Credit Cases 6

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MORTGAGE

[G.R. No. 25235. December 9, 1926.]

LIM JULIAN,plaintiff-appellant, vs. TIBURCIO LUTERO, ASUNCION MAGALONA, andRAFAEL LUTERO,defendants-appellees."EL HOSPITAL DE SAN PABLO DEILOILO,"intervenor-appellee.

Block, Johnston & Greenbaum for appellant.

Lutero, Lutero & Maza for appellees.

Arroyo & Evangelista for the intervenor.

SYLLABUS

1.MORTGAGE OF REAL ESTATE; CONTRACTS FOR FUTURE ADVANCEMENTS TO ASSIST

AGRICULTURISTS.

Contracts for future advancements to assist agriculturist are very common in thePhilippine Islands and elsewhere in agricultural countries. Under such contracts of "advancements" theagriculturist is permitted to take the money as it is needed and thus avoid the necessity of having interestuntil the necessity for is its use actually arises.

2.ADVANCEMENTS, CONTRACTS OF; AMOUNT OF ADVANCEMENTS. It is not uncommon thatcontracts of advancements for agricultural purposes are executed for larger amount than in necessary andsometimes they are executed for less than amount than is found to be necessary for the economic andefficient cultivation of the land upon which they are made.

3.REAL ESTATE MORTGAGE, FORECLOSURE OF. The rule is well settled that in action toforeclosure a mortgage must be limited to the amount mentioned in the mortgage. The exact amount,however, for which the mortgage is given need not always be specifically named in contracts ofadvancements. The amount for which the mortgage is given may be stated in definite or general terms,as is frequently the case in mortgages to secure future advancements. The amount named in themortgage does not limit the amount for which it may stand as security, if, from the four corners of thedocument, the intent to secure future indebtedness is apparent.

4.REAL ESTATE MORTGAGES FOR FUTURE ADVANCEMENTS. Where the plain terms of themortgage for future advancements evidence the intention to secure the payment of a larger amount, andthat it was the intention of the mortgagor to secure a larger amount, the action to foreclose mortgagemay be for the larger amount. In such a case the specific amount mentioned in the mortgage is notcontrolling. Literal accuracy in describing the amount due on a contract for future advancements is notrequired, but the description of the debt must be correct and full enough to direct attention to the sourceof correct information in regard to it and be such as not to mislead or deceive as to the real amount ofsuch mortgage.

5.MORTGAGE TO SECURE FUTURE ADVANCEMENTS. When a mortgage is given to securefuture advancements and the money is paid to the mortgagor little by little and repayments are madefrom time to time, the advancements and repayments are considered together for the purpose ofascertaining the amount due upon the mortgage at maturity. Courts of equity will not permit theconsideration of the repayments only for the purpose of determining the balance due upon the mortgage.

6.MORTGAGE, PARTIAL PAYMENTS ON. The mere fact that in contracts of advancements therepayments at any one time exceeded the specific amount mentioned in the mortgage, will not have theeffect of discharging the mortgage when the advancements at that particular time are greatly in excess of


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the repayments; especially is this true when the contract of advancements or mortgage contains a specificprovision the mortgage shall cover all "such other amounts as may be them due." The sum found to beowing by the debtor at the termination of the contract of advancements between him and the mortgageeis still secured by the mortgage on the debtor's property. Under, mortgage to secure the payments offuture advancements the mere fact that the payments on a particular day equal the amount of themortgage, will not discharge the mortgage before maturity so long as advancements may be demandedand are received.

7.MORTGAGES, THE AMOUNT DUE THEREON.

