Philippine Savings Bank vs. Co

A mortgagor is entitled to personal notice of the extrajudicial foreclosure of his or her mortgage prior to the public auction, as a matter of due process and the bank's duty of utmost diligence, notwithstanding the silence of Act No. 3135. The right to such notice cannot be made to depend solely on a contractual stipulation, and its absence voids the foreclosure.

Josephine Co was the borrower and mortgagor, and Philippine Savings Bank was the lender and mortgagee, under a loan secured by a real estate mortgage over Co's property in Manila. Extrajudicial foreclosure in the Philippines is governed by Act No. 3135, which, as construed in Bonnevie vs. Court of Appeals and implemented by A.M. No. 99-10-05-0, requires only posting and publication of the notice of sale and does not mandate personal notice to the mortgagor. The case called upon the SC to reconsider that settled reading in light of due process principles.

On January 25, 2006, Josephine Co obtained a P10,000,000 loan from Philippine Savings Bank, secured by a real estate mortgage over a portion of land at the corner of Singalong St. and Fermin St., Manila, covered by TCT No. 259982. The loan and mortgage were evidenced by a Promissory Note with Real Estate Mortgage. Paragraph 19 of the Promissory Note provided that upon the occurrence of default, the bank may, at its option and "WITHOUT NEED OF NOTICE OR DEMAND," exercise remedies including foreclosing the mortgage, with the bank appointed as attorney-in-fact to enter upon and take possession of the mortgaged property and sell it at public auction pursuant to Act No. 3135. Paragraph 60 provided that all correspondence relative to the agreement, including demand letters, summonses, subpoenas, or notifications of any judicial or extra-judicial actions, shall be sent to the client at the address given, and that the mere act of sending such correspondence by mail or personal delivery to that address shall be valid and effective notice for all legal purposes.

On January 25, 2006, Philippine Savings Bank annotated the mortgage on TCT No. 271203, which was registered under Co's name. Co subsequently defaulted on the loan after paying only two months of the monthly installment. According to PSBank, when Co defaulted, it sent her a demand letter to the address stated in the Promissory Note. After no payment was made, PSBank applied for extrajudicial foreclosure of the mortgaged property, complying with the notification requirements under Act No. 3135 as shown by the notice of extrajudicial sale, a certificate of posting, and an affidavit of publication.

PSBank was the sole and highest bidder at the public auction. The property covered by TCT No. 271203 was transferred to PSBank, and TCT No. 281141 was issued in its favor.

On February 27, 2013, Co filed a complaint for annulment of foreclosure proceedings with prayer for injunctive relief, claiming, among others, that the mortgage was foreclosed without prior notice of her unpaid outstanding obligation. During trial, Co initially testified that she neither received the P10,000,000 loan nor executed the Promissory Note. She later admitted that she recalled agreeing to secure a loan, and knew that she was in default after paying only two months of the monthly installment. She claimed that she had been waiting for a demand letter from PSBank.

PSBank presented evidence showing that Co had obtained the loan and executed the Promissory Note with Real Estate Mortgage, and that when Co defaulted, it sent her a demand letter to the address stated in the Promissory Note. The RTC found that the parties had no agreement entitling Co to personal notice, while the CA found that PSBank did not refute Co's allegation that no notice was sent to her prior to the foreclosure sale.

• Contract as Law Between Parties: Petitioner argued that the text of the Promissory Note is the law between the parties, and it states that the bank may foreclose the mortgage without need of notice or demand.
• Paragraph 60 Not an Undertaking to Notify: Petitioner insisted that the CA erred in finding that Paragraph 60 in the Promissory Note was an undertaking to notify respondent in case of foreclosure.
• Global Holiday Not Applicable: Petitioner argued that Global Holiday is not on all fours with this case because in that case there was no stipulation between the parties regarding waiver of notice or demand as a consequence of default.
• Notice Sent by Registered Mail: Petitioner claimed that in any case, notice was sent to respondent by registered mail.

• Paragraph 60 Mandates Notice: Respondent, relying solely on Global Holiday, insisted that Paragraph 60 of the Promissory Note mandates that correspondence pertaining to the parties' agreement must be sent to her address.
• No Correspondence Sent: Respondent asserted that Paragraph 60 states all correspondence, including extra-judicial or judicial actions, must be sent to her, and there was no correspondence regarding the intended judicial or extra-judicial action; an act violative of Act No. 3135 for Paragraph 60 is an exception to the rule.
• Special Power of Attorney Not Blanket Authority: Respondent argued that having a Special Power of Attorney does not mean PSBank has blanket authority to do whatever it wants without regard to the rules and regulations imposed by Act No. 3135, especially if it derogates the constitutional and legal rights of the bank's clients; bank business is imbued with public interest.

