G.R. No. L-6453 October 30, 1954
ERNEST BERG, plaintiff-appellant, vs. VALENTIN TEUS, defendant-appellant.

FACTS

In September 1944, defendant Valentin Teus obtained from plaintiff Ernest Berg a credit line of up to P80,000. Teus subsequently received the full amount, evidenced by six promissory notes payable two years after the declaration of armistice between Japan and the USA, with 8% annual interest. To secure this obligation, Teus executed a real estate and chattel mortgage on November 22, 1944, covering parcels of land in Candon, Ilocos Sur, and the machineries/equipment of his Central Azucarera del Norte. The mortgage deed stipulated that Teus must pay property taxes, not alienate or materially alter the property without Berg’s written consent, and in case of violation, the mortgage would be automatically foreclosed, with Teus liable for attorney’s fees equal to 10% of the unpaid debt.
Berg filed an action for foreclosure on May 19, 1948, alleging Teus violated the mortgage terms by conveying the property to J.A. Elizalde and Manuel Elizalde and making material alterations without consent, and by failing to pay taxes. The lower court initially dismissed the case based on the Moratorium Law, but the Supreme Court reversed. After trial, the Court of First Instance of Ilocos Sur rendered a decision ordering Teus to pay Berg P80,000 with 8% interest from November 22, 1944, plus registration/reconstitution costs and trial costs, and decreed the foreclosure sale of the mortgaged properties if payment was not made within 90 days. However, it denied Berg’s claim for 10% attorney’s fees and absolved Berg of Teus’s counterclaim. Both parties appealed.

ISSUE

1. Whether the lower court erred in not awarding the 10% attorney’s fees stipulated in the mortgage deed.
2. Whether the lower court erred in not upholding all agreements in the mortgage deed regarding penalties for violation.
3. Whether the lower court erred in condemning Teus to pay P80,000 with 8% interest in current currency.

RULING

1. The Supreme Court held the lower court did not err in denying the award of 10% attorney’s fees. The stipulated attorney’s fees were in the nature of a penalty for violation of the mortgage terms. The court found that Teus’s actions (the contract with the Elizaldes, sale of shares, incorporation, and transfer of assets to the corporation) were necessary for the rehabilitation of the war-destroyed central and did not constitute an alienation or encumbrance in bad faith intended to defraud the mortgagee. The delinquency in tax payment was understandable given the property’s unproductive state, and the taxes were eventually paid, avoiding substantial injury to Berg. Equity did not warrant imposing the penalty.
2. Related to the first issue, the court found no error in the lower court’s failure to enforce the penalty provisions. The violations were not malicious, and Berg suffered no substantial damage. The rehabilitation efforts by Teus, with Elizalde’s backing, ultimately preserved and enhanced the value of the mortgaged property for the benefit of all parties, including Berg.
3. The Supreme Court held the lower court correctly ordered Teus to pay P80,000 with interest in Philippine currency. The promissory notes provided for payment in “Philippine Treasury Certificates,” and the deed stipulated payment would be demandable only two years after armistice. This clearly contemplated payment in genuine Philippine currency, not Japanese war notes. The court adhered to its precedents rejecting the application of the Ballantyne schedule to such obligations. However, the reservation in the lower court’s decision allowing Teus to invoke the Moratorium Laws was eliminated, as those laws had been declared unconstitutional in Rutter vs. Esteban.
The decision appealed from was affirmed in all other respects, without costs.