G.R. No. 148320 ; June 15, 2006
PILIPINAS BANK, Petitioner, vs. GLEE CHEMICAL LABORATORIES, INC., Respondent.

FACTS

Respondent Glee Chemical Laboratories, Inc. applied for and was granted an P800,000.00 loan by petitioner Pilipinas Bank, secured by a real estate mortgage over its property. The mortgage deed, signed by respondent’s president, Cheng Yong, stated the loan’s purpose was for respondent’s additional working capital. Respondent alleged the loan proceeds were never delivered to it but were instead applied to settle the debt of a third party, Rustica Tan. This application was based on a “Third-Party Liability” clause inserted in the mortgage deed, making the mortgage security for Tan’s obligations.
Petitioner later sought to foreclose both the real estate mortgage and a chattel mortgage over respondent’s properties, the latter stemming from a separate document described as an amendment executed by Rustica Tan alone, purporting to mortgage respondent’s chattels as security for an additional loan. Respondent filed a complaint for annulment of contract and damages, asserting it never consented to securing Tan’s debts.

ISSUE

Whether the Real Estate Mortgage and the subsequent amendment with chattel mortgage are valid and binding contracts upon the respondent.

RULING

The Supreme Court denied the petition and affirmed the lower courts’ decisions declaring the mortgages null and void. The core legal issue revolved around the validity of the “Third-Party Liability” stipulation in the real estate mortgage. For a stipulation pour autrui (in favor of a third party) to be valid, the contracting parties must clearly intend to confer a benefit upon the third person. Here, the factual finding, sustained by both the RTC and the CA, was that the typewritten entries naming Rustica Tan and the third-party liability clause were not present on the pre-printed mortgage document when respondent’s president signed it. The Court upheld this factual determination, emphasizing that the credibility of witnesses is best assessed by the trial court. Since the insertion was made without respondent’s knowledge and consent after signing, there was no meeting of the minds regarding the crucial term that altered the contract’s nature from securing respondent’s own loan to securing the debts of another. Consequently, the real estate mortgage, as altered, was void for lack of consent. The subsequent chattel mortgage was also correctly annulled as it was executed solely by Rustica Tan without respondent’s authority, constituting an unauthorized alienation of respondent’s property. The award of damages and attorney’s fees was sustained due to petitioner’s bad faith in attempting to foreclose based on invalid securities.