Allied Banking Corporation v. Cheng
REITERATIONFacts
The Antecedents: Philippine Pacific Fishing Company, Inc. (Philippine Pacific), through its then Vice-Chairman and President Marilyn Javier, obtained a packing credit accommodation of P1,752,000.00 from Allied Banking Corporation (Allied Bank). To secure this obligation, Marilyn Javier and the spouses Cheng Yong and Lilia Gaw executed a Continuing Guaranty/Comprehensive Surety. Philippine Pacific later defaulted on the payment due to business reverses and alleged misuse of funds, leading to an intra-corporate dispute and a petition for receivership before the Securities and Exchange Commission (SEC). Subsequently, the spouses Cheng Yong and Lilia Gaw were elected president and treasurer of Philippine Pacific, respectively. Allied Bank and Philippine Pacific agreed to restructure the packing credit into a simple loan, evidenced by a promissory note dated August 12, 1981, which the spouses Cheng also signed as co-makers. The spouses Cheng then executed a chattel mortgage over their fishing vessel, "Jean III," to secure this note. Philippine Pacific again defaulted, prompting Allied Bank to apply for extra-judicial foreclosure of the chattel mortgage. The spouses Cheng filed an action for declaratory relief to prevent the sale, but the case was dismissed. The vessel, "Jean III," later sank and was declared a total loss. Procedural History: The spouses Cheng filed a complaint with the Regional Trial Court (RTC) at Makati, seeking an injunction, annulment of contracts, and damages, arguing that the promissory note dated August 12, 1981, was void for lack of SEC management committee approval and that the chattel mortgage was consequently invalid. They also sought to prevent the foreclosure of a real estate mortgage on their San Juan property, which Allied Bank claimed also secured the spouses' obligation as co-makers. The RTC declared both the promissory note and the chattel mortgage invalid and unenforceable, permanently enjoined the foreclosure of both the vessel and the San Juan property, and ordered Allied Bank to pay the spouses Cheng P4,000,000.00 for the loss of the vessel, plus damages and attorney's fees. Allied Bank appealed to the Court of Appeals (CA). The CA partially reversed the RTC decision, finding the promissory note and chattel mortgage valid and enforceable, and ruling that the loss of the vessel must be borne by the spouses Cheng. However, the CA affirmed the RTC's ruling that the real estate mortgage on the San Juan property did not secure the spouses' obligation as co-makers. The CA denied the spouses Cheng's motion for reconsideration. The Petition: Two petitions for review on certiorari under Rule 45 of the Rules of Court were filed. Allied Banking Corporation (G.R. No. 151040) seeks to set aside the CA's decision insofar as it upheld the trial court's injunction against foreclosing the real estate mortgage on the San Juan property, the order to release the mortgage, and the award of attorney's fees and costs. Allied Bank argues that the CA erred in not reversing the RTC decision in its entirety and specifically erred in upholding the respondents' assertion that the real estate mortgage could not be foreclosed with respect to Philippine Pacific's obligation. Cheng Yong and Lilia Gaw (G.R. No. 154109) seek to reverse the CA's decision and resolution, arguing that the CA erred in holding the promissory note and chattel mortgage valid and enforceable, and in ruling that the loss of the vessel must be borne by them. They contend that the promissory note was invalid due to non-fulfillment of a suspensive condition (SEC management committee ratification) and that the chattel mortgage, being an accessory, was also invalid. They further argue that Allied Bank should bear the loss of the vessel as it was in the bank's possession and control at the time of its sinking.
Issue(s)
Whether or not the promissory note dated August 12, 1981, is valid and enforceable. Whether or not the chattel mortgage over the fishing vessel "Jean III" can be foreclosed. Whether or not the real estate mortgage over the San Juan property also secured the spouses Cheng's obligation as co-makers of the promissory note dated August 12, 1981. Whether or not the loss of the fishing vessel "Jean III" must be borne by Allied Bank.
Ruling
The Supreme Court denied the consolidated petitions and affirmed the Court of Appeals' decision in toto. It held that the promissory note and the chattel mortgage are valid and enforceable, and the foreclosure of the chattel mortgage was justified. The Court ruled that the loss of the uninsured vessel must be borne by the spouses Cheng. It also affirmed that the real estate mortgage over the San Juan property was constituted solely to secure GCPI's loan, which had been fully paid, and thus could not be foreclosed to secure the spouses Cheng's obligation as co-makers.
Ratio Decidendi
On Issue 1 (Validity of Promissory Note): The Court held that the promissory note dated August 12, 1981, is valid and enforceable. It agreed with the Court of Appeals that the terms of the note were clear and left no doubt as to the intention of the parties, thus controlling under Article 1370 of the Civil Code. The Court found that the trial court erred in admitting parole evidence to the effect that the note's validity was conditioned upon ratification by the SEC-created management committee, as this violated the parole evidence rule (Rule 130, Section 9 of the Rules of Court). The Court emphasized that Allied Bank was not a party to the SEC case and that the management committee was created after the promissory note was executed, placing the note outside the committee's purview. Therefore, the note was not subject to any condition of ratification. On Issue 2 (Foreclosure of Chattel Mortgage): Consequently, the Court ruled that the chattel mortgage, being accessory to the valid promissory note, is also valid and enforceable. Allied Bank's foreclosure of the chattel mortgage over the vessel "Jean III" was therefore justified. The Court reiterated that the validity of the chattel mortgage is dependent on the validity of the principal obligation it secures. Since the promissory note was deemed valid, the chattel mortgage executed to secure it was also valid and could be subjected to foreclosure proceedings upon default. On Issue 3 (Scope of 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. Citing Article 2126 of the Civil Code, the Court stated that a mortgage directly subjects the property to the fulfillment of the obligation for which it was constituted. The agreement and receipt signed by Allied Bank's representative indicated that the San Juan property was collateral for GCPI's loan, and nothing else. Since GCPI's loan was paid in full, the real estate mortgage accessory to it was extinguished and could not be extended to secure another obligation. On Issue 4 (Loss of the Vessel): The Court ruled that the loss of the mortgaged chattel, the fishing vessel "Jean III," must be borne by the spouses Cheng, not by Allied Bank. As owners of the vessel, it was incumbent upon the spouses to insure it against loss. Since the vessel sank before the chattel mortgage could be foreclosed and was uninsured, its loss must be shouldered by the owners. The Court clarified that Allied Bank's possession and control of the vessel at the time of sinking were not established as a basis for liability, especially given the vessel's abandonment and the owner's responsibility to insure their property.
Main Doctrine
The Supreme Court reiterated the application of the Parole Evidence Rule, holding that when the terms of a contract are clear and unequivocal, the literal meaning of its stipulations shall control, and extrinsic evidence attempting to vary or contradict the written agreement is inadmissible. The Court further affirmed that a mortgage contract is accessory to the principal obligation it secures, and its validity is dependent on the principal obligation. Consequently, the loss of an uninsured mortgaged chattel must be borne by its owner.