JOHNSON & JOHNSON PHILS., INC. & LA CONCHA LAND DEVELOPMENT, INC., PETITIONERS, VS. EDUARDO ERNESTO A. EVANGELISTA, EDILBERTO ANTONIO A. EVANGELISTA, AND RAFAELITA A. EVANGELIST…

Johnson and Johnson Philippines versus Evangelista

The Case

This is a petition for review on certiorari brought by Johnson and Johnson Philippines, Incorporated and La Concha Land Development, Incorporated against the Evangelista siblings, Eduardo Ernesto and Edilberto Antonio, together with their mother Rafaelita. The Evangelistas sued to annul the extrajudicial foreclosure and sale of two parcels of land that had been mortgaged to secure the debts of the family business, Karahayan Enterprises, under a distributorship agreement with Johnson and Johnson. The case matters because it is a clean teaching vehicle on three points every examinee must command: the accessory nature of a real estate mortgage, the strict construction of a dragnet or blanket mortgage clause, and the rule that a petition for review on certiorari is confined to questions of law.

Procedural History

The Evangelistas filed a complaint in the Regional Trial Court of Puerto Princesa City for annulment of the extrajudicial sale and cancellation of the transfer certificates of title issued to La Concha. The trial court ruled for the Evangelistas, declaring the foreclosure and sale null and void, ordering the cancellation of La Concha's titles and the reinstatement of the original titles, and ordering Johnson and Johnson to reimburse La Concha the auction price with interest. It awarded no damages for lack of proof. Johnson and Johnson and La Concha moved for reconsideration, which the trial court denied.

They appealed to the Court of Appeals, which denied the appeal and affirmed the trial court. The appellate court held that the mortgage, being a mere accessory, expired with the principal distributorship agreement, and that the alleged extensions were never formally offered in the trial court and so could not be considered. Reconsideration was denied. Johnson and Johnson and La Concha then elevated the matter to the Supreme Court through a petition for review on certiorari under Rule 45.

Facts

Eduardo and Edilberto Evangelista were the registered owners of two parcels of land. Their father was the proprietor of Karahayan Enterprises, a business engaged in the sale and distribution of Johnson and Johnson products. On November 9, 1998, Karahayan and Johnson and Johnson entered into a Distributorship Agreement appointing Karahayan as distributor for Naga, Bicol and Puerto Princesa, Palawan for two years. The agreement required Karahayan to post collateral, so the siblings authorized their father to mortgage the two parcels.

On March 11, 1999, a Deed of Real Estate Mortgage was executed by the Evangelistas in favor of Johnson and Johnson, granting a credit facility of 2,940,000 pesos in favor of Karahayan, secured by the two parcels. Karahayan closed shop sometime in 2003. In 2005, Johnson and Johnson filed a petition for extrajudicial foreclosure to satisfy an alleged debt of 2,153,990.31 pesos. After notice and public auction, the properties were sold to La Concha for 1,500,000 pesos, and new titles were issued in La Concha's name.

The Evangelistas then sued, insisting the foreclosure was baseless because Karahayan's true obligation was only 578,461.41 pesos and had already been paid. On rebuttal, Rafaelita testified that the Distributorship Agreement had expired on November 9, 2000 without extension, and that the mortgage, being accessory, expired with it. Johnson and Johnson countered that the agreement covered both Bicol and Palawan and that the mortgage contained a dragnet clause reaching all sums owed. It also claimed the agreement had been renewed, but the alleged extension documents were presented for the first time only on appeal.

Issues

• Whether or not the petition for review on certiorari raises questions of fact that are outside the scope of a Rule 45 petition.
• Whether or not the renewal or extension of the Distributorship Agreement was duly proven by preponderance of evidence.
• Whether or not the real estate mortgage could be foreclosed despite the expiration, non-renewal, and non-extension of the Distributorship Agreement, by virtue of its dragnet clause.

Applicable Provisions

The Court quoted the collateral clause of the Distributorship Agreement, which defines what the mortgage secures:

The collateral shall be to guarantee the faithful performance and payment by the DISTRIBUTOR of its obligations under this Agreement and to answer for any of the DISTRIBUTOR's unpaid amounts and obligations, as well as for damages, injury, costs and expenses that may be incurred by the COMPANY under this Agreement.