Contracts must be interpreted from their fourcorners. When a mortgage is given for a specific amount, interest, commissions and damages, and suchother amounts as may be found to be due at the termination of the contract, the specific amountmentioned does not control as to the real amount due upon said contract on mortgage. It has beensettled by a long line of decisions, that mortgages given to secure future advancements are valid andlegal contracts; that the amounts named as consideration in said contract do not limit the amount forwhich the mortgage may stand as security, if, from the four corners of the instrument the intent to securefuture and other indebtedness can be gathered. The consideration named in a mortgage for futureadvancements does not limit the amount for which such contract may stand as security, if, from the fourcorners of the document, the intent to secure future indebtedness is apparent.

8.MORTGAGE; THE AMOUNT DUE. Where a mortgage is given to secure future advancements,

oral proof may be adduced for the purpose of showing the real intent of the parties as to the amount tobe advanced.

9.MORTGAGES TO SECURE ADVANCEMENTS. A mortgage given to secure advancements is acontinuing security and is not discharged by repayment of the amount of the advancements are paid.

10.MORTGAGES, RECORD OF; NECESSITY OF HAVING MORTGAGES REGISTERED. A contractpurporting to be a mortgage is not a mortgage at all until the same has been duly recorded in the registryof property. In this jurisdiction it is an indispensable statutory requirement, in order that a mortgage maybe validly constituted, that the instrument by which it is created, be reconstituted, that the instrument bywhich it is created, be recorded in the registry of deeds. Such contract, however, are valid subsistingobligations between the parties thereto, and may be used as evidence or proof of such obligations. Theydo not however, constitute a mortgage in this jurisdiction.

D E C I S I O N

JOHNSON,J p:

The purpose of this action was to foreclose a certain mortgage given to secure futureadvancements for the sum of P12,000, interest, commissions, damages, and such other amounts as maybe due at the time of maturity. It was executed and delivered to Lim Julian by Tiburcio Lutero and hiswife Asuncion Magalona on the 15th day of April, 1920. It was duly registered in the office of the registrar

of deeds of the Province of Iloilo on the 16th day of June, 1920. It was executed to secure future"advancements" to be made by Lim Julian to the mortgagors to cover expenses "incurred by themortgagors in the cultivation and harvesting of the agricultural crops for the year 1920-1921." To be alittle more specific concerning the purposes of the said "Advancement," reference may be made to themortgage itself. The mortgage recites "that said credit (for future advancements) is given to themortgagors exclusively for the purpose of being employed in the cultivation and care of the sugarplantations and the milling and production of sugar from said sugar plantations and in the purchase ofanimals for the work in connection therewith and all expenses that may be necessary for the workconcerning said sugar plantations."

The mortgage covered the following property:


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(a)Three parcels of land particularly described in paragraph 2 of the complaint, containing an areaof 755,706 square meters more or less;

(b)Twenty-four vacunos and twelve carabaos;

(c)One steam engine;

(d)One battery with two furnaces and eight tanks;

(e)A house of strong material, with galvanized iron proof;

(f)A storehouse for the stems of sugar cane, of light material;

(h)A milling shed of mixed material with nipa roof;

(i)All the sugar cane estimated at 3 000 piculs for the crop of 1920-1921, to be produced uponsaid lands, which were known as the "Hacienda San Ramon" situated in the municipality of Jaiuay.

The complaint alleged that there was still due and unpaid on said mortgage (a) the sum ofP22,807.09 with interest at 12 per cent per annum from the 27th day of June, 1921, until paid; and (b)the sum of P2,000 as penalty for failure on the part of the defendants to comply with their contract. Theplaintiff prayed for a judgment for said amounts, and that in case of a failure on their part to pay thesame, that an order be issued for the sale of the mortgaged premises. Plaintiff also prayed for a judgmentfor costs.

The action was commenced in the Court of First Instance of the Province of Iloilo on the 8th dayof March, 1922. On the 6th day of April, 1922, the defendants Tiburcio Lutero and Asuncion Magalonafiled their answer,denying each and all of the allegationsof the complaint.

On the 25th day of September, 1922, the "Hospital de San Pablo de Iloilo" presented a petition forintervention, which was granted.

