Allied Banking Corporation v. Cheng
REITERATIONFacts
The Antecedents: Philippine Pacific Fishing Company, Inc. (Philippine Pacific) obtained a packing credit accommodation from Allied Banking Corporation (Allied Bank). To secure this, Marilyn Javier and spouses Cheng Yong and Lilia Gaw (spouses Cheng) executed a Continuing Guaranty/Comprehensive Surety. Philippine Pacific defaulted, leading to an intra-corporate dispute and a petition for receivership before the Securities and Exchange Commission (SEC). Subsequently, the parties agreed to a management committee instead of a receiver. Two days prior to the committee's constitution, Allied Bank and Philippine Pacific agreed to restructure the accommodation into a simple loan, evidenced by a promissory note dated August 12, 1981. Spouses Cheng signed this note as officers of Philippine Pacific and as co-makers in their personal capacities. Philippine Pacific again defaulted. To secure the obligation, spouses Cheng executed a chattel mortgage over their fishing vessel, "Jean III," in favor of Allied Bank. Allied Bank initiated extra-judicial foreclosure proceedings. Spouses Cheng filed an action for declaratory relief with injunctive remedies to prevent the sale, but the case was dismissed. The vessel, "Jean III," sank and was declared a total loss due to unnoticed defects from prolonged stay and abandonment. Spouses Cheng then filed a complaint for injunction, annulment of contracts, and damages, seeking to declare the promissory note and chattel mortgage void for lack of SEC management committee approval. They also sought damages for the loss of the vessel. Separately, spouses Cheng had mortgaged their San Juan property to secure a loan of Glee Chemicals Phils., Inc. (GCPI) with Allied Bank. Despite GCPI's full payment, Allied Bank refused to release the mortgage, claiming it also secured the spouses' obligation as co-makers on the August 12, 1981 promissory note, citing a stipulation extending the guaranty. Allied Bank initiated foreclosure of this real estate mortgage. Procedural History: The Regional Trial Court (RTC) declared both the promissory note dated August 12, 1981, and the chattel mortgage over the vessel "Jean III" invalid and unenforceable. It permanently enjoined the foreclosure of both the vessel and the San Juan property, ordered Allied Bank to pay spouses Cheng P4,000,000.00 for the loss of the vessel, P30,000.00 for moral and exemplary damages, and attorney's fees. The RTC denied Allied Bank's motion to dismiss the supplemental complaint. On appeal, the Court of Appeals (CA) reversed the RTC's decision, declaring the promissory note and chattel mortgage valid and enforceable, and holding that the loss of the vessel must be borne by spouses Cheng. The CA affirmed the RTC's ruling regarding the real estate mortgage over the San Juan property, finding it could not be foreclosed for the spouses' obligation as co-makers. Spouses Cheng moved for reconsideration, which the CA denied. The Petition: Allied Banking Corporation filed a petition for review on certiorari seeking to reverse the CA's decision in its entirety, particularly the affirmation of the RTC's ruling on the real estate mortgage. Spouses Cheng Yong and Lilia Gaw also filed a petition for review on certiorari, seeking to reverse the CA's decision and resolution, arguing the promissory note and chattel mortgage were invalid and that Allied Bank should bear the loss of the vessel.
Issue(s)
Whether the promissory note dated August 12, 1981, is valid and enforceable, and whether the chattel mortgage over the fishing vessel "Jean III" can be foreclosed. Whether the loss of the fishing vessel "Jean III" must be borne by Allied Bank or the spouses Cheng. Whether the real estate mortgage constituted over the spouses Cheng's San Juan property can be foreclosed to secure their obligation as co-makers of the promissory note dated August 12, 1981.
Ruling
The Supreme Court denied the consolidated petitions and affirmed the Court of Appeals' decision in toto. The promissory note dated August 12, 1981, and the chattel mortgage over the vessel "Jean III" were declared valid and enforceable. The loss of the vessel was ruled to be borne by the spouses Cheng. The real estate mortgage over the San Juan property was found not to secure the spouses' obligation as co-makers of the promissory note.
Ratio Decidendi
On the validity of the promissory note and chattel mortgage: The Court held that the parole evidence rule, as embodied in Rule 130, Section 9 of the Rules of Court, bars the admission of verbal stipulations that contradict the clear and unequivocal terms of a written contract. The promissory note itself did not contain any condition requiring ratification by the SEC-created management committee. Allied Bank was not a party to the SEC case, and the management committee was created after the promissory note was executed. Therefore, the verbal agreement allegedly made by spouses Cheng regarding the management committee's approval was inadmissible as it varied the terms of the written promissory note. Consequently, the chattel mortgage, being accessory to a valid principal obligation, was also deemed valid and enforceable. The Court agreed with the Court of Appeals that the trial court erred in admitting parole evidence to alter the clear terms of the promissory note. Furthermore, the Court ruled that Allied Bank's foreclosure of the chattel mortgage over the vessel "Jean III" was justified because the promissory note was valid. On the foreclosure of the chattel mortgage and the loss of the vessel: The Court held that the loss of the mortgaged chattel, which sank before foreclosure, must be borne by the spouses Cheng, as they were the owners of the vessel and it was incumbent upon them to insure it against loss. Since the vessel was uninsured, its loss fell upon the owners, not the mortgagee. The Court found no reversible error in the appellate court's decision on this matter. On the foreclosure of the real estate mortgage: The Court affirmed the findings of both the trial court and the Court of Appeals that the real estate mortgage executed by the spouses Cheng over their San Juan property could not be held to secure their obligation as co-makers of the promissory note dated August 12, 1981. Article 2126 of the Civil Code states that a mortgage subjects the property to the fulfillment of the obligation for which it was constituted. The agreement for the San Juan property was specifically to collateralize the loan of GCPI, which had already been paid in full. Therefore, the real estate mortgage, being accessory to the extinguished GCPI loan, was also extinguished and could not be extended to secure a different obligation of the spouses Cheng.
Main Doctrine
The parole evidence rule bars the admission of verbal agreements that contradict the clear and unequivocal terms of a written contract, such as a promissory note, unless an exception to the rule is proven. The loss of a mortgaged chattel, uninsured, must be borne by the owner-mortgagor.