Planters Development Bank vs. Lubiya Agro Industrial Corporation

Where the parties stipulate in their real estate mortgage that the mortgagor shall be personally notified of any judicial or extra-judicial action, the mortgagee's failure to send notice of the extrajudicial foreclosure sale constitutes a contractual breach sufficient to render the foreclosure sale, the certificate of sale, and the consolidation of title null and void, notwithstanding that Act No. 3135 itself requires only posting and publication.

Lubiya Agro Industrial Corporation obtained credit accommodations from Planters Development Bank secured by real estate mortgages over two parcels of land with improvements in General Santos City, covered by Transfer Certificate of Title Nos. T-55058 and T-55057. The mortgage contracts were standard forms prepared by Planters Bank itself, and Paragraph 12 of those contracts provided that all correspondence relative to the mortgage, including demand letters, summonses, subpoenas, or notification of any judicial or extra-judicial action, shall be sent to the mortgagor at the given address or at such address thereafter given in writing. Act No. 3135, which regulates the sale of property under special powers inserted in or annexed to real estate mortgages, supplies the statutory backdrop: it requires posting of the notice of sale in three public places and publication in a newspaper of general circulation, and says nothing about personal notice to the mortgagor.

On August 23, 1995 and November 13, 1997, Planters Development Bank granted two loans to Lubiya Agro Industrial Corporation in the amounts of P6,500,000.00 and P5,000,000.00, respectively, both secured by real estate mortgages over two parcels of land with improvements thereon located in General Santos City and covered by Transfer Certificate of Title Nos. T-55058 and T-55057. The mortgage contracts were standard forms prepared by the bank and carried a Paragraph 12 requiring that all correspondence relative to the mortgage, including demand letters, summonses, subpoenas, or notification of any judicial or extra-judicial action, be sent to the mortgagor at the stated address or at any address later given in writing.

When Lubiya defaulted, Planters Bank sent it a letter dated June 8, 1998 demanding payment and warning that failure to heed the demand would prompt the bank to institute a legal action. Lubiya received that letter on June 24, 1998. Because no payment followed, Planters Bank extrajudicially foreclosed the properties offered as security. A public auction was held on October 6, 1998, at which Planters Bank emerged as the sole and highest bidder; a Certificate of Sale was issued in its favor and recorded with the Registry of Deeds on November 11, 1998. After the redemption period expired, ownership over the properties was consolidated and titles thereto were correspondingly issued in the name of Planters Bank.

On January 23, 2001, Lubiya filed a complaint for nullification of the loan agreement, the foreclosure proceedings, damages, and attorney's fees, with an application for a temporary restraining order and injunction against Planters Bank. The complaint was anchored on the bank's alleged failure to furnish Lubiya with notices regarding the foreclosure and sale of the mortgaged properties despite being obligated under their mortgage contract to do so.

In its Answer, Planters Bank admitted that the loan agreements are contracts of adhesion and that Lubiya was indeed not notified of the extrajudicial foreclosure proceedings. In view of these admissions, Lubiya moved for summary judgment, alleging that no genuine issues existed as to the material facts of the case. The CA thereafter found that Planters Bank had failed to personally notify Lubiya of the extrajudicial foreclosure proceedings as required in Paragraph 12 of the parties' real estate mortgage contracts, an omission that not only breached the contracts but also invalidated the foreclosure.

• Interpretation of Paragraph 12: Planters Bank argued that the CA erred in giving a restrictive interpretation to Paragraph 12 of the real estate mortgage contracts, insisting that the provision does not state that the bank must notify Lubiya of the actual extrajudicial foreclosure sale before it can be validly conducted.
• Sufficiency of the Demand Letter: Planters Bank maintained that its June 8, 1998 letter informing Lubiya of its intention to institute legal action against it — which Lubiya received on June 24, 1998, prior to the October 6, 1998 auction sale — constituted sufficient compliance with the contractual requirement of "notification of any judicial or extrajudicial action."

