Philippine National Bank vs. Heirs of Benedicto and Azucena Alonday

An all-embracing or dragnet clause in a mortgage contract can secure debts of both future and past origins, but the obligations sought to be secured must be sufficiently described in the mortgage contract. For a pre-existing loan to be covered by a subsequent mortgage's dragnet clause, the mortgage must contain some form of acknowledgement or reference to the previously subsisting obligation; the mere existence of a generic dragnet clause, without more, cannot be construed to extend the mortgage to prior loans that the parties had evidently treated as separate and distinct obligations secured by different mortgages.

The Spouses Benedicto and Azucena Alonday obtained two separate loans from the Philippine National Bank at two different branches—an agricultural loan from the Digos, Davao del Sur Branch and a commercial loan from the Davao City Branch—each secured by a distinct real estate mortgage over different properties. The mortgage contracts contained identical all-embracing or dragnet clauses, which are recognized in jurisprudence as valid means to secure debts of both future and past origins, but which are considered exceptional modes of securing obligations that must be carefully scrutinized and strictly construed. The case involves the interpretation of these dragnet clauses and whether a second mortgage executed for a commercial loan could be foreclosed to satisfy the unpaid balance of an earlier agricultural loan.

On September 26, 1974, the Spouses Benedicto and Azucena Alonday obtained an agricultural loan of P28,000.00 from the Philippine National Bank at its Digos, Davao del Sur Branch, securing the obligation by constituting a real estate mortgage on their parcel of land in Sta. Cruz, Davao del Sur, registered under Original Certificate of Title (OCT) No. P-3599. On June 11, 1980, the Spouses Alonday obtained a commercial loan for P16,700.00 from the petitioner's Davao City Branch, constituting a real estate mortgage over their 598 square meter residential lot in Ulas, Davao City, registered under Transfer Certificate of Title (TCT) No. T-66139. Both mortgage contracts contained an identical all-embracing or dragnet clause providing that the mortgage would secure the obligations therein and "those others that the Mortgagee may extend to the Mortgagor," including obligations contracted "before, during or after the constitution of this mortgage," notwithstanding full payment of any or all obligations of the mortgagors.

The Spouses Alonday made partial payments on the commercial loan, which they renewed on December 23, 1983 for the balance of P15,950.00. The renewed commercial loan, although due on December 25, 1984, was fully paid on July 5, 1984. On August 6, 1984, respondents Mercy and Alberto Alonday, the children of the Spouses Alonday, demanded the release of the mortgage over the property covered by TCT No. T-66139. The petitioner informed them, however, that the mortgage could not be released because the agricultural loan had not yet been fully paid, and that as a consequence of the failure to pay, it had foreclosed the mortgage over the property covered by OCT No. P-3599 on August 17, 1984. Notwithstanding such foreclosure, a deficiency balance of P91,525.22 remained.

The petitioner then applied for the extrajudicial foreclosure of the mortgage on the property covered by TCT No. T-66139. A notice of extrajudicial sale was issued on August 20, 1984, and the property was sold on September 28, 1984 to the petitioner in the amount of P29,900.00. Since the Alondays were unable to redeem the property, the petitioner consolidated its ownership. Later, the property was sold for P48,000.00 to one Felix Malmis on November 10, 1989. According to the petitioner, the deed of mortgage relating to the property covered by TCT No. T-66139 included an "all-embracing clause" whereby the mortgage secured not only the commercial loan contracted with its Davao City Branch but also the earlier agricultural loan contracted with its Digos Branch.

The RTC found that if the petitioner had intended to have the second mortgage secure the pre-existing agricultural loan, it should have made an express reservation to that effect; that based on the all-embracing clause, the mortgage was a contract of adhesion, and the ambiguities therein should be construed strictly against the petitioner; that the last sentence of the all-embracing clause provided that the mortgage would be null and void upon the payment of the obligations secured by the mortgage; and that the petitioner was guilty of bad faith in refusing to nullify the mortgage despite full payment of the commercial loan prior to its maturity. The RTC also ruled that because the property had already been sold to Malmis, a third party not brought within the trial court's jurisdiction, it could not order the return of the property, and instead ordered the petitioner to pay the respondents the value of the property under its present market valuation. The CA affirmed, observing that the mortgage, being a contract of adhesion, should be construed strictly against the petitioner as the party who had drafted the same, and that although the petitioner had argued citing Mojica vs. Court of Appeals that all-embracing clauses were valid to secure past, present and future loans, that case was not in point inasmuch as the facts therein were different.

