Philippine National Bank vs. Spouses Rocamora

A mortgagee suing for a deficiency judgment must prove the amount of the obligation at the time of foreclosure and the proceeds of the foreclosure sale, and an escalation clause — even one accompanied by a de-escalation clause — does not authorize the creditor to increase interest rates unilaterally, any such increase requiring the debtor's consent under the principle of mutuality of contracts. Corollarily, a government financial institution's delay in commencing foreclosure, contrary to the mandatory tenor of Presidential Decree No. 385, bears directly on its right to recover the deficiency, since interest, penalties, and depreciation accruing during the delay inflate the claim.

Philippine National Bank was a government financial institution prior to its full privatization in 1996, and it extended credit accommodations under the Cottage Industry Guarantee and Loan Fund, a facility under which a portion of the borrower's obligation was covered by a guarantee upon payment of a guarantee fee. Presidential Decree No. 385, the Mandatory Foreclosure Law, required government financial institutions, after the lapse of sixty days from its issuance, to foreclose collaterals and securities whenever arrearages on an account, including accrued interest and other charges, amounted to at least twenty percent of the total outstanding obligation. The spouses Agustin and Pilar Rocamora were borrowers of the bank whose accommodation was secured by both real and chattel mortgages.

On September 25, 1981, the spouses Agustin and Pilar Rocamora obtained a loan from the Philippine National Bank in the aggregate amount of ₱100,000.00 under the Cottage Industry Guarantee and Loan Fund. The loan was payable in five years, with ₱35,000.00 payable semi-annually and ₱65,000.00 payable annually, and carried interest at 12% per annum plus a penalty fee of 5% per annum in case of delayed payments. The spouses signed two promissory notes evidencing the loan, and to secure their obligations they executed a real estate mortgage over a property covered by Transfer Certificate of Title No. 7160 in the amount of ₱10,000.00 and a chattel mortgage over various machineries in the amount of ₱25,000.00. Payment of the remaining ₱65,000.00 was covered by the CIGLF guarantee, for which the spouses paid the required guarantee fee.

Both the promissory note and the real estate mortgage deed contained an escalation clause allowing PNB to increase the 12% interest rate at any time without notice, within the limits allowed by law. The promissory note provided that the interest rate "the Bank may at any time, without notice, raise within the limits allowed by law," while paragraph (k) of the real estate mortgage deed, entitled "INCREASE OF INTEREST RATE," reserved to the mortgagee the right to increase the interest rate charged on the obligation "within the limits allowed by law at any time depending on whatever policy it may adopt in the future," provided that the rate would be correspondingly decreased should the applicable maximum rate be reduced by law or by the Monetary Board.

The spouses Rocamora paid only a total of ₱32,383.65 on the loan: ₱7,176.00 on March 25, 1982 and ₱7,176.00 on September 25, 1982 on Promissory Note No. CIGLF 01/81, and ₱18,031.65 on September 5, 1982 on Promissory Note No. CIGLF 02/81. PNB commenced foreclosure proceedings in August and October 1990, three years after the spouses defaulted on their obligation in 1987, and the foreclosure of the mortgaged properties yielded ₱75,500.00 in total proceeds.

Finding the recovered proceeds and the prior payments insufficient to satisfy the loan obligations, PNB filed on January 18, 1994 a complaint for deficiency judgment before the Regional Trial Court of Puerto Princesa City, Branch 48. PNB alleged that as of January 7, 1994 the outstanding balance of the loan, including interests and penalties, was ₱206,297.47, consisting of ₱79,484.65 in principal, ₱51,229.35 in total interest due, and ₱75,583.47 in total penalty due. PNB claimed that the outstanding principal balance as of the foreclosure date of September 19, 1990 was ₱79,484.65, plus interest and penalties, for a total due and demandable obligation of ₱250,812.10, and that after deducting the ₱75,500.00 proceeds of the foreclosure sale, the spouses still owed ₱206,297.47.

