Shemberg Corporation, Marketing vs. Citibank, N.A.

A real estate mortgage is valid and binding where it secures existing obligations of the mortgagor, and the Parol Evidence Rule bars the introduction of evidence aliunde to show that the consideration for the mortgage was an alleged oral commitment to renew and increase the mortgagor's credit line. The mortgage contract, being clear and unambiguous, is conclusive between the parties, and none of the exceptions to the Parol Evidence Rule apply to admit evidence of other alleged terms.

Shemberg Corporation (Shemberg) was a corporate borrower that maintained credit accommodations with respondent Citibank, N.A. (Citibank), a banking institution. On December 10, 1996, Shemberg executed a "First Party Real Estate Mortgage" over a parcel of land in Mandaue City, including improvements, machineries, and equipment, in favor of Citibank to secure loan accommodations amounting to P28,242,000.00. The mortgage was executed in the context of Shemberg's existing and continuing credit relationship with the bank, which had previously extended various loan accommodations to the corporation.

Shemberg Corporation (Shemberg) was a corporate borrower of respondent Citibank, N.A. (Citibank). On December 10, 1996, Shemberg executed a real estate mortgage over a parcel of land located in Mandaue City (Lot 1524-G-6), including all improvements, machineries, and equipment found thereon, in favor of Citibank, to secure loan accommodations amounting to P28,242,000.00. The mortgage was embodied in a deed denominated by the parties as "First Party Real Estate Mortgage."

On September 13, 1996, Shemberg executed Promissory Note No. 8976267001 in favor of Citibank in the amount of US$500,000.00. On February 13, 1998, Citibank sent a demand letter to Shemberg requiring payment of the outstanding balance of US$390,000.00 under the promissory note, warning that it would otherwise initiate foreclosure proceedings on the mortgaged properties. Shemberg defaulted on its obligation, and Citibank commenced extra-judicial foreclosure of the mortgaged properties on May 10, 1999. A Notice of Extra-Judicial Sale was issued with the foreclosure sale scheduled on June 16, 1999.

Upon learning of the foreclosure sale, Shemberg filed a Complaint for rescission or declaration of nullity of the contract of real estate mortgage against Citibank before the Regional Trial Court (RTC), Branch 55, Cebu City. Shemberg alleged that in 1996, Citibank required it to execute the real estate mortgage for and in consideration of the increase and renewal of its credit line with the bank; that relying on the representation that its credit line would be renewed, Shemberg executed the mortgage; and that despite the execution of the mortgage, Citibank refused to renew and increase Shemberg's credit line. Shemberg asserted that the mortgage was void for lack of consideration given Citibank's failure to comply with its commitment.

Citibank countered that it required the mortgage to provide additional security to augment Shemberg's subsisting chattel mortgage due to the latter's dire financial condition, and that it made clear to Shemberg that the bank would no longer extend additional credit unless its financial standing improved. Citibank pointed out that the mortgage secured Shemberg's various obligations up to P28,242,000.00, including Promissory Note No. 8976267001, on which Shemberg defaulted in paying the outstanding balance of US$390,000.00 at maturity.

The RTC declared the mortgage void for lack of consideration due to Citibank's failure to fulfill its commitment to renew Shemberg's credit line, but still found Shemberg liable to pay the outstanding obligation under the promissory note. Both parties appealed. The CA reversed, declaring the mortgage and foreclosure valid, and imposed stipulated interest of 8.89% per annum on the unpaid balance. Shemberg moved for reconsideration, which the CA denied, prompting Shemberg to file the present Petition for Review on Certiorari.

• Lack of Consideration: Shemberg argued that the real estate mortgage was void for lack of consideration because Citibank failed to comply with its commitment to renew and increase Shemberg's credit line, which was the alleged consideration for executing the mortgage.
• Parol Evidence Rule Exceptions: Shemberg contended that evidence aliunde should be admitted to prove that the real consideration for the mortgage was the renewal and increase of its credit line, invoking the exceptions to the Parol Evidence Rule.

• Validity of Mortgage: Citibank countered that the real estate mortgage was valid, as it secured Shemberg's existing obligations, including Promissory Note No. 8976267001, and that the mortgage was executed to provide additional security due to Shemberg's dire financial condition.
• No Commitment to Renew: Citibank maintained that it made clear to Shemberg that the bank would no longer extend additional credit unless its financial standing improved, and that the mortgage secured obligations up to P28,242,000.00.

• Validity of the Real Estate Mortgage: Whether the real estate mortgage executed by Shemberg in favor of Citibank is valid and binding between the parties.

• Validity of the Real Estate Mortgage: Yes. The real estate mortgage is valid and binding, as it secured Shemberg's existing obligations to Citibank, including the US$500,000.00 loan under Promissory Note No. 8976267001, and the Parol Evidence Rule barred Shemberg from introducing evidence to show that the consideration was Citibank's alleged commitment to renew and increase its credit line.

• Validity of the Real Estate Mortgage: The Court examined the First Party Real Estate Mortgage and found that it was executed to secure loan accommodations, as well as all past, present, and future obligations of Shemberg to Citibank to the extent of P28,242,000.00. The mortgage provisions expressly covered the principal obligations, any increase in credit accommodations, and all obligations whether past, present, or future. Shemberg itself admitted that when the mortgage was executed on December 10, 1996, it had an outstanding obligation totaling P58,238,200.00 with Citibank. The fact that the outstanding obligation was significantly higher than the amount of secured obligations did not invalidate the mortgage; it only meant that in case of default, Citibank could enforce the mortgage to the maximum amount of P28,242,000.00, which was the total liquidation value of the mortgaged properties. The mortgage thus covered the US$500,000.00 loan obtained under Promissory Note No. 8976267001, and Shemberg's failure to pay the balance of US$390,000.00 justified Citibank's foreclosure.

