Ramos vs. Philippine National Bank

A real estate mortgage containing a clear and unambiguous blanket or dragnet clause secures future obligations of whatever kind contracted before, during or after its constitution, and a pledge is not extinguished into dation in payment by a mere authority to sell the pledged thing, which requires foreclosure to transfer ownership and satisfy the principal obligation. The 1973 mortgage thus continued to secure the unpaid 1989 sugar quedan financing loan despite a separate pledge, and retention of the titles was justified until full satisfaction.

Luis Ramos maintained recurring agricultural credit facilities with PNB, Balayan Branch, beginning in 1973 and renewed annually. PNB also operated a sugar quedan financing program under which borrowers obtained revolving credit lines secured by pledged warehouse receipts or quedans for refined sugar. Ramona Ramos was the wife of Luis Ramos and, after his death, the legal representative of his estate in the action for specific performance to release mortgaged titles.

In 1973 Luis Ramos obtained an ₱83,000.00 agricultural credit line from PNB, Balayan Branch. To secure the loan, the parties executed a Real Estate Mortgage on October 23, 1973 over parcels in Batangas covered by Transfer Certificate of Title Nos. 17217, (T-262) RT-644, 259, (T-265) RT-646 and (T-261) RT-643. The mortgage stated that it secured the ₱83,000.00 loans and those others PNB may extend, including interest, expenses and other obligations whether direct or indirect as appear in PNB's books, and that it would stand as security for subsequent promissory notes as renewal, extension or new loan, or any other accommodations such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, and for any and all other obligations of whatever kind contracted before, during or after its constitution. From 1973 Ramos renewed the loan yearly after paying amounts falling due.

On March 31, 1989 Luis Ramos and PNB entered into a Credit Line Agreement for ₱50,000,000.00 under the bank's Sugar Quedan Financing Program for Crop Year 88/89, available in several availments evidenced by promissory notes payable sixty days from availment but not later than August 31, with Section 3.01 providing that payment would be secured by a pledge on the borrower's quedans under a Contract of Pledge acceptable to the bank. Pursuant thereto, Ramos obtained ₱7,800,000.00 on April 3, 1989 and executed a Contract of Pledge on April 6, 1989 over two official warehouse receipts for refined sugar issued by Noah's Ark Sugar Refinery, Serial Nos. NASR RS-18080 and NASR RS-18081, duly indorsed to PNB. On June 6, 1989 he procured another ₱7,800,000.00 availment with another promissory note and another Contract of Pledge over the same quedans. The April 3 and June 6 notes were later renewed through promissory notes dated October 3, 1989 and October 9, 1989. Ramos failed to settle the resulting ₱15,600,000.00 sugar quedan financing loans and on December 28, 1989 issued an Authorization allowing PNB, Balayan Branch, or its duly authorized officer to dispose and sell all the pledged Quedan Receipts after maturity of the line, specifically enumerating NASR RS-18081 covering 16,129.03 fifty-kilo bags and NASR RS-18080 covering 16,393.44 fifty-kilo bags for Crop Year 1988-89.

Meanwhile, on August 7, 1989 the spouses Luis Ramos and Ramona Ramos obtained a ₱160,000.00 agricultural loan from PNB evidenced by a promissory note, secured by the 1973 real estate mortgage. On November 2, 1990 the spouses fully settled the ₱160,000.00 loan and demanded release of the mortgage, which PNB refused on the ground that the mortgage also secured the unpaid ₱15,600,000.00 sugar quedan financing loan, the quedans having been dishonored by Noah's Ark and collection being the subject of then-pending litigation. According to the spouses, the authorization had effectively transferred the quedans as payment and terminated the pledge, while PNB maintained that it merely held authority to sell and apply proceeds, with ownership remaining in the pledgor until foreclosure.

The spouses filed suit for specific performance to obtain release and return of titles, alleging impairment of rights and lost business opportunities for lack of capital. The trial court found the agricultural loan paid and the sugar loan likewise extinguished by dation in payment through the authorization, ordering release. The Court of Appeals reversed, finding only an appointment as attorney-in-fact to sell under Article 2087 and no meeting of the minds on dation in payment, with doubt resolved in favor of pledge as the lesser transmission of rights.

• Scope and Reliance on Dragnet Clause: Petitioner argued that the general terms of the real estate mortgage excluded the sugar quedan financing loan, as a blanket or dragnet clause secures a subsequent loan only if obtained in reliance on the original security, which condition was absent here as shown by the silence of the credit line agreement, promissory notes and contracts of pledge on the mortgage.
• Intention of Parties Under Article 1371: Petitioner maintained that under Article 1371 of the Civil Code contemporaneous and subsequent acts govern intention, and the absence of any reference to the mortgage in the 1989 sugar loan documents proved the parties intended the mortgage to cover only agricultural crop loans.
• Good Faith and Void Security: Petitioner argued that PNB violated its implied duty of good faith by retaining collateral on obscure prepared terms, that the mortgage could not validly secure a 1989 credit line nonexistent in 1973, and that retention after full payment of the agricultural loan was in bad faith.

