G.R. No. 29196 , December 29, 1928
PHILIPPINE NATIONAL BANK, plaintiff-appellant, vs. GABINO BARRETTO P. PO E. JAP, ET AL., defendants-appellees.

Ponente: J. Ostrand

FACTS

On May 3, 1919, defendant Gabino Barretto P. Po E. Yap executed a real estate mortgage over a parcel of land in Tacloban, Leyte, in favor of the Philippine National Bank (PNB). The mortgage document, executed on a printed form, stated it was to secure credits, loans, and overdrafts, with the total indebtedness secured not to exceed P60,000 plus 7% interest per annum. The evidence established that this mortgage was given to secure Barretto’s guaranty of the indebtedness of the partnership Gabino Barretto & Co., Ltd. to PNB. Subsequently, PNB foreclosed a separate mortgage on Barretto’s Manila property to satisfy the same partnership debt, resulting in a deficiency judgment of P319,913.05. PNB then filed the present action to foreclose the Tacloban mortgage to recover this deficiency. In the interim, Barretto had sold the Tacloban property to Po Tecsi (later substituted by his heir, Po Son Suy), and the mortgage was annotated on the title. The trial court dismissed the complaint, holding that the mortgage only secured a specific P60,000 credit which Barretto never received, rendering the mortgage ineffective.

ISSUE

Whether the real estate mortgage on the Tacloban property can be foreclosed to satisfy the deficiency judgment from the foreclosure of the Manila property, given that the property had been sold to a third party.

RULING

Yes, but recovery is limited. The Supreme Court reversed the trial court’s decision. It held that explanatory evidence was properly admitted to show the mortgage’s true purpose: to secure Barretto’s guaranty of the partnership’s indebtedness to PNB, which was the same debt involved in the Manila foreclosure. However, considering the transaction was in the nature of a suretyship (requiring strict construction in favor of the surety) and that the property was now owned by a third party (an innocent purchaser for value), the mortgage could only be enforced to the extent clearly and expressly agreed upon. The Court limited PNB’s recovery under this mortgage to the principal sum of P60,000, plus 7% interest per annum from the date of the filing of the complaint (August 6, 1925). The other boilerplate clauses in the printed mortgage form (e.g., covering costs of collection, other expenses) were deemed not binding against the current owner as they were inconsistent with the mortgage’s evident primary purpose. The Court ordered the foreclosure of the Tacloban property if the defendants failed to pay the specified amount within four months.