Facts:
1. On December 10, 1996, Shemberg Marketing Corporation executed a real estate mortgage on a parcel of land in Mandaue City, including all improvements, to secure loan accommodations worth P28,242,000.00 in favor of Citibank, N.A.
2. On February 13, 1998, Citibank sent a demand letter to Shemberg to pay the outstanding balance of US$390,000.00 under Promissory Note No. 8976267001. If unpaid, foreclosure proceedings would be initiated.
3. Shemberg failed to pay, leading Citibank to initiate extra-judicial foreclosure on May 10, 1999, scheduling a sale on June 16, 1999.
4. Shemberg filed a complaint for rescission or declaration of nullity of the mortgage contract with the RTC, alleging it was void due to lack of consideration because Citibank did not renew Shemberg’s credit line despite the promise when the mortgage was executed.
5. Citibank countered that the mortgage was required to provide additional security due to Shemberg’s financial situation and covered various outstanding obligations, including the promissory note.
Procedural Posture:
– The RTC declared the mortgage void for lack of consideration but found Shemberg liable for the outstanding balance of the promissory note, payable within a year.
– Both parties appealed to the Court of Appeals (CA), which reversed the RTC’s decision, declaring the mortgage and foreclosure proceedings valid.
– The CA imposed an interest rate of 8.89% per annum on the unpaid promissory note from the foreclosure filing date until finality.
– Shemberg’s motion for reconsideration was denied, prompting the filing of a Petition for Review with the Supreme Court.
Issues:
1. Whether the real estate mortgage was valid between the parties.
2. Whether Citibank had grounds to initiate foreclosure proceedings.
Court’s Decision:
The Supreme Court affirmed the CA’s decision:
1. Validity of the Mortgage:
– The mortgage was deemed valid to secure both present and future obligations, as agreed in the contract and acknowledged by Shemberg when executed with an existing obligation of P58,238,200.00.
– The mortgage’s terms, per Section 9, Rule 130 of the Rules of Court, were clear and thus binding, disallowing parol evidence to alter the written agreement terms.
2. Initiation of Foreclosure:
– Citibank rightfully initiated foreclosure as Shemberg failed to pay the note’s balance (US$390,000.00) covered by the mortgage.
– The foreclosure was justified under the agreed mortgage terms allowing Citibank such enforcement if Shemberg defaulted.
Doctrine:
– The parol evidence rule: A written agreement is considered definitive of the terms agreed upon and cannot be contested by external evidence unless specific exceptions apply.
– Valid mortgages must secure a principal obligation, must involve absolute ownership by the mortgagor, and the mortgagor must have free disposal over the mortgaged property.
Class Notes:
– Essential Elements of a Mortgage: Must secure a principal obligation, involve absolute ownership of the property by the mortgagor, and ensure free disposal of the property by the mortgagor.
– Parol Evidence Rule (Rule 130, Section 9): Precludes external evidence contradicting the terms of a written agreement, except in cases of intrinsic ambiguities, failure to express true intent, invalidity, or post-execution modifications.
Historical Background:
– This case involves the application of traditional property and contract principles in mortgage agreements within commercial banking practices amidst disputes over compliance with commitments not explicitly contained within formal contracts.
Leave a Reply