Prudential Bank vs. Alviar

A "dragnet clause" or "blanket mortgage clause" in a real estate mortgage, while valid and enforceable, will not be extended to cover subsequent loans that were separately secured by other securities unless the parties clearly intended otherwise, as determined by the "reliance on the security test." Where a subsequent loan is secured by a different security, the lender is deemed to have relied on that new security rather than on the original mortgage, and the mortgaged property may only be resorted to for any deficiency after the specific security has been exhausted.

Respondents, spouses Don A. Alviar and Georgia B. Alviar, were the registered owners of a parcel of land in San Juan, Metro Manila, covered by TCT No. 438157. On 10 July 1975, they executed a deed of real estate mortgage in favor of petitioner Prudential Bank to secure a loan of ₱250,000.00. The mortgage contained a "blanket mortgage clause" or "dragnet clause" purporting to secure not only the principal loan but also future credit accommodations that the bank might extend to the mortgagors. The spouses were also officers of Donalco Trading, Inc., with Don Alviar as President and Chairman of the Board and Georgia Alviar as Vice President.

Respondents, spouses Don A. Alviar and Georgia B. Alviar, were the registered owners of a parcel of land in San Juan, Metro Manila, covered by TCT No. 438157. On 10 July 1975, they executed a deed of real estate mortgage in favor of petitioner Prudential Bank to secure a loan of ₱250,000.00, which was annotated on the title. On 4 August 1975, they executed promissory note PN BD#75/C-252 covering the loan, which matured on 4 August 1976 at 12% interest per annum with a 2% service charge. The real estate mortgage contained a clause stating that it secured "certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the Mortgagor and/or DEBTOR, irrespective of number," including "those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary."

On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345, for ₱2,640,000.00, secured by D/A SFDX #129, a "hold-out" on his foreign currency savings account with the bank under Account No. 129, with the passbook to be surrendered until the amount was settled. On 27 December 1976, the spouses executed PN BD#76/C-430 for ₱545,000.00 for Donalco Trading, Inc., of which they were President and Vice President, respectively. This loan was secured by "Clean-Phase out TOD CA 3923," converting a temporary overdraft into an ordinary loan pursuant to a Central Bank circular. On 16 March 1977, petitioner wrote Donalco Trading, Inc., approving a straight loan of ₱545,000.00, with securities including a deed of assignment on two promissory notes executed by Bancom Realty Corporation with a Deed of Guarantee, and a chattel mortgage on heavy and transportation equipment.

On 6 March 1979, respondents paid petitioner ₱2,000,000.00, which petitioner applied to the obligations of G.B. Alviar Realty and Development, Inc., and for the release of the real estate mortgage for a ₱450,000.00 loan covering two lots in North Greenhills. On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the property covered by TCT No. 438157, computing respondents' total obligation at ₱1,608,256.68, covering the three promissory notes plus interest and penalty charges. Respondents then filed a complaint for damages with a prayer for preliminary injunction, claiming they had paid their principal loan. Petitioner averred that the ₱2,000,000.00 payment was made by G.B. Alviar Realty and Development, Inc., which had a separate loan secured by a separate mortgage.

The trial court initially dismissed the complaint and ordered the Sheriff to proceed with the foreclosure, but on reconsideration, it set aside its decision and found that only the ₱250,000.00 loan was secured by the mortgage. The Court of Appeals affirmed, ruling that while continuing loan arrangements based on one security are common practice, such agreements must be clear and unequivocal, and here the parties executed different promissory notes with particular securities for each loan. The appellate court also found that respondents had not yet paid the ₱250,000.00 covered by PN BD#75/C-252.

• Validity and Coverage of the Dragnet Clause: Petitioner maintained that the "blanket mortgage clause" or "dragnet clause" in the real estate mortgage expressly covered not only the ₱250,000.00 under PN BD#75/C-252 but also the two other promissory notes included in the application for extrajudicial foreclosure, citing cases upholding the validity of mortgage contracts securing future advancements.
• Multiple Securities Not Prohibited: Petitioner argued that there is no law or rule prohibiting an obligation from being covered by more than one security, and that respondents' continued withdrawals from the foreign currency account while the promissory note was outstanding strengthened the belief that the real estate mortgage principally secured all of respondents' promissory notes.
• Non-Exclusivity of Other Securities: Petitioner posited that the security for PN BD#76/C-345 was not exclusive, as the "dragnet clause" covered all obligations of the respondents.
• Piercing the Veil of Corporate Fiction: Petitioner insisted that respondents attempted to evade foreclosure by claiming the promissory notes were executed in their corporate capacity, and that PN BD#76/C-430 was in fact for home construction and personal consumption, warranting the piercing of the corporate veil.
• No Oppression in Contract Execution: Petitioner alleged that the mortgage contract was executed by respondents with knowledge and understanding of the "dragnet clause," being highly educated individuals, seasoned businesspersons, and political personalities, with no oppressive use of superior bargaining power.

