Quirino Gonzales Logging Concessionaire vs. Court of Appeals

An action to recover a deficiency after extrajudicial foreclosure of a real estate mortgage is a mortgage action that prescribes ten years from the date of foreclosure, and mere notices of foreclosure sale do not constitute the written extrajudicial demand required under Article 1155 of the Civil Code to interrupt the prescriptive period. Further, under the Negotiable Instruments Law, a promissory note satisfying the requisites of negotiability is prima facie deemed issued for a valuable consideration; the person in possession has prima facie authority to fill blanks, and the signer’s claim of having signed in blank is not a defense.

In 1962, Quirino Gonzales Logging Concessionaire, through its proprietor Quirino Gonzales, obtained credit accommodations from Republic Planters Bank—a P450,000.00 overdraft line and a P400,000.00 letter of credit line—secured by a real estate mortgage on four parcels of land in Manila, Makati, and Quezon City. Petitioners defaulted. The bank extrajudicially foreclosed the mortgage in 1965, bought the land as the highest bidder, and consolidated ownership. Petitioners also executed promissory notes in 1964 and 1967 to secure advances for log exports. Alleging that a deficiency remained after foreclosure and that the promissory notes remained unpaid, the bank sued in 1977.

• Nature of the Action: Republic Planters Bank filed a complaint for sum of money against Quirino Gonzales Logging Concessionaire and spouses Quirino and Eufemia Gonzales to recover the unpaid balance of credit accommodations and promissory notes, plus interest, commissions, and attorney’s fees.

• Credit Accommodations and Security: In 1962, QGLC was granted a P900,000.00 credit line consisting of an overdraft line (later reduced to P450,000.00) and a letter of credit line of P400,000.00. The obligations were secured by a real estate mortgage on four parcels of land. The parties executed agreements for credit in current account, applications and agreements for commercial letters of credit, and trust receipts.

• Foreclosure and Consolidation: Petitioners defaulted. In 1965, the bank extrajudicially foreclosed the mortgage under Act No. 3135, emerged as the highest bidder at the public auction, and subsequently consolidated ownership, obtaining new certificates of title in its name.

• The Bank’s Complaint: The complaint set out ten causes of action. The first cause pertained to the overdraft line, alleging an unpaid balance of P1,224,301.56 after applying the foreclosure proceeds. The second to fifth causes concerned the LC line under four distinct letters of credit issued in favor of Monark International, J.B.L. Enterprises, and Super Master Auto Supply for tractors, equipment, and trucks; the bank claimed it paid sight drafts drawn by the beneficiaries but petitioners had not fully repaid, leaving unpaid face amounts or deficiencies (P71,500.00, P68,064.97, P155,000.00, and P45,504.74). The sixth to ninth causes were based on promissory notes issued by petitioners: June 18, 1964 for P55,000.00 at 12% interest; July 7, 1967 for P20,000.00; July 18, 1967 for P38,000.00; and August 23, 1967 for P11,000.00, the last three at 13% interest, all payable 30 days after date. The tenth cause involved P120.48 in accounts receivable.

• Answer and Affirmative Defenses: Petitioners admitted the mortgage, the opening of the credit line, the issuance of LCs, and the foreclosure, but denied availing of the credit accommodations, receiving the value of the promissory notes, or physically receiving the tractors and equipment. They raised prescription and want of consideration as affirmative defenses.

• Trial Court Rulings: The RTC dismissed the first to sixth causes of action on the ground of prescription, finding that more than ten years had elapsed from the time the actions accrued (latest in 1964) to the filing of the complaint in 1977. It doubted the seventh and eighth causes because QGLC’s logging concession had been terminated in 1965, making log exports in 1967 implausible, and gave credence to testimony that the Gonzales spouses signed the notes in blank and never received the loan proceeds. The ninth cause was likewise disbelieved. The tenth cause lacked evidence. On the counterclaim, the RTC granted petitioners ten years from the issuance of the bank’s title to seek reconveyance, suggesting the foreclosed obligation was fictitious.

• Appellate Court Reversal: The Court of Appeals held that the notices of foreclosure sale interrupted the prescriptive period as they were “tantamount” to extrajudicial demands. The promissory notes prevailed over oral testimony, and the counterclaim for reconveyance had prescribed. It struck down the attorney’s fees and remanded for determination of the amounts due the bank.

• Prescription of the First to Sixth Causes of Action: Petitioners maintained that the first six causes had prescribed because more than ten years had elapsed since the right of action accrued in 1964, and the foreclosure notices did not constitute the written extrajudicial demand required by Article 1155 of the Civil Code to interrupt the prescriptive period.

