PHILIPPINE ASSET GROWTH ONE, INC., PETITIONER, VS. GIL G. CHUA, RESPONDENT.

Philippine Asset Growth One versus Chua

The Case

This is a petition for review on certiorari brought by Philippine Asset Growth One, Incorporated, which the Court calls PAGO, against Gil G. Chua. PAGO is the assignee of a loan originally extended by Rizal Commercial Banking Corporation, and it foreclosed a real estate mortgage over Chua's Quezon City property to collect on unpaid trust receipts. Chua sued to annul the mortgage and the foreclosure sale, and the lower courts agreed with him. The case matters because it settles two questions every mortgage practitioner must know: when an after-incurred-obligations clause, also called a blanket mortgage clause or dragnet clause, actually captures a later debt, and when the failure to give personal notice of foreclosure voids the sale.

Procedural History

Chua filed a complaint for declaration of nullity of the mortgage and of the extrajudicial foreclosure sale, with damages, before the Regional Trial Court of Quezon City. The trial court ruled in Chua's favor. It declared the real estate mortgage, the foreclosure, the certificate of sale, and the annotations on the title null and void; it ordered the Registry of Deeds to cancel the annotations; and it ordered PAGO to return the owner's duplicate copy of the title. PAGO moved for reconsideration, which the trial court denied.

PAGO appealed to the Court of Appeals, which denied the appeal and affirmed the trial court in full. The Court of Appeals held that the mortgage did not even contain a valid dragnet clause, that the four trust receipts were not secured by the mortgage, and that PAGO failed to send the notice required by the mortgage. PAGO's motion for reconsideration was denied, so PAGO elevated the case to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

Gil G. Chua owned a parcel of land with improvements in Cubao, Quezon City, covered by a transfer certificate of title in his name, married to Ma. Paz Catherine M. Chua. On March 31, 2006, Chua mortgaged the property to Rizal Commercial Banking Corporation by a real estate mortgage. The mortgage secured loans, overdrafts, and other credit accommodations obtained by Interbrand Logistics and Distribution, Incorporated, a corporation in which Chua was a stockholder, in the principal amount of 3,350,000 pesos, and it contained a clause extending the security to obligations the mortgagee might later extend. Chua's wife also signed the mortgage, and it was annotated on the title.

In 2009, three years after the mortgage, Interbrand entered into four trust receipts with the bank for the shipment of Nestle products, in the amounts of about 16.9 million, 3.5 million, 33 million, and 25.6 million pesos. Interbrand failed to pay when the amounts fell due. In 2013, the bank assigned to PAGO, on a without recourse basis, all its rights over Interbrand's loan, with an outstanding principal balance of 441,914,918.40 pesos, including the promissory note, the mortgages, and the security interests. The assignment listed the four trust receipts, Chua's title, and the real estate mortgage among the collateral documents.

In September 2015, PAGO sent a final demand for 114,870,918.44 pesos to Interbrand, to Spouses Edgar and Doris San Luis, and to Chua. When the demand went unheeded, PAGO filed a petition for extrajudicial foreclosure over Chua's property and a property of the spouses San Luis, based on the four unpaid trust receipts. The sheriff posted and published a notice of sale, and on January 12, 2016, both properties were sold to PAGO at public auction. Chua received the sheriff's notice only in the third week of January 2016, after the sale. He then sued to annul the mortgage and the foreclosure.

Issues

• Whether or not the four trust receipts are secured by the real estate mortgage.
• Whether or not the extrajudicial foreclosure proceedings are null and void.

Applicable Provisions

Article 1159 of the Civil Code provides:

Article 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

This anchors the Court's premise that the mortgage and its stipulations bind the parties and must be honored.

Article 2091 of the Civil Code provides:

Article 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition.

This is the textual basis for holding that a mortgage may secure future or after-incurred obligations, provided they are accurately described.

Section 3 of Act Number 3135, as amended, governs the notice required in extrajudicial foreclosure, and the Court summarizes it thus:

Section 3 of Act No. 3135, only requires the posting of the notice of extrajudicial foreclosure sale in three public places and the publication of the said notice in a newspaper of general circulation.

This establishes the general rule that personal notice to the mortgagor is not required by law, which the Court then measures against the parties' contract.

Ruling

On the first issue, the Court denied the petition. It first corrected the Court of Appeals: the mortgage does contain a valid after-incurred-obligations clause. The clause, reading "as well as those that the Mortgagee may hereafter extend to the Mortgagor and or Debtor, including interest and expenses, or any other obligation owing to the Mortgagee," is phrased in the same terms the Court had already recognized as a dragnet clause in earlier cases. But validity is not coverage. The Court applied the reliance on the security test: a dragnet clause is a continuing offer by the borrower to secure future loans under the original mortgage, and the lender does not accept that offer when it takes a different security for the later loan. Here, the disclosure statements appended to the trust receipts left the collateral boxes unmarked, so the trust receipts made no reference to the mortgage. The parties relied on the trust receipts themselves as the security. The Court also noted that Chua signed the mortgage, while Interbrand signed the trust receipts. The four trust receipts therefore fall outside the mortgage, and PAGO could not foreclose on the mortgage based solely on their nonpayment.

On the second issue, the Court held the foreclosure void for breach of contract. Personal notice is not required by law, but the parties may stipulate it, and paragraph 13 of the mortgage required all correspondence, including notifications of any extrajudicial action, to be sent to the mortgagor. The Court quoted its earlier ruling that failure to send the notice of foreclosure sale is a contractual breach sufficient to render the sale null and void. PAGO sent no notice to Chua of the foreclosure petition before proceeding, and that omission is fatal.

Doctrine

An after-incurred-obligations clause, also called a blanket mortgage clause or dragnet clause, is a valid stipulation that subsumes all debts of past or future origin, and under Article 2091 a mortgage may secure all kinds of obligations, including future ones accurately described. But such a clause is only an offer of security, and under the reliance on the security test it does not cover a later debt for which the lender took separate security, because acceptance of different collateral shows reliance on the new security rather than the old mortgage. Separately, while Section 3 of Act Number 3135 requires only posting and publication, the parties may contract for personal notice, and failure to give the stipulated notice renders the foreclosure sale null and void.

Disposition

The Supreme Court denied PAGO's petition, sustaining the annulment of the real estate mortgage and the extrajudicial foreclosure sale in favor of Chua.

Remember This

Memorize the line: a dragnet clause is a continuing offer, and the lender rejects that offer when it takes a different security for the later loan. Examiners use this case to test the reliance on the security test on dragnet clauses and the exception that a stipulated personal notice of foreclosure is binding and its breach voids the sale.