Philippine National Bank vs. Vito

An acceleration clause in a mortgage contract, stipulating that the mortgagee may declare all stipulations violated and proceed to foreclosure upon the mortgagor's failure to comply with any condition such as payment of any installment, is valid and binding under the Civil Code, and upon default renders all remaining installments due and demandable at the will of the creditor.

The Philippine National Bank, a government banking institution, extended a loan to the defendant spouses Flaviano Lopez Vito and Maximina del Castillo, secured by a mortgage over real property located in the Province of Occidental Negros. The mortgage contract contained an acceleration clause in paragraph 5, permitting the mortgagee to declare stipulations violated and foreclose upon any default by the mortgagors. The North Negros Sugar Co., Inc. was joined as a defendant, presumably holding an interest in the mortgaged lands.

On July 25, 1918, the defendant spouses Flaviano Lopez Vito and Maximina del Castillo mortgaged certain realty located in the Province of Occidental Negros to secure the payment of a loan of ₱24,000 granted to them by the plaintiff, the Philippine National Bank. The mortgage deed was recorded in the office of the registrar of deeds of the province on July 26, 1918. Under the terms of the mortgage contract, the spouses bound themselves to pay ₱24,000 plus interest at 8 per cent per annum in ten annual installments of ₱3,602.64 each, payable on or before July 18 of each year from the date of the contract. Paragraph 5 of the mortgage contract stipulated that if the mortgagors, their heirs, executors, or administrators should at any time neglect, fail, or refuse to comply with all or any of the stipulations and conditions of the mortgage, the mortgagee would have the right to declare such stipulations and conditions violated and to proceed to the foreclosure of the mortgage.

On July 18, 1920, the defendants made a partial payment on account of the obligation, leaving a balance of ₱16,248.84. They bound themselves to pay this debit balance with interest at 8 per cent per annum in eight annual installments of ₱2,844.68 each, payable on or before July 18 of each year beginning July 18, 1920, pursuant to a new scale of payments attached to the complaint.

The defendant spouses thereafter failed to pay the sums corresponding to six yearly installments and interest thereon, covering the period from July 1920 to July 1926. On May 31, 1927, the plaintiff instituted the action demanding payment of the installments due and unpaid, as well as those corresponding to the years 1927 and 1928. The defendants answered with a general denial and failed to appear at the trial.

After the plaintiff adduced its evidence, the trial court rendered judgment ordering the defendants to pay ₱13,404.18 with interest at 8 per cent per annum from July 1920, compounded semiannually, and costs, while reserving to the plaintiff the proper action for the last annual installment of ₱2,844.88 and the interest thereon. The plaintiff excepted to that portion of the judgment reserving its action on the last installment, contending that the trial court erred in holding that the eighth annual installment was not yet demandable.

• Demandability of the Last Installment: Petitioner argued that the trial court committed error in holding that the eighth annual installment of ₱2,844.88 was not yet demandable, given that the mortgage contract contained an acceleration clause permitting the mortgagee to declare all stipulations violated upon any default and to proceed to foreclosure.

• Acceleration Clause — Effect of Default on Undue Installments: Whether the acceleration clause in the mortgage contract renders all remaining installments due and demandable upon the mortgagor's failure to pay any installment, such that the mortgagee may collect the entire debt including installments not yet matured according to their original terms.

• Acceleration Clause — Effect of Default on Undue Installments: Yes. The acceleration clause is valid and binding under the Civil Code, and upon the mortgagor's default, the period is rendered ineffective, making all remaining installments due and demandable at the will of the creditor.

• Acceleration Clause — Effect of Default on Undue Installments: The Court applied Article 1255 of the Civil Code, which permits contracting parties to establish any agreements, terms, and conditions they deem proper, provided they are not contrary to law, morals, or public order. The acceleration clause in paragraph 5 of the mortgage contract was found to be perfectly valid, as it violated none of these restrictions. Pursuant to Article 1278, contracts, once valid, are binding on the contracting parties. While Article 1125 provides that obligations for which a day certain has been fixed are demandable only when that day arrives, the defendants' right to avail themselves of the agreed periods was made subject to the resolutory condition contained in paragraph 5. The non-fulfillment of the conditions of the contract — specifically, the failure to pay annual installments — triggered that resolutory condition, rendering the period ineffective and making the obligation demandable. Although the clause was not entirely explicit regarding the maturity of installments following those due and unpaid, the Court construed the parties' intention as authorizing the creditor, upon any default, to declare all remaining installments due, since the creditor was not bound to declare the unpaid installment due — it became due by the failure to pay. The Court supported this reasoning with American jurisprudence, including Phillips vs. Taylor, Biedka vs. Ashkenas, McLean vs. Presley's Adm'r., Phipps vs. Lopinsky, and First Trust & Savings Bank vs. Bitter Root Valley Irr. Co., all of which upheld the enforceability of acceleration clauses allowing foreclosure for the entire debt upon partial default.