• Personal Notice in Extrajudicial Foreclosure: Whether PSBank's failure to personally notify Co of the extrajudicial foreclosure of her mortgaged property voids the foreclosure.

• Personal Notice in Extrajudicial Foreclosure: Yes. A mortgagor is entitled to personal notice of the extrajudicial foreclosure of his or her mortgage prior to the public auction, as a matter of due process and the bank's duty of utmost diligence; the absence of such notice voids the foreclosure.

• Personal Notice in Extrajudicial Foreclosure: The SC acknowledged the settled rule under Bonnevie vs. Court of Appeals that Act No. 3135 does not require personal notice to the mortgagor, Section 3 requiring only posting in three public places and publication once a week for three consecutive weeks, and A.M. No. 99-10-05-0 having denied a request to require personal notice. The SC held, however, that a revisit of this reading was in order. Under the current reading, the sale of the mortgaged property is by default in the hands of the mortgagee, and the sale could proceed without the owner having any idea it is occurring, without any opportunity to dispute the circumstances; fundamental fairness demanded that this reading be revisited. The SC reasoned that the right to property is protected under the due process clause, and while the due process clause generally limits government action, it has been applied to relationships between private persons, such as employment contracts and contracts between students and academic institutions, where the directives requiring notice and hearing were provided by statute and recognized as due process applied in the private sector. This recognition created sufficient space to revisit Bonnevie and require personal notice on the mortgagor notwithstanding the silence of Act No. 3135. Citing De La Salle University, Inc. vs. Court of Appeals, the SC emphasized that the due process clause embodies a system of rights based on moral principles deeply imbedded in the traditions and feelings of the people, and that the right to due process is so basic that its assurance must be the general rule and not the exception. The SC then reviewed the line of cases. Metropolitan Bank and Trust Company vs. Wong reiterated that personal notice is not necessary but found a contractual basis to hold the mortgagee bound to notify the mortgagor, interpreting a similar provision as intended to apprise the mortgagor of any action on the property. The SC noted, however, that a plain reading of the provision in Wong reveals no specific and clear undertaking to personally notify the mortgagor; the contract simply contains an address where correspondence should be sent. This conclusion contravened Cortes vs. Intermediate Appellate Court, which construed a similar paragraph as not specifically requiring personal notice of foreclosure sale and held that even if the provision expressed a general intent, it could not prevail against the parties' specific intent that Act No. 3135 be the controlling law. Although the textual reasoning in Cortes is sound, the SC noted it is a stray case, and subsequent cases have followed Wong, consistently holding that failure to notify prior to extrajudicial foreclosure invalidates the foreclosure where a contract stipulates the mortgagor's address for purposes of service. The SC attributed these decisions to an express contractual agreement, but a review of the stipulations suggested the decisions were based more on a duty to ensure the observance of due process in extrajudicial foreclosure processes rather than the parties' intentions; the decisions invalidating foreclosures on the basis of contract contained no attempts at statutory construction and instead emphasized the protection of rights. The SC cited Wong's admonition that the right of a bank to foreclose must be exercised according to its clear mandate, each and every requirement of the law must be complied with, and the exercise of a right ends when the right disappears, and it disappears when it is abused especially to the prejudice of others. The SC also cited Pasno vs. Ravina, which, although involving notice to a mortgagor's estate, pointed out the importance of notice in foreclosure and created space to read further into Act No. 3135 to require the observance of certain procedure notwithstanding its silence. Turning to the case, the SC noted that it may be tempting to apply Wong, but what differentiates the Promissory Note here from the agreement in Wong is that Paragraph 60 expressly pertains to a stipulation as to the respondent's address, and Paragraph 19 expressly states that, as a consequence of default, the bank may foreclose the mortgage "without need of notice or demand." This diminished the applicability of Wong and compelled a closer consideration of why the SC so quickly concludes that parties have created the mortgagor's right to personal notice notwithstanding the absence of definite words. The SC held that due process requires that a mortgagor be notified, to afford him or her an opportunity to safeguard his or her rights, prior to the extrajudicial foreclosure of his or her mortgage and the sale of his or her property. The current reading of Act No. 3135 affords no safeguards whatsoever for the mortgagor; the publication requirement is not intended as notification for the mortgagor but for the public, to enable participation in the auction sale. Although the line of cases succeeding Wong recognize that parties can agree that the mortgagor is entitled to personal notice, the right to personal notice should not be one which is opt-in. Moreover, the business of banking is imbued with public interest, and banks should conduct their business in a way that observes the highest degree of diligence to their clients. The SC therefore found that Co was entitled to personal notification of the extrajudicial foreclosure, and denied the petition.

