CPN CARGO FORWARDING, ET AL., PLAINTIFFS-APPELLANTS, VS. PHILIPPINE POSTAL SAVINGS BANK ET. AL., DEFENDANTS-APPELLEES.

CPN Cargo Forwarding versus Philippine Postal Savings Bank

The Case

This is an appeal by CPN Cargo Forwarding, CPN Motor Sales and Risen Christ Catholic School, together with Father Nestor Chavez, against the Philippine Postal Savings Bank. The borrowers sued to nullify the extrajudicial foreclosure of the mortgaged property and the mortgage documents themselves, and to recover damages. The case matters because it gathers in one decision the rules a bar candidate needs on contracts of adhesion, on the nature of a revolving credit line, on what counts as substantial performance, and on the posting and publication requirements of Act Number 3135.

Procedural History

The borrowers filed a complaint for nullification of foreclosure proceedings and mortgage documents, with damages, before the Regional Trial Court of Tabaco City, Albay. The trial court dismissed the complaint for want of merit, with costs against the plaintiffs. The bank then filed an ex parte petition for a writ of possession, which the trial court granted, and the borrowers' motion for reconsideration was denied, so the bank was placed in possession of the property. The borrowers appealed to the Supreme Court, which resolved the appeal on the merits.

Facts

In January 1998 the borrowers availed of a credit facility of 13,000,000 pesos from the Philippine Postal Savings Bank, to raise working capital and to pay off an existing loan with the Philippine National Bank. The facility had two parts: a ten year term loan of 5,000,000 pesos, and a revolving credit line of 8,000,000 pesos with a one year renewable term. The loan was secured by a real estate mortgage over a property in Tabaco, Albay, registered in the name of Father Nestor Chavez.

From August 1998 onward, after only seven monthly payments, two of which were in checks later dishonored, the borrowers stopped paying. In August 1999 the bank sent a demand letter giving them fifteen days to settle and warning of foreclosure. In November 1999 the bank extrajudicially foreclosed the property and was declared the highest bidder at the public auction with a bid of 20,571,000 pesos. The certificate of sale was registered in December 1999. In October 2000 the borrowers offered to redeem the property for 20,000,000 pesos within the one year redemption period, but they never redeemed it. The bank then consolidated its title and a new certificate was issued in its name.

In February 2001 the borrowers filed their complaint, attacking the foreclosure as premature and as violative of the publication requirements of Act Number 3135. They claimed the loan documents were contracts of adhesion signed in blank, that the interest rate was unilaterally raised from a verbally agreed 25 percent to 32 percent, that the loan was bloated from 13,000,000 to 16,000,000 pesos, and that their payments of 8,984,911 pesos and 78 centavos amounted to substantial performance.

Issues

• Whether or not the borrowers are bound by the loan contracts despite their claim that these were contracts of adhesion signed in blank.
• Whether or not the bank unilaterally increased the interest rate and bloated the loan amount.
• Whether or not the borrowers' payments amounted to substantial performance that should have prevented foreclosure.
• Whether or not the foreclosure was premature.
• Whether or not the foreclosure sale is void for failure to comply with the posting and publication requirements of Act Number 3135.

Applicable Provisions

Article 1159 of the Civil Code provides:

Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

This is the basis for holding the borrowers to the terms of the loan documents they signed and later used and benefited from.

Section 3 of Act Number 3135 provides:

Notice shall be given by posting notices of the sale for not less than 20 days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.

This is the exact standard against which the Court measured the validity of the foreclosure sale.

Ruling

On the first issue, the Court held that the borrowers cannot escape their contracts by calling them contracts of adhesion. By signing the documents they are presumed to have known the consequences, and as business persons they were expected to take due care. Even granting they signed in blank, they received their copies three days later and never objected; instead they used and benefited from the loan proceeds, which is tacit approval of the terms.

On the second issue, the Court found no unilateral increase. The borrowers were reasonably apprised of the rates, and the last three renewal promissory notes actually carried a reduced rate of 25 percent. The alleged bloating was an afterthought, since the borrowers had never objected before the sale and had even offered to redeem for 20,000,000 pesos.

On the third issue, the Court explained that in a revolving credit line the borrower may re-avail within the ceiling after paying an availment. The payments of 8,984,911 pesos and 78 centavos covered only the first availment of 8,000,000 pesos and a few installments on the term loan; the second availment under the renewal promissory notes remained unpaid. There was therefore no substantial performance.

On the fourth issue, the Court held the foreclosure was not premature, because the principal obligation was due and unpaid despite final demand, so the bank properly exercised its right as mortgagee.

On the fifth issue, the Court found compliance with Section 3 of Act Number 3135: publication once a week for three consecutive weeks in the Bicol Chronicle, a newspaper of general circulation, and posting in three public places in Tabaco, namely the Municipal Building, the Post Office and the Hall of Justice. The sheriff's failure to issue a certificate of posting does not nullify the sale, because such a certificate is not indispensable. The borrowers also virtually recognized the validity of the proceedings by offering to redeem and later asking for an extension.

Doctrine

A party who signs a contract is presumed to know its contents and is bound by its stipulations, which have the force of law between the parties under Article 1159 of the Civil Code; a contract of adhesion is not per se invalid, and signing in blank followed by silence and benefit from the proceeds amounts to tacit approval. In a revolving credit line, payments made on an earlier availment do not extinguish a later re-availment, so they cannot be pleaded as substantial performance. Foreclosure is proper once the principal obligation is due and unpaid after demand. Under Section 3 of Act Number 3135, posting in at least three public places and weekly publication for three consecutive weeks in a newspaper of general circulation suffice, and the absence of a certificate of posting does not prove lack of posting.

Disposition

The Supreme Court dismissed the appeal and affirmed the trial court's decision dismissing the complaint, with the bank prevailing.

Remember This

Memorize this line: a certificate of posting is not indispensable to the validity of an extrajudicial foreclosure under Act Number 3135, and the absence of a certificate is not proof of lack of posting. Examiners use this case on contracts of adhesion, revolving credit lines and substantial performance, and the posting and publication requirements of extrajudicial foreclosure.