G.R. No. 42449 July 5, 1989
C & C Commercial Corporation, Clara Reyes Pastor, and Other Stockholders vs. Philippine National Bank, National Investment Development Corporation, Provincial Sheriff of Rizal, City Sheriff of Manila, and Hon. Judge Augusto Valencia

FACTS

Petitioner C & C Commercial Corporation (ACPPI) incurred substantial obligations with respondent Philippine National Bank (PNB) through letters of credit. Due to non-payment, PNB filed a collection suit. The parties instead entered into a Voting Trust Agreement in 1969, granting PNB and its affiliate, the National Investment Development Corporation (NIDC), full managerial control over ACPPI for five years. During this trust period, ACPPI executed a chattel mortgage in favor of NIDC to secure a loan. Subsequently, an audit report indicated the PNB/NIDC management was a failure. Consequently, ACPPI and its stockholders filed a complaint (Civil Case No. Q-18176) to terminate the Voting Trust Agreement and recover massive damages for alleged grossly negligent management.
While this main case was pending, PNB initiated extrajudicial foreclosure proceedings on real estate mortgages assigned to it by the Development Bank of the Philippines and sought to include unsecured obligations. NIDC also separately moved to foreclose the chattel mortgage. Petitioners applied for a preliminary injunction in the main case to stop these foreclosure sales. The trial court denied the injunction, primarily citing Presidential Decree No. 385, which prohibits courts from issuing injunctions against foreclosure by government financial institutions. Petitioners elevated the case via certiorari.

ISSUE

Whether the trial court committed grave abuse of discretion in denying the application for a preliminary injunction against the foreclosure sales, despite the pendency of the main action questioning the validity of the loans and alleging failure of consideration.

RULING

Yes. The Supreme Court granted the petition, setting aside the trial court’s order. The Court ruled that PD 385, while generally prohibiting injunctions against government financial institution foreclosures, is not an absolute and inflexible rule. It does not apply where there is a clear showing of a grave violation of the borrower’s rights, such as a pending serious challenge to the very validity of the secured obligations.
The legal logic hinges on the principle that a foreclosure presupposes a valid and existing debt. In this case, the petitioners in the main action (Civil Case No. Q-18176) raised substantive issues contesting the NIDC loan’s validity, including allegations of misappropriation of proceeds and failure of consideration. These issues, if proven, could render the secured obligation void or inexistent. Following the precedent in Filipinas Marble Corporation v. Intermediate Appellate Court, the Court held that allowing foreclosure to proceed while the validity of the principal obligation is being litigated would be unjust and could cause irreparable injury. Therefore, the trial court’s rigid application of PD 385, without considering the pending challenge to the loan’s validity, constituted a grave abuse of discretion. The Court permanently enjoined the NIDC chattel mortgage foreclosure, subject to the posting of an injunction bond, pending the main case’s resolution. However, it allowed PNB to proceed with the foreclosure of the DBP-assigned real estate mortgages, as those obligations were not similarly contested.