G.R. No. 27045, December 7, 1927
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs. OLUTANGA LUMBER COMPANY, defendant-appellant.

FACTS

The Bank of the Philippine Islands (BPI) filed a complaint against Olutanga Lumber Company (Olutanga) to recover a deficiency claim of P78,765.81 after foreclosing two chattel mortgages. The properties were sold at public auction for only P11,100. Olutanga defended by alleging that the foreclosure sale was fraudulent. It presented as evidence a letter agreement dated July 13, 1922, between BPI and Walter A. Smith Co., Inc. This agreement showed that BPI had already arranged, prior to the foreclosure sale, to sell the foreclosed properties to Smith Co. for P88,667.21, payable in installments. Furthermore, BPI had facilitated the cancellation of Olutanga’s timber license and its re-issuance in favor of Smith Co., thereby devaluing the mortgaged properties (a sawmill dependent on the license) and discouraging other bidders. After the sheriff’s sale to BPI for P11,100, BPI immediately resold the properties to Smith Co. pursuant to their prior agreement. Olutanga also claimed that BPI took and sold properties not covered by the mortgages, valued at P5,520.11.

ISSUE

Was the foreclosure sale conducted by BPI tainted by fraud, warranting that BPI be held accountable for the actual value it agreed to receive for the properties, rather than the low auction price?

RULING

YES. The Supreme Court reversed the trial court’s decision. It found the foreclosure sale to be fraudulent. The prior secret agreement between BPI and Smith Co. effectively made BPI a mere conduit for the transfer of the properties to Smith Co. for a predetermined price (P88,667.21). By securing the transfer of the crucial timber license to Smith Co. before the sale, BPI rendered the mortgaged sawmill practically worthless to any other bidder, ensuring it would be the only bidder and could acquire the property at a minimal price. This scheme constituted fraud against the mortgagor, Olutanga. Consequently, BPI could not benefit from its own fraud by claiming a deficiency based on the artificially low auction price. BPI was ordered to account to Olutanga for the true value it was to receive: the P88,667.21 purchase price from Smith Co. After deducting Olutanga’s actual debt to BPI (recalculated by the Court as P72,439), BPI was liable to pay Olutanga the difference of P16,228.21. Additionally, BPI must pay Olutanga P5,520.11, the value of the un-mortgaged properties it unlawfully took and sold.