G.R. No. 122079 June 27, 1997
SPOUSES ANTONIO E.A. CONCEPCION and MANUELA S. CONCEPCION, petitioners, vs. HON. COURT OF APPEALS, HOME SAVINGS BANK AND TRUST COMPANY, and as nominal party-defendants, THE SHERIFF ASSIGNED TO SAN JUAN, METRO MANILA, and who conducted the auction sale and the REGISTER OF DEEDS or his representative of San Juan, Metro Manila, and ASAJE REALTY CORPORATION, respondents.

FACTS

On January 17, 1979, Home Savings Bank and Trust Company granted spouses Antonio and Manuela Concepcion a loan of P1,400,000.00, secured by a promissory note and a real estate mortgage over their property in Greenhills, San Juan. The promissory note authorized the bank to unilaterally increase the interest rate without advance notice in the event of increases in the Central Bank’s rediscount rate or interest rates on deposits/loans. Pursuant to this clause, the bank increased the interest rate from 16% to 21% (February 1980), then to 30% (October 1984), and finally to 38% (November 1984), correspondingly increasing the quarterly amortizations. The Concepcions paid the increased amortizations under protest until January 1985 but subsequently defaulted on the higher amortization starting April 1985. After demand letters, the bank extrajudicially foreclosed the mortgage. The notice of sale was published and sent to the Concepcions at addresses in Quezon City and San Juan. The auction proceeded on June 11, 1986, with the bank as the highest bidder. The Concepcions failed to redeem the property within the statutory period, leading the bank to consolidate its title. On July 31, 1987, the bank sold the property to Asaje Realty Corporation. Meanwhile, on July 29, 1987, the Concepcions filed an action to cancel the foreclosure sale, nullify the consolidation of title and the unilateral interest rate increases, and claim damages. They later amended the complaint to implead Asaje Realty and seek cancellation of the sale to it. The Regional Trial Court dismissed the complaint and awarded attorney’s fees to the defendants. The Court of Appeals affirmed the dismissal but deleted the award of attorney’s fees. The Concepcions elevated the case to the Supreme Court, contending they were denied their contractually stipulated right to personal notice of the foreclosure.

ISSUE

Whether the bank complied with the contractual stipulation on notice in the mortgage contract, and what are the consequences of any non-compliance, particularly regarding the validity of the foreclosure sale and the subsequent sale to an innocent purchaser.

RULING

The Supreme Court found merit in the petition regarding the notice issue. The mortgage contract stipulated that all correspondence, including notifications of any judicial or extrajudicial actions, shall be sent to the mortgagor at the address given or at a subsequently provided written address, and such sending would constitute valid notice. The Court held that this stipulation, not being contrary to law, morals, good customs, public order, or public policy, is the law between the parties and must be faithfully complied with. The bank’s failure to send the foreclosure notice to the new U.S. address provided in writing by the Concepcions on October 11, 1983, constituted an inexcusable breach of its covenant. The bank’s interpretation that it had an alternative to send correspondence to either the old or new address was rejected as illogical and contrary to the provision’s purpose of apprising the mortgagors to safeguard their rights. Neither the Concepcions’ subsequent opportunity to redeem nor failed payment negotiations justified this breach.
However, the Court ruled that the Concepcions could no longer seek reconveyance of the property from Asaje Realty Corporation, as it was an innocent purchaser in good faith who bought the property when title was already in the bank’s name and was under no obligation to investigate beyond the face of the certificate of title.
Furthermore, the Court upheld the Court of Appeals’ invalidation of the bank’s unilateral interest rate increases. While escalation clauses are generally valid, the increases imposed were invalid because the bank failed to prove that the increases were solely due to Central Bank adjustments and not arbitrary. The promissory note’s authorization was conditioned on increases in the Central Bank’s rediscount rate or interest rates on savings/time deposits/loans. The bank did not present evidence to show the increases were directly and exclusively tied to such CB adjustments. Therefore, the increases from 16% to 21%, 30%, and 38% were declared void. Consequently, the bank could still be held accountable for the bid price received from Asaje Realty Corporation over and above the amount legally due based on the original 16% interest rate.