G.R. No. L-33084




Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-33084 November 14, 1988 ROSE PACKING COMPANY, INC., petitioner, vs. THE COURT OF APPEALS, HON. PEDRO C. NAVARRO, Judge of the Court of First Instance of Rizal (Br. III), PHILIPPINE COMMERCIAL & INDUSTRIAL BANK & PROVINCIAL SHERIFF OF RIZAL, respondents. PARAS, J.: This is a petition for review on certiorari of the decision 1 of the Court of Appeals in CA-G.R. No. 43198-R promulgated on December 16,1970 (Rollo, pp. 237-249), the dispositive portion of which reads as follows: WHEREFORE, in view of the foregoing, this Court hereby renders judgment: 1. Denying the petition to set aside and annul the questioned orders dated January 31, 1969 and May 7,1969 rendered by respondent Judge, the same having been issued in consonance with the exercise of the Court's discretion. 2. Declaring valid the foreclosure sale of May 9, 1969 but finding the consolidation of ownership over the properties sold at such sale to have been prematurely executed thereby rendering it void ab initio. 3. In accordance with this Court's resolution dated May 8, 1970, petitioner is hereby granted sixty (60) days from receipt of a copy of this decision within which to redeem the properties sold at the foreclosure sale of May 9, 1969. 4. Dismissing the charge of contempt against PCIB and its Executive Vice-President and General Manager, Eugenio R. Unson,. for lack of merit. and its Resolution 2 dated January 12, 1971 (Rollo, p. 280), denying petitioner's motion for reconsideration, as wen as its Resolution 3 dated January 22, 1971 (Rollo, p. 281) denying petitioner's supplement to motion for reconsideration. The facts of the case as presented by petitioner and as embodied in the decision of the Court of Appeals are as follows: On December 12, 1962 respondent bank (PCIB) approved a letter- request by petitioner for the reactivation of its overdraft line of P50,000.00, discounting line of P100,000.00 and a letter of credit-trust receipt line of P550,000.00 as wen as an application for a loan of P300,000.00, on fully secured real estate and chattel mortgage and on the further condition that respondent PCIB appoint as it did appoint its executive vice-president Roberto S. Benedicto as its representative in petitioner's board of directors. On November 3, 1965 the National Investment & Development Corporation (NIDC), the wholly owned investment subsidiary of the Philippine National Bank, approved a P2.6 million loan application of petitioner with certain conditions. Pursuant thereto, the NIDC released to petitioner on November 7, 1965 the amount of P100,000.00. Subsequently, petitioner purchased five (5) parcels of land in Pasig, Rizal making a down payment thereon. On January 5,1966, the NIDC released another P100,000.00 to petitioner and on January 12, 1966, the aforesaid releases totalling P200,000.00 were applied to the payment of preferred stock which NIDC subscribed in petitioner corporation to partially implement its P1,000,000.00 investment scheme as per agreement. Thereafter, the NIDC refused to make further releases on the approved loan of petitioner. On August 3, 1966 and October 5, 1966, respondent PCIB approved additional accomodations to petitioner consisting of a P710,000.00 loan for the payment of the balance of the purchase price of those lots in Pasig required to be bought, P500,000.00 loan for operating capital, P200,000.00 loan to be paid directly to petitioner's creditors, while consolidating all previous accommodations at P1,597,000.00—all of which were still secured by chattel and real estate mortgages. However, PCIB released only P300,000.00 of the P710,000.00 approved loan for the payment of the Pasig lands and some P300,000.00 for operating capital. On June 29,1967, the Development Bank of the Philippines approved an application by petitioner for a loan of P1,840,000.00 and a guarantee for $652,682.00 for the purchase of can making equipment. Immediately upon receipt of notice of the approval of the Development Bank of the loan, petitioner advised respondent PCIB of the availability of P800,000.00 to partially pay off its account and requested the release of the titles to the Pasig lots for delivery to the Development Bank of the Philippines. Respondent PCIB verbally advised petitioner of its refusal, stating that all obligations should