G.R. No. 187678; April 10, 2013
SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners, vs. CHINA BANKING CORPORATION, Respondent.

FACTS

Petitioners Spouses Ignacio F. Juico and Alice P. Juico obtained a loan from respondent China Banking Corporation, evidenced by two Promissory Notes dated October 6, 1998, for the sums of ₱6,216,000 and ₱4,139,000, respectively. The loan was secured by a Real Estate Mortgage (REM) over petitioners’ property in Quezon City. Petitioners failed to pay the monthly amortizations. After demand, the mortgaged property was sold at public auction on February 23, 2001, with respondent as the highest bidder for ₱10,300,000. As of that date, respondent computed petitioners’ total outstanding obligation at ₱19,201,776.63, representing principal, interests, penalties, and attorney’s fees. After applying the auction proceeds, a deficiency of ₱8,901,776.63 remained. Respondent demanded payment of this deficiency and, upon petitioners’ failure to pay, filed a collection suit.
In their Answer, petitioners admitted the debt but argued the complaint stated no cause of action because the principal was deemed paid by the foreclosure sale. They contended any deficiency liability should only be ₱55,000 (the difference between the total obligation of ₱10,355,000 and the bid price). They further argued that the claimed deficiency consisted only of penalty and compounded interest, which is not favored under the Civil Code.
At trial, respondent’s witness, Ms. Annabelle Cokai Yu, presented a Statement of Account detailing the computation of the total obligation, which included monthly interest at varying rates (e.g., 15%, 24.50%, 21.50%, 19.50%, 18.00%) and a penalty charge of 1/10 of 1% per day on the total amount due. Petitioner Ignacio F. Juico testified he signed a blank promissory note and was informed the interest rate would be based on prevailing market rates, which respondent communicated to him monthly by telephone.
The Regional Trial Court (RTC) ruled in favor of respondent, ordering petitioners to pay the deficiency amount plus legal interest and attorney’s fees. The Court of Appeals affirmed the RTC decision.

ISSUE

Whether the Court of Appeals erred in affirming the RTC decision ordering petitioners to pay the deficiency claim after the foreclosure of the mortgaged property.

RULING

The Supreme Court DENIED the petition and AFFIRMED the assailed Court of Appeals Decision and Resolution.
The Court held that a mortgagee-creditor has the right to claim for any deficiency resulting from the foreclosure sale of the mortgaged property. This right is explicitly recognized under Section 6 of Act No. 3135, as amended. The application of the foreclosure proceeds to the mortgagor’s obligation is governed by Article 1253 of the Civil Code, which states that if the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. Consequently, the proceeds from the foreclosure sale were correctly applied first to the interest, then to the principal. Since the proceeds were insufficient to cover the total obligation (principal, interest, penalties, and attorney’s fees), a valid deficiency claim remained.
The Court rejected petitioners’ argument that the deficiency represented only penalty and compounded interest. The Statement of Account clearly showed the computation included the principal balances, accrued interest at varying rates, penalty charges, and attorney’s fees. The penalty charge of 1/10 of 1% per day, stipulated in the promissory notes, was deemed valid and enforceable. The Court also found no merit in petitioners’ claim that the interest rate was unilaterally imposed. The promissory notes provided for interest at the prevailing market rate, and petitioner Ignacio Juico admitted he was informed of the rate changes monthly and understood his obligations under the notes before signing them. His claim of having signed a blank promissory note was belied by his own admission of having read the documents.
Therefore, respondent bank was entitled to recover the deficiency amount of ₱8,901,776.63, plus interest at the legal rate from February 23, 2001, and attorney’s fees as stipulated.