• Validity of the Promissory Notes (Seventh to Ninth Causes): Petitioners argued that the notes were signed in blank, that they never received the value of the notes, and that the advances were unnecessary because they had sufficient deposits and unremitted export proceeds with the bank.

• Reconveyance of Foreclosed Properties: Petitioners contended that the dismissal of the bank’s principal action entitled them to the return of the real properties that had been mortgaged and foreclosed.

• Attorney’s Fees: Petitioners asserted that the award of attorney’s fees in their favor was proper.

• Prescription of the First to Sixth Causes of Action: The bank countered that the notices of foreclosure sale were tantamount to formal extrajudicial demands that interrupted the running of the prescriptive period.

• Validity of the Promissory Notes: The bank argued that the promissory notes were valid; their genuineness and due execution were deemed admitted under the Rules of Court because petitioners failed to deny them under oath; want of consideration was not proved; and the notes, being negotiable, were prima facie issued for consideration.

• Reconveyance: The bank asserted that the counterclaim for reconveyance was itself barred by prescription and that no irregularity attended the foreclosure to justify reconveyance.

• Attorney’s Fees: The bank contended that the award of attorney’s fees lacked legal basis.

• Prescription of the First to Sixth Causes of Action: Whether the bank’s causes of action for recovery of the deficiency after foreclosure and for payment under the promissory note constituting the sixth cause were barred by prescription.

• Liability under the Promissory Notes (Seventh to Ninth Causes of Action): Whether petitioners could be held liable under the promissory notes given their defenses of signing in blank, want of consideration, and the alleged absence of need for the advances.

• Reconveyance of Foreclosed Properties: Whether the dismissal of the bank’s complaint entitled petitioners to reconveyance of the foreclosed properties or to an award of moral and exemplary damages.

• Attorney’s Fees: Whether the award of attorney’s fees to petitioners was warranted.

• Prescription of the First to Sixth Causes of Action: The first to fifth causes of action were suits to recover the deficiency after extrajudicial foreclosure; such an action is a mortgage action that prescribes in ten years from the time the right of action accrues. The right to claim the deficiency accrued upon foreclosure in 1965. Since the complaint was filed only on January 27, 1977, more than ten years had elapsed. The notices of foreclosure sale did not interrupt prescription because Article 1155 of the Civil Code requires a “written extrajudicial demand by the creditors,” and the contents of the notices were not shown to contain such an explicit demand. Even assuming arguendo that the notices interrupted prescription, the period still lapsed. The sixth cause of action on a separate promissory note was also barred because the foreclosure notices were not shown to cover it. Consequently, the first to sixth causes of action were dismissed.

• Liability under the Promissory Notes (Seventh to Ninth Causes of Action): The promissory notes satisfied the requirements of Section 1 of the Negotiable Instruments Law and were therefore negotiable. Under Section 24, negotiable instruments are prima facie deemed to have been issued for a valuable consideration. Petitioners, who admitted the genuineness and due execution of the notes by failing to specifically deny them under oath, did not present sufficient evidence to rebut the presumption of consideration. Their claim that they signed the notes in blank afforded no defense because Section 14 of the Negotiable Instruments Law gives the person in possession prima facie authority to fill blanks. The documentary exhibits they invoked did not establish want of consideration or irrelevance. Thus, liability under the seventh to ninth causes of action was upheld, and the case was remanded for determination of the exact amounts due.

• Reconveyance of Foreclosed Properties: The foreclosure was conducted under Act No. 3135, and no irregularity attended the proceedings. The mere fact that the bank’s suit for deficiency had prescribed did not render the foreclosure void or entitle petitioners to reconveyance. The counterclaim for reconveyance itself was barred by prescription. The claim for moral and exemplary damages was not raised in the lower courts and could not be entertained for the first time on appeal.

• Attorney’s Fees: The award of attorney’s fees in favor of petitioners lacked legal basis and was properly set aside.

• Prescription of Deficiency Action after Foreclosure — An action to recover a deficiency after extrajudicial foreclosure of a real estate mortgage is a mortgage action that prescribes ten years from the date of foreclosure. The right to claim the deficiency accrues at the time of foreclosure, not from the date of the underlying written contracts. The prescriptive period runs from the moment the mortgagee has a cause of action—i.e., when the foreclosure sale yields a deficiency and the mortgagee may demand payment. (Civil Code, Art. 1142; Caltex Philippines, Inc. v. Intermediate Appellate Court, 176 SCRA 741; DBP v. Tomeldan, 101 SCRA 171).

