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G.R. No. 164549 - Philippine National Bank v. Spouses Agustin and Pilar Rocamora

G.R. No. 164549 - Philippine National Bank v. Spouses Agustin and Pilar Rocamora



[G.R. NO. 164549 : September 18, 2009]




We resolve in this Petition for Review on Certiorari 1 the legal propriety of the deficiency judgment that the petitioner Philippine National Bank (PNB) seeks against the respondents - the spouses Agustin and Pilar Rocamora (spouses Rocamora).


On September 25, 1981, the spouses Rocamora obtained a loan from PNB in the aggregate amount of P100,000.00 under the Cottage Industry Guarantee and Loan Fund (CIGLF). The loan was payable in five years, under the following terms: P35,000 payable semi-annually and P65,000 payable annually. In addition to the principal amount, the spouses Rocamora agreed to pay interest at the rate of 12% per annum, plus a penalty fee of 5% per annum in case of delayed payments. The spouses Rocamora signed two promissory notes2 evidencing the loan.

To secure their loan obligations, the spouses Rocamora executed two mortgages: a real estate mortgage3 over a property covered by Transfer Certificate of Title No. 7160 in the amount of P10,000, and a chattel mortgage4 over various machineries in the amount of P25,000. Payment of the remaining P65,000 was under the CIGLF guarantee, with the spouses Rocamora paying the required guarantee fee.

Both the promissory note and the real estate mortgage deed contained an escalation clause that allowed PNB to increase the 12% interest rate at anytime without notice, within the limits allowed by law. The pertinent portion of the promissory note stated:

For value received, we, jointly and severally, promise to pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its office in Pto. Princesa City, Philippines, the sum of xxx together with interest thereon at the rate of 12% per annum until paid, which interest rate the Bank may at any time, without notice, raise within the limits allowed by law, and I/we also agree to pay jointly and severally, 5% per annum penalty charge, by way of liquidated damages, should this note be unpaid or is not renewed on due date. [Emphasis supplied.]

While paragraph (k) of the real estate mortgage deed provided:


The MORTGAGEE reserves the right to increase the interest rate charged on the obligation secured by this mortgage including any amount which it may have advanced within the limits allowed by law at any time depending on whatever policy it may adopt in the future; Provided, that the interest rate on the accommodation/s secured by the mortgage shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in that maximum interest rate. [Emphasis supplied.]

The spouses Rocamora only paid a total of P32,383.655 on the loan. Hence, the PNB commenced foreclosure proceedings in August and October 1990. The foreclosure of the mortgaged properties yielded P75,500.00 as total proceeds.

After the foreclosure, PNB found that the recovered proceeds and the amounts the spouses Rocamora previously paid were not sufficient to satisfy the loan obligations. PNB thus filed, on January 18, 1994, a complaint for deficiency judgment6 before the Regional Trial Court (RTC) of Puerto Princesa City, Branch 48. The PNB alleged that as of January 7, 1994, the outstanding balance of the spouses Rocamora's loan (including interests and penalties) was P206,297.47, broken down as follows:

Principal '. ............

P 79,484.65

Total interest due up to 01-07-94 '. .


Total penalty due up to 01-07-94 '. .



P 206,297.477

The PNB claimed that the outstanding principal balance as of foreclosure date (September 19, 1990) was P79,484.65, plus interest and penalties, for a total due and demandable obligation of P250,812.10. Allegedly, after deducting the P75,500 proceeds of the foreclosure sale, the spouses Rocamora still owed the bank P206,297.47.

The spouses Rocamora refused to pay the amount claimed as deficiency. They alleged that the PNB "practically created" the deficiency by (a) increasing the interest rates from 12% to 42% per annum, and (b) failing to immediately foreclose the mortgage pursuant to Presidential Decree No. 385 (PD 385 or the Mandatory Foreclosure Law) to prevent the interest and penalty charges from accruing.