This clause confines the security to obligations arising under the agreement itself, not to liabilities from separate transactions.

The Court also quoted the operative granting clause of the Deed of Real Estate Mortgage:

NOW THEREFORE, for an in consideration of the foregoing premises and the terms and conditions hereinafter set forth and as security for the payment on demand or at maturity, as the case may be, of all sums of money now owed by EDILBERTO R. EVANGELISTA or which may hereafter be owing by said EDILBERTO R. EVANGELISTA to the MORTGAGEE under the Distributorship Agreement, credit facility or any other instruments, notes payable or bills of exchange, purchases and advances made in connection with said Distributorship Agreement or credit facility including any renewals, amendments or extension thereof, the MORTGAGORS have transferred and conveyed and by these presents do hereby transfer and convey by way of mortgage unto the MORTGAGEE, its successors-in-interest and assigns, all their rights, title and interest in the parcels of land described below together with all the buildings and improvements now existing or which may thereafter exist thereon.

This is the dragnet language invoked by the petitioners, and its reach turns on whether the debts arose in connection with the agreement or its renewals.

Finally, the Court cited the rule on issues tried by consent, which the trial court used to entertain the expiration defense raised only on rebuttal:

When issues not raised by the pleadings are tried with the express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings.

This allowed the expiration of the mortgage to be resolved despite not being pleaded.

Ruling

On the first issue, the Court held that the petition raises questions of fact, because resolving the two arguments requires examining the Distributorship Agreement, the Deed of Real Estate Mortgage, and the documents offered to prove renewal. A question of law arises when there is doubt as to what the law is on a certain state of facts, while a question of fact arises when doubt exists as to the truth or falsity of the alleged facts. A Rule 45 petition is limited to questions of law, and the Court does not reweigh evidence. Nevertheless, given the serious nature of the issue, the Court proceeded to rule on the substance.

On the second issue, the Court held that the renewal or extension was not proven by preponderance of evidence. The Distributorship Agreement was effective for two years and expressly provided that the absence of a duly signed extension agreement would not trigger automatic renewal. The testimony of Johnson and Johnson's own records custodian never mentioned any renewal or extension document. The alleged extension agreements were attached only on appeal and were never formally offered in the trial court, so the trial court had no opportunity to authenticate and examine them. The Court stressed that the Court of Appeals may receive evidence only when it grants a new trial based on newly discovered evidence.

On the third issue, the Court held that the mortgage could not be foreclosed absent any liability flowing from the expired, unrenewed, and unextended Distributorship Agreement. A mortgage is by nature an accessory contract dependent on the principal obligation, so its enforcement depends on whether the principal obligation was violated. The Court explained the dragnet clause, quoting Prudential Bank versus Alviar, and held that such clauses are carefully scrutinized and strictly construed. Reading the collateral clause and the mortgage's granting clause together, the Court found that the mortgage may be foreclosed only to answer for liabilities under the November 9, 1998 Distributorship Agreement and transactions made in connection with it, not for liabilities arising from separate transactions. Since Karahayan's remaining liabilities stemmed from purchases outside the contract period, they flowed from a separate agreement not secured by the collaterals. The foreclosure was therefore invalid.

Doctrine

A real estate mortgage is an accessory contract that cannot exist independently of the principal obligation; it may be enforced only upon a violation of that principal obligation. A dragnet or blanket mortgage clause, which is phrased to subsume all debts of past or future origin, is carefully scrutinized and strictly construed, and it reaches only debts falling within the intent gathered from the four corners of the instrument. Where the security is expressly tied to a specific distributorship agreement and its renewals, it does not secure liabilities arising from separate transactions outside that agreement. Finally, a petition for review on certiorari under Rule 45 is confined to questions of law, and the Court of Appeals may receive additional evidence only in a new trial grounded on newly discovered evidence.

Disposition

The petition was denied, and the Decision and Resolution of the Court of Appeals were affirmed; the Evangelistas prevailed, and the foreclosure and sale in favor of La Concha were declared null and void.

Remember This

Memorize this line: a mortgage is a mere accessory, and a dragnet clause is strictly construed against the party who drafted it. Examiners use this case to test the accessory nature of mortgage, the strict construction of dragnet clauses, and the rule that questions of fact are barred in a Rule 45 petition.