PNB vs. Spouses Tajonera and Eduarosa Realty Development, Inc.

A mortgage constituted as security for a loan becomes unenforceable when the creditor fails to release the full approved loan amount, as the creditor's non-performance of its reciprocal obligation deprives the accessory mortgage contract of sufficient valuable consideration.

Respondent Eduarosa Realty Development, Inc. (ERDI) was engaged in realty construction and the sale of condominium buildings. Respondent Ma. Rosario Tajonera, as Vice President of ERDI, also performed the duties of president and marketing director, dealing with banks, suppliers, and contractors. ERDI, through Rosario, obtained loans from petitioner Philippine National Bank (PNB) and entered into several credit agreements to finance the completion of the construction of the 20-storey Eduarosa Tower Condominium located in Roxas Boulevard, Parañaque City. The respondent spouses owned a 958-square meter lot with improvements situated in Greenhills, San Juan, Metro Manila, covered by TCT No. 29733, which would later be mortgaged as additional security for the loans.

On March 5, 1991, ERDI obtained from PNB a loan in the principal amount of ₱60,000,000.00 plus ₱5,000,000.00 in Domestic Bills Purchased, pursuant to a Credit Agreement. As security for the initial loan, ERDI executed a Real Estate Mortgage (REM) consisting of three parcels of land covered by TCT Nos. 38845, 38846, and 38847 with an aggregate area of 1,352 square meters situated in Roxas Boulevard, Tambo, Parañaque, Metro Manila, registered in the name of ERDI (Parañaque properties). The loan was likewise secured by the assignment of proceeds of contract receivables arising from the sale of condominium units to be constructed on the mortgaged Parañaque properties.

On January 31, 1992, ERDI and PNB executed the First Amendment to the Credit Agreement, whereby ERDI obtained an additional loan of ₱40,000,000.00. As additional security for the increased loan amounts, the respondent spouses mortgaged their 958-square meter lot and improvements thereon situated in Greenhills, San Juan, Metro Manila, covered by TCT No. 29733, as evidenced by the Supplement to REM executed on January 28, 1992. On October 28, 1992, the parties executed the Second Amendment to the Credit Agreement to extend the repayment dates of the loan and the additional loan. The following year, on November 3, 1993, the parties entered into the Third Amendment to the Credit Agreement, wherein PNB granted a second additional loan of ₱55,000,000.00 to ERDI, subject to several conditions stated therein, including a repayment schedule commencing on June 30, 1994 in eleven equal consecutive quarterly installments until December 31, 1996.

As of September 30, 1994, ERDI's outstanding loan obligation with PNB amounted to ₱211,935,067.40. ERDI failed to settle its obligation, prompting PNB to file an application for foreclosure of the Greenhills property. PNB emerged as the highest bidder and was issued a Certificate of Sale dated October 9, 1997. Upon ERDI's failure to redeem the property, PNB consolidated its title, caused the cancellation of TCT No. 29733, and obtained a new title, TCT No. 9424-R, in its name. PNB, however, did not release the remaining balance of the approved additional loan under the Third Amendment, amounting to ₱39,503,088.84. According to PNB's own witness, Mr. Mallari, the bank withheld further availments because of the borrower's failure to pay maturing obligations, even though the respondents' first amortization under the Third Amendment was not due until June 30, 1994.

The respondents filed a complaint for annulment of sale, cancellation of title, cancellation of mortgage, and damages before the RTC, alleging that the title transferred to PNB was null and void because the mortgage obligation had been novated and no new loans were released in violation of the Supplement to REM, that the foreclosure was defective for lack of personal notice, and that PNB's delay in releasing loan proceeds caused the non-completion of the condominium project. The RTC found PNB guilty of breach of contract for violating the credit agreements, as its failure to release the balance of the approved loan prevented the completion of the Eduarosa Towers Condominium project, transgressing the very purpose of the credit agreements. This factual finding was affirmed by the CA.

