G.R. No. 29196 , December 29, 1928
PHILIPPINE NATIONAL BANK, plaintiff-appellant, vs. GABINO BARRETTO P. PO E. JAP, ET AL., defendants-appellees.

Ponente: OSTRAND, J.

FACTS

On May 3, 1919, defendant Gabino Barretto P. Po E. Yap executed a real estate mortgage over a parcel of land in Tacloban, Leyte, in favor of the Philippine National Bank (PNB). The mortgage document, executed on a printed form, stated it was to secure a sum not exceeding P60,000, plus 7% interest, costs of collection, and other items for which the mortgagor was or might become indebted to the bank. The mortgage was given to secure Barretto’s guaranty of the indebtedness of the partnership Gabino Barretto & Co., Ltd. to PNB. Subsequently, Barretto sold the mortgaged property to Po Tecsi, who obtained a transfer certificate of title with the mortgage annotated.

PNB later foreclosed a separate mortgage on Barretto’s Manila property to satisfy the partnership’s debt. After the sale of the Manila property, a deficiency judgment of P319,913.05 remained. PNB then filed the present action to foreclose the Tacloban mortgage to recover this deficiency. The trial court held that the mortgage only secured a specific P60,000 credit which Barretto never received, and thus absolved the defendants. PNB appealed.

ISSUE

Whether the real estate mortgage on the Tacloban property can be foreclosed to cover the deficiency judgment resulting from the foreclosure of the Manila property, given that the property had been sold to a third party (Po Tecsi, later substituted by his heir Po Son Suy).

RULING

Yes, but recovery is limited. The Supreme Court reversed the trial court’s decision.

The Court held that explanatory evidence was properly admitted to show the true intent of the parties, as the carelessly prepared printed mortgage form did not fully express their agreement. The evidence established that the mortgage was intended to secure Barretto’s guaranty of the partnership Gabino Barretto & Co., Ltd.’s indebtedness to PNBthe same debt involved in the Manila foreclosure.

However, applying the rule that a mortgage securing a suretyship must be construed strictly in favor of the surety, and considering that the mortgaged property had passed to an innocent third party (the purchaser Po Tecsi), the Court limited the bank’s recovery under the Tacloban mortgage to the principal sum of P60,000 expressly stated in the document, plus interest at 7% per annum from the date of the filing of the complaint (August 6, 1925). The other boilerplate clauses in the printed form (e.g., covering all other indebtedness, costs, etc.) were deemed not binding on the innocent purchaser.

The Court ordered that unless the defendants paid P60,000 plus the stipulated interest within four months from the return of the records, the mortgaged property should be sold at public auction to satisfy the debt.