KOREA EXCHANGE BANK, PETITIONER, VS. FILKOR BUSINESS INTEGRATED, INC., KIM EUNG JOE, AND LEE HAN SANG, RESPONDENTS.

Korea Exchange Bank versus Filkor Business Integrated

The Case

This is a petition for review on certiorari brought by Korea Exchange Bank against Filkor Business Integrated, Inc. and its sureties, Kim Eung Joe and Lee Han Sang. The bank obtained a summary judgment ordering the debtors to pay their dollar obligations, but the trial court refused to include in its judgment the foreclosure and public auction sale of the mortgaged property that the bank had prayed for. The case matters because it fixes the test for determining the nature of an action — the allegations of the complaint and the character of the relief sought — and because it reminds us that a mortgage creditor who sues on a real estate mortgage does not, by that act alone, abandon his lien.

Procedural History

Korea Exchange Bank filed a complaint for collection with prayer for foreclosure before the Regional Trial Court of Cavite City, Branch 88. The bank moved for summary judgment under Rule 35 of the 1997 Rules of Civil Procedure. On March 12, 1999, the trial court granted the motion and rendered judgment for the bank on all twenty-seven causes of action, ordering the respondents to pay jointly and severally. The order, however, omitted the prayer that the mortgaged property be foreclosed and sold at public auction.

The bank filed a partial motion for reconsideration. On April 16, 1999, the trial court denied it, ruling that by filing an ordinary action for collection the bank had abandoned its mortgage lien, citing Danao versus Court of Appeals and Manila Trading and Supply Company versus Co Kim. The bank then went directly to the Supreme Court by petition for review on certiorari, raising a pure question of law.

Facts

On January 9, 1997, Filkor borrowed 140,000 US dollars from Korea Exchange Bank, payable on July 9, 1997. Of this amount, only 40,000 US dollars was paid. Filkor also executed nine trust receipts in favor of the bank from June 26, 1997 to September 11, 1997, but failed to turn over the proceeds of the goods or the goods themselves. From June 9, 1997 to October 1, 1997, Filkor negotiated to the bank the proceeds of seventeen letters of credit issued by the Republic Bank of New York and Banque Leumi France, S.A. When the bank presented the bills of exchange, they were dishonored because of discrepancies.

Earlier, on February 9, 1996, to secure payment of all its obligations, Filkor executed a Real Estate Mortgage over the improvements on the lot it was leasing at the Cavite Export Processing Zone Authority. Respondents Kim Eung Joe and Lee Han Sang also executed Continuing Suretyships binding themselves jointly and severally with Filkor.

When the respondents failed to pay, the bank filed a complaint with twenty-seven causes of action. It prayed that it be paid, that the mortgaged property be foreclosed and sold at public auction should the respondents fail to pay within ninety days from entry of judgment, and for other reliefs. The trial court granted summary judgment but left out the foreclosure prayer, and denied reconsideration on the ground of abandonment of the mortgage lien.

Issues

• Whether or not the bank's complaint was an action for foreclosure of a real estate mortgage rather than an action for collection of a sum of money.
• Whether or not the bank abandoned its mortgage lien by filing the action.
• Whether or not the appeal was correctly lodged with the Supreme Court rather than with the Court of Appeals.

Applicable Provisions

Section 1 of Rule 68 of the 1997 Rules of Civil Procedure provides:

SECTION 1. Complaint in action for foreclosure. – In an action for the foreclosure of a mortgage or other encumbrance upon real estate, the complaint shall set forth the date and due execution of the mortgage; its assignments, if any; the names and residences of the mortgagor and the mortgagee; a description of the mortgaged property; a statement of the date of the note or other documentary evidence of the obligation secured by the mortgage, the amount claimed to be unpaid thereon; and the names and residences of all persons having or claiming an interest in the property subordinate in right to that of the holder of the mortgage, all of whom shall be made defendants in the action.

The bank's complaint satisfied these requisites, which shows that the action was one for foreclosure.

Section 2 of Rule 68 of the 1997 Rules of Civil Procedure provides:

SEC. 2. Judgment on foreclosure for payment or sale. - If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment.

This provision required the trial court to order foreclosure and sale in default of payment.

Section 1 of Rule 45 of the 1997 Rules of Civil Procedure provides:

SECTION 1. Filing of petition with Supreme Court. – A party desiring to appeal by certiorari from a judgment or final order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever authorized by law, may file with the Supreme Court a verified petition for review on certiorari. The petition shall raise only questions of law which must be distinctly set forth.

Because the appeal raised only a question of law, it was properly filed with the Supreme Court.

Ruling

On the first issue, the Court held that the nature of an action is determined by the allegations of the complaint and the character of the relief sought. Paragraph 183 of the complaint alleged the date and due execution of the real estate mortgage and described the mortgaged properties. The names and residences of the mortgagor and mortgagee appeared in the early paragraphs, and the dates of the obligations and the amounts unpaid were set out in the twenty-seven causes of action. The prayer expressly asked that the mortgaged property be foreclosed and sold at public auction. These allegations satisfied Section 1 of Rule 68, so the action was one for foreclosure of a real estate mortgage.

On the second issue, the Court found no indication whatsoever that the bank had waived its rights under the mortgage. The trial court therefore erred in concluding that the bank had abandoned its mortgage lien. Since the action was one for foreclosure, it was incumbent upon the trial court to order foreclosure and sale under Section 2 of Rule 68. The dispositive portion of the March 12, 1999 decision had to be modified accordingly, subject to any appeal filed by the respondents.

On the third issue, the Court held that what the bank impugned was the trial court's determination of the nature of the action based on the pleadings, which involves a question of law. The appeal was therefore correctly filed with the Supreme Court under Section 1 of Rule 45.

Doctrine

First, the nature of an action and the court's jurisdiction over it are determined by the allegations of the complaint and the character of the relief sought, not by the caption or the form the pleader chooses.

Second, a complaint that sets forth the date and due execution of the mortgage, describes the mortgaged property, names the mortgagor and mortgagee, states the obligations secured and the amounts unpaid, and prays for foreclosure and sale, is an action for foreclosure under Section 1 of Rule 68.

Third, in a foreclosure action the court must render judgment for the sum due and order payment within a period of not less than ninety days nor more than one hundred twenty days from entry of judgment, and in default of payment the property shall be sold at public auction, as Section 2 of Rule 68 commands.

Fourth, the mere filing of a collection suit does not by itself amount to abandonment of the mortgage lien; waiver must appear, and here none was shown.

Fifth, an appeal raising only a pure question of law may be filed directly with the Supreme Court under Section 1 of Rule 45.

Disposition

The petition was granted. The order of March 12, 1999 was modified to state that the mortgaged property of Filkor be foreclosed and sold at public auction should Filkor fail to pay its obligations to the bank within ninety days from entry of judgment, with no pronouncement as to costs.

Remember This

Memorize this line: the nature of an action is determined by the allegations of the complaint and the character of the relief sought, and a mortgage creditor who sues does not thereby abandon his lien. Examiners use this case to test Rule 68 foreclosure requisites, the rule against implied waiver of the mortgage, and the direct appeal to the Supreme Court on pure questions of law.