G.R. No. 90169. April 7, 1993.
PILAR PAGSIBIGAN, petitioner, vs. COURT OF APPEALS and PLANTERS DEVELOPMENT BANK, respondents.

FACTS

On November 3, 1976, petitioner Pilar Pagsibigan, through her daughter as attorney-in-fact, obtained an agricultural loan of P4,500.00 from Planters Development Bank, secured by a mortgage over a parcel of land. The promissory note contained an acceleration clause. The first payment was due on May 3, 1977. Petitioner made an initial payment on July 6, 1977, which was delayed, and several subsequent payments totaling P11,900.00. The bank applied only four of these payments to the loan, while the rest were “temporarily lodged to accounts payable since the account was already past due.” On May 7, 1984, the bank extrajudicially foreclosed the mortgage for an outstanding balance of P29,554.81, selling the property to itself for P8,163.00 and claiming a deficiency of P21,391.81. Petitioner filed an action for annulment of sale with damages. The trial court ruled in favor of petitioner, but the Court of Appeals reversed the decision, ordering petitioner to pay the deficiency.

ISSUE

1. Whether the foreclosure and auction sale of the property is valid and justified under the circumstances.
2. Whether petitioner is entitled to recover damages and attorney’s fees as a result of the foreclosure and auction sale.

RULING

1. The foreclosure is not valid. The bank’s conduct constituted a waiver of its right under the acceleration clause and its right to foreclose upon the first default. The bank accepted delayed payments on three occasions, applying them to the principal and interest, and issuing receipts, thereby leading petitioner to believe her payments were being applied to her obligation. The bank is estopped from applying subsequent payments to “accounts payable.” Petitioner’s payments constituted substantial performance of her obligation. Under Article 1234 of the Civil Code, substantial performance in good faith allows the obligor to recover as if there had been strict fulfillment. Furthermore, under Article 1235, when a creditor accepts performance knowing its incompleteness without protest, the obligation is deemed complied with. The foreclosure sale is annulled, and reconveyance of the property is ordered.
2. Yes, petitioner is entitled to damages. The bank acted in bad faith by taking advantage of petitioner’s ignorance, lodging her payments to accounts payable, and then imposing exorbitant interest and penalty charges at 19% each, inflating the obligation to P29,554.81. For the mental anguish, sleepless nights, and serious anxiety caused, the bank is liable for moral damages fixed at P50,000.00. To deter similar acts, exemplary damages of P20,000.00 are awarded, on top of the forfeiture of any remaining loan balance. Attorney’s fees of P10,000.00 are also awarded.