• Sufficient Valuable Consideration: PNB argued that the Supplement to REM was supported by sufficient and valuable consideration because the loan proceeds secured by it under the Third Amendment had been substantially released to the respondents, and that without the additional collateral over the Greenhills property, PNB would not have made the respondents' loan account current under the First Amendment.
• No Breach of Contract: PNB insisted there was no breach, substantial or otherwise, of its contractual obligation when it did not release the remaining balance of the approved loan, considering that the respondents had no history of any payment on either interest or principal of the loan and did not need the entire amount for the purpose-specific loan grant.
• Erroneous Annulment of Accessory Contract: PNB contended that the CA erred in annulling and cancelling the Supplement to REM (the accessory contract) while ratiocinating that the Third Amendment (the principal contract) became unenforceable only to the extent of the unreleased portion of the loan proceeds.

• Nullity of Foreclosed Title: Respondents alleged that the title to the mortgaged property transferred to PNB as a consequence of the foreclosure proceedings was null and void because their mortgage obligation had been novated and no new loans were released to them, in violation of the provisions of the Supplement to REM.
• Defective Foreclosure: Respondents contended that the foreclosure proceedings were defective due to PNB's failure to send personal notice to the respondent spouses.
• Delay Causing Non-Completion: Respondents asserted that PNB's delay in the release of loan proceeds under the credit agreements caused the non-completion of the condominium project.
• Discharge of Mortgage: Respondents argued that the properties mortgaged under the original mortgage contract covering the condominium titles should be discharged, as the property of the respondent spouses had already been foreclosed.

• Valuable Consideration: Whether the CA erred in ruling that the Supplement to REM dated January 28, 1992 lacked sufficient valuable consideration even when the loan proceeds secured by it under the Third Amendment had been substantially released by PNB, and the Credit Agreement and its First and Second Amendments, upon which the same Supplement to REM was similarly constituted as additional security, had all been duly executed and consummated.
• Breach of Contract: Whether the CA erred in ruling that PNB breached its contractual obligation when it supposedly failed to release the remaining balance of the approved loan in the amount of ₱39,503,088.84 to the respondents even when the latter had not had a single history of payment and did not need the entire amount for the purpose-specific loan grant.
• Annulment of Accessory Contract: Whether the CA erred in ruling for the annulment and cancellation of the Supplement to REM (the accessory contract) upon a finding of breach of contractual obligation on the part of PNB, yet ratiocinating that the Third Amendment (the principal contract) became unenforceable only to the extent of the unreleased portion of the loan proceeds.

• Valuable Consideration: No. The Supplement to REM lacked sufficient valuable consideration because PNB failed to release the remaining balance of ₱39,503,088.84 of the approved loan under the Third Amendment, and the Supplement to REM was constituted as security not only for the First Amendment but also for the Second and Third Amendments.
• Breach of Contract: Yes. PNB breached its contractual obligation by refusing to release the balance of the approved additional loan, a refusal that was unjustified because the respondents' first amortization was not yet due when PNB withheld the release, and PNB's own witness testified that the sole reason was the borrower's failure to settle amortization.
• Annulment of Accessory Contract: The annulment was proper. A mortgage is an accessory contract dependent on the principal obligation; since PNB failed to fulfill its principal obligation under the Third Amendment by not releasing the full loan amount, the Supplement to REM became unenforceable and was no longer necessary because PNB's interest was amply protected by the Parañaque properties.

• Valuable Consideration: The Supplement to REM was constituted not only as security for the First Amendment but also in consideration of the Second and Third Amendments, as evidenced by Section 2.05(b) of the Third Amendment, which expressly listed the Supplement to REM dated January 28, 1992 among the collaterals securing the full payment of the loans. PNB's obligation to furnish the ₱55,000,000.00 additional loan accrued on November 3, 1993, the date the parties entered into the Third Amendment. Since PNB refused to release ₱39,503,088.84 of the approved loan, there was no sufficient valuable consideration in the execution of the Supplement to REM. The factual finding of the RTC, affirmed by the CA, that PNB's failure to release the balance caused the non-completion of the condominium project, was binding on the Supreme Court, the trial court being in a better position to examine the real evidence and observe the demeanor of witnesses.