• Bar on New Theory on Appeal: Respondent countered that whether the parties intended the mortgage to secure the sugar loan was never raised before the RTC or in the main CA proceedings and could not be raised for the first time in reconsideration and in the instant petition.
• Consent to Future-Obligation Coverage: Respondent argued that the spouses consented to the mortgage securing future and subsequent loans, never contested its validity and enforceability, and the contract must therefore govern the parties' relations.
• No Novation or Dation in Payment: Respondent maintained that the Authorization did not terminate the pledge or transfer ownership, but merely authorized disposal and sale with proceeds applied to the obligation pursuant to Article 2087, with the debtor remaining owner under Article 2103 until foreclosure, so retention was lawful until full settlement.

• Clarity of Mortgage Terms and Need to Determine Intent: Whether the meaning of the general terms of the real estate mortgage is clear and leaves no doubt so that there is no need to determine whether the parties intended to provide a security interest on the real estate collateral for the sugar quedan financing loan in addition to the agricultural crop loan.
• Coverage of Dragnet Clause Over Different Loan: Whether the general terms of the real estate mortgage should be understood to include in its coverage the borrower's sugar quedan financing loan that is different from the agricultural crop loan undisputedly agreed to be covered.
• Validity as Security for Later Credit Line: Whether the real estate mortgage executed in 1973 may be considered a valid and existing security device for the sugar quedan financing loan obtained pursuant to a credit line agreement executed only in 1989.

• Clarity of Mortgage Terms and Need to Determine Intent: No resort to extrinsic intent was warranted. The mortgage language expressly covering subsequent notes, other accommodations and any and all obligations contracted before, during or after constitution was clear and unambiguous, so its literal meaning governs.
• Coverage of Dragnet Clause Over Different Loan: Yes. The blanket or dragnet stipulation validly extended the mortgage beyond the agricultural loan to the sugar quedan financing loan, and the existence of a separate pledge did not remove the later loan from its ambit, at most requiring exhaustion of the special security first under Prudential Bank vs. Alviar.
• Validity as Security for Later Credit Line: Yes. A dragnet clause by its nature contemplates future indebtedness, so the 1973 mortgage remained a valid and existing security for the 1989 availments, with the pledge unextinguished absent foreclosure and the sugar loan still subject to pending collection litigation.

• Clarity of Mortgage Terms and Need to Determine Intent: New theories not brought before the trial court are generally barred on appeal to preserve fair play, justice and due process, with only narrow exceptions for jurisdiction or a change in legal theory requiring no further evidence, neither of which applied where intention on a 1989 agreement was first raised in 2006 after seventeen years and would require additional proof. Even overlooking the procedural bar, interpretation was unnecessary because obligations arising from contracts have the force of law and clear terms leave no doubt as to intention, confining courts to the literal stipulations without supplying words. The mortgage expressly stated it would stand for subsequent notes as renewal, extension or new loan, other accommodations, and any and all other obligations of whatever kind contracted before, during or after constitution, covering future loans of any kind and not only agricultural crop loans.
• Coverage of Dragnet Clause Over Different Loan: A mortgage liability is generally limited to the amount mentioned, but where the four corners show intent to secure future and other indebtedness the stipulation is valid as a blanket or dragnet clause, as recognized where properties secured not only the subject loan but such other loans or advances already obtained or still to be obtained. Petitioners' reliance on Prudential Bank vs. Alviar was misplaced because that ruling did not exclude subsequently secured loans from the dragnet clause; it merely required exhaustion of the special security before foreclosing the real estate mortgage, leaving the creditor entitled to hold the prior mortgage in case of deficiency. Hence release could not be compelled while the sugar loan remained unpaid.
• Validity as Security for Later Credit Line: The Authorization was nothing more than authority to dispose and sell the quedans after maturity, a standard pledge condition conforming to Article 2087 allowing alienation of the pledge upon default, without language passing ownership upon nonpayment and without meeting of the minds on price and object required for sale-governed dation in payment under Article 1245, with doubt resolved in favor of pledge as the lesser transmission. A creditor in real security cannot appropriate without foreclosure, any pactum commissorio being void, and the pledgor remains owner before foreclosure; under Article 2115 it is the sale of the thing pledged that extinguishes the principal obligation. PNB's status as pledgee had been confirmed in Philippine National Bank vs. Sayo, Jr., and with payment through the pledged receipts still in litigation, the mortgage necessarily remained.