be liquidated before the release of the titles to the Pasig properties. Following the PCIB's rejection of petitioner's counter-proposal, petitioner purchased a parcel of land at Valenzuela, Bulacan with the P800,000.00 DBP loan, with the latter's consent. On January 5, 1968 respondent PCIB filed a complaint against petitioner and Rene Knecht, its president for the collection of petitioner's indebtedness to respondent bank, which complaint was docketed as Civil Case No. 71697 of the Court of First Instance of Manila. On January 22, 1968, PCIB gave petitioner notice that it would cause the real estate mortgage to be foreclosed at an auction sale, which it scheduled for February 27,1968. Thus, respondent Sheriff served notice of sheriffs sale (of the real properties mortgaged to respondent PCIB) on July 18,1968 at 10:00 a.m., more particularly, T.C.T. No. 73620 (barrio Sto. Domingo, municipality of Cainta); T.C.T. No. 177019 (barrio of San Joaquin, Pasig, Rizal); and T.C.T. No. 175595 (barrio San Joaquin, Pasig, Rizal). Subsequently, on July 15, 1968, petitioner filed a complaint docketed as Civil Case No. 11015 in the Court of First Instance of Rizal to enjoin respondents PCIB and the sheriff from proceeding with the foreclosure sale, to ask the lower court to fix a new period for the payment of the obligations of petitioner to PCIB and for other related matters. Petitioner likewise prayed, pending final judgment, for the issuance ex-parte of a writ of preliminary injunction enjoining herein respondents from proceeding with the foreclosure sale scheduled to be held on July 18, 1968. On January 31, 1969, the lower court issued ail order denying the application for preliminary injunction and dissolving its restraining order which had been issued on July 17, 1968. Petitioner promptly filed a motion for reconsideration which was denied by the lower court on May 7, 1969. On May 8, 1969 petitioner filed with respondent Court of Appeals a petition for certiorari with application for a restraining order and preliminary injunction against the foreclosure sale (Rollo, p. 54).<äre\|\|anº•1àw> On May 13, 1969 respondent Court resolved to issue a writ of preliminary injunction upon filing by petitioner of a bond in the amount of P60,000.00. However, petitioner moved for amendment of the Order issuing the preliminary injunction, on the ground that the aforementioned resolution of respondent Court came too late to stop the foreclosure sale which was held on May 9, 1969, praying instead that the preliminary injunction should now enjoin respondents, particularly respondent Provincial Sheriff, from proceeding to give effect to the foreclosure sale of May 9, 1969; that said sheriff should refrain from issuing a deed of certificate of sale pursuant thereto and from registering the certificate of deed of sale in the Registry of Deeds; and to toll or stop the running of the period of redemption. Respondent Court resolved to deny said motion in its Resolution dated May 28, 1969 (Rollo, pp. 237-242). On May 8, 1970, on urgent motion of petitioner, respondent Court granted petitioner a period of sixty (60) days from receipt of the decision to be rendered in CA-G.R. No. 43198 within which to redeem its properties sold, should the said decision be one declaring the execution sale in dispute to be valid (Rollo, p. 231). Meantime, on May 12, 1970, an affidavit of consolidation of ownership executed by Eugenio R. Unson for and in behalf of respondent PCIB concerning the properties involved in the instant petition for certiorari, was registered with the Register of Deeds of Pasig, Rizal at 8:00 a.m.. Consequently, the old transfer certificates of title covering the aforementioned properties were cancelled and new ones issued in the name of respondent PCIB, the buyer at the foreclosure sale. In view thereof, petitioner filed a motion charging respondent PCIB and its Executive Vice-President and Assistant General Manager Eugenio R. Unson with contempt of court. Petitioner prayed that (a) the Deed of Sale dated May 12, 1970 and the consolidation of ownership of the same date be declared null and void; (b) that the new transfer certificates of title TCT Nos. 286174, 286175, and 286176—be cancelled and the old ones, TCT Nos. 177019,175595, and 73620 be restored or revived by the Register of Deeds of Rizal; and (c) that the respondent