• Breach of Contract: In a loan as a reciprocal obligation, the creditor should release the full loan amount and the debtor repays when it becomes due and demandable. If a party in a reciprocal contract does not perform its obligation, the other party cannot be obliged to perform what is expected of them while the other's obligation remains unfulfilled. PNB's refusal to release the balance was not justified by the respondents' failure to settle amortization, because under the express terms of the Third Amendment, the respondents' first amortization arose only on June 30, 1994, while PNB's obligation to furnish the additional loan accrued on November 3, 1993. PNB's own witness, Mr. Mallari, testified that the reason for withholding the release was simply the borrower's failure to settle the quarterly amortization due June 30, 1994. PNB's reliance on Sps. Omengan vs. Philippine National Bank was rejected because in that case there was no perfected contract over the increase in credit line, whereas here the Third Amendment constituted a perfected contract. Moreover, in Omengan, PNB had reason to doubt the borrowers' exclusive ownership of the collateral, whereas here the respondents were unquestionably the exclusive owners of the Greenhills property.

• Annulment of Accessory Contract: A mortgage is an accessory contract dependent on the principal obligation, such that enforcement of the mortgage depends on whether there has been a violation of the principal obligation. While a creditor and debtor may regulate the order of compliance with their reciprocal obligations, it is presupposed that in a loan the lender should perform its obligation — the release of the full loan amount. PNB did not fulfill its principal obligation under the Third Amendment, rendering the Supplement to REM unenforceable. The Supplement to REM was also no longer necessary because PNB's interest was amply protected by the Parañaque properties together with the 20-storey condominium building, which the RTC found would have been sufficient security even without the Greenhills property. As a banking institution imbued with public interest, PNB was duty-bound to comply with the terms of its credit agreements, specifically the release of the additional loan in its entirety, to maintain public confidence in the banking system. Regarding damages, moral and exemplary damages were properly deleted because nothing in the records showed that PNB acted with deliberate intent to maliciously cause harm, and the respondents were themselves remiss in their obligation to pay amortization. Attorney's fees were sustained under Article 2208(11) of the Civil Code, the respondents having been compelled to litigate to recover their property and protect their interest.

• Reciprocal Obligations in Loan Contracts — In a loan, which is a reciprocal obligation, the obligation or promise of each party is the consideration for that of the other. The creditor should release the full loan amount and the debtor repays when it becomes due and demandable. If a party in a reciprocal contract does not perform its obligation, the other party cannot be obliged to perform what is expected of them while the other's obligation remains unfulfilled. When one party has performed or is ready and willing to perform, the other party who has not performed incurs in delay. The Court applied this doctrine to hold that PNB's obligation to release the full additional loan accrued on the date of the Third Amendment (November 3, 1993), and its failure to release the balance constituted breach, since the respondents' first amortization was not due until June 30, 1994.

• Mortgage as an Accessory Contract — A mortgage remains an accessory contract dependent on the principal obligation, such that enforcement of the mortgage depends on whether there has been a violation of the principal obligation. While a creditor and debtor may regulate the order of compliance with their reciprocal obligations, it is presupposed that in a loan the lender should first perform its obligation — the release of the full loan amount. The Court applied this doctrine to annul the Supplement to REM, because PNB failed to fulfill its principal obligation under the Third Amendment, rendering the accessory mortgage unenforceable. The mortgage was also deemed no longer necessary because PNB's interest was amply protected by the Parañaque properties.

• Breach of Contract — Breach of contract is the failure without legal reason to comply with the terms of a contract, or the failure, without legal excuse, to perform any promise which forms the whole or part of the contract. The Court found PNB guilty of breach for failing to release the remaining balance of the approved loan, which transgressed the very purpose of the credit agreements — to finance the completion of the Eduarosa Towers.

• Damages in Breach of Contract — Moral damages are authorized in breaches of contract only when the defendant has acted fraudulently or in bad faith. Exemplary damages require a showing that the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Attorney's fees may be awarded when the plaintiff was compelled to litigate to protect their interest (Article 2208(11), Civil Code). The Court sustained the deletion of moral and exemplary damages for lack of proof of bad faith, while upholding attorney's fees because the respondents were compelled to litigate to recover their property.