• Change of theory on appeal; estoppel — Points of law, theories, issues and arguments not brought to the attention of the trial court cannot be raised for the first time on appeal, otherwise basic principles of fair play, justice and due process are trampled. Exceptions are limited to jurisdiction raised at any time without mocking fair play, and a change in legal theory in the interest of justice within appellate discretion only when no further evidence is needed for the adverse party to meet the new issue, as in Lianga Lumber Company vs. Lianga Timber Co., Inc. The rule was applied to bar petitioners' seventeen-year-delayed claim that the sugar loan was not obtained in reliance on the mortgage.
• Literal interpretation of clear contracts — Obligations arising from contracts have the force of law and must be complied with in good faith; when terms are clear and leave no doubt as to intention, the literal meaning governs and courts may not alter the contract by construction, supply material stipulations, or read in words, resorting to interpretation only when vague and ambiguous. Applied to enforce the mortgage's express future-obligation language without examining extrinsic quedan documents under Article 1371 of the Civil Code.
• Blanket mortgage or dragnet clause — Although mortgage liability is usually limited to the amount named, amounts named do not limit the security where the instrument shows intent to secure future and other indebtedness; such cross-collateral stipulation for loans already obtained or still to be obtained is valid and binding, as in Banate vs. Philippine Countryside Rural Bank (Liloan, Cebu), Inc. The doctrine sustained coverage of the 1989 sugar quedan loans by the 1973 mortgage despite their different nature.
• Special security and dragnet mortgage under Prudential Bank vs. Alviar — The giving of another special security for subsequent loans does not remove those loans from a prior dragnet clause; the creditor must first exhaust the special security before foreclosing the real estate mortgage and may hold the prior mortgage for any deficiency. Petitioners were thus not entitled to release even under their cited authority.
• Pledge, pactum commissorio, dation in payment and foreclosure — In real security like pledge the creditor cannot appropriate the thing without foreclosure, any contrary pactum commissorio being void, and the debtor continues to own the thing under Article 2103 until expropriation; dation in payment under Article 1245 requires delivery and transmission of ownership as accepted equivalent of performance, governed by sales law requiring meeting of the minds on object and price. Authority to sell under Article 2087 and sale under Article 2115 extinguish the obligation only upon actual foreclosure sale, so the Authorization did not novate or extinguish the sugar loan.

• "Points of law, theories, issues, and arguments not brought to the attention of the trial court ought not to be considered by a reviewing court, as these cannot be raised for the first time on appeal." — States the procedural bar applied to petitioners' new non-reliance and intent theory first raised on reconsideration before the Court of Appeals.
• "Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith." — Anchors the refusal to rewrite the mortgage, requiring enforcement of its clear future-obligation stipulations as written.
• "As a general rule, a mortgage liability is usually limited to the amount mentioned in the contract." — Introduces the dragnet-clause exception that allowed the 1973 mortgage to secure later and different indebtedness where such intent appears on the face of the instrument.
• "The creditor, in a contract of real security, like pledge, cannot appropriate without foreclosure the things given by way of pledge." — Defines why the Authorization to dispose and sell the quedans did not transfer ownership or effect dation in payment absent foreclosure.

• Imani vs. Metropolitan Bank and Trust Company, G.R. No. 187023, November 17, 2010 — Cited as authority for the general rule barring issues raised for the first time on appeal on estoppel and fair-play grounds.
• Lianga Lumber Company vs. Lianga Timber Co., Inc., 166 Phil. 661 (1977) — Cited as source of the exception allowing change of legal theory on appeal only when no further evidence is required of the adverse party; found inapplicable because petitioners' intent theory needed additional proof.
• Prisma Construction and Development Corporation vs. Menchavez, G.R. No. 160545, March 9, 2010 — Followed for the settled principles on force of contractual obligations and literal interpretation of clear terms without judicial rewriting.
• Banate vs. Philippine Countryside Rural Bank (Liloan, Cebu), Inc., G.R. No. 163825, July 13, 2010 — Followed as controlling illustration that a cross-collateral stipulation for other loans already obtained or still to be obtained is a valid variety of dragnet clause.
• Prudential Bank vs. Alviar, 502 Phil. 595 (2005) — Distinguished as invoked by petitioners; interpreted to hold that a special security for later loans does not exclude them from the dragnet clause but requires exhaustion of that security before foreclosing the prior mortgage.
• Philippine National Bank vs. Sayo, Jr., 354 Phil. 211 (1998) — Reiterated to confirm PNB's status as pledgee of the quedans and the rule that foreclosure, not mere authority to sell, transfers title and satisfies the pledgor's liability.

• Article 1245, Civil Code — Governs dation in payment as alienation of property to the creditor in satisfaction of money debt, with sales law applying; invoked by the RTC to find extinguishment but rejected for absence of transfer of ownership and meeting of the minds on thing and price.
• Article 1371, Civil Code — Provides that intention is judged principally by contemporaneous and subsequent acts; invoked by petitioners from silence of quedan documents but held inapplicable where mortgage terms were clear and unambiguous.
• Article 2087, Civil Code — States it is of the essence of pledge or mortgage that upon default the thing may be alienated for payment; supported treating the Authorization as a standard pledge condition appointing PNB as attorney-in-fact to sell.
• Article 2103, Civil Code — Provides that unless expropriated the debtor continues to own the thing pledged; supported PNB's position that ownership remained with Ramos until foreclosure.
• Article 2115, Civil Code — Provides sale of the thing pledged extinguishes the principal obligation whether proceeds equal the debt and charges; supported the conclusion that the sugar loan remained unsettled prior to actual foreclosure sale.

Renato C. Corona, Chief Justice, Chairperson; Mariano C. Del Castillo, Associate Justice; Roberto A. Abad, Associate Justice; Jose Catral Mendoza, Associate Justice. No separate concurring opinion with additional reasoning appears in the text.