K-PHIL., INC., SOO MYUNG PARK AND NETWORK DEVELOPMENT HOLDING CORP., PETITIONERS, VS. METROPOLITAN BANK & TRUST COMPANY, REGALADO E. EUSEBIO, IN HIS CAPACITY AS CLERK OF COURT V…

K-Phil versus Metropolitan Bank and Trust Company

The Case

This is a petition for review brought by K-Phil, Incorporated, Soo Myung Park, and Network Development Holding Corporation against Metropolitan Bank and Trust Company, the Clerk of Court and ex-officio sheriff of Imus, Cavite, and the sheriff who issued the notice of sale. The borrowers and the owner-mortgagor went to the Supreme Court to challenge the decision of the Court of Appeals which set aside a notice of extrajudicial sale but nonetheless refused to declare the foreclosure void and refused to award damages. The case matters because it fixes the standard for testing the validity of a notice of extrajudicial foreclosure: not every error invalidates the notice, only a substantial one, meaning an error calculated to deter or mislead bidders, to depreciate the property, or to prevent it from bringing a fair price.

Procedural History

K-Phil and Network filed a complaint for breach of contract and damages with an application for a writ of preliminary injunction and a temporary restraining order before the Regional Trial Court of Imus, Cavite, Branch 20. The trial court issued a temporary restraining order, then granted a writ of preliminary injunction upon the posting of a bond, and later authorized the sale of the mortgaged machineries with the proceeds to be delivered to the bank. After trial, the trial court dismissed the complaint, holding that there was no infirmity in the foreclosure petition and no basis for damages. The borrowers elevated the case to the Court of Appeals, which agreed that the omission of Network from the caption was not fatal, but found a discrepancy in the amount of indebtedness and an improper venue, and set aside the notice of extrajudicial sale, ordering the sheriff to issue, publish, and serve a new notice correcting the inaccuracies. Unsatisfied, the petitioners came to the Supreme Court by petition for review under Rule 45.

Facts

In October 1996, Metropolitan Bank extended to K-Phil various loans and credit accommodations. These loans were secured by a mortgage over two lots owned by Network Development Holding Corporation and occupied by K-Phil, and by a deed of chattel mortgage over K-Phil's machineries and equipment.

Because of the alleged violation of the terms and conditions of the loans, the bank filed a petition for extrajudicial foreclosure of the real estate and chattel mortgages with the Office of the Clerk of Court and ex-officio sheriff of the Regional Trial Court of Imus, Cavite in June 2002. Upon approval by the executive judge, the sheriff issued a notice of extrajudicial sale setting the public auction in August 2002.

K-Phil and Network then filed a complaint for breach of contract and damages with an application for injunctive relief. They claimed that the foreclosure was premature and contrary to a restructuring agreement, that the petition stated the wrong amount and failed to implead and notify Network as owner-mortgagor, and that the venue of the auction in Imus was inconsistent with the stipulation that the sale be held at the capital of the province, Trece Martires City, or in the city where the property is located, Dasmariñas, Cavite. The trial court enjoined the auction. After trial, it dismissed the complaint. On appeal, the Court of Appeals set aside the notice of sale for the discrepancy in the amount and the improper venue, and ordered a new notice to be issued.

Issues

• Whether or not the petition for extrajudicial foreclosure was null and void for its failure to implead Network and to state the correct amount of indebtedness.
• Whether or not it was proper for the Court of Appeals to order the issuance of a new notice of extrajudicial sale with the necessary corrections.
• Whether or not Metropolitan Bank was liable for damages and attorney's fees.

Applicable Provisions

Act Numbered 3135, as amended, governs the sale of property under special powers inserted in or annexed to real estate mortgages, and the Court cites it as the measure of a valid foreclosure application. The Court notes that the omission of Network from the caption was not a violation of this Act, because the body of the application controlled and the notice itself identified Network as mortgagor.

On the strict compliance required for notices of sale, the Court adopts the rule that statutory provisions governing publication of notice of mortgage foreclosure sales must be strictly complied with, and that even slight deviations will invalidate the notice. The Court explains the purpose of the notice through its quotation from the Olizon decision:

The object of a notice of sale is to inform the public of the nature and condition of the property to be sold, and of the time, place and terms of the sale. Notices are given for the purpose of securing bidders and to prevent a sacrifice of the property. If these objects are attained, immaterial errors and mistakes will not affect the sufficiency of the notice; but if mistakes or omissions occur in the notices of sale, which are calculated to deter or mislead bidders, to depreciate the value of the property, or to prevent it from bringing a fair price, such mistakes or omissions will be fatal to the validity of the notice, and also to the sale made pursuant thereto.

This passage supplies the test the Court applies to the discrepancy in the amount of indebtedness: an error is fatal only if it is calculated to deter or mislead bidders, to depreciate the property, or to prevent a fair price.

Ruling

On the first issue, the Court held that the omission of Network from the caption of the application was not fatal. It is the allegations in the body of the petition that control, not the heading or caption, and the body included Network. The notice of sale clearly identified Network as the mortgagor, and such identification in the notice was what counted under the rules on extrajudicial foreclosure. As for the amount, the bank alleged 159,026,257.49 pesos in its petition, and only in the course of the proceedings agreed to 143,335,891 pesos, so the notice based on the petition carried the higher figure. The Court held that the validity of a notice of sale is not affected by immaterial errors; only substantial errors will invalidate it. Unless the error was calculated to deter or mislead bidders, to depreciate the property, or to prevent it from bringing a fair price, a discrepancy between the amount in the notice and the amount actually due does not constitute a substantial error. Here the discrepancy tended to appreciate, rather than depreciate, the value of the mortgaged properties, because the bidding would begin at the higher amount, and it could not reasonably have prevented the estimation of a fair price.

On the second issue, the Court held that the order of the Court of Appeals for the sheriff to issue, publish, and serve a new notice of extrajudicial sale correcting the inaccuracies and inadequacies of the prior notice was sufficient to remedy the discrepancies. The Court rejected the argument that the duty to amend the petition rested solely on the bank.

On the third issue, the Court found no findings to support the grant of damages. Neither the trial court nor the Court of Appeals saw any taint of bad faith on the part of the bank, so the Court declined to award damages and attorney's fees.

Doctrine

First, in an application for extrajudicial foreclosure, it is the allegations in the body of the petition that control, not the heading or caption; the omission of an owner-mortgagor from the caption is not fatal where the body identifies that party and the notice of sale names it as mortgagor.

Second, statutory provisions governing publication of notice of mortgage foreclosure sales must be strictly complied with, and even slight deviations will invalidate the notice. But the validity of a notice of sale is not affected by immaterial errors; only substantial errors will invalidate it. An error is substantial when it is calculated to deter or mislead bidders, to depreciate the value of the property, or to prevent it from bringing a fair price.

Third, a discrepancy between the amount of the obligation stated in the notice of sale and the amount actually due is not a substantial error where it tends to appreciate rather than depreciate the value of the property, since the bidding begins at the higher amount.

Fourth, damages are not awarded against the mortgagee absent a finding of bad faith in instituting the foreclosure.

Disposition

The Supreme Court denied the petition and affirmed the result reached by the Court of Appeals, with costs against the petitioners.

Remember This

The one line to memorize: only substantial errors invalidate a notice of extrajudicial foreclosure, meaning errors calculated to deter or mislead bidders, to depreciate the property, or to prevent it from bringing a fair price. Examiners use this case to test the distinction between immaterial and substantial errors in the notice of sale, and the rule that the body of the foreclosure petition, not its caption, controls.