The RTC dismissed PNB's complaint in its decision dated November 10, 1999.8 The trial court invalidated the escalation clause in the promissory note and the resulting increased interest rates. The court also rejected PNB's reason for the delay in commencing foreclosure proceedings, ruling that the delay was contrary to the immediate and mandatory foreclosure that PD 385 required. The finding that the bank's actions were contrary to law, justice, and morals justified the award of actual, moral, and exemplary damages to the spouses Rocamora. Attorney's fees and costs of suit were also ordered paid.9

Except for modifications in the awarded damages, the Court of Appeals (CA) decision of March 23, 2004 affirmed the RTC ruling.10 The CA held that the PNB effectively negated the principle of mutuality of contracts when it increased the interest rates without the spouses Rocamora's conformity. The CA also found the long delay in the foreclosure of the mortgage, apparently a management lapse, prejudicial to the spouses Rocamora's interests and contrary as well to law and justice. More importantly, the CA found insufficient evidence to support the P206,297.47 deficiency claim; the bank's testimonial and documentary evidence did not support the deficiency claim that, moreover, was computed based on bloated interest rates. The CA maintained these rulings despite the motion for reconsideration PNB filed;11 hence, PNB's present recourse to this Court.


In insisting that it is entitled to a deficiency judgment of P206,297.47, PNB argues that the RTC and the CA erred in invalidating the escalation clause in the parties' agreement because it fully complied with the requirements for a valid escalation clause under this Court's following pronouncement in Banco Filipino Savings and Mortgage Bank v. Navarro:12]

It is now clear that from March 17, 1980 [the effectivity date of Presidential Decree No. 1684 allowing the increase in the stipulated rate of interest], escalation clauses, to be valid, should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board." [Emphasis supplied.]

The PNB posits that the presence of a "de-escalation clause" (referring to the second of the above requirements, which was designed to prevent a resulting one-sided situation on the part of the lender-bank) in the real estate mortgage deed rules out any violation of the principle of mutuality of contracts.

The PNB also contends that it did not unreasonably delay the institution of foreclosure proceedings by acting three years after the spouses Rocamora defaulted on their obligation. Under Article 1142 of the Civil Code, a mortgage action prescribes in 10 years; the same 10-year period is provided in Article 1144 (1) for actions based on written contracts. Thus, the PNB alleges that it had 10 years from 1987 (the time when the spouses Rocamora allegedly defaulted from paying their loan obligation) to institute the foreclosure proceedings. Its decision to foreclose in 1990 - three years after the default - should not be taken against it, especially since the delay was prompted by the bank's sincere desire to assist the spouses Rocamora.

Additionally, the PNB claims that the decision to foreclose is entirely the bank's prerogative. The provisions of PD 385 should not be read as a limitation affecting the right of banks to foreclose within the 10-year period granted under the Civil Code. While PD 385 requires government banks to immediately foreclose mortgages under specified conditions, the provision does not limit the period within which the bank can foreclose; to hold otherwise would be contrary to the stated objectives of PD 385 to enhance the resources of government financial institutions and to facilitate the financing of essential development programs and projects.

On the basis of these arguments, the PNB contests the damages awarded to the spouses Rocamora, as the PNB had no malice, nor any furtive design: when it increased the interest rates pursuant to the escalation clause; when it decided to foreclose the mortgages only in 1990; and when it sought to claim the deficiency. PNB claimed all these to be proper acts made in the exercise of its rights.

Opposing the PNB's arguments, the spouses Rocamora allege the following:

A. The PNB failed to sufficiently and satisfactorily prove the amount of P250,812.10, claimed to be the total obligation due at the time of foreclosure, against which the proceeds of the foreclosure sale (P75,500.00) were deducted and which became the basis of the bank's deficiency claim (P206,297.47);

b. The "ballooning" of the spouses Rocamora's loan obligation was the PNB's own doing when it increased the interest rates and failed to immediately foreclose the mortgages;

c. The PNB's unilateral increase of interest rates violated the principle of mutuality of contracts;

d. The PNB failed to comply with the immediate and mandatory foreclosure required under PD 385; andcralawlibrary

e. The PNB failed to call on the CIGLF which secured the payment of P65,000.00 of the loan.


We find no basis to reverse the CA's decision and, consequently, deny the petition.

Proof of Deficiency Claim Necessary

The foreclosure of chattel and real estate mortgages is governed by Act Nos. 1508 and 3135, respectively. Although both laws do not contain a provision expressly or impliedly authorizing the mortgagee to recover the deficiency resulting after the foreclosure proceeds are deducted from the principal obligation, the Court has construed the laws' silence as a grant to the mortgagee of the right to maintain an action for the deficiency; the mortgages are given merely as security, not as settlement or satisfaction of the indebtedness.13

As in any claim for payment of money, a mortgagee must be able to prove the basis for the deficiency judgment it seeks. The right of the mortgagee to pursue the debtor arises only when the proceeds of the foreclosure sale are ascertained to be insufficient to cover the obligation and the other costs at the time of the sale.14 Thus, the amount of the obligation prior to foreclosure and the proceeds of the foreclosure are material in a claim for deficiency.