The spouses Rocamora refused to pay the amount claimed as deficiency, alleging that PNB "practically created" the deficiency by increasing the interest rates from 12% to 42% per annum and by failing to immediately foreclose the mortgage pursuant to Presidential Decree No. 385, thereby allowing interest and penalty charges to accrue. They further alleged that PNB failed to sufficiently and satisfactorily prove the ₱250,812.10 claimed as the total obligation due at the time of foreclosure, that the ballooning of their obligation was PNB's own doing, that the unilateral increase violated the principle of mutuality of contracts, that PNB failed to comply with the immediate and mandatory foreclosure required under PD 385, and that PNB failed to call on the CIGLF which secured ₱65,000.00 of the loan.

Both the RTC and the CA found that PNB failed to prove the claimed deficiency, its own testimonial and documentary evidence having contradicted one another: PNB alleged an obligation of ₱250,812.10 at the time of foreclosure, yet its own statement of account dated October 23, 1996 showed a total obligation of only ₱206,664.34 as of that date, and its own witness, Mr. Reynaldo Caso, testified that the amount due from the spouses was only ₱206,664.34. The Court's own computation confirmed the discrepancy, since ₱250,812.10 less ₱75,500.00 yields ₱175,312.10 while ₱206,664.34 less ₱75,500.00 yields ₱131,164.34, neither of which equals the ₱206,297.47 claimed. PNB's own ledgers in the records likewise indicated that it imposed interest rates higher than the agreed 12% per annum, and PNB admitted that the outstanding obligation of the spouses before foreclosure exceeded the 20% threshold required by PD 385.

• Validity of the Escalation Clause: PNB argued that the RTC and the CA erred in invalidating the escalation clause because it fully complied with the requirements for a valid escalation clause under Banco Filipino Savings and Mortgage Bank vs. Navarro — namely, that there can be an increase in interest if increased by law or by the Monetary Board, and that the stipulation must include a provision for reduction of the stipulated interest in the event the applicable maximum rate is reduced by law or by the Monetary Board.
• Presence of a De-Escalation Clause: PNB posited that the presence of a de-escalation clause in the real estate mortgage deed ruled out any violation of the principle of mutuality of contracts.
• Timeliness of Foreclosure: PNB contended that it did not unreasonably delay the institution of foreclosure proceedings by acting three years after the spouses defaulted, since a mortgage action prescribes in ten years under Article 1142 of the Civil Code and actions based on written contracts prescribe in ten years under Article 1144(1), giving it ten years from the 1987 default to institute foreclosure; that the decision to foreclose is entirely the bank's prerogative; that PD 385 should not be read as limiting the period within which banks may foreclose, as holding otherwise would be contrary to the stated objectives of PD 385; and that the delay was prompted by the bank's sincere desire to assist the spouses Rocamora.
• Computation Based on the Original Rate: PNB alleged that the ₱206,297.47 deficiency claim was computed using only the original 12% per annum interest rate.
• Impropriety of Damages: PNB contested the damages awarded to the spouses Rocamora, asserting that it had no malice nor any furtive design when it increased the interest rates pursuant to the escalation clause, when it decided to foreclose the mortgages only in 1990, and when it sought to claim the deficiency, all of which it claimed were proper acts made in the exercise of its rights.

• Insufficient Proof of the Deficiency: The spouses Rocamora alleged that PNB failed to sufficiently and satisfactorily prove the amount of ₱250,812.10 claimed to be the total obligation due at the time of foreclosure, against which the ₱75,500.00 proceeds of the foreclosure sale were deducted to arrive at the deficiency claim of ₱206,297.47.
• Ballooning of the Loan Obligation: The spouses maintained that the ballooning of their loan obligation was PNB's own doing when it increased the interest rates and failed to immediately foreclose the mortgages.
• Violation of Mutuality of Contracts: The spouses argued that PNB's unilateral increase of interest rates violated the principle of mutuality of contracts.
• Non-Compliance with PD 385: The spouses alleged that PNB failed to comply with the immediate and mandatory foreclosure required under PD 385.
• Failure to Call on the CIGLF Guarantee: The spouses alleged that PNB failed to call on the CIGLF which secured the payment of ₱65,000.00 of the loan.

