BANGKO SENTRAL NG PILIPINAS, PETITIONER, VS. AGUSTIN LIBO-ON, RESPONDENT.

Bangko Sentral ng Pilipinas versus Libo-on

The Case

This is a petition for review on certiorari brought by the Bangko Sentral ng Pilipinas against Agustin Libo-on, arising from a complaint for damages with a prayer for injunctive relief that sought to stop the extrajudicial foreclosure of a parcel of land mortgaged to the Rural Bank of Hinigaran. The case matters because it fixes the requirements for a valid assignment of credit involving real property, and it explains why the mere pledge and deposit of mortgage documents with a second creditor does not transfer the mortgagee's power to foreclose. It is a favorite of examiners on the law on credit transactions, on pledge, and on the prohibition against pactum commissorium.

Procedural History

Agustin Libo-on filed the action for damages with a prayer for a temporary restraining order and a writ of preliminary injunction before the Regional Trial Court of the Sixth Judicial Region in Negros Occidental, Branch 51. The trial court granted the writ of preliminary injunction, and after pre-trial the parties agreed that the only principal issue was whether the Bangko Sentral had the authority to foreclose the subject mortgage. The trial court rendered judgment in favor of the spouses Libo-on, declaring the application for extrajudicial foreclosure and the notice of public auction irregular and unlawful, making the injunction permanent, and ordering the Bangko Sentral to pay attorney's fees and litigation expenses, while denying moral damages.

The Bangko Sentral appealed to the Court of Appeals in Cebu City, which denied the appeal and affirmed the trial court. The Bangko Sentral then came to the Supreme Court by a petition for review on certiorari under Rule 45 of the Rules of Court.

Facts

In August and September 1997, Agustin Libo-on and his wife Mercedes secured loans from the Rural Bank of Hinigaran in the amounts of 100,000 pesos and 300,000 pesos. They executed promissory notes payable to the Rural Bank, and as security they executed a deed of real estate mortgage over a parcel of land covered by a transfer certificate of title in favor of the Rural Bank.

Shortly thereafter, in September and October 1997, the Rural Bank in turn obtained loans from the Bangko Sentral ng Pilipinas in the amounts of 800,000 pesos and 640,000 pesos, executing a document denominated as a promissory note with trust receipt agreement. As security, the Rural Bank pledged and deposited with the Bangko Sentral promissory notes with supporting transfer certificates of title, including the promissory note and title of the spouses Libo-on.

When the loans fell due and remained unpaid, the Bangko Sentral demanded payment from the spouses Libo-on and then filed an application for extrajudicial foreclosure against their mortgage security. Before the auction sale could be completed, Agustin Libo-on filed the action for damages with injunctive relief, insisting that there was no privity of contract between him and the Bangko Sentral, that the Rural Bank had not authorized the Bangko Sentral to act on its behalf, and that the mortgage had not been assigned to it.

Issues

• Whether or not the Bangko Sentral ng Pilipinas has the right to foreclose the real estate mortgage constituted by the spouses Libo-on in favor of the Rural Bank of Hinigaran, in the absence of a notarized deed of assignment, special power of attorney, or any document of transfer of rights executed by the mortgagee Rural Bank in its favor.
• Whether or not there is privity of contract between the spouses Libo-on and the Bangko Sentral ng Pilipinas.
• Whether or not the award of attorney's fees and litigation expenses in favor of the respondent is warranted.

Applicable Provisions

Article 1625 of the Civil Code provides:

An assignment of a credit, right or action shall produce no effect as against third person, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property.

This is the formal requirement the Court uses to test whether the alleged assignment of the mortgage credit can bind third persons such as the spouses Libo-on.

Article 2085 of the Civil Code provides:

The following requisites are essential to the contracts of pledge and mortgage: x x x x (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged.

This is the requisite the Court applies to the Rural Bank's pledge of the spouses' title and promissory note to the Bangko Sentral.

Article 2088 of the Civil Code provides:

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of the same. Any stipulation to the contrary is null and void.

This is the prohibition against pactum commissorium, which the Court invokes to explain why the Bangko Sentral could not simply appropriate the mortgaged property to itself.

Ruling

On the first issue, the Court held that the Bangko Sentral has no authority to foreclose. An assignment of credit is an agreement by which the owner of a credit transfers his credit and accessory rights to another, who acquires the power to enforce it to the same extent as the assignor. But no deed of assignment of credit or mortgage was ever presented. Even if the promissory note with trust receipt were treated as an assignment, it failed the formalities required by law, because a mortgage credit is a real right and its transfer must be in a public instrument and registered to bind third persons. The mere pledge and deposit of the mortgage contract, the transfer certificate of title, and the promissory note did not give the Bangko Sentral the authority to foreclose.

The Court also held that the Rural Bank could not validly pledge the security documents, because it was neither the absolute owner of the subject property nor of those documents while the real estate mortgage contract with the spouses subsisted. Unless the property is foreclosed and title consolidated, the spouses Libo-on remain the owners. The Court stressed that he who is not the owner of the property pledged cannot legally constitute such a guaranty, and the pledgee acquires no right whatsoever in the property.

Finally, the Court examined the language of the promissory note with trust receipt agreement and found nothing showing an absolute conveyance of title. The agreement itself spoke of deposit and pledge as collateral security and gave the Bangko Sentral a mere lien, which is inconsistent with an assignment of credit. The Court quoted the agreement:

Within three hundred thirty (330) days after date, for value received, the undersigned promises to pay to the order of the Bangko Sentral ng Pilipinas xxx, having deposited with and pledged to the said Bangko Sentral as collateral security for the payment of this note and any other liability or liabilities, whether direct or contingent, of the undersigned to the said Bangko Sentral due or to become due or that may be hereafter contracted, the securities described in the schedule included in the application for loan dated October 13, 1997 accompanying this note. The said Bangko Sentral is hereby given a lien for the payment of this note and any of the said other liabilities upon all the property or securities now or hereafter in the possession of said Bangko Sentral. xxx

On the second issue, because there was no valid assignment of credit, there was no privity of contract between the spouses Libo-on and the Bangko Sentral, and the latter had no standing to proceed against the mortgaged property. On the third issue, the Court affirmed the award of attorney's fees and litigation expenses, since the respondent was forced to defend his rights.

Doctrine

An assignment of credit transfers the credit and its accessory rights to the assignee, who may enforce it to the same extent as the assignor. Where the assignment involves real property, Article 1625 of the Civil Code requires that it appear in a public instrument and be registered in the Registry of Property to bind third persons. A mortgage credit is a real right, so its transfer must comply with these formalities.

The mere pledge and deposit of a mortgage contract, a transfer certificate of title, and a promissory note do not amount to an assignment of credit and confer no authority to foreclose. Under Article 2085 of the Civil Code, the pledgor must be the absolute owner of the thing pledged; a mortgagee who is not the owner cannot validly pledge the mortgaged property or its security documents. And under Article 2088 of the Civil Code, the creditor cannot appropriate the things given by way of pledge or mortgage, any stipulation to the contrary being null and void.

Disposition

The Supreme Court denied the petition and affirmed the decision and resolution of the Court of Appeals, so the respondent Agustin Libo-on prevailed and the foreclosure was declared unlawful.

Remember This

Memorize this line: a mortgage credit is a real right, so its assignment must be in a public instrument and registered to bind third persons, and a mere pledge of the title and promissory note is not an assignment. Examiners use this case to test the formalities of assignment of credit under Article 1625, the ownership requisite of pledge under Article 2085, and the prohibition against pactum commissorium under Article 2088.