In this case, both the RTC and the CA found that PNB failed to prove the claimed deficiency; its own testimonial and documentary evidence in fact contradicted one another. The PNB alleged that the spouses Rocamora's obligation at the time of foreclosure (September 19, 1990) amounted to P250,812.10, yet its own documentary evidence15 showed that, as of that date, the total obligation was only P206,664.34; the PNB's own witness, Mr. Reynaldo Caso, testified that the amount due from the spouses Rocamora was only P206,664.34.

At any rate, whether the total obligation due at the time of foreclosure was P250,812.10 as PNB insisted or P206,664.34 as its own record disclosed, our own computation of the amounts involved does not add up to the P206,297.47 PNB claimed as deficiency.16 We find it significant that PNB has been consistently unable to provide a detailed and credible accounting of the claimed deficiency. What appears clear is that after adding up the spouses Rocamora's partial payments and the proceeds of the foreclosure, the PNB has already received a total of P107,883.68 as payment for the spouses Rocamora's P100,000.00 loan; the claimed P206,297.47 deficiency consisted mainly of interests and penalty charges (or about 61.5% of the amount claimed). The spouses Rocamora posit that their loan would not have bloated to more than double the original amount if PNB had not increased the interest rates and had it immediately foreclosed the mortgages.

Escalation clauses do not authorize the unilateral increase of interest rates

Escalation clauses are valid and do not contravene public policy.17 These clauses are common in credit agreements as means of maintaining fiscal stability and retaining the value of money on long-term contracts. To avoid any resulting one-sided situation that escalation clauses may bring, we required in Banco Filipino18] the inclusion in the parties' agreement of a de-escalation clause that would authorize a reduction in the interest rates corresponding to downward changes made by law or by the Monetary Board.

The validity of escalation clauses notwithstanding, we cautioned that these clauses do not give creditors the unbridled right to adjust interest rates unilaterally.19 As we said in the same Banco Filipino case, any increase in the rate of interest made pursuant to an escalation clause must be the result of an agreement between the parties.20 The minds of all the parties must meet on the proposed modification as this modification affects an important aspect of the agreement. There can be no contract in the true sense in the absence of the element of an agreement, i.e., the parties' mutual consent. Thus, any change must be mutually agreed upon, otherwise, the change carries no binding effect.21 A stipulation on the validity or compliance with the contract that is left solely to the will of one of the parties is void; the stipulation goes against the principle of mutuality of contract under Article 1308 of the Civil Code.22 As correctly found by the appellate court, even with a de-escalation clause, no matter how elaborately worded, an unconsented increase in interest rates is ineffective if it transgresses the principle of mutuality of contracts.

Precisely for this reason, we struck down in several cases - many of them involving PNB - the increase of interest rates unilaterally imposed by creditors. In the 1991 case of PNB v. CA and Ambrosio Padilla,23 we declared:

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void. Hence, even assuming that the P1.8 million loan agreement between the PNB and private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it." Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

We repeated this rule in the 1994 case of PNB v. CA and Jayme-Fernandez24 and the 1996 case of PNB v. CA and Spouses Basco. 25 Taking no heed of these rulings, the escalation clause PNB used in the present case to justify the increased interest rates is no different from the escalation clause assailed in the 1996 PNB case;26 in both, the interest rates were increased from the agreed 12% per annum rate to 42%. We held:

PNB successively increased the stipulated interest so that what was originally 12% per annum became, after only two years, 42%. In declaring the increases invalid, we held:

We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts.

x    x    x

In this case no attempt was made by PNB to secure the conformity of private respondents to the successive increases in the interest rate. Private respondents' assent to the increases cannot be implied from their lack of response to the letters sent by PNB, informing them of the increases. For as stated in one case, no one receiving a proposal to change a contract is obliged to answer the proposal.27 [Emphasis supplied.]

On the strength of this ruling, PNB's argument - that the spouses Rocamora's failure to contest the increased interest rates that were purportedly reflected in the statements of account and the demand letters sent by the bank amounted to their implied acceptance of the increase - should likewise fail.