• Personal Notice in Extrajudicial Foreclosure — A mortgagor is entitled to personal notice of the extrajudicial foreclosure of his or her mortgage prior to the public auction. This is required not only by contract but by principles of due process and the utmost diligence required of banks. Failure to give such notice voids the foreclosure, the auction sale, the certificate of sale, and any resulting transfer certificate of title.
• Due Process in Private Relationships — The due process clause generally limits government action, but it has been applied to relationships between private persons, such as employment contracts and contracts between students and academic institutions. This concept of due process applied by statute in the private sector creates space for the SC to require personal notice on the mortgagor notwithstanding the silence of Act No. 3135.
• Right to Personal Notice Not Opt-In — The right of a mortgagor to personal notice of extrajudicial foreclosure should not be one which is opt-in, dependent solely on a contractual stipulation. It is a matter of due process and must be the general rule, not the exception.
• Bank's Duty of Utmost Diligence — The business of banking is imbued with public interest, and banks should conduct their business in a way that observes the highest degree of diligence to their clients.

• "Notwithstanding the absence of an express directive under Act No. 3135, principles of due process and the utmost diligence of banks require that mortgagors be personally notified of extrajudicial foreclosures of their mortgages prior to public auctions." — This is the SC's opening statement of the rule it establishes, framing the holding that personal notice is required despite statutory silence.
• "The right to due process is so basic that its assurance must be the general rule and not the exception." — This articulates the SC's due process rationale for requiring personal notice.
• "Although the line of cases succeeding Wong recognize that parties to a mortgage can agree that the mortgagor is entitled to personal notice, the right to personal notice should not be one which is opt-in." — This is the SC's key doctrinal shift: personal notice is not merely a contractual option but a due process requirement.
• "Moreover, the business of banking is imbued with public interest, and banks should conduct their business in a way that observes the highest degree of diligence to their clients." — This grounds the requirement in the bank's fiduciary duty.

• Bonnevie vs. Court of Appeals, 210 Phil. 100 (1983) — The SC reconsidered this ruling, which had held that Act No. 3135 does not require personal notice to the mortgagor. The SC departed from it in light of due process principles.
• Metropolitan Bank and Trust Company vs. Wong, 412 Phil. 207 (2001) — Followed in result (failure to notify invalidates foreclosure) but the SC noted its contractual reasoning was weakened by the express waiver in Paragraph 19; the SC instead grounded the requirement in due process.
• Cortes vs. Intermediate Appellate Court, 256 Phil. 979 (1989) — The SC acknowledged its textual reasoning as sound but noted it is a "stray case" that subsequent cases did not follow.
• Global Holiday Ownership Corporation vs. Metropolitan Bank & Trust Company, 607 Phil. 850 (2009) — Cited by the CA as basis for holding that a similar provision was an undertaking to personally notify the mortgagor; the SC did not adopt this contractual reasoning.
• Pasno vs. Ravina, 54 Phil. 378 (1930) — Cited to show that the SC has read into Act No. 3135 certain procedural requirements notwithstanding its silence, creating space for requiring personal notice.
• De La Salle University, Inc. vs. Court of Appeals, 565 Phil. 330 (2007) — Cited for the proposition that the due process clause embodies fundamental rights deeply embedded in Philippine society.

• Section 3, Act No. 3135 — Requires notice of sale by posting in at least three public places and publication once a week for three consecutive weeks in a newspaper of general circulation. The SC held that this provision, while silent on personal notice, does not preclude requiring personal notice to the mortgagor as a matter of due process.
• Article III, Section 1, 1987 Constitution — The due process clause. The SC applied it to require personal notice to the mortgagor prior to extrajudicial foreclosure, even in the absence of statutory directive.
• Paragraph 19, Promissory Note with Real Estate Mortgage — Authorized the bank to foreclose the mortgage without need of notice or demand upon default. The SC noted this provision but held it did not eliminate the due process requirement of personal notice.
• Paragraph 60, Promissory Note with Real Estate Mortgage — Stipulated that all correspondence, including notifications of judicial or extra-judicial actions, be sent to the client at the stated address. The SC held this was a stipulation as to address, and the right to personal notice is not dependent on such stipulation.