PCIB be ordered to surrender and deposit the TCT Nos. 177019, 175595, and 73620 with respondent Court for safekeeping (Rollo. p. 243). On December 16, 1970 respondent Court promulgated the questioned decision (Rollo, pp. 237-249). On January 12, 1971 it resolved (Rollo, p. 280) to deny petitioner's motion for reconsideration dated January 5, 1971 (Rollo, p. 250) and on January 22, 1971 it again resolved (Rollo, p. 281) to deny petitioner's supplement to motion for reconsideration dated January 18, 1971 (Rollo, p. 260). The instant Petition for Review on certiorari (Rollo, p. 12) was filed with the Court on February 16, 1971. On February 23, 1971, the Court resolved to give due course to the petition and ordered the issuance of preliminary injunction enjoining respondents from enforcing or implementing the appealed decision of respondent Court of Appeals, upon petitioner's posting a bond of P50,000.00 (Rollo, p. 584). The writ of preliminary injunction was issued on April 28, 1971 (Rollo, p. 619). The Brief for Petitioner was filed on June 18, 1971 (Rollo, p. 631). The Brief for the Respondents was filed on September 20, 1971 (Rollo, p. 655). The Reply Brief was filed on December 6, 1971 (Rollo, p. 678). On April 2, 1971 respondent PCIB filed a motion for leave to lease real estate properties in custodia legis, more specifically the 31, 447 sq.m. lot located at Sto. Domingo, Cainta, Rizal covered by TCT No. 286176 (Rollo, p. 697). Petitioner filed its opposition to the motion on May 27, 1971 (Rollo, p. 712). The reply to the opposition was filed on December 6,1971 (Rollo, p. 730); the rejoinder to respondent PCIB's reply to opposition, on November 19, 1971 (Rollo, p. 736). Meantime the case was transferred to the Second Division, by a Resolution of the First Division dated January 17, 1983 (Rollo, p. 752). The issues raised in this case are the following: 1. WHETHER OR NOT RESPONDENT COURT ERRED IN FINDING THAT THE LOWER COURT DID NOT COMMIT AN ABUSE OF DISCRETION IN DENYING PETITIONER'S APPLICATION FOR A PRELIMINARY INJUNCTION AND DISSOLVING THE RESTRAINING ORDER PREVIOUSLY ISSUED. (Brief for Petitioner, pp. 21-47); 2. WHETHER OR NOT RESPONDENT COURT ERRED IN DECLARING VALID THE FORECLOSURE SALE ON MAY 9,1969 OF THE MORTGAGED PROPERTIES EN MASSE WHEN THEY REFER TO SEVERAL REAL ESTATE MORTGAGES EXECUTED ON DIFFERENT DATES. (Brief for Petitioner, pp. 47-50). The main issue is whether or not private respondents have the right to the extrajudicial foreclosure sale of petitioner's mortgaged properties before trial on the merits. The answer is in the negative. Petitioner filed Civil Case No. 11015 in the Court of First Instance of Rizal, Branch II, to obtain judgment (1) enjoining defendants (respondents herein) from proceeding with the foreclosure sale of the subject real estate mortgages, (2) fixing a new period for the payment of the obligations of plaintiff to defendant PCIB sufficiently long to enable it to recover from the effects of defendant PCIB's inequitable acts, (3) ordering defendant PCIB to immediately give up management of plaintiffs canning industry and to pay plaintiff such damages as it may prove in the concept of actual, compensatory and exemplary or corrective damages, aside from attorney's fees and expenses of litigation, plus costs (Rollo, p. 98). It is to be noted that petitioner filed the above case mainly to forestall the foreclosure sale of the mortgaged properties before final judgment. The issuance of a writ of preliminary injuction could have preserved the status quo of the parties in relation to the subject matter litigated by them during the pendency of the action (Lasala v. Fernandez, 5 SCRA 79 [1962]; De Lara v. Cloribel, 14 SCRA 269 [1965]; Locsin v. Climaco, 26 SCRA 816 [1969]. When the lower court denied the issuance of the writ prayed for and dissolved the restraining order it had previously issued, in its order dated January 31, 1969 (Rollo, p. 138) it practically adjudicated the case before trial on the merits. While petitioner corporation does not deny, in fact, it admits its indebtedness to respondent bank (Brief for Petitioner, pp. 7-11), there were matters that needed the preservation of the status quo between the parties. The foreclosure sale was premature. First was the question of whether or not petitioner corporation was already in default. In its