• Proof of the Deficiency Claim: Whether PNB sufficiently proved the amount of the obligation at the time of foreclosure and the resulting deficiency of ₱206,297.47 so as to entitle it to a deficiency judgment.
• Validity of the Escalation Clause and the Interest Increases: Whether the escalation clause, coupled with a de-escalation clause, authorized PNB to increase the interest rate from 12% to 42% per annum without the spouses Rocamora's conformity, or whether such unilateral increase violated the principle of mutuality of contracts.
• Effect of the Delay in Foreclosure: Whether PNB's delay in commencing foreclosure proceedings, contrary to the mandatory foreclosure mandated by PD 385, affects its right to recover the deficiency.
• Propriety of the Awarded Damages: Whether the spouses Rocamora are entitled to moral and exemplary damages, attorney's fees, and litigation costs on account of PNB's acts.

• Proof of the Deficiency Claim: No. A mortgagee must prove both the amount of the obligation prior to foreclosure and the proceeds of the foreclosure sale, the right to pursue the debtor arising only upon ascertainment that the proceeds are insufficient to cover the obligation and other costs at the time of sale.
• Validity of the Escalation Clause and the Interest Increases: No. Even with a de-escalation clause, no matter how elaborately worded, an unconsented increase in interest rates is ineffective if it transgresses the principle of mutuality of contracts under Article 1308 of the Civil Code.
• Effect of the Delay in Foreclosure: The delay militated against the deficiency claim. Section 1 of PD 385 mandated immediate foreclosure by government financial institutions once arrearages reached at least 20% of the total outstanding obligation, and the interest, penalties, and depreciation accruing during the delay inflated the amount claimed.
• Propriety of the Awarded Damages: No. Moral and exemplary damages, attorney's fees, and litigation costs were deleted, bad faith not having been sufficiently established; a breach of contract alone does not warrant moral damages.

• Proof of the Deficiency Claim: The foreclosure of chattel and real estate mortgages is governed by Act No. 1508 and Act No. 3135, respectively. Although both laws contain no provision expressly or impliedly authorizing the mortgagee to recover the deficiency after the foreclosure proceeds are deducted from the principal obligation, the Court has construed the laws' silence as a grant to the mortgagee of the right to maintain an action for the deficiency, the mortgages being given merely as security and not as settlement or satisfaction of the indebtedness. As in any claim for payment of money, however, the mortgagee must prove the basis for the deficiency judgment it seeks; the right to pursue the debtor arises only when the proceeds of the foreclosure sale are ascertained to be insufficient to cover the obligation and the other costs at the time of the sale. Thus, the amount of the obligation prior to foreclosure and the proceeds of the foreclosure are material. Here, both the RTC and the CA found that PNB failed to prove the claimed deficiency, its own testimonial and documentary evidence having contradicted one another: PNB alleged an obligation of ₱250,812.10 at the time of foreclosure, yet its own documentary evidence showed that as of that date the total obligation was only ₱206,664.34, and its own witness, Mr. Reynaldo Caso, testified to that same lower figure. Whether the obligation was ₱250,812.10 or ₱206,664.34, the Court's own computation did not add up to the ₱206,297.47 claimed, since ₱250,812.10 less ₱75,500.00 is ₱175,312.10, while ₱206,664.34 less ₱75,500.00 is ₱131,164.34. PNB was consistently unable to provide a detailed and credible accounting of the claimed deficiency; what appeared clear was that after adding the spouses' partial payments and the foreclosure proceeds, PNB had already received a total of ₱107,883.68 as payment for the ₱100,000.00 loan, and that the claimed deficiency consisted mainly of interests and penalty charges, or about 61.5% of the amount claimed.

