Case Digest: SPOUSES VIOLA v. EQUITABLE PCI BANK, INC.

SPOUSES LEOPOLDO S. VIOLA and MERCEDITA VIOLA v.
EQUITABLE PCI BANK, INC.

572 SCRA 245 (2008)

A mortgage must sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage

Spouses Leopoldo and Mercedita Viola of Leo-Mers Commercial, Inc. obtained a loan through a credit line facility from the Philippine Commercial International Bank (PCI Bank), which was later merged with Equitable Bank and became known as Equitable PCI Bank, Inc. To secure the payment of the loan, a ―Real Estate Mortgage‖ in favor of PCI Bank was executed. Spouses Viola made partial payments therein; PCI Bank contends however, that Spouses Viola made no further payments despite demands. Thus, PCI Bank extrajudicially foreclosed the mortgage before the Regional Trial Court (RTC) and that the mortgaged properties were sold at a public auction.

Spouses Viola filed a complaint for annulment of foreclosure sale, accounting and damages before the RTC. They alleged that they had made substantial payments of P3,669,210.67, receipts of which were issued without PCI Bank specifying “whether the payment was for interest, penalty or the principal obligation”. Based on PCI Bank‘s statement of account, not a single centavo of their payments was applied to the principal obligation, that the foreclosure proceedings and auction sale were null and void because the mortgage debt is only P2,224,073.31, for the principal obligation, and P1,455,137.36, on the interest, but the mortgaged properties were sold to satisfy an inflated of P4,783,254.69, plus 3% penalty fee per month year and 15% interest per year, which amounted to P14,024,623.22.

The RTC upheld the position of the PCI Bank but reduced the interest of the principal. Spouses Viola filed a Motion for Reconsideration but it was denied. On appeal, the Court of Appeals (CA) dismissed the petition for lack of merit.

ISSUE:

Whether or not the mortgage contract also secured the penalty fee per month on the outstanding amount as stipulated in the Credit Line Agreement.

HELD:

A mortgage must sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage.

In the case at bar, the parties executed two separate documents on March 31, 1997 – the Credit Line Agreement granting the Client a loan through a credit facility in the maximum amount of P4,700,000.00, and the Real Estate Mortgage contract securing the payment thereof.

As the Credit Line Agreement specifically defined ―a penalty fee of three percent (3%) per month of the outstanding amount to be computed from the day deficiency is incurred up to the date of full payment thereon,‖ the provision of the mortgage contract does not specifically mention that.

Since an action to foreclose ―must be limited to the amount mentioned in the mortgage‖ and the penalty fee of 3% per month of the outstanding obligation is not mentioned in the mortgage, it must be excluded from the computation of the amount secured by the mortgage.

―Penalty fee‖ is entirely different from ―bank charges‖. The phrase ―bank charges‖ is normally understood to refer to compensation for services. A ―penalty fee‖ is likened to a compensation for damages in case of breach of the obligation. Being penal in nature, such fee must be specific and fixed by the contracting parties, unlike in the present case which slaps a 3% penalty fee per month of the outstanding amount of the obligation.

Moreover, the ―penalty fee‖ does not belong to the species of obligation enumerated in the mortgage contract, namely: “loans, credit and other banking facilities obtained x x x from the Mortgagee, . . . including the interest and bank charges, . . . the costs of collecting the same and of taking possession of and keeping the mortgaged properties, and all other expenses to which the Mortgagee may be put in connection with or as an incident to this mortgage . . .”

In Philippine Bank of Communications v. Court of Appeals which raised a similar issue, the Court held that there is also sufficient authority to declare that any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it.