• Inapplicability of the Dragnet Clause: Respondents claimed that the "dragnet clause" cannot be applied to subsequent loans extended to Don Alviar and Donalco Trading, Inc., since these loans were covered by separate promissory notes that expressly provided for different forms of security.
• Limited Application to Joint Loans: Respondents reiterated the trial court's holding that the "blanket mortgage clause" would apply only to loans obtained jointly by respondents, and not to loans obtained by other parties such as Donalco Trading, Inc.
• Contract of Adhesion: Respondents placed a premium on the finding of the lower courts that the real estate mortgage clause was a contract of adhesion and must be strictly construed against petitioner bank.

• Validity of the Dragnet Clause: Whether the "blanket mortgage clause" or "dragnet clause" in the real estate mortgage is valid.
• Coverage of the Dragnet Clause: Whether the "blanket mortgage clause" covers subsequent loans that were separately secured by other securities, specifically PN BD#76/C-345 and PN BD#76/C-430.
• Propriety of Foreclosure: Whether petitioner properly sought foreclosure of the mortgaged property for the non-payment of all three loans.

• Validity of the Dragnet Clause: Yes. 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 indebtedness can be gathered from the four corners of the instrument.
• Coverage of the Dragnet Clause: No. Applying the "reliance on the security test," the dragnet clause does not cover subsequent loans for which other securities were given. When a mortgagor takes another loan for which another security was given, it cannot be inferred that such loan was made in reliance solely on the original security with the dragnet clause, but rather on the new security given.
• Propriety of Foreclosure: No. The foreclosure of the mortgaged property should only be for the ₱250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security for PN BD#76/C-345 after that security has been exhausted.

• Validity of the Dragnet Clause: The Court recognized that a "blanket mortgage clause" or "dragnet clause" is one specifically phrased to subsume all debts of past or future origins, and such clauses are carefully scrutinized and strictly construed. These clauses enable parties to provide continuous dealings without executing a new security on each new transaction, operating as a convenience and accommodation to borrowers. It has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts. The Court found that the terms of the provision in the instant case were clear and unambiguous, and contrary to the Court of Appeals' finding, the parties intended the real estate mortgage to secure not only the ₱250,000.00 loan but also future credit facilities and advancements that may be obtained by the respondents.

• Coverage of the Dragnet Clause: The Court distinguished the cases cited by petitioner, noting that in those cases, the subsequent loans were not covered by any security other than the mortgage deeds containing the dragnet clause. In the case at bar, PN BD#76/C-345 was secured by a "hold-out" on Don Alviar's foreign currency savings account, while PN BD#76/C-430 was secured by "Clean-Phase out TOD CA 3923" and eventually by a deed of assignment and chattel mortgage. The Court adopted the "reliance on the security test" from American jurisprudence, which holds that when a subsequent loan is secured by a different security, the lender is deemed to have relied on that new security rather than the original mortgage. The dragnet clause in the first security instrument constitutes a continuing offer by the borrower to secure further loans under the first security, and when the lender accepts a different security, he does not accept the offer. The Court further noted that in the absence of clear, supportive evidence of a contrary intention, a mortgage containing a dragnet clause will not be extended to cover future advances unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor.

• Propriety of Foreclosure: The Court held that it was improper for petitioner to seek foreclosure of the mortgaged property for non-payment of all three promissory notes. While the existence and validity of the dragnet clause cannot be denied, there is a need to respect the existence of the other security given for PN BD#76/C-345. The foreclosure should only be for the ₱250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security for the second promissory note after that security has been exhausted. The Court also addressed the corporate personality issue, holding that PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the respondents, was not within the contemplation of the blanket mortgage clause, and petitioner failed to show that respondents were hiding behind the corporate structure to evade payment. Finally, the Court noted that the mortgage contract and promissory notes were contracts of adhesion, drafted and prepared solely by petitioner, and any ambiguity must be construed against the party responsible for its preparation, applying the principle of contra proferentem.

• Reliance on the Security Test — When a mortgagor takes another loan for which another security was given, it cannot be inferred that such loan was made in reliance solely on the original security with the dragnet clause, but rather on the new security given. The dragnet clause in the first security instrument constitutes a continuing offer by the borrower to secure further loans under the first security, and when the lender accepts a different security, he does not accept the offer. The Court adopted this test from American jurisprudence to determine whether a dragnet clause covers subsequent loans separately secured by other securities.

• Strict Construction of Dragnet Clauses — A "blanket mortgage clause" or "dragnet clause" is one specifically phrased to subsume all debts of past or future origins, and such clauses are "carefully scrutinized and strictly construed." While mortgages given to secure future advancements are valid and legal contracts, 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.

• Contra Proferentem — Any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it. Where the real estate mortgage appears in a standard form drafted and prepared solely by the bank, and the promissory notes were made on standard forms prepared by the bank, such contracts are contracts of adhesion and must be strictly construed against the party responsible for their preparation.

