PILAR PAGSIBIGAN, PETITIONER, VS. COURT OF APPEALS AND PLANTERS DEVELOPMENT BANK, RESPONDENTS.

This is a petition for review on certiorari of the
decision* of the Court of Appeals in CA-G.R. CV No. 18385
entitled “Pilar Pagsibigan, Plaintiff-appellee vs. Planters Development Bank,
Defendant-appellant,” the decretal portion of which reads:

“WHEREFORE, the decision appealed
from is hereby reversed and another one entered ordering plaintiff-appellee
Norma Manalili, to pay the deficiency of P21,391.81. No pronouncement is made as
to costs.

“SO ORDERED.”^[1]

The undisputed facts are summarized by the respondent court as
follows:

“Stripped of non-essentials, it appears that on August 4, 1974,
plaintiff-appellee, [petitioner, herein] through her daughter as
attorney-in-fact, obtained an agricultural loan from the Planters Development
Bank (formerly Bulacan Development Bank), in the sum of P4,500.00 secured by a
mortgage over a parcel of land covered by Transfer Certificate of Title No. T?129603
(Exhibit “A”; “A-1”), which loan was later fully paid (Exhibits “B”; “B-1” to
“B-3”. Another loan for the same amount
was obtained from the bank on November 3, 1977 [year 1977 should read 1976
instead] secured by the same parcel of land. The Promissory Note for the second loan (Exhibit “1”) stipulated that
for a first payment to be made on May 3, 1977 and payments every six months
thereafter at P1,018.14 with 19% interest for unpaid amortizations. The said Promissory Note, containing an
acceleration clause (Exhibit “1-A”), was not denied by plaintiff-appellee
[petitioner] (TSN, December 10, 1986, pp. 9-10).

Initial payment was made on July 6, 1978 [year 1978 should read
1977 instead] followed by several payments in the total amount of P11,900.00
(Exhibits “D”; “D-1” to “D-7”). However, only four of these payments were applied to the loan (TSN,
March 16, 1987, pp. 14-16), while the rest were “temporarily lodged to accounts
payable since the account was already past due” (TSN, June 1, 1987, pp.
15-16). On the basis of a Petition for
Extrajudicial Foreclosure of Mortgage (Exhibit “6”) and the statement of
Account (Exhibit “12”), the property was foreclosed extrajudicially on May 7,
1984 for failure to pay an outstanding balance of P29,554.81 (Exhibit
“13”). This resulted in the property being sold to the bank
for P8,163.00, and the bank thereafter claimed a deficiency of P21,391.81.

In the action for annulment of sale with damages and writ of
preliminary injunction instituted by plaintiff-appellee, the lower court
sustained appellee’s [petitioner] theory of overpayment (Decision, p. 3), as
against the propriety of the foreclosure.”^[2]
[Bracketed words Ours].

Petitioner submits the following issues for resolution:

“1. Whether or not the foreclosure and auction sale of the property
is valid and justified under the circumstances; and

2. Whether or not
petitioner is entitled to recover damages as well as attorney’s fees as a
result of the foreclosure and auction sale.”^[3]

It is petitioner’s contention that the bank has no right to
foreclose the mortgage, there having been full payment of the principal
obligation. As per their computation^[4]
the payment which they have made totalling P11,900.00 more than sufficiently
covered their total obligation with respect to their loan, there having been,
in fact, an overpayment of either P4,642.38 or P6,106.75 based on the interest
rate used in the computation. Thus, the
principal obligation having been extinguished by payment, the accessory
obligation of mortgage is necessarily extinguished, and the foreclosure thereof
is improper and not valid.

The respondent bank on the other hand countered that the
computation relied upon by petitioner is not in consonance with the Promissory Note^[5] which she signed because the
Promissory Note contains an acceleration clause. Respondent bank also averred that upon petitioner’s failure to
pay her first installment, the entire obligation became due and demandable and
its right to foreclose the mortgage has accrued. Thus, when it foreclosed the mortgage in 1984, with the
outstanding obligation at P29,554.81, it was acting well within its rights.

We note at this point that the respondent bank does not dispute
the fact that petitioner had made several payments in an amount totalling to
P11,900.00. It likewise admits that
only part of the amount tendered was applied to the loan and the bulk of such
payment was “temporarily lodged to accounts payable since the account was already
past due”^[6]
[Underlining Ours]. Petitioner assails
the respondent bank for not applying her payment to the loan. Because of said act, the loan remained
outstanding when it should have been extinguished and should have also
extinguished the accessory contract of real estate mortgage.

Petitioner wants Us to rule not only on the regularity or
legality of the foreclosure but also on its propriety in the light of the
attending circumstances.

There is no question that the respondent bank has the right to foreclose
the mortgage upon the first default of petitioner on May 3, 1977, but the
records show that it did not. When it
received payment of petitioner on July 6, 1977, which had been 2 months and 3
days delayed, it applied P154.80 to the principal, P210.00 to interest, and
only P25.20 to penalty. From this act
of receiving delayed payment, it is clear that the respondent bank had waived
its right under the acceleration clause so that instead of claiming penalty charges
on the entire amount of P4,500.00, it only computed the penalty based on the
defaulted amortization payment which is P1,018.14. If it computed the penalty charge at 19% of the entire amount of
P4,500.00 which would have been due and demandable by virtue of the
acceleration clause, the penalty charges would be much more than P25.20.