Evidently, PNB's failure to secure the spouses Rocamora's consent to the increased interest rates prompted the lower courts to declare excessive and illegal the interest rates imposed. To go around this lower court finding, PNB alleges that the P206,297.47 deficiency claim was computed using only the original 12% per annum interest rate. We find this unlikely. Our examination of PNB's own ledgers, included in the records of the case, clearly indicates that PNB imposed interest rates higher than the agreed 12% per annum rate.28 This confirmatory finding, albeit based solely on ledgers found in the records, reinforces the application in this case of the rule that findings of the RTC, when affirmed by the CA, are binding upon this Court.ςηαñrοblεš  Î½Î¹r†υαl  lαω  lιbrαrÿ

PD 385 mandates immediate foreclosure of collaterals and securities when the arrearages amount to at least 20% of the total outstanding obligation

Another reason that militates against the deficiency claim is PNB's own admitted delay in instituting the foreclosure proceedings.29

Section 1 of PD 385 states:

Section 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from the issuance of this Decree, to foreclose the collaterals and/or securities for any loan, credit, accommodation, and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty percent (20%) of the total outstanding obligations, including interest and other charges, as appearing in the books of account and/or related records of the financial institution concerned. This shall be without prejudice to the exercise by the government financial institutions of such rights and/or remedies available to them under their respective contracts with their debtors, including the right to foreclose on loans, credits, accommodations and/or guarantees on which the arrearages are less than twenty percent (20%). [Emphasis supplied.]

Under PD 385, government financial institutions - which was PNB's status prior to its full privatization in 1996 - are mandated to immediately foreclose the securities given for any loan when the arrearages amount to at least 20% of the total outstanding obligation.30

As stated in the narrated facts, PNB commenced foreclosure proceedings in 1990 or three years after the spouses defaulted on their obligation in 1987. On this factual premise, the PNB now insists as a legal argument that its right to foreclose should not be affected by the mandatory tenor of PD 385, since it exercised its right still within the 10-year prescription period allowed under Articles 1142 and 1144 (1) of the Civil Code.

PNB's argument completely misses the point. The issue before us is the effect of the delay in commencing foreclosure proceedings on PNB's right to recover the deficiency, not on its right to foreclose. The delay in commencing foreclosure proceedings bears a significant function in the deficiency amount being claimed, as the amount undoubtedly includes interest and penalty charges which accrued during the period covered by the delay. The depreciation of the mortgaged properties during the period of delay must also be factored in, as this affects the proceeds that the mortgagee can recover in the foreclosure sale, which in turn affects its deficiency claim. There was also, in this case, the four-year gap between the foreclosure proceedings and the filing of the complaint for deficiency judgment - during which time interest, whether at the 12% per annum rate or higher, and penalty charges also accrued. For the Court to grant the PNB's deficiency claim would be to award it for its delay and its undisputed disregard of PD 385.

The Award for Damages

Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the defendant acted fraudulently or in bad faith or in wanton disregard of his contractual obligations.31 The breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive. Likewise, a breach of contract may give rise to exemplary damages only if the guilty party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.32

We are not sufficiently convinced that PNB acted fraudulently, in bad faith, or in wanton disregard of its contractual obligations, simply because it increased the interest rates and delayed the foreclosure of the mortgages. Bad faith cannot be imputed simply because the defendant acted with bad judgment or with attendant negligence. Bad faith is more than these; it pertains to a dishonest purpose, to some moral obliquity, or to the conscious doing of a wrong, a breach of a known duty attributable to a motive, interest or ill will that partakes of the nature of fraud.33 Proof of actions of this character is undisputably lacking in this case. Consequently, we do not find the spouses Rocamora entitled to an award of moral and exemplary damages. Under these circumstances, neither should they recover attorney's fees and litigation expense.34 These awards are accordingly deleted.

WHEREFORE, we DENY the petitioner's Petition for Review on Certiorari, and MODIFY the March 23, 2004 decision of the Court of Appeals in CA-G.R. CV No. 66088 by DELETING the moral and exemplary damages, attorney's fees, and litigation costs awarded to the respondents. All other aspects of the assailed decision are AFFIRMED. Costs against the petitioner.



* Designated additional Member of the Second Division per Special Order No. 691 dated September 4, 2009.