• Validity of the Escalation Clause and the Interest Increases: Escalation clauses are valid and do not contravene public policy; they are common in credit agreements as means of maintaining fiscal stability and retaining the value of money in long-term contracts. To avoid the one-sided situation that escalation clauses may bring, Banco Filipino Savings and Mortgage Bank vs. Navarro required the inclusion in the parties' agreement of a de-escalation clause authorizing a reduction in interest rates corresponding to downward changes made by law or by the Monetary Board. The validity of escalation clauses notwithstanding, these clauses do not give creditors the unbridled right to adjust interest rates unilaterally; any increase in the rate of interest made pursuant to an escalation clause must be the result of an agreement between the parties, since the minds of all the parties must meet on the proposed modification as it affects an important aspect of the agreement. There can be no contract in the true sense in the absence of the element of agreement, and any change must be mutually agreed upon, otherwise it carries no binding effect. A stipulation on the validity or compliance with the contract left solely to the will of one of the parties is void under Article 1308 of the Civil Code. As correctly found by the appellate court, even with a de-escalation clause, no matter how elaborately worded, an unconsented increase in interest rates is ineffective if it transgresses the principle of mutuality of contracts. The Court had struck down similar unilateral increases in several cases, many of them involving PNB, beginning with PNB vs. CA and Ambrosio Padilla, where a condition making the fulfillment of a contract dependent exclusively upon the uncontrolled will of one party was declared void and the agreement was characterized as a contract of adhesion and a veritable trap for the weaker party. The rule was repeated in PNB vs. CA and Jayme-Fernandez and PNB vs. CA and Spouses Basco. The escalation clause used in the present case was no different from the clause assailed in the 1996 PNB case, in both of which the interest rates were increased from the agreed 12% per annum to 42%; no attempt was made by PNB to secure the conformity of the debtors to the successive increases, and their assent could not be implied from their lack of response to the letters informing them of the increases, since no one receiving a proposal to change a contract is obliged to answer the proposal. PNB's argument that the spouses' failure to contest the increased rates purportedly reflected in the statements of account and demand letters amounted to implied acceptance therefore failed. PNB's claim that the deficiency was computed using only the original 12% per annum rate was likewise unlikely, as the bank's own ledgers in the records clearly indicated that it imposed interest rates higher than the agreed 12% per annum, a confirmatory finding that reinforced the rule that findings of the RTC, when affirmed by the CA, are binding upon the Court.

• Effect of the Delay in Foreclosure: Section 1 of PD 385 makes it mandatory for government financial institutions, after the lapse of sixty days from the issuance of the decree, to foreclose the collaterals and/or securities for any loan, credit, accommodation, and/or guarantee granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty percent of the total outstanding obligations, including interest and other charges, as appearing in the books of account and/or related records of the financial institution concerned. Under PD 385, government financial institutions — which was PNB's status prior to its full privatization in 1996 — are mandated to immediately foreclose the securities given for any loan when the arrearages amount to at least 20% of the total outstanding obligation. PNB commenced foreclosure proceedings in 1990, or three years after the spouses defaulted in 1987, and argued that its right to foreclose should not be affected by the mandatory tenor of PD 385 since it exercised that right within the ten-year prescription period under Articles 1142 and 1144(1) of the Civil Code. The argument missed the point: the issue was the effect of the delay in commencing foreclosure proceedings on PNB's right to recover the deficiency, not on its right to foreclose. The delay bore a significant function in the deficiency amount claimed, as the amount undoubtedly included interest and penalty charges that accrued during the period covered by the delay; the depreciation of the mortgaged properties during that period must also be factored in, as it affects the proceeds recoverable in the foreclosure sale and, in turn, the deficiency claim. There was likewise a four-year gap between the foreclosure proceedings and the filing of the complaint for deficiency judgment, during which interest, whether at the 12% per annum rate or higher, and penalty charges also accrued. To grant the deficiency claim would be to award PNB for its delay and its undisputed disregard of PD 385.

