IN RE: PETITION FOR THE ISSUANCE OF A WRIT OF POSSESSION (SPOUSES WILFREDO PALADA, SR.,/ ELENA PALADA REPRESENTED BY THEIR ATTORNEY IN FACT, SPOUSES WILFREDO PALADA, JR.,/ BRIGI…

Bank of the Philippine Islands versus Spouses Palada

The Case

This is an appeal brought by the Bank of the Philippine Islands against the spouses Wilfredo Palada, Senior and Elena Domingo, the spouses Andres and Carmen Pastorin, and Wilfredo Palada, Junior and Brigida Pastorin. The bank had extrajudicially foreclosed several mortgaged lots after the younger Palada spouses defaulted on their loans, bought the lots at the auction sale, consolidated title in its own name, and then sought a writ of possession to eject the former owners. The former owners sued to annul the sheriff's certificate of sale, and the trial court ruled in their favor. The case matters because it fixes two rules a reviewee must carry into the examination room: first, that separate loan obligations secured by separate collaterals must be foreclosed separately; and second, that an accommodation mortgagor may redeem his property by paying only the winning bid price plus interest, not the entire debt of the borrower.

Procedural History

The bank filed a petition for the issuance of a writ of possession before the Regional Trial Court of Santiago City, Branch 35. To stop the writ, the former owners filed a complaint for nullity of the sheriff's certificate of sale and for damages, which was raffled to the same branch and consolidated with the petition because both cases involved the same properties and the same issues. On December 18, 2009, the trial court rendered a Joint Decision in favor of the former owners. It nullified the sheriff's certificate of sale, cancelled the bank's consolidated titles, reinstated the former owners' titles, denied the writ of possession, and ordered the bank to pay moral damages of 100,000 pesos, exemplary damages of 50,000 pesos, and attorney's fees of 100,000 pesos. The bank moved for reconsideration, which the trial court denied. The bank then brought this appeal, assigning as errors the trial court's rulings that the three real estate mortgages were separate and distinct, that separate foreclosures were required, that there was no proper consolidation of ownership, and that damages and attorney's fees were due.

Facts

The spouses Wilfredo Palada, Junior and Brigida Pastorin obtained loans from the bank, formerly the Far East Bank and Trust Company. As security, they executed three separate real estate mortgages. The mortgage dated January 16, 1996 secured a loan of 800,000 pesos over two titles registered in the name of Elena Domingo, married to Wilfredo Palada, Senior. The mortgage dated July 12, 1996 secured a loan of 150,000 pesos over two titles registered in the name of Andres Pastorin, married to Carmen Pastorin. Another mortgage dated the same day secured a loan of 50,000 pesos over a title registered in the name of Wilfredo Palada, Junior, married to Brigida Palada. The senior Palada spouses and the Pastorin spouses had merely lent their certificates of title to the younger spouses as security, as shown by a Special Power of Attorney. They were accommodation mortgagors; the younger spouses were the real borrowers.

When the younger spouses failed to pay, the bank extrajudicially foreclosed the properties. At the auction sale held on January 18, 2002, the bank was the highest bidder at 3,289,000 pesos. A certificate of sale was issued, registered, and annotated on the titles. After the one-year redemption period lapsed, the bank executed an affidavit of consolidation, cancelled the old titles, and obtained new titles in its own name.

The former owners refused to vacate. The bank then filed its petition for a writ of possession, and the former owners countered with their complaint for nullity. They argued that because the loan obligations were separate and distinct and each was secured by different collaterals, a separate foreclosure proceeding should have been conducted on each mortgage. The trial court agreed, and the bank appealed.

Issues

• Whether or not the three real estate mortgages are separate and distinct from one another, each securing only the obligation stated in its own deed.
• Whether or not a separate foreclosure proceeding should have been conducted for each mortgage instead of a single foreclosure over all the properties.
• Whether or not there was a proper consolidation of ownership in favor of the bank, given that the affidavit of consolidation was undated and unregistered.
• Whether or not the former owners are entitled to moral damages, exemplary damages, and attorney's fees.

