PNB foreclosed the third mortgage even when the obligation, the Third Loan, secured by the mortgage has been completely paid prior to the foreclosure. Obviously, the Property could no longer be foreclosed to satisfy an extinguished obligation."
• "It is unfair to compel the Spouses Cruz to show how PNB applied the Land Bank bonds and cash. Having indisputably received the payments, it was PNB’s burden to show how it applied these payments."
• "Moral damages are not punitive in nature but are designed to compensate and alleviate in some way the physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury unjustly caused to a person."
• "With respect to petitioner's contention that the respondent court erred in affirming the trial court's decision awarding P10,000.00 attorney's fees to private respondent, we rule in favor of petitioner. The text of the trial court's decision does not mention the reason for the award of attorney's fees and the award was simply contained in the dispositive portion of the trial court's decision. It is now settled that the reasons or grounds for an award must be set forth in the decision of the court."

• Ganzon, et al. vs. Hon. Inserto, et al. — Cited for the principle that a mortgage is an accessory contract dependent on the principal obligation.
• Philippine National Bank vs. Court of Appeals (324 SCRA 714) — Cited for the rule that the Supreme Court is not a trier of facts.
• Dee vs. Court of Appeals — Cited for the principle that the Supreme Court respects factual findings of trial courts absent exceptional circumstances.
• Expertravel & Tours, Inc. vs. Court of Appeals — Cited for the definition and requirements for awarding moral damages.
• Pimentel vs. Court of Appeals — Cited for the requirement that the basis for attorney's fees must appear in the text of the decision.
• MHP Garments, Inc. vs. Court of Appeals and Tan vs. Court of Appeals — Cited by the Court of Appeals for the principle that bad faith is required for moral damages.

• Rule 45 of the Rules of Court — Governs the petition for review on certiorari filed by PNB.
• Act No. 3135 — The law regulating the sale of property under special powers inserted in or annexed to real estate mortgages, under which PNB filed the petition for foreclosure.
• Presidential Decree No. 385 — Requiring government financial institutions to foreclose mandatorily loans with arrearages of at least 20% of the total outstanding obligation.
• Articles 2229 and 2234 of the Civil Code — Provisions on exemplary damages cited to explain that exemplary damages cannot be awarded without proof of moral damages.