• Propriety of the Awarded Damages: Moral damages are not recoverable simply because a contract has been breached; they are recoverable only if the defendant acted fraudulently or in bad faith or in wanton disregard of its contractual obligations, and the breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive. Likewise, a breach of contract may give rise to exemplary damages only if the guilty party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. The Court was not sufficiently convinced that PNB acted fraudulently, in bad faith, or in wanton disregard of its contractual obligations simply because it increased the interest rates and delayed the foreclosure of the mortgages. Bad faith cannot be imputed simply because the defendant acted with bad judgment or with attendant negligence; it pertains to a dishonest purpose, to some moral obliquity, or to the conscious doing of a wrong, a breach of a known duty attributable to a motive, interest or ill will that partakes of the nature of fraud. Proof of actions of this character was indisputably lacking, and consequently the spouses Rocamora were not entitled to an award of moral and exemplary damages; under those circumstances, neither should they recover attorney's fees and litigation expenses, and these awards were accordingly deleted.

• Mutuality of Contracts and Escalation Clauses — Escalation clauses are valid and do not contravene public policy, being common in credit agreements as means of maintaining fiscal stability and retaining the value of money in long-term contracts. To prevent the one-sided situation such clauses may produce, the agreement must include a de-escalation clause authorizing a reduction in interest rates corresponding to downward changes made by law or by the Monetary Board. An escalation clause, however, does not give creditors the unbridled right to adjust interest rates unilaterally: any increase must be the result of an agreement between the parties, because the minds of all the parties must meet on a modification affecting an important aspect of the agreement. A stipulation leaving the validity or compliance of the contract solely to the will of one of the parties is void under Article 1308 of the Civil Code. Applied here, PNB's increase of the interest rate from 12% to 42% per annum without the spouses Rocamora's conformity was ineffective notwithstanding the de-escalation clause, and the spouses' silence in the face of the bank's letters did not amount to implied assent.
• Proof Required for a Deficiency Judgment — Foreclosure of chattel and real estate mortgages is governed by Act No. 1508 and Act No. 3135, respectively. Although these laws do not expressly or impliedly authorize the mortgagee to recover the deficiency remaining after the foreclosure proceeds are deducted from the principal obligation, the laws' silence has been construed as a grant to the mortgagee of the right to maintain an action for the deficiency, the mortgages being merely security and not settlement or satisfaction of the indebtedness. The right to pursue the debtor arises only when the proceeds of the foreclosure sale are ascertained to be insufficient to cover the obligation and the other costs at the time of the sale; hence the amount of the obligation prior to foreclosure and the proceeds of the foreclosure are material. Applied here, PNB's testimonial and documentary evidence contradicted each other, and no credible accounting supported the ₱206,297.47 claimed.
• Mandatory Foreclosure under Presidential Decree No. 385 — Section 1 of PD 385 makes it mandatory for government financial institutions, after the lapse of sixty days from the issuance of the decree, to foreclose the collaterals and/or securities for any loan, credit, accommodation, and/or guarantee granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty percent of the total outstanding obligations, including interest and other charges, as appearing in the books of account and/or related records of the financial institution concerned. Applied here, PNB — a government financial institution prior to its full privatization in 1996 — commenced foreclosure only in 1990, three years after the 1987 default, and the delay inflated the deficiency claim through accruing interest and penalties and the depreciation of the mortgaged properties; the delay affects the right to recover the deficiency even though the right to foreclose was exercised within the ten-year prescriptive period.
• Bad Faith as Requisite for Moral and Exemplary Damages in Breach of Contract — Moral damages are not recoverable simply because a contract has been breached; they are recoverable only if the defendant acted fraudulently or in bad faith or in wanton disregard of its contractual obligations, and the breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive. Exemplary damages may be awarded for breach of contract only if the guilty party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. Bad faith cannot be imputed simply because the defendant acted with bad judgment or with attendant negligence; it pertains to a dishonest purpose, to some moral obliquity, or to the conscious doing of a wrong, a breach of a known duty attributable to a motive, interest or ill will that partakes of the nature of fraud. Applied here, PNB's increase of interest rates and delay in foreclosure did not sufficiently establish bad faith, warranting deletion of the moral and exemplary damages, attorney's fees, and litigation costs.