• Factual Findings of Trial Court — Conclusions and findings of fact of the trial court are entitled to great weight on appeal and should not be disturbed unless for strong and cogent reasons, because the trial court is in a better position to examine real evidence and observe the demeanor of witnesses. When the CA adopts the findings of fact of the trial court, the same are binding upon the Supreme Court. The Court applied this doctrine to uphold the factual finding that PNB's failure to release the loan balance caused the non-completion of the condominium project.

• "PNB, not having released the balance of the last loan proceeds in accordance with the Third Amendment had no right to demand from the respondents compliance with their own obligation under the loan. Indeed, if a party in a reciprocal contract like a loan does not perform its obligation, the other party cannot be obliged to perform what is expected of them while the other's obligation remains unfulfilled." — This passage articulates the ratio decidendi on reciprocal obligations: PNB's failure to release the full loan amount precluded it from demanding performance from the respondents and justified the annulment of the accessory mortgage.

• "While a creditor and a debtor could regulate the order in which they should comply with their reciprocal obligations, it is presupposed that in a loan the lender should perform its obligation – the release of the full loan amount." — This defines the controlling doctrine on the primacy of the lender's obligation in a loan-mortgage arrangement and underpins the annulment of the Supplement to REM.

• "Considering that there was no sufficient valuable consideration in the execution of the Supplement to REM on the Third Amendment as the balance of the last approved additional loan in the amount of ₱39,503,088.54 remained unreleased, the cancellation of the Supplement to REM constituted over the respondents' Greenhills property was in order." — This states the Court's conclusion linking the lack of valuable consideration to the cancellation of the mortgage, the decisive holding of the case.

• Development Bank of the Philippines vs. Guarina Agricultural and Realty Development Corporation, G.R. No. 160758, January 15, 2014 — Cited as controlling authority for the doctrines on reciprocal obligations in loan contracts and on mortgage as an accessory contract dependent on the principal obligation. The Court relied on this case twice — first for the principle that the lender must release the full loan amount, and second for the principle that a mortgage is an accessory contract whose enforcement depends on violation of the principal obligation.

• Cortes vs. Court of Appeals, 527 Phil. 153 (2006) — Cited via DBP vs. Guarina for the proposition that if a party in a reciprocal contract does not perform its obligation, the other party cannot be obliged to perform while the other's obligation remains unfulfilled.

• Central Bank of the Philippines vs. Court of Appeals, 223 Phil. 266 (1985) — Cited for the doctrine that in reciprocal obligations, the obligation or promise of each party is the consideration for that of the other, and when one party has performed or is ready and willing to perform, the other who has not performed incurs in delay.

• Sps. Omengan vs. Philippine National Bank, 541 Phil. 293 (2007) — Distinguished. In Omengan, there was no perfected contract over the conditionally approved additional loan because the condition attached to the increase in credit line was not accepted by the borrowers, and PNB had reason to doubt the borrowers' exclusive ownership of the collateral. In the present case, the Third Amendment constituted a perfected contract and the respondents were unquestionably the exclusive owners of the Greenhills property.

• Dato vs. Bank of the Philippine Islands, G.R. No. 181873, November 27, 2013, 710 SCRA 716 — Cited for the doctrine that factual findings of the trial court, when affirmed by the CA, are binding on the Supreme Court.

• Philippine National Bank vs. Pike, 507 Phil. 322 (2005) — Cited for the principle that the stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks, underscoring PNB's duty to observe high standards of integrity and performance.

• Philippine National Bank vs. RBL Enterprises, Inc., G.R. No. 149569, May 28, 2004, 430 SCRA 299 — Cited for the rule that moral damages in breach of contract require fraud or bad faith, and that exemplary damages require wanton, fraudulent, reckless, oppressive, or malevolent conduct.

• Article 2208(11), Civil Code — Authorizes the award of attorney's fees when the plaintiff was compelled to litigate to protect their interest. The Court sustained the award of attorney's fees because PNB's failure to release the remaining balance of the approved loan compelled the respondents to litigate to recover their property.

• Article 2232, Civil Code — Governs exemplary damages, which may be awarded if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. The Court upheld the CA's deletion of exemplary damages because no such conduct was proven against PNB.

Antonio T. Carpio (Chairperson), Arturo D. Brion, Mariano C. Del Castillo, and Marvic M.V.F. Leonen concurred in the decision. No separate concurring opinions were written.