The Court further rejected Shemberg's contention that the real consideration for the mortgage was the renewal and increase of its credit line. Section 9, Rule 130 of the Rules of Court, the Parol Evidence Rule, provides that when the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon, and no evidence of such terms other than the contents of the written agreement is admissible. The rule forbids any addition to or contradiction of the terms of a written instrument by testimony purporting to show that other terms were orally agreed on at or before the signing of the document. The rule, however, is not absolute, and a party may present evidence aliunde if he puts in issue any of the four exceptions: (a) intrinsic ambiguity, mistake, or imperfection in the written agreement; (b) failure of the written agreement to express the true intent and agreement of the parties; (c) validity of the written agreement; or (d) existence of other terms agreed to after the execution of the written agreement.

The Court found that the first and second exceptions did not apply, as the mortgage contract clearly and succinctly stated its terms, leaving no doubt as to the parties' contractual intention. The third exception was inapplicable because Shemberg's purpose for introducing evidence aliunde was not to invalidate the contract but to prove that Citibank reneged on its alleged commitment to renew and increase the credit line, which was supposedly the consideration for the mortgage. The fourth exception likewise did not apply, as it was never alleged that the parties agreed to other terms after the execution of the mortgage. The Court thus saw no reason to overturn the CA's factual findings, holding that the terms agreed upon in the mortgage are binding and conclusive between the parties.

• Parol Evidence Rule — Under Section 9, Rule 130 of the Rules of Court, when the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon, and there can be, between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement. The rule forbids any addition to or contradiction of the terms of a written instrument by testimony purporting to show that, at or before the signing of the document, other terms were orally agreed on by the parties. The Court applied this rule to bar Shemberg's evidence that the consideration for the mortgage was Citibank's alleged oral commitment to renew and increase its credit line, as the written mortgage clearly stated its terms.

• Exceptions to the Parol Evidence Rule — A party may present evidence aliunde to modify, explain, or add to the terms of a written agreement if he puts in issue in his pleading any of the four exceptions: (a) intrinsic ambiguity, mistake, or imperfection in the written agreement; (b) failure of the written agreement to express the true intent and agreement of the parties; (c) validity of the written agreement; or (d) existence of other terms agreed to by the parties after the execution of the written agreement. The first exception applies when the ambiguity or uncertainty is readily apparent from reading the contract; the second pertains to instances where the contract is so obscure that the contractual intention cannot be understood by mere inspection; the third applies where the purpose of introducing the evidence is to show the invalidity of the contract; and the fourth involves a situation where the parties agreed to other terms after the execution of the written agreement. The Court found none of these exceptions applicable to Shemberg's case.

• Requisites for a Valid Mortgage — For a mortgage to be valid, the only requisites are: (a) it must be constituted to secure the fulfillment of a principal obligation; (b) the mortgagor must be the absolute owner of the mortgaged property; and (c) the mortgagor has free disposal of the property or has legal authority to do so. All these requisites were present in the case, as the mortgage secured Shemberg's existing obligations, and Shemberg was the owner of the mortgaged property with free disposal thereof.

• "Section 9, or what is commonly known as the Parol Evidence Rule, 'forbids any addition to or contradiction of the terms of a written instrument by testimony purporting to show that, at or before the signing of the document, other terms were orally agreed on by the parties.'" — This passage states the canonical formulation of the Parol Evidence Rule, which the Court applied to bar Shemberg's evidence of an alleged oral commitment by Citibank to renew and increase its credit line.

• "Under the Parol Evidence Rule, the terms of a written contract are deemed conclusive between the parties and evidence aliunde is inadmissible to change the terms embodied in the document." — This passage articulates the conclusive effect of written contracts under the Parol Evidence Rule, which was the controlling principle in rejecting Shemberg's claim that the mortgage lacked consideration.

• "The fact that Shemberg's outstanding obligation is significantly higher than the amount of secured obligations does not invalidate the real estate mortgage. It only means that in case of default, Citibank can enforce the mortgage to the maximum amount of P28,242,000.00, which, notably, is simply the total liquidation value of the mortgaged properties." — This passage addresses Shemberg's argument that the mortgage was invalid because its outstanding obligation exceeded the secured amount, clarifying that the mortgage's coverage is limited to the stated maximum amount.

• Spouses Amoncio vs. Benedicto, 582 Phil. 217, 227 (2008) — Cited as the source of the Parol Evidence Rule's formulation and its exceptions. The Court relied on this case to define the rule and enumerate the four exceptions, and to explain the application of each exception to the facts.

• Sofia Tabuada Novee Yap, Ma. Loreta Nadal, and Gladys Eridente vs. Eleonor Tabuada, Julieta Trabuco, Laureta Redondo and Sps., Bernan Certeza and Eleonor D. Certeza, G.R. No. 196510, September 12, 2018 — Cited in a footnote for the proposition that the only requisites for a valid mortgage are that it secures a principal obligation, the mortgagor is the absolute owner of the property, and the mortgagor has free disposal of the property or legal authority to do so.

• Section 9, Rule 130, Rules of Court — The Parol Evidence Rule, which provides that when the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon, and there can be no evidence of such terms other than the contents of the written agreement. The Court applied this rule to bar Shemberg from introducing evidence that the consideration for the mortgage was Citibank's alleged commitment to renew and increase its credit line, as the written mortgage clearly stated its terms.

Peralta (Chairperson), Leonen, A. Reyes, Jr., and Hernando, JJ., concurred in the Decision.