• "As correctly found by the appellate court, even with a de-escalation clause, no matter how elaborately worded, an unconsented increase in interest rates is ineffective if it transgresses the principle of mutuality of contracts." — This is the ratio decidendi on the escalation clause issue, holding that the presence of a de-escalation clause does not cure the absence of the debtor's consent to an interest increase.
• "The issue before us is the effect of the delay in commencing foreclosure proceedings on PNB's right to recover the deficiency, not on its right to foreclose." — This passage frames the Court's rejection of PNB's prescription-based argument and clarifies that PD 385's mandatory foreclosure requirement bears on the deficiency claim rather than on the right to foreclose.
• "Bad faith is more than these; it pertains to a dishonest purpose, to some moral obliquity, or to the conscious doing of a wrong, a breach of a known duty attributable to a motive, interest or ill will that partakes of the nature of fraud." — This states the canonical formulation of bad faith as a requisite for moral and exemplary damages in breach of contract, and supplies the ground for deleting the damages awarded by the lower courts.
• "The right of the mortgagee to pursue the debtor arises only when the proceeds of the foreclosure sale are ascertained to be insufficient to cover the obligation and the other costs at the time of the sale." — This defines the accrual of the mortgagee's right to sue for a deficiency and explains why the obligation at foreclosure and the foreclosure proceeds are material to the claim.

• Banco Filipino Savings and Mortgage Bank vs. Navarro, G.R. No. L-46591, July 28, 1987, 152 SCRA 346 — Controlling precedent laying down the two requirements for a valid escalation clause: that there can be an increase in interest if increased by law or by the Monetary Board, and that the stipulation must include a provision for reduction of the stipulated interest in the event the applicable maximum rate is reduced by law or by the Monetary Board.
• PNB vs. CA and Ambrosio Padilla, G.R. No. 88880, April 30, 1991, 196 SCRA 536 — Followed; a contract containing a condition making its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties is void, and a loan agreement allowing the bank to increase interest at will would be a contract of adhesion and a veritable trap for the weaker party.
• PNB vs. CA and Jayme-Fernandez, G.R. No. 107569, November 8, 1994, 238 SCRA 20 — Followed; reiterates the rule invalidating unilateral increases in interest rates by PNB.
• PNB vs. CA and Spouses Basco, G.R. No. 109563, July 9, 1996, 258 SCRA 549 — Followed; the escalation clause in the present case was no different, with interest rates raised from 12% to 42% per annum, and the debtors' lack of response to the bank's letters did not imply assent to the increases.
• Floirendo vs. Metropolitan Bank and Trust Company, G.R. No. 148325, September 3, 2007, 532 SCRA 43 — Cited for the rule that any change in the contract must be mutually agreed upon, otherwise the change carries no binding effect.
• Superlines Transportation Company vs. ICC Leasing and Financing Corporation, G.R. No. 150673, February 28, 2003, 398 SCRA 508 — Cited for the mortgagee's right to sue for a deficiency and for the instances in which the law expressly forecloses that right, such as the sale of the thing pledged under Article 2115 and the foreclosure of a chattel mortgage on personal property sold on installment under Article 1484, paragraph 3, of the Civil Code.
• PNB vs. CA, G.R. No. 121739, June 14, 1999, 308 SCRA 229 — Cited for the materiality of the amount of the obligation prior to foreclosure and of the proceeds of the foreclosure in a claim for deficiency.
• Development Bank of the Philippines vs. Vda. De Moll, G.R. No. L-25807, January 31, 1972, 43 SCRA 82 — Cited alongside PNB vs. CA on the same point regarding the proof required in a deficiency claim.
• Spouses Almeda vs. CA and PNB, G.R. No. 113412, April 17, 1996, 256 SCRA 292 — Cited for the validity of escalation clauses as not contrary to public policy.
• Insular Bank of Asia & America vs. Salazar, G.R. No. L-82082, March 25, 1988, 159 SCRA 133 — Cited alongside Spouses Almeda on the validity of escalation clauses.
• Pilipinas Shell Petroleum Corporation vs. John Bordman Ltd. of Iloilo, Inc., G.R. No. 159831, October 14, 2005, 473 SCRA 151 — Cited for the rule that a breach of contract may give rise to exemplary damages only if the guilty party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.
• Francisco vs. Ferrer, G.R. No. 142029, February 28, 2001, 353 SCRA 261 — Cited, together with Cojuangco, Jr. vs. CA, for the definition of bad faith as involving a dishonest purpose, moral obliquity, or the conscious doing of a wrong.
• Cojuangco, Jr. vs. CA, G.R. No. 119398, July 2, 1999, 309 SCRA 602 — Cited on the same definition of bad faith as a requisite for moral damages.
• Equitable PCI Bank vs. Ng Sheung Ngor, G.R. No. 171545, December 19, 2007, 541 SCRA 223 — Cited for the rule that attorney's fees and litigation expenses are not recoverable absent the requisite bad faith in the breach of contract.

