PHILIPPINE COMMERCIAL INTERNATIONAL BANK (FORMERLY PHILIPPINE COMMERCIAL & INDUSTRIAL BANK), PETITIONER, VS. INTERMEDIATE APPELLATE COURT AND SPOUSES JOSE SALGADO AND JULIETA SA…

Philippine Commercial International Bank versus Salgado

The Case

This is a petition for review on certiorari brought by the Philippine Commercial International Bank, formerly the Philippine Commercial and Industrial Bank, against the Intermediate Appellate Court and the spouses Jose Salgado and Julieta Salgado. The bank seeks to reverse the appellate court's decision in two connected matters: the main action for recovery of a sum of money on a promissory note, and the spouses' claim for damages arising from a writ of preliminary attachment that the Supreme Court had earlier declared irregularly issued. The case matters because it gathers in one decision two rules every examinee must carry: the prohibition against a mortgage creditor splitting a single cause of action by suing on the debt and foreclosing the mortgage at the same time, and the standard for awarding damages when a creditor wrongfully attaches property.

Procedural History

The bank filed a complaint for recovery of a sum of money with an application for a writ of preliminary attachment before the Court of First Instance of Rizal. The trial court, through Judge Nelly Romero Valdellon, dismissed the complaint and awarded the spouses moral damages, exemplary damages, and attorney's fees, holding that the note was sufficiently secured by a real estate mortgage and was not yet due and demandable. On the bank's motion for reconsideration, the trial court, through Judge Gregorio Pineda, reversed itself, ordered the spouses to pay the note with interest, penalties, bank charges, and attorney's fees, and maintained the writ of attachment. The spouses appealed to the Intermediate Appellate Court.

In a separate proceeding, the Supreme Court had already ruled that the affidavit supporting the attachment was false and that the writ was irregularly issued. On the strength of that ruling, the spouses filed a claim for damages on account of the illegal attachment, which was referred to the Regional Trial Court for trial and reception of evidence. That court found actual damages not satisfactorily proved but granted moral damages, exemplary damages, and attorney's fees. The Intermediate Appellate Court then consolidated the appeal in the damages claim with the main case, reversed the trial court's ruling in the main case, and increased the damages awarded. After its motion for reconsideration was denied, the bank filed this petition for review.

Facts

The spouses Salgado executed a promissory note in favor of the bank in the amount of 1.3 million pesos. The note was in truth secured by several real estate mortgages duly registered and annotated on the titles of the affected properties. When the bank sued to collect on the note, it applied for a writ of preliminary attachment, and its credit division manager executed an affidavit stating that the note had no sufficient security and that the spouses were disposing of or concealing their properties to defraud creditors. The writ was granted upon the filing of a bond, and the deputy sheriff levied on fifteen parcels of land registered in the spouses' names.

The bank also filed a petition for extrajudicial foreclosure of four real estate mortgages, alleging an outstanding debt of more than 3.1 million pesos as of the end of April 1978. At the auction sale, the bank was the highest bidder at more than 2.3 million pesos. The spouses moved to quash the writ, showing that the bank had blotted out the words real estate mortgage from the copy of the promissory note attached to its complaint, making it appear that the note was unsecured. The trial court lifted the writ, and the Supreme Court later confirmed that the affidavit was false and the writ irregular.

In the main case, the trial court first dismissed the complaint, then reversed itself on reconsideration and ordered the spouses to pay. The spouses appealed, and the appellate court reversed the trial court in the main case and increased the damages in the illegal attachment claim. The bank then came to the Supreme Court, raising questions on the application of payments and on liability for damages arising from a dissolved writ of attachment.

Issues

• Whether or not the proceeds of an extrajudicial foreclosure sale may be applied as payment to the debtor's other outstanding obligation with the same bank, which is the subject of an ordinary action for collection, rather than to the indebtedness secured by the mortgage.
• Whether or not a bank creditor that applied for and obtained a writ of attachment later dissolved, without any pronouncement of bad faith in the earlier case, may be held liable for damages in consequence of that writ.

Applicable Provisions

Article 1252 of the New Civil Code, on the application of payments, provides:

He who has several debts due from him to the same creditor may declare, at the time of making the payment, which of them is to be applied.

This provision governs how the foreclosure proceeds are to be credited among the spouses' several obligations to the bank.

Section 20 of Rule 57 of the Rules of Court, on the claim for damages arising from a wrongful attachment, provides:

An application for a writ of preliminary attachment may be filed with the court at any time after the filing of the complaint.

This provision is the procedural anchor for the spouses' separate claim for damages on account of the illegal attachment.

Ruling

On the first issue, the Court held that no valid waiver of the mortgage can be inferred from the bank's act of filing a collection suit and then filing foreclosure proceedings for the same security. While the law allows a mortgage creditor to institute either a personal action for the debt or a real action to foreclose the mortgage, he cannot pursue both remedies simultaneously or successively. The Court quoted the governing rule:

For non-payment of a note secured by mortgage, the creditor has a single cause of action against the debtor. This single cause of action consists in the recovery of the credit with execution of the security.

By filing the collection suit and then the extrajudicial foreclosure, the bank split a single cause of action. The Court further held that the application of the proceeds from the sale of mortgaged property to the mortgagor's obligation is an act of payment, so the 2.3 million pesos realized at the auction may be applied first to liquidate the 1.3 million peso debt subject of the main case, because that debt was secured by the foreclosed mortgages, was the most onerous at fourteen percent interest per year, and was the oldest.

On the second issue, the Court held that the suing out of the writ of attachment was wrongful, a question already settled in the earlier case. The bank argued that because the earlier decision made no finding of bad faith, it could not be liable. The Court rejected this: the silence of that decision on bad faith does not mean its absence, because only the legality of the writ was in issue there, and proof of bad faith or malice need be shown only in the claim for damages. The Court affirmed the finding of malice and bad faith, since the bank blotted out the existence of the real estate mortgage from the copy of the note attached to its complaint, making it appear unsecured when it was fully secured, and never mentioned the mortgage in its complaint.

On damages, the Court held that the award of actual damages was not supported by evidence, since the losses claimed were remote, speculative, or not duly established by competent proofs. Moral damages, exemplary damages, and attorney's fees were proper, but the amounts awarded by the appellate court were excessive and had to be reduced.

Doctrine

A mortgage creditor has a single cause of action against the debtor for a debt secured by mortgage. He may institute either a personal action for the debt or a real action to foreclose the mortgage, but he cannot pursue both remedies simultaneously or successively, for doing so splits a single cause of action and subjects the debtor to vexation and oppression. The proceeds of a foreclosure sale are an act of payment, and under Article 1252 they may be applied to the debtor's most onerous and oldest obligation among those secured by the foreclosed mortgage. A creditor who wrongfully sues out a writ of attachment may be held liable for damages even if the earlier decision on the legality of the writ made no finding of bad faith, because bad faith or malice need be proved only in the separate claim for damages. Actual damages from a wrongful attachment must be the direct and proximate result of the attachment and must be duly established by competent proofs; moral damages, exemplary damages, and attorney's fees may be awarded, but in reasonable amounts.

Disposition

The Court affirmed the decision of the Court of Appeals with modification, reducing the damages to 40,000 pesos as moral damages, 15,000 pesos as exemplary damages, and 20,000 pesos as attorney's fees, in favor of the spouses Salgado.

Remember This

The single line to memorize: a mortgage creditor may sue on the debt or foreclose the mortgage, but never both, for that splits a single cause of action. Examiners use this case to test the rule against splitting a cause of action, the application of payments under Article 1252, and the requisites for damages arising from a wrongful attachment.