Applicable Provisions

Article 2234 of the Civil Code governs the award of exemplary damages and provides:

While the amount of the exemplary damages need not be proved, the plaintiff must show that he is entitled to moral, temperate or compensatory damages before the court may consider the question of whether or not exemplary damages should be awarded.

This provision defeats the award of exemplary damages, because the former owners failed to establish any entitlement to moral damages in the first place.

Article 2208 of the Civil Code governs the recovery of attorney's fees and provides:

In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except: (1) When exemplary damages are awarded; (2) When defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest; (3) In criminal cases of malicious prosecution against the plaintiff; (4) In case of a clearly unfounded civil action or proceeding against the plaintiff; (5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim; (6) In actions for legal support; (7) In actions for the recovery of wages of household helpers, laborers and skilled workers; (8) In actions for indemnity under workmen's compensation and employer's liability laws; (9) In a separate civil action to recover civil liability arising from a crime; (10) When at least double judicial costs are awarded; (11) In any other case where the court deems it just and equitable that attorney's fees and expenses of litigation should be recovered. In all cases, the attorney's fees and expenses of litigation should be reasonable.

Because none of the enumerated circumstances is present, the award of attorney's fees cannot stand.

Ruling

On the first and second issues, resolved jointly, the Court held that the three loan obligations were secured by three separate and distinct collaterals. The amount of each loan is specifically stated in each deed, and the particular titles are annotated at the back of each deed. The Court stressed that if the younger spouses had intended all five properties to answer for all their loans, they should have annotated every title at the back of each deed of mortgage and made entries on each title stating the amount loaned. They did not. The Court also noted that not all the mortgaged properties belonged to the younger spouses; the senior Palada spouses and the Pastorin spouses were mere accommodation mortgagors. Relying on the doctrine that an accommodation mortgagor who redeems pays only the winning bid price plus interest at the public auction sale, and not the entire liability of the debtor, the Court held that the properties of the accommodation mortgagors should have been foreclosed separately so that their redemption prices could be determined. Because only a single foreclosure was held, those redemption prices were left undetermined. The trial court was therefore correct that a separate foreclosure was required for each loan obligation.

On the third issue, the Court found it no longer necessary to discuss whether there was a proper consolidation of ownership, because the foreclosure itself was improperly conducted and all acts done subsequent to the foreclosure sale are likewise deemed improper.

On the fourth issue, the Court deleted the awards. Moral damages require pleading and proof of moral suffering, mental anguish, fright, and the like, and mere allegations do not suffice; they must be substantiated by clear and convincing proof. The former owners neither alleged nor proved such suffering, and moral and exemplary damages were not even among their prayers. Without moral damages, exemplary damages cannot be awarded under Article 2234. As for attorney's fees, none of the circumstances in Article 2208 applies, and the mere fact that a party was forced to litigate to protect real rights, or that a decision went against it, does not justify the award.

Doctrine

First, where a debtor obtains several separate loans, each secured by a distinct real estate mortgage over specifically identified titles and for a specifically stated amount, each mortgage secures only its own obligation, and each must be foreclosed separately. A single foreclosure over all the properties is improper.

Second, an accommodation mortgagor is not liable for the principal obligation of the debtor. His liability extends only up to the loan value of his mortgaged property, so that upon redemption he pays only the winning bid price plus interest at the public auction sale, not the entire debt of the borrower. This is why separate foreclosures are imperative: they fix the redemption price of each accommodation mortgagor's property.

Third, moral damages must be pleaded and proved by clear and convincing evidence, and without them exemplary damages cannot be awarded under Article 2234. Attorney's fees are the exception, not the rule, and must fall within one of the circumstances of Article 2208.

Disposition

The appeal was partly granted: the trial court's Joint Decision was affirmed as to the nullification of the sale, the cancellation of the bank's titles, the reinstatement of the former owners' titles, and the denial of the writ of possession, but modified by deleting the awards of moral damages, exemplary damages, and attorney's fees for lack of factual and legal basis.

Remember This

Memorize this line: separate loans secured by separate collaterals require separate foreclosures, and an accommodation mortgagor redeems only at the winning bid price plus interest. Examiners use this case to test the rights of accommodation mortgagors and the strict requirements for moral damages, exemplary damages, and attorney's fees.