• Applicability of Mojica and Stare Decisis: The petitioner submitted that Mojica vs. Court of Appeals validates the use of an all-embracing clause in a mortgage agreement to secure not only the amount indicated on the mortgage instrument, but also the mortgagor's future and past obligations; that by denying the applicability of Mojica and other similar rulings, the CA disregarded the principle of stare decisis; and that the CA in effect thereby regarded all-embracing clauses as invalid as to prior obligations.

• Unsubstantiated Damages: The petitioner argued that even assuming arguendo that the cited decisions are inapplicable, the CA grievously erred in awarding the unsubstantiated amount of P1.7 million in damages and P20,000.00 as attorney's fees against PNB without factual and legal basis. The petitioner pointed out that the complaint of the Spouses Alonday had placed the value of the property at P1,200.00 per square meter, and that respondent Alberto Alonday had testified during trial that the value of the property had been only P1,200.00 per square meter.

N/A — The decision does not recount the respondents' specific arguments on appeal.

• Scope of the Dragnet Clause: Whether the all-embracing or dragnet clause contained in the first mortgage contract executed between the parties for the security of the first loan could authorize the foreclosure of the property under the mortgage to secure a second loan despite the full payment of the second loan.

• Validity of the CA's Restriction of the Dragnet Clause: Whether the Court of Appeals grievously erred in restricting and delimiting the scope and validity of the standard "all-embracing clause" in real estate mortgage contracts solely to future indebtedness and not to prior ones, contrary to leading Supreme Court decisions on the matter.

• Award of Damages: Whether the Court of Appeals grievously erred in awarding the unsubstantiated amount of P1.7 million in damages and P20,000.00 as attorney's fees against PNB without factual and legal basis.

• Scope of the Dragnet Clause: No. The all-embracing or dragnet clause in the second mortgage contract did not secure the earlier agricultural loan because the pre-existing loan was not sufficiently described in the mortgage contract, and the parties' execution of separate mortgages for separate loans indicated their intent to treat each loan individually and separately.

• Validity of the CA's Restriction of the Dragnet Clause: No. The CA did not hold that all-embracing or dragnet clauses were altogether invalid as to prior obligations; it only pointed out that it could not find similar rulings as to mortgages executed to secure prior loans, and correctly applied the requirement that obligations must come fairly within the terms of the mortgage contract to be deemed secured.

• Award of Damages: Partially. The award of P1,700,000.00 was reduced to P717,600.00 because the lower courts' valuation of P3,000.00 per square meter was the product of guesswork, whereas the P1,200.00 per square meter valuation stated by the respondents in their complaint was insulated from arbitrariness.

• Scope of the Dragnet Clause: The Court recognized that all-embracing or dragnet clauses have been upheld as valid means to secure debts of both future and past origins, citing Traders Royal Bank vs. Castañares. However, the Court likewise emphasized that such clauses are an exceptional mode of securing obligations, and obligations could only be deemed secured by the mortgage if they came fairly within the terms of the mortgage contract. For all-embracing or dragnet clauses to secure future loans, such loans must be sufficiently described in the mortgage contract. The Court reasoned that if the requirement could be imposed on a future loan that was uncertain to materialize, there is a greater reason that it should be applicable to a past loan, which is already subsisting and known to the parties. The petitioner had the opportunity to include some form of acknowledgement of the previously subsisting agricultural loan in the terms of the second mortgage contract but did not do so. The mere fact that the mortgage constituted on the property covered by TCT No. T-66139 made no mention of the pre-existing loan could only strongly indicate that each of the loans of the Spouses Alonday had been treated separately by the parties themselves, which sufficiently explained why the loans had been secured by different mortgages. The Court applied the "reliance on the security test" from Prudential Bank vs. Alviar, holding that when a different security was taken for the second loan, no intent that the parties relied on the security of the first loan could be inferred. The execution of the subsequent mortgage to secure the subsequent loan was an indication that the parties intended to treat each loan as distinct from the other and to secure each of the loans individually and separately.

• Validity of the CA's Restriction of the Dragnet Clause: The Court found that the petitioner wrongly insisted that the CA held all-embracing or dragnet clauses altogether invalid as to prior obligations. The CA, while reiterating that the Court upheld the validity of using real estate mortgages to secure future advancements, only thereby pointed out that it could not find similar rulings as to mortgages executed to secure prior loans. The Court further concurred with the CA and the RTC in their holding that the mortgage contracts executed by the Spouses Alonday were contracts of adhesion exclusively prepared by the petitioner. Under Article 1306 of the Civil Code, the contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. A contract of adhesion, albeit valid, becomes objectionable only when it takes undue advantage of one of the parties—the weaker party—by having such party just adhere to the terms of the contract. In such situation, the courts go to the succor of the weaker party by construing any obscurity in the contract against the party who prepared the contract, the latter being presumed as the stronger party to the agreement and as the party who caused the obscurity. Being the party that had prepared the contract of mortgage, the petitioner's failure to expressly incorporate the reference to the agricultural loan should be construed that it did not at all contemplate the earlier loan when it entered into the subsequent mortgage.