• Validity and Effect of Acceleration Clauses in Mortgage Contracts — Contracting parties may stipulate that upon the mortgagor's failure to comply with any condition of the mortgage, such as non-payment of any installment, the mortgagee may declare all stipulations violated and proceed to foreclosure. Such a clause constitutes a valid resolutory condition under the Civil Code. Upon default, the period agreed upon for the payment of future installments is resolved, rendering the entire obligation demandable. The creditor is not bound to declare the unpaid installment due, for it becomes due by the failure to pay. This doctrine is supported by the principle that the entire debt may, at the election of the mortgagee, become due upon a partial default in payment, and foreclosure may be had for the entire amount upon such default.

• Freedom of Contract under Article 1255 of the Civil Code — Contracting parties may establish any agreements, terms, and conditions they deem proper, provided they are not contrary to law, morals, or public order. Contracts thus validly formed are binding on the parties pursuant to Article 1278, as construed in a long series of Supreme Court decisions.

• "We are of the opinion that the non-fulfillment of the conditions of the contract renders the period ineffective, and makes the obligation demandable at the will of the creditor." — This passage articulates the ratio decidendi: default on any installment triggers the resolutory condition, extinguishing the benefit of the period and accelerating the entire obligation.

• "And so it must be, because the creditor is not bound to declare the unpaid installment due, for they became due by the failure to pay." — This clarifies that the acceleration is automatic upon default; the creditor need not take further action to declare maturity, as the unpaid installments become due by operation of the default itself.

• "In case of an agreement between the parties to the effect that the entire debt or may, at the election of the mortgagee, become due upon a partial default in payment of the mortgage debt, or an installment thereof, foreclosure may be had for the entire amount upon such default." — This quotation from Corpus Juris was adopted by the Court as the doctrinal formulation supporting acceleration clauses, anchoring the ruling in established jurisprudential authority.

• Phillips vs. Taylor, 96 Alabama 426 — Cited as supporting authority for the proposition that where a mortgage authorizes the mortgagee to declare the entire debt due upon default in payment of any note, the mortgagee may foreclose for the entire debt upon such default before the maturity of all notes.
• Biedka vs. Ashkenas, 197 New York Supplement 851 — Cited for the rule that where a mortgage provides that default in payment of any installment renders the whole principal sum due, the entire balance becomes due upon such default, even if the accompanying bond lacks a similar provision.
• McLean vs. Presley's Adm'r., 56 Alabama 211 — Cited for the principle that upon default in payment of any note at maturity, the mortgagee may sell the entire mortgaged premises and retain sufficient proceeds to pay even the notes not then due.
• Phipps vs. Lopinsky, 97 West Virginia 457 — Cited as confirming the rule that default on one note secured by a trust deed with an acceleration clause renders all remaining notes due, permitting a decree for the full amount and a sale of the property.
• First Trust & Savings Bank vs. Bitter Root Valley Irr. Co., 251 Federal Reporter 320 — Cited for the proposition that where a trust deed securing bonds is an entire contract to be performed in installments, all bonds become due upon default in an installment.

• Article 1255, Civil Code — Permits contracting parties to establish any agreements, terms, and conditions they deem proper, provided they are not contrary to law, morals, or public order. Applied to uphold the validity of the acceleration clause in the mortgage contract.
• Article 1278, Civil Code — Provides that contracts are binding between the parties. Applied to enforce the binding effect of the validly formed mortgage contract, including its acceleration clause.
• Article 1125, Civil Code — Provides that obligations for the performance of which a day certain has been fixed shall be demandable only when that day arrives. Applied to explain that while the period suspends demandability, the resolutory condition in the acceleration clause renders the period ineffective upon default.

Avanceña, C.J., Johnson, Street, Malcolm, Ostrand, Romualdez, and Villa-Real, JJ., concurred.