The defendant Rafael Lutero was made a defendant in the action simply because he was a tenantoccupying and cultivating the three parcels of land in questions.

The "Hospital de San Pablo de Iloilo" was permitted to intervene, upon its allegation that it had aprior mortgage upon its allegation that it had a prior mortgage upon the property in question (Exhibit AA)for the sum of P22,400. Said alleged mortgage was executed on the 17th day of June, 1920. It was

executed on the 17th day of June, 1920. It was executed before a notary but was never registered in theregistry of property. Said document cannot be considered a mortgage therefore. (Art. 1875, Civil Code.) Itwill be remembered that the mortgage in favor of the plaintiff herein was executed upon the 15th day of

April, 1920, nearly two months before Exhibit AA was executed and delivered. The mortgage held by theplaintiff was actually registered in the office of the registrar of deeds on the 16th day of June, 1920, orone day before the alleged mortgage of the intervenor was executed. More will be said concerning thecontention of the intervenorwhen we come to discuss the rights which they claim in the present action.

On the 25th day of March, 1925, or nearly four yearsafter the present actions was commenced,the defendants Tiburcio Lutero and his wife Asuncion Magalona filed another answer to the petition, inwhich they alleged, in addition to a general denial, and after admitting the execution and delivery of the

mortgage have been paid and that whatever indebtedness still existed against them and in favor of theplaintiff was an ordinary debt.

Upon the issue thus presented by the petition, the second answer of the defendants and thepetition of the intervenor, the cause was brought on for trial. After hearing the evidence the HonorableFernando Salas, judge, reached the following conclusions: (a) That the complaint against Tiburcio Luteroand Asuncion Magalona should be dismissed with costs against the plaintiff; (b) that Rafael Lutero, thetenant, should be absolved from all liability under the complaint with costs against the plaintiff; (c) thatthe registrar of deeds of the Province of Iloilo should cancel the mortgage lien in favor of the plaintiff,which fact should be noted upon the certificate of title No. 6667; (d) that the mortgage executed anddelivered by Tiburcio Lutero and Asuncion Magalona on the 17th day of June, 1920, in favor of the


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"Hospital de San Pablo" should be registered in the registry of Property of the Province of Iloilo as the firstlien upon the real property in question, and (e) that the mortgage executed in favor of the ""Hospital deSan Pablo" on the 17th day of June, 1920, should take preference over the mortgage executed by saidmortgagors to the plaintiff herein on the 15th day of April, 1920. From that Judgment the plaintiffappealed.

In discussing the rights of the respective parties to the present action we are of the opinion thatwe should discuss the rights of the original parties first and then the rights of the intervenor.

The plaintiff-appellant alleged in his first assignment of error that the lower court committed anerror (a) in holding that his mortgage was paid, (b) in ordering its cancellation and (c) in dismissing thecomplaint against Rafael Lutero. In order to fully understand that assignment of error a full statement ofthe entire transaction between the mortgagors and the plaintiff becomes necessary.

The defendants Tiburcio Lutero and Asuncion Magalona executed the mortgage in questioncovering the property described in the complaint, with the following pertinent provisions:

(1)That the said parcels of land were subject to a first mortgage in favor of the Philippine NationalBank for the sum of P9,500, payable with interest at 8 per cent per annum for the period of ten years,payable by annual installments;

(2)That the said mortgagors have applied to and obtained from Lim Julian a credit of P12,000,