• Award of Damages: The Court upheld the petitioner's challenge to the valuation of P3,000.00 per square meter, finding that the RTC's determination was easily the product of guesswork, for the language employed in its judgment in reference to such value was "could reasonably be." The CA adverted to the valuation as "approximately P3,000.00," indicating that its own determination of the fair market value was of similar tenor. The valuation by both lower courts could not be upheld, for it is basic enough that in their determination of actual damages, the courts should eschew mere assertions, speculations, conjectures or guesswork; otherwise, they would be guilty of arbitrariness and whimsicality. Moreover, the courts cannot grant reliefs not prayed for in the pleadings or in excess of what is being sought by the party. To accord with what is fair, based on the records, the Court reduced the basis of the actual damages to P1,200.00 per square meter, rendering a total of P717,600.00 as actual damages. The Court also imposed compensatory interest on the actual damages at 12% per annum from the date of judicial demand until June 30, 2013, and 6% per annum from July 1, 2013 until full payment, pursuant to Nacar vs. Gallery Frames. Under Article 2212 of the Civil Code, interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point; accordingly, the interest due shall itself earn legal interest of 6% per annum from the date of finality of the judgment until its full satisfaction.

• Dragnet or All-Embracing Clause Doctrine — An all-embracing or dragnet clause in a mortgage contract is a valid means to secure debts of both future and past origins, but it is an exceptional mode of securing obligations, and obligations can only be deemed secured by the mortgage if they come fairly within the terms of the mortgage contract. For such clauses to secure future loans, the loans must be sufficiently described in the mortgage contract; a fortiori, the same requirement applies to past loans, which are already subsisting and known to the parties. The Court applied this doctrine to hold that the second mortgage's dragnet clause did not cover the earlier agricultural loan because the mortgage made no mention of the pre-existing loan, indicating that the parties treated each loan separately.

• Reliance on the Security Test — When a mortgagor takes another loan for which another security was given, it could not be inferred that such loan was made in reliance solely on the original security with the dragnet clause, but rather on the new security given. The dragnet clause in the first security instrument constitutes a continuing offer by the borrower to secure further loans under the security of the first security instrument, and when the lender accepted a different security, he did not accept the offer. The Court applied this test to conclude that the execution of the subsequent mortgage to secure the subsequent loan indicated that the parties intended to treat each loan as distinct and to secure each individually and separately.

• Contract of Adhesion Doctrine — A contract of adhesion, albeit valid, becomes objectionable only when it takes undue advantage of one of the parties—the weaker party—by having such party just adhere to the terms of the contract. In such situation, the courts go to the succor of the weaker party by construing any obscurity in the contract against the party who prepared the contract, the latter being presumed as the stronger party to the agreement and as the party who caused the obscurity. The Court applied this doctrine to construe the petitioner's failure to expressly incorporate the reference to the agricultural loan in the second mortgage contract as indicating that it did not at all contemplate the earlier loan when it entered into the subsequent mortgage.

• Monetary Interest vs. Compensatory Interest — Monetary interest is a compensation fixed by the parties for the use or forbearance of money, and under Article 1956 of the Civil Code, no interest shall be due unless it has been expressly stipulated in writing. Compensatory interest is imposed by law or by courts as penalty or indemnity for damages, and under Article 2209 of the Civil Code, if the obligation consists in the payment of a sum of money and the debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the payment of interest was agreed upon. The Court applied this distinction to impose compensatory interest on the actual damages awarded to the respondents.

• "For the all-embracing or dragnet clauses to secure future loans, therefore, such loans must be sufficiently described in the mortgage contract. If the requirement could be imposed on a future loan that was uncertain to materialize, there is a greater reason that it should be applicable to a past loan, which is already subsisting and known to the parties." — This passage articulates the core ratio decidendi: the requirement of sufficient description applies with greater force to pre-existing loans than to future loans, and the petitioner's failure to reference the agricultural loan in the second mortgage was fatal to its claim.

• "The mere fact that the mortgage constituted on the property covered by TCT No. T-66139 made no mention of the pre-existing loan could only strongly indicate that each of the loans of the Spouses Alonday had been treated separately by the parties themselves, and this sufficiently explained why the loans had been secured by different mortgages." — This passage establishes the evidentiary significance of the parties' conduct in executing separate mortgages for separate loans, supporting the conclusion that the dragnet clause did not extend to the earlier agricultural loan.