letter dated August 12,1966 to petitioner corporation, among the conditions that respondent bank set for the consolidation of the outstanding obligations of petitioner was the liquidation of the said obligations together with the latter's other obligations in the financing scheme already approved by the NIDC and PDCP. To quote: a) These facilities shall be temporary and shall be fully liquidated, together with other obligations from a refinancing scheme already approved by the NIDC and PDCP totalling Pl million in equity and P2.6 million in long term financing. In this connection, the firm shall present to this Bank a certified copy of the terms and conditions of the approval by the NIDC and PDCP. (Brief for the Respondent, p. 41). In other words, the loans of petitioner corporation from respondent bank were supposed to become due only at the time that it receives from the NIDC and PDCP the proceeds of the approved financing scheme. As it is, the conditions did not happen. NIDC refused to make further releases after it had made two releases totalling P200,000.00 which were all applied to the payment of the preferred stock NIDC subscribed in petitioner corporation to partially implement its P1,000,000.00 investment scheme (Brief for Petitioner, p. 9). The efficacy or obligatory force of a conditional obligation is subordinated to the happening of a future and uncertain event so that if the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed (Gaite v. Fonacier, 2 SCRA 831 [1961]).<äre\|\|anº•1àw> Petitioner corporation alleges that there had been no demand on the part of respondent bank previous to its filing a complaint against petitioner and Rene Knecht personally for collection on petitioner's indebtedness (Brief for Petitioner, p. 13). For an obligation to become due there must generally be a demand. Default generally begins from the moment the creditor demands the performance of the obligation. Without such demand, judicial or extrajudicial, the effects of default will not arise (Namarco v. Federation of United Namarco Distributors, Inc. 49 SCRA 238 [1973]; Borje v. CFI of Misamis Occidental, 88 SCRA 576 [1979]). Whether petitioner corporation is already in default or not and whether demand had been properly made or not had to be determined in the lower court. Granting that the findings of the lower court after trial on the merits answer both questions in the affirmative, another question that had to be determined was the question of cause or consideration. The loan agreements between petitioner and respondent Bank are reciprocal obligations (the obligation or promise of each party is the consideration for that of the other Penacio v. Ruaya, 110 SCRA 46 [1981], cited. in Central Bank of the Philippines v. Court of Appeals, 139 SCRA 46 [1985] ). A contract of loan is not a unilateral contract as respondent Bank thinks it is (Brief for the Respondent, p. 19). The promise of petitioner to pay is the consideration for the obligation of respondent bank to furnish the loan (Ibid.). Respondent bank had complete control of the financial affairs and the management of petitioner corporation. It appointed its executive vice-president Roberto S. Benedicto as its representative in petitioner's board of directors, giving him the position of vice-president in petitioner corporation (Brief for Petitioner, p. 7). Upon the resignation of Roberto S. Benedicto as vice-president and member of the board of directors of petitioner corporation on December 29, 1965 (Brief for Petitioner, p. 8), respondent bank designated Rafael Ledesma as its representative in petitioner corporation's board of directors, due representation in the board of petitioner being a condition for the loan granted to the petitioner (Rollo, p. 166). In fact, Rafael Ledesma was designated Chairman of the Board of Directors (Rollo, p. 169). Respondent bank required petitioner to appoint Sycip, Gorrez, Velayo & Co. as full-time comptroller-treasurer of the corporation at a monthly salary of P1,500.00 (Brief for Petitioner, p. 9; Brief for the Respondent, p. 41). On January 2, 1967, it also required petitioner to replace its then manager, the Management & Investment Development Associates (MIDA) and to appoint instead Edmundo Ledesma at a monthly salary of P3,000.00 and transportation allowance of P1,000.00 plus an assistant manager, Venancio