G.R. No. 200553 . December 10, 2018.
SPOUSES GILDARDO C. LOQUELLANO AND ROSALINA JULIET B. LOQUELLANO, PETITIONERS, VS. HONGKONG AND SHANGHAI BANKING CORPORATION, LTD., HONGKONG AND SHANGHAI BANKING CORPORATION-STAFF RETIREMENT PLAN AND MANUEL ESTACION, RESPONDENTS.

FACTS

Petitioner Rosalina Loquellano, an employee of respondent Hongkong and Shanghai Banking Corporation (HSBC), obtained a housing loan from the HSBC-Staff Retirement Plan (HSBC-SRP), secured by a real estate mortgage. She was dismissed in 1993 following a labor dispute. Due to her termination, salary deductions for loan amortizations ceased, causing default. In August 1995, after receiving demand letters and reminders, Rosalina deposited payments covering all arrears, interests, and penalties from January 1994 to August 1995. HSBC accepted and credited these payments, and subsequent installment due reminders reflected a reduced outstanding balance. Rosalina continued making payments, which were debited from her account and credited to her loan up to June 1996.
Despite these payments and the updated account status, respondent HSBC-SRP extrajudicially foreclosed the mortgaged property in May 1996, alleging that the entire loan obligation had accelerated upon Rosalina’s termination. The petitioners filed a complaint for annulment of the foreclosure sale, arguing it was conducted in bad faith as they were no longer in default.

ISSUE

Whether the extrajudicial foreclosure of the mortgage was valid despite the petitioners’ payments updating their loan account prior to the foreclosure.

RULING

The Supreme Court ruled the foreclosure was invalid. The legal logic centers on the principle that a mortgage is merely an accessory contract securing the principal loan obligation. The right to foreclose arises only upon default. Here, the petitioners were not in default at the time of foreclosure. By accepting the lump-sum payment in August 1995 and subsequently accepting and crediting ongoing monthly payments, the respondent HSBC-SRP effectively waived any prior default and recognized the reinstatement of the loan on its original installment terms. The act of accepting payments and issuing updated statements indicating a decreasing principal balance constituted a clear abandonment of any declared acceleration of the loan. Consequently, the foreclosure conducted while the loan was current constituted a violation of the respondents’ duty to act with justice and good faith under Articles 19 and 20 of the Civil Code. The foreclosure sale was therefore annulled, and the respondents were held liable for damages due to their abusive exercise of a contractual right.