G.R. No. L-22957 and L-23737 August 31, 1971
DEVELOPMENT BANK OF THE PHILIPPINES, plaintiff-appellant, vs. NATIONAL MERCHANDISING CORPORATION, ET AL., defendants-appellees, FELIX DUMARAN, ET AL., intervenors-appellants.

FACTS

The Development Bank of the Philippines (DBP) filed a collection suit against National Merchandising Corporation (NAMERCO) and the Sycips to recover the unpaid balance on four promissory notes, totaling P554,632.61, secured by chattel mortgages. The defendants admitted executing the notes but raised affirmative defenses, alleging the contracts were simulated. They claimed the mortgaged farm equipment had already been sold to farmers, making these farmers the real debtors, and that the notes merely represented DBP’s 50% advance payment for these farmers under a separate financing scheme. They also counterclaimed for over a million pesos in damages, arguing DBP foreclosed the mortgages in bad faith by selling all properties in one lot for a shockingly low price (P67,400 for properties valued at over P1.1 million), deliberately suppressing their value.
DBP countered that the loans were obtained by NAMERCO for its exclusive benefit, with NAMERCO representing itself as the owner of the chattels in the sworn mortgage contracts. It asserted the foreclosure sales were regular and that defendants, who did not participate in the bidding, could not contest the price. The trial court dismissed DBP’s complaint and upheld the defendants’ counterclaim, awarding them substantial damages. Both DBP and intervenors (claiming to be the real farmer-owners) appealed.

ISSUE

The core issues were: (1) Whether NAMERCO and the Sycips were liable on the promissory notes; (2) Whether DBP acted in bad faith in foreclosing the mortgages and conducting the auction sales; and (3) Whether the defendants were entitled to damages on their counterclaim.

RULING

The Supreme Court reversed the trial court’s decision. On the liability, the Court held NAMERCO and the Sycips were jointly and severally liable on the promissory notes. The evidence indisputably established their execution of the notes and mortgage contracts, wherein they unequivocally bound themselves as obligors. Their defense of simulation was unsubstantiated; the documents were clear and contained sworn declarations of ownership and obligation. The legal logic is that a party is bound by the clear terms of a contract they have voluntarily signed, and they cannot later evade liability by claiming the contract does not reflect their true intent without clear and convincing proof of such simulation.
Regarding the foreclosure, the Court ruled DBP acted within its rights and committed no actionable wrong. The chattel mortgage contracts authorized DBP to foreclose and sell the properties at public auction. The argument that selling the chattels en bloc instead of piecemeal constituted bad faith was rejected. The Court found no evidence that DBP deliberately sold them as one lot to depress the price, and noted the defendants never objected during the sales nor presented convincing proof that a piecemeal sale would have yielded a significantly higher return. However, on equitable grounds, the majority held that while DBP was not legally at fault for the auction price, the defendants were entitled to have the actual net proceeds DBP later obtained from its subsequent disposal of the foreclosed chattels credited against their debt. The case was remanded solely to determine this actual net sale price for proper credit.
Consequently, the award of damages and attorney’s fees to the defendants was set aside for lack of basis, as DBP’s actions were legally justified. The intervenors’ appeal was dismissed for lack of merit, as the primary obligation remained with the signatories to the notes.