Concepcion at a salary of P1,000.00 a month. During the next 18 months' management by defendant's designated manager, no meeting of the board of directors of petitioner was called- Edmundo Ledesma exercised full control and management (Brief for Petitioner, pp. 10-11; Rollo, p. 167). Respondent Bank has not given up management of petitioner's food canning industry and continues to hold it. Even Atty. Juan de Ocampo has been retained by petitioner as corporate counsel, at the insistence of respondent bank (Brief for Petitioner, p. 14). This has not been denied by respondent bank. Respondent bank's designation of its own choice of people holding key positions in petitioner corporation tied the hands of petitioner's board of directors to make decisions for the interest of petitioner corporation, in fact, undermined the latter's financial stability. During the 18 months of Edmundo Ledesma's management, petitioner's factory produced some P200,000.00 worth of canned goods which according to petitioner is only equivalent to its normal production in three weeks (Brief for Petitioner, pp.10-11). Respondent bank justifies the underproduction by averring that petitioner at that time did not have sufficient capital to operate the factory, and that said factory was only operating for the purpose of avoiding spoilage and deterioration of the raw materials then in store at the petitioner's factory (Rollo. p. 168) and yet respondent bank insists, that it had released the entire amount of P500,000.00 loan to petitioner (Rollo, p. 167) earmarked for operating capital purposes (Brief for the Respondent, p. 43) and admits having granted a P40,000.00 loan at a higher interest of 14% per annum to petitioner at the request of the same Edmundo Ledesma (Rollo, p. 167). After the Development Bank of the Philippines had approved on June 29, 1967 a loan of P1,840,000.00 applied for by petitioner in 1961, respondent bank informed of the availability of P800,000.00 to pay off partially petitioner's account with it and requested to release the titles of the Pasig parcels for delivery to the Development Bank of the Philippines, and the amount actually released by the Development Bank, Rafael Ledesma, in his capacity as Chairman of petitioner's board of directors wrote a letter to the Development Bank of the Philippines stating that Rene Knecht, petitioner's president, had no authority to borrow for petitioner, being a mere figurehead president, although Rene Knecht, controlled 87% of the stockholding of petitioner and the by-laws authorized the president to borrow for the company (Brief for Petitioner, pp. 11-13).<äre\|\|anº•1àw> That Rafael Ledesma wrote a letter to the Development Bank of the Philippines is admitted by respondent bank (Rollo, p. 169). The Development Bank of the Philippines refused to make further releases on the approved loan or to issue the dollar guaranty for the importation of can making machinery. It was Atty. Juan de Ocampo, the corporate counsel retained by petitioner at the insistence of respondent bank that instituted the collection suit and extra-judicial foreclosure for respondent bank against petitioner (Brief for Petitioner, pp. 13-14; Rollo, p. 79). It is apparent that it is respondent bank practically managing petitioner corporation through its representatives occupying key positions therein. Not even the president of petitioner corporation could escape control by respondent bank through the Comptroller Treasurer assigned "to countersign all checks and other disbursements and decide on all financial matters regarding the operations and who shall see to it that operations are carried out" (Brief for the Respondent, p. 41). There is basis for petitioner's complaint of interference by respondent bank with petitioner's financing (Brief for Petitioner, pp. 3132) and such interference is only a consequence of respondent bank's management of petitioner corporation through the officers occupying key positions therein. Thus, if ever petitioner corporation was in financial straits instead of being rehabilitated this can be attributed to the mismanagement of respondent corporation through its representatives in petitioner corporation. In a similar case, Filipinas Marble Corporation v. Intermediate Appellate Court (142 SCRA 180 [1986]) where the lending institution took over the management of the borrowing