Philippine currency, with interest at 12 per cent per annum upon the following conditions: (a) That saidcredit is given to the mortgagors exclusively for the purpose of being employed in the cultivation and careof the sugar plantations aforementioned, in the milling and production of sugar from said sugarplantations and in the purchase of animals for the work in connection therewith, and all expenses thatmay be necessary for the work concerning said sugar plantations; that said credit may be taken by themortgagors little by little from the creditor or mortgagee at the rate of P1,500, Philippine currency, permonth, until the sum is totally taken, and shall each interest only from the date or dates when theamounts are taken, as shown by the valesor receipts which shall be executed in each case by themortgagors, who must execute that same every time that they take the monthly amounts; (b) that thesugar to be produced from the sugar-cane plantations, and as it is produced by the mortgagors, shall beshipped by the latter for their account and risk to the mortgagee, to the city of Iloilo, in order that thelatter may sell the same at the current price in the market or deposit the same in the warehouses of

foreign firms in the City of Manila, or in his warehouses, that is, in the warehouses of the mortgagee inthis city, Iloilo, as he may deem suitable to the interest of the mortgagors, and the quedans of which, incase of deposit, shall be issued in the name of the mortgagors, and the latter shall immediately indorsethe same to the mortgagee; that the mortgagee shall receive said sugar cane and take care thereof withthe diligence of a good father of a family, trying his best to obtain the best price in the market or at leastthe price in the Iloilo market; that said mortgagee is authorized to receive or collect the value of saidsugar; that the mortgagee is authorized to purchase the sugar for himself with preference in case of equalprice and conditions; that the mortgagee shall, on account of his work in receiving, taking care of, andtrying to obtain a good price for, said sugar, receive as compensation for that work, whether the sugar issold or purchased by him, 2 per cent of the gross value of said sugar. The mortgagee was also authorizedto retain such part of the value of said sugar as may be deemed fit in order that he may make payment to

himself of the 2 per cent compensation and of said credit and the interest therein.

Immediately upon the execution of said mortgage, with the foregoing conditions and even beforeits execution, the plaintiff began to make advancements for the purpose mentioned in said mortgage tothe defendants, as appears from Exhibit B, of both money and effects or supplies. All of the parties agreethat Exhibit B is a true and correct statement of all advancements of money, effects or merchandise paidand delivered by the plaintiff to the defendants between the 11th day of March, 1920 and the 19th day ofMay, 1921, including the interest on the various advancements during said period. They also agree thatsaid Exhibit B, with some exceptions perhaps, shows the true and exact amount of sugar and cashdelivered and paid by the defendants to the plaintiff between the 16th day of March, 1920, and the 27thday of June, 1921. By reference to Exhibit B it will be found that the plaintiff and the defendants have


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agreed that the advancements, merchandise and accrued interest account during the period amount toP36,964.27 while the sugar delivered and the payments made by the defendants to the plaintiff amountedto P14,157.18, leaving a balance due in favor of the plaintiff in the sum of P22,807.09. Said amountrepresents the amount claimed in the present action with 12 per cent from the 27th day of June, 1921,together with the sum of P2,000 as a penalty for the failure of the defendants to comply with theircontract.

The mortgagors contend that the mortgage was for the sum of P12,000 with interest only; that

inasmuch as they have paid more than P14,000, the mortgage debt has been paid and that they aretherefore not liable for any other amount on said mortgage; that whatever other amount of indebtednessexists against them is an ordinary indebtedness and cannot be recovered in an action to foreclose themortgage; that they are entitled to have said mortgage cancelled.

In making that contention the mortgagors have evidently overlooked paragraph 10 of theirmortgage, which provides "that all the obligations of the mortgagors and allthe conditions stipulated inthis document must and shall be fulfilled on or before the 30th day of April, 1921, the date when saidsugar plantations are to be harvested or controverted into sugar and shipped to the mortgagee, and thecredit and its interest aforementioned, and such other amounts as may be then due from themortgagors." By reference to paragraph 12 of the mortgage it will be seen that if the mortgagors, theheirs, assigns and successors in interest shall fail to fulfill all the conditions and obligations of said

mortgage,that the same shall remain in full force and effect and may be enforcible in accordance withlaw.

