G.R. No. 209837 , May 12, 2021
Goldwell Properties Tagaytay, Inc., Nova Northstar Realty Corporation, and NS Nova Star Company, Inc., represented herein by Flor Alano, Petitioners, vs. Metropolitan Bank and Trust Company, Respondent.

FACTS

Petitioners Goldwell Properties Tagaytay, Inc. (Goldwell) and Nova Northstar Realty Corporation (Nova) obtained loans from respondent Metropolitan Bank and Trust Company (Metrobank) secured by real estate mortgages and surety agreements. After experiencing financial difficulties, they requested a modification of their interest payment scheme. The parties subsequently executed two Debt Settlement Agreements (DSAs) dated August 15, 2003, which restructured their obligations. The DSAs stipulated new payment terms, including a two-year moratorium on principal payments, quarterly interest payments, and a five-year payment period. The agreements also contained provisions for default, allowing Metrobank to revert to the original loan amounts, impose penalties, and foreclose on the mortgages.
Petitioners made payments until August 2004. Subsequently, they engaged in a series of negotiations with Metrobank, proposing various settlement offers, including paying a lump sum in exchange for the release of some mortgaged properties. These proposals were rejected by Metrobank, which found the amounts insufficient. Metrobank then sent demand letters and initiated foreclosure proceedings. Petitioners filed a Complaint for Specific Performance; Accounting and Damages, alleging that Metrobank acted in bad faith by unreasonably delaying the approval of their initial request for interest payment modification, which led to the accumulation of interest, and by unjustly rejecting their subsequent settlement proposals. The Regional Trial Court dismissed the complaint, a decision affirmed by the Court of Appeals.

ISSUE

Whether the Court of Appeals erred in affirming the dismissal of petitioners’ complaint, specifically concerning Metrobank’s alleged breach of the duty of good faith and its right to foreclose on the mortgages.

RULING

The Supreme Court denied the petition and affirmed the assailed Court of Appeals decision. The Court held that petitioners failed to substantiate their claim of bad faith on the part of Metrobank. The delay in approving the initial request for interest payment modification was not proven to be deliberate or in bad faith. The subsequent DSAs, which petitioners voluntarily entered into, novated the original loan agreements and constituted a binding compromise that settled their obligations as of July 31, 2003. Petitioners’ default under the DSAs was established, as they failed to pay the quarterly interest amortizations starting November 2004. This default made the entire obligation due and demandable and entitled Metrobank to exercise its contractual rights under the DSAs, including foreclosure. The Court found that Metrobank’s rejection of petitioners’ various settlement proposals was a legitimate exercise of its rights as a creditor and did not constitute bad faith, as the bank was not obligated to accept amounts less than what was legally due. The DSAs’ stipulation allowing Metrobank to revert to the original loan terms upon default was a valid penal clause. Furthermore, the imposition of penalty charges and Value Added Tax (VAT) on past due interest was deemed legally permissible. The foreclosure proceedings were a direct consequence of petitioners’ default under the valid and binding DSAs.