• Due Process: Lubiya maintained that Planters Bank's failure to give personal notice of the foreclosure proceedings violated Lubiya's fundamental right to due process.

• Notice of Extrajudicial Foreclosure: Whether the lack of personal notice of the extrajudicial foreclosure proceedings upon the mortgagor renders the same null and void.

• Notice of Extrajudicial Foreclosure: Yes. Although personal notice is not required by Act No. 3135, the parties validly stipulated in Paragraph 12 of the mortgage contracts that notice of any judicial or extra-judicial action be sent to the mortgagor, and breach of that stipulation voids the foreclosure.

• Notice of Extrajudicial Foreclosure: The SC began from the general rule that personal notice to the mortgagor in extrajudicial foreclosure proceedings is not necessary, because Section 3 of Act No. 3135 requires only (a) posting of the notice of extrajudicial foreclosure sale in three public places and (b) publication of the notice in a newspaper of general circulation. Jurisprudence, however, is replete with the pronouncement that the parties to a mortgage contract are not precluded from imposing additional stipulations, including the requirement of personal notification to the mortgagor of any action relative to the mortgage contract, such as the institution of an extrajudicial foreclosure proceeding. The exception to the rule therefore arises when the parties stipulate that personal notice is additionally required to be given to the mortgagor, and failure to abide by either the general rule or its exception renders the foreclosure proceedings null and void. Applying this to Paragraph 12 of the parties' contracts — which covers "notification of any judicial or extra-judicial action" — the SC held that Planters Bank obligated itself to notify Lubiya of any judicial or extrajudicial action it may resort to with respect to the mortgages. The bank's argument that the June 8, 1998 demand letter satisfied this additional obligation was rejected: a demand for payment is not the notice of the foreclosure sale that the stipulation contemplates. The SC relied on Metropolitan Bank vs. Wong, which held that violation of an identical paragraph 12 stipulation is sufficient to invalidate the extrajudicial foreclosure sale, and noted that the Wong ruling was reiterated in Global Holiday Ownership Corporation vs. Metropolitan Bank and Trust Company, Carlos Lim vs. Development Bank of the Philippines, and Ramirez vs. The Manila Banking Corporation, all of which involved provisions similar to Paragraph 12. The SC stressed that the purpose of such stipulations is precisely to apprise mortgagors of any action which the mortgagees might take on the mortgaged properties, in order to accord the former an opportunity to safeguard their rights; when Planters Bank failed to send the notice of foreclosure sale to Lubiya, it committed a contractual breach sufficient to render the October 6, 1998 foreclosure sale null and void. The SC added that the loan agreements and mortgage contracts are standard contracts of adhesion prepared by the petitioner itself, so that if the parties had not intended to require personal notice in addition to the statutory requirements of posting and publication, the provision should not have been included at all. Finally, a contract is the law between the parties and, absent any showing that its provisions are wholly or in part contrary to law, morals, good customs, public order, or public policy, it shall be enforced to the letter by the courts.

• Personal Notice as Contractual Exception to Act No. 3135 — The general rule is that personal notice to the mortgagor in extrajudicial foreclosure proceedings is not necessary; Section 3 of Act No. 3135 requires only posting of the notice of sale in three public places and publication in a newspaper of general circulation. The exception is when the parties stipulate that personal notice is additionally required to be given to the mortgagor. Failure to abide by the general rule, or by its exception, renders the foreclosure proceedings null and void.
• Contract as Law Between the Parties — A contract is the law between the parties and, absent any showing that its provisions are wholly or in part contrary to law, morals, good customs, public order, or public policy, it shall be enforced to the letter by the courts. Applied here, Paragraph 12 of the mortgage contracts had to be given effect even though Act No. 3135 did not demand personal notice.
• Contracts of Adhesion Drafted by the Mortgagee — Where the loan and mortgage contracts are standard contracts of adhesion prepared by the bank itself, the bank cannot argue away a notice stipulation it inserted; had the parties not intended to require personal notice in addition to the statutory requirements of posting and publication, the provision should not have been included in the mortgage contracts.
• Purpose of the Notice Stipulation — The purpose of such stipulations is to apprise the mortgagor of any action which the mortgagee might take on the mortgaged properties, in order to accord the former an opportunity to safeguard his rights. A demand letter for payment does not serve this purpose with respect to the foreclosure sale itself.
• Effect of Breach on the Foreclosure, Certificate of Sale, and Consolidation — The mortgagee's failure to send the notice of foreclosure sale to the mortgagor constitutes a contractual breach sufficient to render the foreclosure sale null and void; in this case the nullity extended to the certificate of sale and the consolidation of title in the bank's favor.