• Article 1308, Civil Code — Provides that the contract must bind both contracting parties, and its validity or compliance cannot be left to the will of one of them. Applied to void the unilateral increases in interest rates imposed by PNB under the escalation clause.
• Article 2220, Civil Code — Governs the award of moral damages in cases of breach of contract, which requires that the defendant acted fraudulently or in bad faith or in wanton disregard of its contractual obligations. Applied to delete the moral damages awarded by the lower courts.
• Article 1142, Civil Code — Provides that a mortgage action prescribes in ten years. Invoked by PNB to justify its three-year delay in foreclosing; the Court held the provision inapposite because the issue was the effect of the delay on the deficiency claim, not on the right to foreclose.
• Article 1144(1), Civil Code — Provides that actions based on a written contract prescribe in ten years. Invoked by PNB on the same basis and rejected for the same reason.
• Article 2115, Civil Code — Cited in the discussion of the mortgagee's right to recover a deficiency, as an instance where the law expressly forecloses the creditor's right to sue for any deficiency, namely in the sale of the thing pledged.
• Article 1484, paragraph 3, Civil Code — Cited alongside Article 2115 as another instance where the law expressly forecloses the right to recover a deficiency, namely in the foreclosure of a chattel mortgage on personal property sold on installment basis.
• Section 1, Presidential Decree No. 385 (Mandatory Foreclosure Law) — Makes it mandatory for government financial institutions, after the lapse of sixty days from the issuance of the decree, to foreclose the collaterals and/or securities for any loan, credit, accommodation, and/or guarantee whenever the arrearages, including accrued interest and other charges, amount to at least twenty percent of the total outstanding obligations, including interest and other charges, as appearing in the books of account and/or related records of the financial institution concerned. Applied to hold that PNB's three-year delay in foreclosing, despite the arrearages exceeding the 20% threshold, militated against its deficiency claim.
• Act No. 1508 (Chattel Mortgage Law) and Act No. 3135 (Real Estate Mortgage Law) — Govern the foreclosure of chattel and real estate mortgages, respectively. Their silence on the recovery of a deficiency was construed as a grant to the mortgagee of the right to maintain an action for the deficiency, subject to proof of the obligation and the foreclosure proceeds.
• Rule 45, Rules of Court — The procedural basis of PNB's petition for review on certiorari assailing the CA decision.
• Section 13, Article VIII, 1987 Constitution — Cited in the certification that the conclusions of the Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

Justice Conchita Carpio-Morales (Acting Chairperson, designated as such per Special Order No. 690 dated September 4, 2009); Justice Consuelo Ynares-Santiago (designated additional Member of the Second Division per Special Order No. 691 dated September 4, 2009); Justice Mariano C. del Castillo; and Justice Roberto A. Abad. Chief Justice Reynato S. Puno issued the certification pursuant to Section 13, Article VIII of the Constitution.