• "A contract of adhesion, albeit valid, becomes objectionable only when it takes undue advantage of one of the parties the weaker party- by having such party just adhere to the terms of the contract. In such situation, the courts go to the succor of the weaker party by construing any obscurity in the contract against the party who prepared the contract, the latter being presumed as the stronger party to the agreement, and as the party who caused the obscurity." — This passage states the canonical formulation of the contract of adhesion doctrine as applied to the mortgage contracts prepared exclusively by the petitioner bank.

• "We are at a loss at how the RTC had computed and determined the valuation at P3,000.00/square meter. Such determination was easily the product of guesswork on the part of the trial court, for the language employed in its judgment in reference to such value was 'could reasonably be.'" — This passage explains the basis for reducing the damages award, emphasizing that courts must eschew mere assertions, speculations, conjectures or guesswork in determining actual damages.

• Mojica vs. Court of Appeals, G.R. No. 94247, September 11, 1991, 201 SCRA 517 — Cited by the petitioner to support the validity of all-embracing clauses to secure past, present and future loans; distinguished by the CA and the Court because the facts therein involved a mortgage made to answer for future advancement or renewal of the loan, whereas the instant case involved a property used as security for a commercial loan obtained after the agricultural loan.

• Prudential Bank vs. Alviar, G.R. No. 150197, July 28, 2005, 464 SCRA 353 — Followed for the "reliance on the security test," holding that when a different security was taken for the second loan, no intent that the parties relied on the security of the first loan could be inferred; applied by analogy to conclude that the execution of the subsequent mortgage indicated the parties' intent to treat each loan separately.

• Traders Royal Bank vs. Castañares, G.R. No. 172020, December 6, 2010, 636 SCRA 519 — Cited for the proposition that all-embracing or dragnet clauses have been recognized as valid means to secure debts of both future and past origins, and that such clauses must be carefully scrutinized and strictly construed.

• Asiatrust Development Bank vs. Tuble, G.R. No. 183987, July 25, 2012, 677 SCRA 519 — Cited for the rule that obligations could only be deemed secured by the mortgage if they came fairly within the terms of the mortgage contract.

• Philippine National Bank vs. Manalo, G.R. No. 174433, February 24, 2014, 717 SCRA 254 — Cited for the doctrine on contracts of adhesion and the rule that courts construe any obscurity in the contract against the party who prepared it.

• Siga-an vs. Villanueva, G.R. No. 173227, January 20, 2009, 576 SCRA 696 — Cited for the distinction between monetary interest and compensatory interest, and the conditions for the imposition of each.

• Nacar vs. Gallery Frames, G.R. No. 189871, August 13, 2013, 703 SCRA 439 — Followed for the applicable interest rates: 12% per annum until June 30, 2013, and 6% per annum from July 1, 2013, taking into consideration the lowering of interest rates by the Monetary Board.

• De Guzman vs. Tumolva, G.R. No. 188072, October 19, 2011, 659 SCRA 725 — Cited for the rule that in determining actual damages, courts should eschew mere assertions, speculations, conjectures or guesswork.

• Diona vs. Balangue, G.R. No. 173559, January 7, 2013, 688 SCRA 22 — Cited for the rule that courts cannot grant reliefs not prayed for in the pleadings or in excess of what is being sought by the party.

• Planters Development Bank vs. Lopez, G.R. No. 186332, October 23, 2013, 708 SCRA 481 — Cited for the rule that interest due shall earn legal interest from the date of finality of the judgment until its full satisfaction, the interim period being deemed to be an equivalent to a forbearance of credit.

• Article 1306, Civil Code — Provides that contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy; cited as the express recognition by law of the right of the people to enter into all manner of lawful conventions, and as the basis for the objection against contracts of adhesion that negate the autonomy of the will of the parties.

• Article 1956, Civil Code — Provides that no interest shall be due unless it has been expressly stipulated in writing; cited to distinguish monetary interest from compensatory interest, requiring both an express stipulation for the payment of interest and that the agreement be reduced in writing.

• Article 2209, Civil Code — Provides that if the obligation consists in the payment of a sum of money and the debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the payment of interest was agreed upon; cited as the basis for imposing compensatory interest on the actual damages awarded.

• Article 2212, Civil Code — Provides that interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point; cited as the basis for requiring that the interest due shall itself earn legal interest of 6% per annum from the date of finality of the judgment until full satisfaction.

• Sereno, C.J. — On leave.
• Leonardo-De Castro, J. — Concurred.
• Perlas-Bernabe, J. — Concurred.
• Caguioa, J. — Concurred.

N/A — The decision does not indicate any dissenting opinion.