This is similarly observed in payments which the respondent bank
received on June 6, 1978 and August 26, 1978. We also noticed that in Exhibit “D-3”, the receipt which the respondent
bank issued to petitioner for the August 26, 1978 partial payment, it waived
its right under Article 1253^[7] of
the Civil Code on Application of Payments when it applied the payment to the
principal instead of the interest. Thus, on that date the outstanding obligation of petitioner was already
reduced to P3,558.21 after she had paid a total of P2,200,00 over a
period of nine months from the time the loan was obtained.

From this conduct of the respondent bank it is clear that it
neither enforced its right under the acceleration clause nor its right to
foreclose under the mortgage contract. For more than four years, the respondent bank made petitioner believe
that it was applying her payment on the loan and interest just like before when
the respondent bank accepted such payment and issued a receipt therefor. It is
bound by estoppel to apply the same as payment for petitioner’s
obligation as it did when it received previous payments on three
occasions. Its act of applying said payments to accounts
payable is clearly prejudicial to petitioner. We cannot countenance this act of the bank.

We hold that the payment amounting to P8,650.00 for the balance
of P3,558.20 as of August 26, 1978^[8] plus
the P1,000.00 it was asked to pay on April 24, 1984 would at the very least
constitute substantial performance.

Article 1234 of the Civil Code, provides:

“Article 1234. If the
obligation has been substantially performed in good faith, the obligor may
recover as though there had been a strict and complete fulfillment, less
damages suffered by the obligee.”

Petitioner in this case has the right to
move for the cancellation of the mortgage and the release of the mortgaged
property, upon payment of the balance of the loan. Definitely, it would not be in the amount demanded by the
respondent bank, which the trial court held to be P29,554.81.

This Court, in Angeles vs. Calasanz^[9]
held that:

“The breach of the contract adverted to by the
defendants-appellants is so slight and casual when we consider that apart from
the initial downpayment of P392.00 the plaintiffs-appellees had already paid
the monthly installments for a period of almost nine (9) years. In other words, in only a short time, the
entire obligation would have been paid. Furthermore, although the principal obligation was only P3,920.00
excluding the 7 percent interests, the plaintiffs-appellees had already paid an
aggregate amount of P4,533.38. To
sanction the rescission made by the defendants-appellants will work injustice
to the plaintiffs-appellees. It would
unjustly enrich the defendants-appellants.

Article 1234 of the Civil Code which provides that:

x x x                                    x x x

also militates against the unilateral act
of the defendants-appellants in cancelling the contract.”

Thus, aside from the fact that the respondent bank was estopped
from enforcing its right to foreclose by virtue of its acceptance of the
delayed payments for a period of more than six years, the application of such
payment to the interest and the principal during the first three payments constitutes
a virtual waiver of the acceleration clause provided in the contract. We cannot sustain the legality of the
foreclosure under the peculiar facts of this case, because there is substantial
performance of the obligation on the part of petitioner. Under Article 1235 of the Civil Code, when
the creditor accepts performance, knowing its incompleteness and irregularity
without protest or objection, the obligation is deemed complied with.

This Court cannot ignore the fact that the respondent bank
succeeded in taking advantage of the ignorance of petitioner in transactions
such as the one involved in the case at bar by lodging the bulk of petitioner’s
payment to account payable based on the flimsy reason that she had been in
default, and then considering the entire debt pursuant to an acceleration
clause as earning interest and penalty charges at an exorbitant rate of 19%
each from the date of first default up to the date of foreclosure, thus
bringing the obligation to an astronomical amount of P29,554.81. This indicates bad faith on the part of the
respondent bank. For the mental
anguish, sleepless nights and serious anxiety this has caused petitioner, the
respondent bank is liable for moral damages which this Court fixes at
P50,000.00.

To serve as a deterrent for the respondent bank from repeating
similar acts and to set an example and correction for the public good, this
Court likewise awards exemplary damages. In view of its nature, it should be imposed in such amount as to
sufficiently and effectively deter similar acts in the future^[10]
by the respondent bank and other banks, which amount this court fixes at
P20,000.00 on top of the forfeiture of whatever balance on the loan which the
respondent may actually have in its favor.

This Court likewise orders the annulment of the foreclosure sale
and the reconveyance of the property subject of the real estate mortgage
pursuant to the annotation of lis pendens in the certificate of
title of the subject property.

Attorney’s fees by way of damages is likewise awarded for the
same reason that exemplary damages is awarded and this is fixed at P10,000.00.

WHEREFORE, the appealed decision is hereby SET ASIDE and a
new one entered ordering the reconveyance of the foreclosed property and the
payment of moral damages, exemplary damages and attorney’s fees as above
specified, with costs against private respondent Planters Development Bank.

SO ORDERED.

Narvasa, C.J., (Chairman), Padilla, Regalado, and Nocon, JJ., concur.

* Penned by Associate Justice Jose
A.R. Melo; concurred in by Associate Justices Ricardo L. Pronove, Jr. and
Alfredo L. Benipayo.

^[1]
Decision, p. 5, Rollo, p. 33.

^[2]
Ibid., pp. 29-30.

^[3]
Rollo, p. 15.

^[4]
Exhibits “H-2” and “H-3”.

^[5]
Exhibit “1”.

^[6]
TSN, June 1, 1987, pp. 15-16.

^[7]
CIVIL CODE, Art. 1253. If the debt
produces interest, payment of the principal shall not be deemed to have been
made until the interests have been covered.

^[8]
Exhibit “D-3”.

^[9]
135 SCRA 323 (1985), citing J.M. Tuazon and Co., Inc. vs. Javier, 31
SCRA 829 (1970).

^[10]
Lopez vs. Pan American World Airways, 16 SCRA 431 (1966).