G.R. No. 171865. October 12, 2016.
PHILIPPINE NATIONAL BANK, PETITIONER, VS. HEIRS OF BENEDICTO AND AZUCENA ALONDAY, RESPONDENTS.

FACTS

On September 26, 1974, the Spouses Alonday obtained an agricultural loan from PNB’s Digos Branch, secured by a real estate mortgage on a parcel of land in Sta. Cruz, Davao del Sur. On June 11, 1980, they obtained a separate commercial loan from PNB’s Davao City Branch, secured by a mortgage on a different residential lot in Davao City. Both mortgage contracts contained an identical, broad dragnet clause stating the mortgage would secure all obligations of the mortgagor to the mortgagee, past, present, or future. The commercial loan was fully paid on July 5, 1984. The agricultural loan remained unpaid and was foreclosed, but a deficiency balance persisted.
PNB, invoking the dragnet clause in the second mortgage contract, applied for the extrajudicial foreclosure of the Davao City property (the commercial loan collateral) to satisfy the deficiency from the agricultural loan. The property was sold to PNB. The heirs of the Spouses Alonday filed a complaint for damages, arguing the foreclosure was illegal since the specific commercial loan secured by that mortgage had been fully paid.

ISSUE

Whether the dragnet clause in the second real estate mortgage contract authorized the foreclosure of the mortgaged property to secure the payment of a separate, pre-existing loan (the agricultural loan) after the specific loan for which the mortgage was originally constituted had been fully satisfied.

RULING

No. The Supreme Court affirmed the lower courts’ rulings that the foreclosure was invalid. The Court explained that while dragnet clauses are legally permissible, they are strictly construed against the mortgagee-bank. For a dragnet clause to secure future or other obligations, those obligations must be of the same kind as, or related to, the primary obligation for which the mortgage was principally constituted. Here, the two loans were distinct in nature (agricultural vs. commercial), obtained from different bank branches, and secured by different properties under separate deeds. The commercial loan mortgage could not be construed to secure the unrelated, pre-existing agricultural loan absent clear, explicit, and specific language to that effect within the four corners of the contract itself. The payment of the commercial loan extinguished the principal obligation for which the second mortgage was established. Consequently, PNB acted in bad faith in foreclosing the property. The Court modified the monetary award, ordering PNB to pay the heirs the fair market value of the foreclosed property at the time of the filing of the complaint, with legal interest.