Traders Royal v. Castares (G.R. No. 172020; December 6, 2010)

CASE DIGEST: TRADERS ROYAL BANK, Petitioner, v. NORBERTO CASTARES and MILAGROS CASTARES, Respondents. (G.R. No. 172020; December 6, 2010).

FACTS: Between 1977 and 1978, respondents obtained from petitioner Traders Royal Bank various loans and credit accommodations. Respondents executed two real estate mortgages (REMs) covering their properties. As evidenced by Promissory Note No. BD-77-113 dated May 10, 1977, petitioner released only the amount of P35,000.00 although the mortgage deeds indicated the principal amounts as P86,000.00 and P60,000.00.

For failure of the respondents to pay their outstanding loans with petitioner, the latter proceeded with the extrajudicial foreclosure of the real estate mortgages. Thereafter, petitioner instituted Civil Case No. R-22608 for deficiency judgment, claiming that after applying the proceeds of foreclosure sale to the total unpaid obligations of respondents, the latter are still indebted to petitioner for the sum of P83,397.68.

The RTC ruled on favor of petitioner. The trial court found that despite respondents insistence that the REM covered only a separate loan for P86,000.00 which they believed petitioner committed to lend them, the evidence clearly shows that said REM was constituted as security for all the promissory notes.

With the trial courts denial of their motion for reconsideration, respondents appealed to the CA. Finding merit in respondents arguments, the appellate court set aside the trial courts judgment. Hence, the present petition.

ISSUE: Did the CA err in reversing the RTC decision?

HELD: The subject REMs contain the following provision: That, for and in consideration of certain loans, overdrafts and other credit accommodations obtained, from the Mortgagee by the Mortgagor and/or SPS. NORBERTO V. CASTARES & MILAGROS M. CASTARES and to secure the payment of the same, the principal of all of which is hereby fixed at EIGHTY-SIX THOUSAND PESOS ONLY (P86,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may hereafter extend to the Mortgagor, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the Mortgagee.

The above stipulation is also known as "dragnet clause" or "blanket mortgage clause" in American jurisprudence that would subsume all debts of past and future origins. It has been held as a valid and legal undertaking, the amounts specified as consideration in the contracts do not limit the amount for which the pledge or mortgage stands as security, if from the four corners of the instrument, the intent to secure future and other indebtedness can be gathered.A "dragnet clause" operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract.

In holding that the REMs were null and void, the CA opined that the full amount of the principal loan stated in the deed should have been released in full, sustaining the position of the respondents that the promissory notes were not secured by the mortgage and unrelated to it. However, a reading of the afore-quoted provision of the REMs shows that its terms are broad enough to cover packing credits and export advances granted by the petitioner to respondents.

That the respondents subsequently availed of letters of credit and export advances in various amounts as reflected in the promissory notes, buttressed the claim of petitioner that the amounts of P86,000.00 and P60,000.00 stated in the REMs merely represent the maximum total loans which will be secured by the mortgage. This must be so as respondents confirmed that the mortgage was constituted for the purpose of obtaining additional capital as dictated by the needs of their export business.

Significantly, no complaint was made by the respondents as to the non-release of P86,000.00 and P60,000.00, in full, simultaneous or immediately following the execution of the REMs -- under a single promissory note each equivalent to the said sums -- and no demand for the said specific amounts was ever made by the petitioner. Even the letter-complaint sent by respondents to the Central Bank almost a year after the extrajudicial foreclosure sale mentioned only the questioned entries in their passbook and the $4,220.00 telegraphic transfer.

Considering that respondents deemed it a serious "banking malpractice" for petitioner not to release in full the loan amount stated in the REMs, it can only be inferred that respondents themselves understood that the P86,000.00 and P60,000.00 indicated in the REMs was intended merely to fix a ceiling for the loan accommodations which will be secured thereby and not the actual principal loan to be released at one time.

Thus, the RTC did not err in upholding the validity of the REMs and ordering the respondents to pay the deficiency in the foreclosure sale to satisfy the remaining mortgage indebtedness. GRANTED.