• "As a general rule, personal notice to the mortgagor in extrajudicial foreclosure proceedings is not necessary." — States the baseline rule from which the SC builds the exception, anchoring the whole analysis on Act No. 3135's posting and publication requirements.
• "Thus, the exception to the rule is when the parties stipulate that personal notice is additionally required to be given the mortgagor. Failure to abide by the general rule, or its exception, renders the foreclosure proceedings null and void." — The canonical formulation of the doctrine; it supplies both the exception and the sanction of nullity in two sentences.
• "Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action which petitioner might take on the subject property, thus according him the opportunity to safeguard his rights. When petitioner failed to send the notice of foreclosure sale to respondent, he committed a contractual breach sufficient to render the foreclosure sale on November 23, 1981 null and void." — Quoted from Metropolitan Bank vs. Wong; supplies the rationale for the stipulation and the operative consequence of breaching it.
• "Fundamentally, a contract is the law between the parties and, absent any showing that its provisions are wholly or in part contrary to law, morals, good customs, public order, or public policy, it shall be enforced to the letter by the courts." — The contract-law foundation of the ruling, answering the bank's attempt to read Paragraph 12 restrictively.

• Metropolitan Bank and Trust Company vs. Wong, 412 Phil. 207 (2001) — Controlling precedent; quoted at length and applied, having held that violation of an identical paragraph 12 stipulation is sufficient to invalidate the extrajudicial foreclosure sale.
• Global Holiday Ownership Corporation vs. Metropolitan Bank and Trust Company, 607 Phil. 850 (2009) — Followed; cited for the general rule that personal notice is not necessary absent stipulation, and as one of the cases reiterating Wong.
• Carlos Lim vs. Development Bank of the Philippines, 713 Phil. 24 (2013) — Followed; listed among the cases reiterating Wong, all involving provisions similar to Paragraph 12.
• Ramirez vs. The Manila Banking Corporation, 723 Phil. 674 (2013) — Followed; reiterated Wong and was also cited for the rule that a contract is the law between the parties and for the purpose of the notice stipulation.
• Paradigm Development Corporation of the Philippines vs. Bank of the Philippine Islands, G.R. No. 191174, June 7, 2017 — Cited for the statutory requirements under Act No. 3135 and for the purpose of the contractual notice stipulation.

• Section 3, Act No. 3135 (An Act to Regulate the Sale of Property under Special Powers Inserted In or Annexed to Real Estate Mortgages) — Requires that notice of the sale be given by posting notices for not less than twenty days in at least three public places of the municipality or city where the property is situated, and, if the property is worth more than four hundred pesos, by publication once a week for at least three consecutive weeks in a newspaper of general circulation. The SC applied it as establishing the general rule that personal notice is unnecessary, but held that it does not preclude the parties from imposing additional stipulations.
• Paragraph 12 of the Real Estate Mortgage Contracts — Provides that "[a]ll correspondence relative to this mortgage, including demand letters, summons, subpoenas, or notification of any judicial or extra-judicial action, shall be sent to the Mortgagor at the above given address or at the address that may hereafter be given in writing by the Mortgagor to the Mortgagee." The SC construed it as a binding obligation on Planters Bank to notify Lubiya of the extrajudicial foreclosure sale, and treated its breach as sufficient to void the foreclosure.