If it had been the intention of the parties to said mortgage to make it a mortgage for the securityof the payment of P12,000 given for "future advancements" only, and no more, with interest anddamages, then what was the occasion or purpose of adding in said paragraph 10 "andsuch other amounts as may be then due?' If P12,000 was the limit of the obligation incurred by theobligors, and no more, then what did the parties to the contract have in mind when they said "and suchother amounts as may be then due from the mortgagors to the mortgagee?" It is a reasonablepresumption that the parties had in mind that, for some reason or other, the mortgagors might needmore money during the year to be employed directly or indirectly in the cultivations and care of the sugarplantations covered by the mortgage, or that more money might be necessary for the proper milling andproduction of sugar from said sugar plantations and in the purchase of animals for work in connectionwith the cultivation of said plantations, or for expenses that might be necessary for the proper workingand cultivation of sugar plantations?

Contracts for future advancements (mortgages) like the present were known at Common Law.They are very common not only in the Philippine Islands but elsewhere in agricultural countries. Contractsfor the advancement of money to assist agriculturists for the cultivation and harvesting of crops are wellknown in all agricultural countries. Under such contracts of "advancements" the agriculturists is permittedto take the money as it is needed and thus avoid the necessity of paying interest until the necessity for itsuse actually arises. It is not uncommon that said contracts are executed for a larger amount than isnecessary and sometimes they are executed for a less amount than is found to be necessary for theeconomic and efficient cultivation of the land.

In the present case the mortgagors evidently believed that P1,500 per month would be sufficientto supply all of their demands for the sufficient to supply all of their haciendafor the year 1920-1921.They were to receive the money little by littleuntil the P12,000 was taken. If some favorable conditionhad arisen during the year was taken. If some favorable condition had arisen during the year so that thesum of P1,500 was unnecessary, we cannot bring ourselves to believe that the mortgage could havecompelled them to have receive during the year the full P12,000. In that event could the mortgage forP12,000? Such a result would have been unconscionable. The courts would not have permitted theforeclosure of a mortgage for P12,000 when, for example, but P6,000 had been actually delivered to themortgagors. Upon the other hand, it is well known that in contracts of "advancements" many conditionsmay arise during the agricultural year which would necessitates, for the efficient and economic cultivationof the crops, the use of more money than either of the parties to the contract had contemplated; such as


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floods, storms disease among animals which might decimate them, all of which conditions would make itnecessary to use more money that the parties had contemplated. Conditions might arise during the yearwhich would render absolutely useless the expenditure of the amount of money mentioned in the contractof advancements unless additional amounts are expended.

The best proof in the present case, that the mortgagors needed more money of the efficient andeconomic cultivation of their hacienda than they had contemplated at the time of making said mortgage,

is found in Exhibit B. Under Exhibit A they were only entitled to receive P1,500 per month. By reference toExhibit B, it will be seen that during the very first month after the execution of said contract, or betweenthe 15th day of April, 1920 and 18th day of May, 1920, they received the sum of P{2,500 in cash insteadof P1,500. The same condition is shown in other months. It is admitted that during the year themortgagors received in cash and effects the sum of P34,245.29. They admit that the plaintiff had no othersecurity for the payment of the difference between the P34,245.29 plus the interest, and the P12,000unless said difference was covered by the mortgage. The appellant contends that the phrase in paragraph10 "and such other amounts as may be the due" (in addition to the P12,000) was inserted in saidmortgage for the very purpose of covering any amount or amounts received by the mortgagors over andabove the P12,000. It is also admitted that by Exhibit B there is still due the amount of P22,807.09.Whether or not that amount should be reduced by payments represented by Exhibits 1, 2, and 3 will be

discussed later.This action was not begun until nearly one year after the termination of the contract, and yet the

mortgagors admit that they continued to receive advancements during that period. They admit that theynever called the attention of the mortgagee to the fact that the advancements received by them, over andabove the P12,000, were not covered by the mortgage. They admit that they did not ask for acancellation of the mortgage at the time the amounts paid equaled P12,000. They admit that they madeno claim nor representation to the mortgagee that the mortgage had been paid, until nearly four yearsafter the action had been commenced. Their only excuse for not making that representation to themortgagee was the fear that they would not received more advancements. In other words the mortgagorswere trying to deceive the mortgagee and to increase their indebtedness to him believing that he had nosecurity for advancements amounting to more than P22,000.