• Separate Corporate Personality — A corporation has a personality separate and distinct from that of its officers and stockholders, and officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority. The legal fiction of separate corporate personality may be disregarded if used to perpetuate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.

• "A 'blanket mortgage clause,' also known as a 'dragnet clause' in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are 'carefully scrutinized and strictly construed.'" — This passage defines the dragnet clause and establishes the standard of strict construction applied throughout the decision.

• "The parties having conformed to the 'blanket mortgage clause' or 'dragnet clause,' it is reasonable to conclude that they also agreed to an implied understanding that subsequent loans need not be secured by other securities, as the subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the first security is a corollary component of the 'dragnet clause.' But of course, there is no prohibition, as in the mortgage contract in issue, against contractually requiring other securities for the subsequent loans. Thus, when the mortgagor takes another loan for which another security was given it could not be inferred that such loan was made in reliance solely on the original security with the 'dragnet clause,' but rather, on the new security given. This is the 'reliance on the security test.'" — This passage articulates the core ratio decidendi of the case, establishing the reliance on the security test as the controlling principle.

• "The real estate mortgage in issue appears in a standard form, drafted and prepared solely by petitioner, and which, according to jurisprudence must be strictly construed against the party responsible for its preparation. If the parties intended that the 'blanket mortgage clause' shall cover subsequent advancement secured by separate securities, then the same should have been indicated in the mortgage contract. Consequently, any ambiguity is to be taken contra proferentum, that is, construed against the party who caused the ambiguity which could have avoided it by the exercise of a little more care." — This passage applies the contra proferentem rule to the mortgage contract, reinforcing the strict construction of the dragnet clause.

• Lim Julian vs. Lutero, 49 Phil. 703 (1926) — Cited by petitioner to support the validity of mortgage contracts securing future advancements; distinguished by the Court as involving a different factual milieu where subsequent loans were not covered by other securities.
• Tad-Y vs. Philippine National Bank, 120 Phil. 806 (1964) — Cited by petitioner; distinguished on the same ground that subsequent loans were not separately secured.
• Quimson vs. Philippine National Bank, 146 Phil. 629 (1970) — Cited by petitioner; distinguished on the same ground.
• C & C Commercial vs. Philippine National Bank, G.R. No. 42449, July 5, 1989, 175 SCRA 1 — Cited by petitioner; distinguished on the same ground.
• Mojica vs. Court of Appeals, G.R. No. 94247, September 11, 1991, 201 SCRA 517 — Cited by petitioner for the proposition that mortgages given to secure future advancements are valid and legal contracts; the Court cited it for the same proposition but distinguished its application to the facts.
• China Banking Corporation vs. Court of Appeals, 333 Phil. 158 (1996) — Cited by petitioner; the Court cited it for the rule that the amounts named as consideration do not limit the amount for which the mortgage may stand as security if the intent to secure future indebtedness can be gathered from the four corners of the instrument.
• Philippine Bank of Communications vs. Court of Appeals, 323 Phil. 297 (1996) — Cited for the definition of dragnet clauses and the rule that they are carefully scrutinized and strictly construed.
• Anglo-Californian Bank, Ltd. vs. Cerf, 147 Cal 384, 81 P 1077 — Cited as the source of the American jurisprudence on the two schools of thought regarding dragnet clauses and the "reliance on the security test."
• Union Bank vs. Wendland, 54 Cal App 3d 393, 126 Cal Rptr 549 — Cited for the application of the reliance on the security test, holding that when a different security was taken for the second loan, no intent that the parties relied on the security of the first loan could be inferred.
• Complex Electronics Employees Association vs. National Labor Relations Commission, 369 Phil. 666 (1999) — Cited for the rule that a corporation has a personality separate and distinct from that of its officers and stockholders.
• Nicario vs. National Labor Relations Commission, 356 Phil. 936 (1998) — Cited for the rule that the legal fiction of separate corporate personality may be disregarded if used to perpetuate fraud or evade obligations.
• Unimasters Conglomeration, Inc. vs. Court of Appeals, 335 Phil. 415 (1997) — Cited for the definition of a contract of adhesion.
• Prudential Bank vs. Intermediate Appellate Court, G.R. No. 74886, December 8, 1992, 216 SCRA 257 — Cited for the rule that contracts of adhesion must be strictly construed against the party responsible for their preparation.
• Garcia vs. Court of Appeals, 327 Phil. 1097 (1996) — Cited for the contra proferentem rule.

• Rule 45, Rules of Court — The petition for review on certiorari was filed under this rule, which governs appeals from judgments, final orders, or resolutions of the Court of Appeals to the Supreme Court.
• Section 13, Article VIII, Constitution — Referenced in the certification portion of the decision, requiring that conclusions in a case be reached in consultation before the case is assigned to the writer of the opinion of the Court's Division.

• Puno, J. (Chairman)
• Austria-Martinez, J.
• Callejo, Sr., J.
• Chico-Nazario, J.