corporation and led that corporation to bankcruptcy through mismanagement or misappropriation of the funds, defeating the very purpose of the loan which is to develop the projects of the corporation, the Court ruled that it is as if the loan was never delivered to it and thus, there was failure on the part of the respondent DBP to deliver the consideration for which the mortgage and the assignment of deed were executed. It cannot be determined at this point how much of the total loan, most especially the P500,000.00 loan for operating capital and the P40,000.00 loan of the manager, Edmundo Ledesma, had been mismanaged or misspent by respondent bank through its representatives. This matter should rightfully be litigated below in the main action (Filipinas Marble Corportion v. Intermediate Appellate Court. (supra). Furthermore, respondent bank was in default in fulfilling its reciprocal obligation under their loan agreement. By its own admission it failed to release the P710,000.00 loan (Rollo, p. 167) it approved on October 13, 1966 (Brief for Respondent, p. 44) in which case, petitioner corporation, under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case (Central Bank of the Philippines v. Court of Appeals, 139 SCRA 46 [1985]). As a consequence, the real estate mortgage of petitioner corporation cannot be entirely foreclosed to satisfy its total debt to respondent bank. (Central Bank of the Philippines v. Court of Appeals, supra.) The issue of whether the foreclosure sale of the mortgaged properties en masse was valid or not must be answered in the negative. The rule of indivisibility of a real estate mortgage refers to the provisions of Article 2089 of the Civil Code, which provides: Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. Therefore the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as the debt is not completely satisfied. Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. Respondent bank cites the above-quoted article in its argument that the mortgage contract is indivisible and that the loan it secures cannot be divided among the different lots (Brief for Respondent, p. 27). Respondent Court upheld the validity of the sale en masse (Rollo, p. 246). The rule, however, is not applicable to the instant case as it presupposes several heirs of the debtor or creditor which does not obtain in this case (Central Bank of the Philippines v. Court of Appeals, supra.) Furthermore, granting that there was consolidation of the entire loan of petitioner corporations approved by respondent bank, the rule of indivisibility of mortgage cannot apply where there was failure of consideration on the part of respondent bank for the mismanagement of the affairs of petitioner corporation and where said bank is in default in complying with its obligation to release to petitioner corporation the amount of P710,000.00. In fact the real estate mortgage itself becomes unenforceable (Central Bank of the Philippines v. Court of Appeals, supra). Finally, it is noted that as already stated hereinabove, the exact amount of petitioner's total debt was still unknown. PREMISES CONSIDERED, (1) the decision of the Court of Appeals is REVERSED insofar as it sustained: (a) the lower court's denial of petitioner's application for preliminary injunction and (b) the validity of the foreclosure sale; (2) the lower court is ordered to proceed with the trial on the merits of the main case together with a determination of exactly how much are petitioner's liabilities in favor of respondent bank PCIB so that proper measures may be taken for their eventual liquidation; (3) the preliminary injunction issued by this Court on April 28, 1971 remains in force until the merits of the main case are resolved; and (4) the motion of respondent bank dated April 1, 1981 for leave to lease the real properties in custodia legis is DENIED. SO ORDERED. Melencio-Herrera (Chairperson), Padilla, and Sarmiento, JJ., concur. Regalado, J., took no part. Footnotes 1 Penned by Justice Antonio Canizares and concurred in by Justices Ruperto G. Martin and Manuel P. Barcelona. 2 Penned by Justice Antonio Canizares and concurred in by Justices Ruperto G. Martin and Manuel P. Barcelona. 3 Written by Justice Antonio Canizares and concurred in by Justices Ruperto G. Martin and Manuel P. Barcelona. The Lawphil Project - Arellano Law Foundation