The rule, of course, is well settled that an action to foreclose a mortgage must be limited to theamount mentioned in the mortgage. The exact amount, however, for which the mortgage is given neednot always be specifically named. The amount for which the mortgage is given may be stated in definiteor general terms, as is frequently the case in mortgages to secure future advancements. The amountnamed in the mortgage does not limit .the amount for which it may stand as security, if, from the fourcorners of the document, the intent to secure future indebtedness or future advancements is apparent.Where the plain terms, of the mortgage, evidence such an intent, they will control as against a contentionof the mortgagor that it was the understanding of the parties that the mortgage was security onlyfor thespecific amount named. (Citizens Savings Bank vs. Kock, 117 Mich., 226.) In that case the amountmentioned in the mortgage was $7,000. The mortgage, however, contained a provision that "themortgagors agree to pay said mortgagee what sum of money which they may now or hereafter owe saidmortgagee." At the time the action of foreclosure was brought the mortgagors owed the mortgagee thesum of $21,522. The defendants contended that the amount to be recovered in an action for foreclosureshould be limited to the mount named as consideration for the mortgage did not limit the amount forwhich the mortgage stood as security, if, from the whole instrument the intent to secure futureindebtedness could be gathered. The court held that a mortgage to cover future advances is valid.(Michigan Insurance Co., vs. Brown, 11 Mich., 265; Jones on Mortgages, 1 sec. 373; Keyes vs. Bump's

Administrator, 59 Vt., 391; Fisher vs. Otis, 3 Pins., 78; Brown vs. Kiefer, 71 N. Y., 610; Douglas vs.Reynolds, 7 Peters [U. S.], 113; Shores vs. Doherty, 65 Wis., 153.)

Literal accuracy in describing the amount due, secured by a mortgage, is not required, but thedescription of the debt must be correct and full enough to direct attention to the sources of correctinformation in regard to it, and be such as not to mislead or deceive as to the amount of it, by the


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language used. Reading the mortgage before us from its four corners, we find that the description of thedebt is full enough to give information concerning the amount due. The mortgage recites that it is givento secure the sum of P12,000, interest, commissions, damages, and allother amounts which may befound to be due at maturity. The terms of the contract are sufficiently clear to put all parties who mayhave occasion to deal with the property mortgaged upon inquiry. The parties themselves from the veryterms of the mortgage could not be in ignorance at any time of the amount of their obligation and thesecurity held to guarantee the payment.

When a mortgage is given for future advancements and the money is paid to the mortgagor "littleby little" and repayments are made from time to time, the advancements and the repayments must beconsidered together for the purpose of ascertaining the amount due upon the mortgage at maturity.courts of equity will not permit the consideration of the repayments only for the purpose of determiningthe balance due upon the mortgage. (Luengo & Martinez vs. Moreno, 26 Phil., 111.) The mere fact that incontract of advancements the repayments at any one time exceeds the specific amount mentioned in themortgage, will not have the effect of discharging the mortgage when the advancements at that particulartime are greatly in excess of the repayments; especially is this true when the contract of advancement ormortgage contains a specific provision that the mortgage shall cover all "such other amounts as may bethen due."Such a provision is added to the contract of advancements or mortgage for the expresspurpose of covering advancements in excess of the amount mentioned in the mortgage. (Luengo &Martinezvs. Moreno, supra.)

The sum found to be owing by the debtor at the termination of the contract of advancementsbetween him and the mortgagee, during continuing credit, is still secured by the mortgage on the debtor'sproperty, and the mortgagee is entitled to bring the proper action for the collection of the amounts stilldue and to request the sale of the property covered by the mortgage. (Luengo & