Producers Bank of the Philippines vs. Excelsa Industries, Inc.

A drawer that executes a separate letter of undertaking in consideration of a bank's negotiation of its drafts is directly and primarily liable for their value, independent of its liability on the drafts and notwithstanding its discharge for lack of notice of dishonor and protest; a blanket mortgage (dragnet) clause likewise secures future advances, including export advances, where the intent to secure future indebtedness appears on the face of the mortgage.

Respondent Excelsa Industries, Inc. manufactures and exports fuel products, particularly charcoal briquettes as an alternative fuel source, and maintained credit accommodations with petitioner Producers Bank of the Philippines. Those accommodations consisted of a bill discounted and secured credit accommodation and, later, a packing credit line or credit export advance tied to a letter of credit issued by Kwang Ju Bank, Ltd. of Seoul, Korea through its correspondent, the Bank of the Philippine Islands. The real estate mortgage Excelsa executed over its Marikina properties carried a blanket mortgage clause fixing the principal at ₱500,000.00 while extending the security to obligations the mortgagee might thereafter extend.

Respondent Excelsa Industries, Inc. is a manufacturer and exporter of fuel products, particularly charcoal briquettes as an alternative fuel source, and had maintained credit accommodations with petitioner Producers Bank of the Philippines. In January 1987 Excelsa applied for a packing credit line, or credit export advance, supported by Letter of Credit No. M3411610NS2970 dated 14 October 1986, which Kwang Ju Bank, Ltd. of Seoul, Korea had issued through its correspondent bank, the Bank of the Philippine Islands, in the amount of US$23,000.00 for the account of Shin Sung Commercial Co., Ltd., also of Seoul; T.L. World Development Corporation was the original beneficiary and, on 05 December 1986, for value received, transferred to Excelsa all its rights and obligations under the letter of credit. Producers Bank approved a ₱300,000.00 packing credit line, of which about ₱96,000.00 in principal remained outstanding, and Excelsa executed the corresponding promissory notes. Before that application, Excelsa had obtained from Producers Bank a ₱200,000.00 bill discounted and secured credit accommodation, of which ₱110,000.00 was outstanding when the packing credit line was approved, secured by a real estate mortgage dated 05 December 1986 over its properties covered by TCT Nos. N-68661, N-68662, N-68663, N-68664, N-68665 and N-68666, all issued by the Register of Deeds of Marikina. The mortgage fixed the principal at ₱500,000.00 and further secured those obligations "that the MORTGAGEE may hereafter extend to the MORTGAGOR, including interest and expenses or any other obligation owing to the MORTGAGEE."

On 17 March 1987 Excelsa presented for negotiation to Producers Bank drafts drawn under the letter of credit and the corresponding export documents, in consideration for its drawings in the amounts of US$5,739.76 and US$4,585.79. Producers Bank purchased the drafts and export documents and paid Excelsa the peso equivalent of the drawings, subject to the conditions laid down in two separate undertakings executed by Excelsa dated 17 March 1987 and 10 April 1987. In both undertakings Excelsa warranted that the drafts and accompanying documents were valid, genuine and accurately represented the facts stated therein and would be accepted and paid in accordance with their tenor, and undertook to pay on demand the full amount of the drafts or any unpaid balance thereof, converted at the prevailing selling rate, with interest and all charges and expenses.

On 24 April 1987 Kwang Ju Bank, Ltd. notified Producers Bank by cable that the Korean buyer refused to pay the export documents on account of typographical discrepancies, and returned the documents to Producers Bank. Excelsa then wrote Producers Bank on 27 July 1987 informing it that the matter had been brought before the Korea Trade Court and that it was ready to liquidate its past due account, and reiterated the same assurance in a letter dated 08 September 1987. In a letter dated 05 October 1987 Kwang Ju Bank, Ltd. informed Producers Bank that it would be returning the export documents on account of the non-acceptance by the importer.

Producers Bank demanded payment of the peso equivalent of the export documents, plus interest and other charges, as well as the other due and unpaid loans. Its computation placed Excelsa's total due and demandable obligation at ₱573,225.60, inclusive of interest, spread over six accounts: EBP-PHO-87-1121 (US$4,585.97 at 21.212) for ₱119,165.06; EBP-PHO-87-1095 (US$5,739.76 at 21.212) for ₱151,580.97; BDS-001-87 for ₱61,777.78; BDS-030/86 A for ₱123,555.55; BDS-PC-002-/87 for ₱55,822.91; and BDS-005/87 for ₱61,323.33. Because no payment followed, Producers Bank moved for extrajudicial foreclosure of the real estate mortgage. The total approved bid price, inclusive of attorney's fees and sheriff's fees, was pegged at ₱752,074.63, and at the public auction held on 05 January 1988 the Sheriff of Antipolo, Rizal issued a certificate of sale in favor of Producers Bank as the highest bidder. The certificate of sale was registered on 24 March 1988, and on 12 June 1989, after Excelsa failed to redeem, Producers Bank executed an affidavit of consolidation, upon which the Register of Deeds of Marikina issued new certificates of title in the bank's name.

On 17 November 1989 Excelsa instituted an action for the annulment of the extrajudicial foreclosure, with prayer for preliminary injunction and damages, against Producers Bank and the Register of Deeds of Marikina; the complaint, docketed as Civil Case No. 1587-A, was raffled to Branch 73 of the RTC of Antipolo, Rizal, and prayed that the defendants be enjoined from causing the transfer of ownership over the foreclosed properties. Producers Bank in turn filed on 05 April 1990 a petition for the issuance of a writ of possession, docketed as LR Case No. 90-787, before the same branch, which ordered the consolidation of the two cases. The RTC found that Producers Bank's obligation consisted only of receiving, not collecting, the export proceeds and that it could not be considered Excelsa's agent; that Excelsa's warranties in the undertakings made it liable; that the mortgage secured both the earlier loans and the export advances; and that the notice of extrajudicial sale had been sent by registered mail and received, as borne out by the sheriff's notice, the certificate of posting, the registry return card and the affidavit of publication. The CA, on appeal, found instead that Producers Bank was Excelsa's agent under Central Bank Circular No. 491, being the only entity authorized to collect the export proceeds from the importer and convert them for remittance; that Producers Bank was negligent in preparing and scrutinizing the export documents and in failing to advise Excelsa of Kwang Ju Bank's warning; and that the personal notice requirement in the mortgage had not been complied with.

• Agency and Liability for the Discrepancies: Petitioner argued that the CA erred in finding it to be respondent's agent and in holding it liable for the discrepancies in the export documents.
• Validity of the Foreclosure: Petitioner argued that the CA erred in invalidating the foreclosure sale.
• Estoppel by Laches: Petitioner argued that the CA erred in declaring that respondent was not estopped from questioning the foreclosure sale.
• Personal Notice: Petitioner claimed that under paragraph 12 of the real estate mortgage, personal notice of the foreclosure sale is not a requirement to the validity of the foreclosure sale.

• Role of the Negotiating Bank: Respondent maintained that petitioner was not only a collection agent but was considered a purchaser of the export documents.
• Notice of the Sale: Respondent claimed that it did not receive the notice of the sale and only learned about it from petitioner.

• Coverage of the Blanket Mortgage Clause: Whether the real estate mortgage, by virtue of its blanket mortgage clause, secured respondent's drafts that were not accepted and paid by Kwang Ju Bank, Ltd.
• Personal Notice of Foreclosure: Whether petitioner's failure to furnish personal notice of the foreclosure sale to respondent invalidated the extrajudicial foreclosure under paragraph 12 of the real estate mortgage.
• Petitioner's Obligation as Negotiating Bank: Whether petitioner, as negotiating bank under the letter of credit, was liable for the dishonor of the drafts and export documents such that respondent could escape liability under its separate undertakings.
• Estoppel by Laches: Whether respondent was estopped by laches from questioning the foreclosure sale.

• Coverage of the Blanket Mortgage Clause: Yes. The blanket mortgage clause covered the unpaid drafts and the other obligations, and respondent in any event admitted other due and demandable loans secured by promissory notes.
• Personal Notice of Foreclosure: No. Paragraph 12 required petitioner merely to furnish the notice, not to ensure its actual receipt, and the notice of sheriff's sale was sent by registered mail and received in due course.
• Petitioner's Obligation as Negotiating Bank: No. Respondent's separate undertakings made it directly and primarily liable for the drafts' value, independent of the drafts and notwithstanding the absence of notice of dishonor and protest.
• Estoppel by Laches: Yes. Respondent was guilty of laches and estopped from questioning the foreclosure, the sale having been conducted in accordance with the prescribed rules.

• Coverage of the Blanket Mortgage Clause: The real estate mortgage contained a blanket mortgage clause, also known as a dragnet clause, which the SC described through Union Bank of the Philippines vs. Court of Appeals as one "specifically phrased to subsume all debts of past and future origins," carefully scrutinized and strictly construed, and which enables the parties to provide for continuous dealings whose nature or extent may not be known or anticipated at the time, avoiding the expense and inconvenience of executing a new security on each new transaction. It has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in such contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. Because the mortgage here expressly covered obligations the mortgagee "may hereafter extend" to the mortgagor, petitioner was not precluded from seeking foreclosure of the real estate mortgage based on the unpaid drafts drawn by respondent. Independently of that, respondent admitted that aside from the unpaid drafts it also had due and demandable loans secured from another account, evidenced by Promissory Notes BDS-001-87, BDS-030/86 A, BDS-PC-002-/87 and BDS-005/87.

• Personal Notice of Foreclosure: Paragraph 12 of the mortgage provided that all correspondence relative to the mortgage, including demand letters, summonses, subpoenas, or notifications of any judicial or extrajudicial action, "shall be sent to the mortgagor" at the stated address, and that "the mere act of sending any correspondence by mail or by personal delivery to the said address shall be valid and effective notice to the MORTGAGOR for all legal purposes," with the fact that a communication is not actually received, is returned unclaimed, or cannot be delivered not excusing or relieving the mortgagor from the effects of the notice. The records showed that a notice of sheriff's sale was sent by registered mail to respondent and received in due course, the registry return card evidencing receipt on 21 December 1987 of the notice of the sale set for 05 January 1988 being marked as Exhibit 35. Even on respondent's claim that it did not receive the notice and learned of it only from petitioner, paragraph 12 requires petitioner merely to furnish the notice and does not oblige it to ensure that respondent actually receives it. Petitioner therefore performed its obligation under paragraph 12.

• Petitioner's Obligation as Negotiating Bank: In the two undertakings executed by respondent as a condition for the negotiation of the drafts, respondent held itself liable if the drafts were not accepted. Following Velasquez vs. Solidbank Corporation, where the drawer had likewise executed a separate letter of undertaking in consideration of the bank's negotiation of its sight drafts, the drawer can still be made liable under the letter of undertaking even if discharged due to the bank's failure to protest the non-acceptance of the drafts. The undertaking is a separate contract from the sight draft; the liability under it is direct and primary, independent of the liability under the sight draft, and subsists even if the sight draft is dishonored for non-acceptance or non-payment. The consideration for the undertaking was the drawer's promise to pay the bank the value of the sight draft if dishonored for any reason, and the bank would not have agreed to grant the advance export payment were it not for the undertaking. Thus, notwithstanding petitioner's alleged failure to comply with the requirements of notice of dishonor and protest under Sections 89 and 152 of the Negotiable Instruments Law, respondent could not escape liability under the separate undertakings, in which it promised to pay on demand the full amount of the drafts.

• Estoppel by Laches: The RTC found that the foreclosure was done in accordance with the prescribed rules, as borne out by Exhibit 33 (the notice of extrajudicial sale executed by the Sheriff of Antipolo), Exhibit 34 (the certificate of posting of extrajudicial sale), Exhibit 35 (the return card evidencing receipt by respondent of the notice of extrajudicial sale) and Exhibit 21 (the affidavit of publication); that petitioner had made demands for payment of respondent's outstanding loans and advances, which respondent acknowledged and committed to liquidate; that for failure to pay on maturity the mortgage was foreclosed on 05 January 1988 and the certificate of sale annotated on 24 March 1988; and that, no redemption having been made, title was consolidated in petitioner's name in July 1989. The SC adopted and approved these findings as fully supported by the evidence on record, and held respondent guilty of laches and barred from questioning the foreclosure at that point.

• Dragnet clause (blanket mortgage clause) — A stipulation "specifically phrased to subsume all debts of past and future origins," which enables the parties to provide for continuous dealings whose nature or extent may not be known or anticipated at the time, and which avoids the expense and inconvenience of executing a new security on each new transaction; it operates as a convenience and accommodation to the borrower by making additional funds available without additional security documents, saving time, travel, loan closing costs, costs of extra legal services and recording fees. Such clauses are carefully scrutinized and strictly construed. Mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration do not limit the amount for which the mortgage may stand as security if the intent to secure future and other indebtedness can be gathered from the four corners of the instrument. Applied: the clause covering obligations the mortgagee "may hereafter extend" to the mortgagor secured the unpaid drafts and the other promissory-note accounts.
• Independence of the letter of undertaking from the draft — Where a drawer executes a separate letter of undertaking in consideration of the bank's negotiation of its drafts, liability under the undertaking is direct and primary and independent of liability under the draft; it subsists even if the draft is dishonored for non-acceptance or non-payment, and even if the drawer is discharged for lack of notice of dishonor and protest under Sections 89 and 152 of the Negotiable Instruments Law. Applied: respondent's two undertakings bound it to pay on demand the full amount of the drafts despite their dishonor.
• Contractual notice in a mortgage — sending versus receipt — Where the mortgage stipulates that the mere act of sending correspondence by mail or personal delivery to the mortgagor's stated address is valid and effective notice for all legal purposes, and that non-receipt, return unclaimed, or the absence of any person at the address does not relieve the mortgagor, the mortgagee complies by furnishing the notice; it is not obliged to ensure actual receipt. Applied: the registered-mail notice of sheriff's sale satisfied paragraph 12 and saved the foreclosure from invalidation.
• Review of factual findings under Rule 45 — Findings of fact are conclusive as a general principle in a petition for review on certiorari limited to errors of law, but review of factual issues is warranted as an exception where the factual findings of the RTC and the CA conflict. Applied: the SC reviewed the factual issues because the RTC and the CA diverged on agency, negligence, notice and laches.
• Laches as a bar to attacking a foreclosure — A debtor that acknowledged its outstanding loans and advances, committed to liquidate them, allowed the certificate of sale to be annotated, and failed to redeem within the period is guilty of laches and cannot later question the regularity of the foreclosure sale. Applied: respondent was held estopped from assailing the sale.

• "Is one which is specifically phrased to subsume all debts of past and future origins. Such clauses are 'carefully scrutinized and strictly construed.'" — The SC's definition of a dragnet clause, quoted from Union Bank of the Philippines vs. Court of Appeals, supplying the canon of strict construction that governs blanket mortgage clauses.
• "The liability of petitioner under the letter of undertaking is direct and primary. It is independent from his liability under the sight draft. Liability subsists on it even if the sight draft was dishonored for non-acceptance or non-payment." — From Velasquez vs. Solidbank Corporation, adopted by the SC as the basis for holding respondent liable despite the absence of notice of dishonor and protest.
• "Thus, notwithstanding petitioner's alleged failure to comply with the requirements of notice of dishonor and protest under Sections 89 and 152, respectively, of the Negotiable Instruments Law, respondent may not escape its liability under the separate undertakings, where respondent promised to pay on demand the full amount of the drafts." — The ratio on the negotiating bank's position: the separate undertakings, not the law on negotiable instruments, fix the drawer's liability.
• "In any event, paragraph 12 of the real estate mortgage requires petitioner merely to furnish respondent with the notice and does not oblige petitioner to ensure that respondent actually receives the notice." — The SC's construction of the contractual notice clause, which removed the ground on which the CA had invalidated the foreclosure.

• Velasquez vs. Solidbank Corporation, G.R. No. 157309, 28 March 2008, 550 SCRA 119 — Controlling precedent; the drawer remains liable under a separate letter of undertaking even if discharged for the bank's failure to protest the non-acceptance of the drafts.
• Union Bank of the Philippines vs. Court of Appeals, G.R. No. 164910, 30 September 2005, 471 SCRA 751 — Supplied the definition and rationale of the dragnet clause, including the rule that such clauses are carefully scrutinized and strictly construed.
• Prudential Bank vs. Alviar, G.R. No. 150197, 28 July 2005, 464 SCRA 353 — Cited for the settled rule that mortgages securing future advancements are valid and that the amount named as consideration does not limit the security where the intent to secure future indebtedness appears on the face of the instrument.
• Agasen vs. Court of Appeals, 382 Phil. 391 (2000) — Cited as the authority for reviewing factual issues as an exception to the general rule, given the conflict between the RTC's and the CA's findings.

• Section 89, Negotiable Instruments Law — Requires notice of dishonor to the drawer and each indorser, with discharge of any party to whom notice is not given; invoked by respondent but held not to relieve it because of its separate undertakings.
• Section 152, Negotiable Instruments Law — Requires protest of a foreign bill dishonored by non-acceptance or non-payment, on pain of discharge of the drawer and indorsers; likewise held not to defeat petitioner's claim under the separate undertakings.
• Paragraph 12, Real Estate Mortgage (05 December 1986) — Stipulated that correspondence relative to the mortgage shall be sent to the mortgagor at the stated address, that the mere act of sending by mail or personal delivery shall be valid and effective notice for all legal purposes, and that non-receipt or return unclaimed shall not relieve the mortgagor; construed to require only furnishing, not receipt, and held complied with.
• Rule 43 and Rule 45, 1997 Rules of Civil Procedure — Governed the mode of review; the SC noted that the petition is generally limited to errors of law but treated the conflict in factual findings between the RTC and the CA as an exception warranting review.
• Central Bank Circular No. 491 — Invoked in the CA's finding that petitioner was the only entity authorized to collect the export proceeds from the importer and convert them for remittance to respondent; the SC did not adopt that characterization in resolving the petition.