• Interruption of Prescription by Written Extrajudicial Demand — Under Article 1155 of the Civil Code, prescription of actions is interrupted by the filing of an action in court, by a written extrajudicial demand by the creditor, or by any written acknowledgment of the debt by the debtor. The law specifically requires a “written extrajudicial demand.” Notices of foreclosure sale, absent any showing that they contain an explicit demand for payment of the underlying obligation, are not equivalent to such written extrajudicial demand and do not toll the prescriptive period.

• Negotiability and Presumption of Consideration — An instrument that meets the formal requirements of Section 1 of the Negotiable Instruments Law is negotiable. Under Section 24, every negotiable instrument is deemed prima facie to have been issued for a valuable consideration, and the person who signed it is presumed to have become a party for value. The burden of proving want of consideration rests on the party alleging it. (Republic v. Court of Appeals, 296 SCRA 171).

• Authority to Fill Blanks under Section 14, NIL — Where a negotiable instrument is wanting in a material particular, the person in possession has prima facie authority to complete it by filling the blanks. A signature on a blank paper delivered to be converted into a negotiable instrument operates as prima facie authority to fill it up as such for any amount. This rule precludes a signer from later disclaiming liability merely on the ground that the instrument was signed in blank.

• “Prescription of actions is interrupted when they are filed before the court, when there is a written extrajudicial demand by the creditors, and when there is any written acknowledgment of the debt by the debtor. The law specifically requires a written extrajudicial demand by the creditors which is absent in the case at bar.”

• “A mortgage action prescribes after ten years from the time the right of action accrued. … In the present case, the Bank, as mortgagee, had the right to claim payment of the deficiency after it had foreclosed the mortgage in 1965. In other words, the prescriptive period started to run against the Bank in 1965.”

• “The promissory notes, however, appear to be negotiable as they meet the requirements of Section 1 of the Negotiable Instruments Law. Such being the case, the notes are prima facie deemed to have been issued for consideration.”

• “It is no defense that the promissory notes were signed in blank as Section 14 of the Negotiable Instruments Law concedes the prima facie authority of the person in possession of negotiable instruments, such as the notes herein, to fill in the blanks.”

• Caltex Philippines, Inc. v. Intermediate Appellate Court, 176 SCRA 741 (1989) — Followed; defined a suit to recover a deficiency after extrajudicial foreclosure as a mortgage action.

• Development Bank of the Philippines v. Tomeldan, 101 SCRA 171 (1980) — Followed; confirmed that the mortgagee has the right to claim the deficiency and that the prescriptive period runs from the time of foreclosure.

• Development Bank of the Philippines v. Mirang, 66 SCRA 141 (1975) — Followed; reiterated that the right to recover the deficiency accrues upon foreclosure.

• Parañaque Kings Enterprises, Inc. v. Court of Appeals, 268 SCRA 727 (1997) — Cited for the elements of a cause of action and when the right of action accrues.

• Republic v. Court of Appeals, 296 SCRA 171 (1998) — Cited for the rule that the party asserting want of consideration in a negotiable instrument bears the burden of proof.

• Article 1144, Civil Code — Actions upon a written contract, upon an obligation created by law, and upon a judgment must be brought within ten years from the time the right of action accrues. Applied to bar the bank’s first to sixth causes of action.

• Article 1142, Civil Code — A mortgage action prescribes after ten years. Applied to characterize the deficiency suit as a mortgage action and to determine when prescription began.

• Article 1155, Civil Code — Provides the modes of interruption of the prescriptive period: filing of an action, written extrajudicial demand, or written acknowledgment of the debt. Applied to reject the claim that mere foreclosure notices interrupted prescription.

• Sections 1, 14, and 24, Negotiable Instruments Law — Section 1 lists the requisites for negotiability; the promissory notes were deemed negotiable. Section 24 creates a prima facie presumption of consideration, which petitioners failed to rebut. Section 14 grants prima facie authority to fill blanks; petitioners’ claim of signing in blank was rejected on this basis.

• Act No. 3135 — Governs the extrajudicial foreclosure of real estate mortgages; no irregularity was found in the proceedings.

• Rule 8, Section 8, Rules of Court — The genuineness and due execution of an actionable document are deemed admitted unless specifically denied under oath. Applied to deem the promissory notes’ genuineness and due execution admitted.

Puno, Panganiban, Sandoval-Gutierrez, and Corona, JJ., concur.