** Designated Acting Chairperson of the Second Division per Special Order No. 690 dated September 4, 2009.

1 Filed under Rule 45 of the Rules of Court; rollo, pp. 22-48.

2 Promissory Note (PN) Nos. CIGLF 01/81 and 02/81; id., pp. 60-61.

3 Id., pp. 62-63.

4 Id., p. 64.

5 Listed below are the payments made by the spouses Rocamora:


Date of Payment

Amount Paid

On PN No. CIGLF 01/81for the P35,000 loan:

March 25, 1982


September 25, 1982


On PN No. CIGLF 02/81 for the P65,000 loan:

September 5, 1982



P 32,383.65

6 Docketed as Civil Case No. 2675.

7 Statement of Account as of January 7, 1994; rollo, p. 70.

8 Id., pp. 71-80.

9 The dispositive part of the RTC decision of November 10, 1999 reads:

WHEREFORE, premises considered, the instant complaint is hereby dismissed for lack of merit and finding the counterclaim meritorious, the [PNB] is ordered to pay the [spouses Rocamora] Two Hundred Thousand Pesos (P200,000.00) as damages for breach of contract and for acting contrary to law, justice, and morals, One Hundred Thousand Pesos (P100,000.00) as exemplary damages, One Hundred Thousand (P100,000.00) as moral damages and Fifty Thousand Pesos (P50,000.00) as attorney's fees; and to pay the costs of suit.

10 Rollo, pp. 10-16; the dispositive part of the CA Decision of March 23, 2004 reads:

WHEREFORE, in view of the foregoing discussions, the assailed decision is hereby MODIFIED as follows:

1. The complaint is hereby ordered DISMISSED;

2. [PNB is] ordered to pay the [spouses Rocamora] the sum of Thirty Thousand Pesos (P30,000.00) as moral damages; Thirty Thousand Pesos as exemplary damages (P30,000.00); and Fifty Thousand Pesos (P50,000.00) as attorney's fees;

3.Cost of suit.

11 CA Resolution dated July 12, 2004; id., p. 18.

12 G.R. No. L-46591, July 28, 1987, 152 SCRA 346.

13 We also stated that when the law intends to foreclose the right of a creditor to sue for any deficiency resulting from a foreclosure of security given to guarantee an obligation, it so expressly provides such as with respect to the sale of the thing pledged (see Article 2115 of the Civil Code) and foreclosure of chattel mortgage on personal property sold on installment basis (see Article 1484, par. 3 of the Civil Code); Superlines Transportation Company v. ICC Leasing and Financing Corporation, G.R. No. 150673, February 28, 2003, 398 SCRA 508.

14 See PNB v. CA, G.R. No. 121739, June 14, 1999, 308 SCRA 229; and Development Bank of the Philippines v. Vda. De Moll, G.R. No. L-25807, January 31, 1972, 43 SCRA 82.

15 Statement of Account dated October 23, 1996; records, p. 269.

16 P250,812.10 less P75,500 (proceeds of foreclosure) is P175,312.10, while P206,664.34 less P75,500 is P131,164.34.

17 Spouses Almeda v. CA and PNB, G.R. No. 113412, April 17, 1996, 256 SCRA 292; Insular Bank of Asia & America v. Salazar, G.R. No. L-82082, March 25, 1988, 159 SCRA 133.

18 Supra note 12.

19 Ibid.

20 PNB v. CA and Spouses Basco, G.R. No. 109563, July 9, 1996, 258 SCRA 549, citing Banco Filipino, supra note 12.

21 Floirendo v. Metropolitan Bank and Trust Company, G.R. No. 148325, September 3, 2007, 532 SCRA 43.

22 The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

23 G.R. No. 88880, April 30, 1991, 196 SCRA 536.

24 G.R. No. 107569, November 8, 1994, 238 SCRA 20.

25 Supra note 20.

26 The pertinent portion of the promissory note in the 1996 PNB case read:

For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY (P15,000.00), Philippine Currency, together with interest thereon at the rate of 12 % per annum until paid, which interest rate the Bank may at any time without notice, raise within the limits allowed by law, and I/we also agree to pay jointly and severally ____% per annum penalty charge, by way of liquidated damages should this note be unpaid or is not renewed on due dated.

27 Ibid.

28 Records, pp. 295-296.

29 Id., p. 380.

30 Records reveal that PNB admitted that the outstanding obligation of the spouses Rocamora before foreclosure was beyond the 20% requirement in PD 385; see records, pp. 209 and 359.

31 CIVIL CODE, Article 2220.

32 Pilipinas Shell Petroleum Corporation v. John Bordman Ltd. of Iloilo, Inc., G.R. No. 159831, October 14, 2005, 473 SCRA 151.

33 Francisco v. Ferrer, G.R. No. 142029, February 28, 2001, 353 SCRA 261; Cojuangco, Jr. v. CA, G.R. No. 119398, July 2, 1999, 309 SCRA 602.

34 Equitable PCI Bank v. Ng Sheung Ngor, G.R. No. 171545, December 19, 2007, 541 SCRA 223.

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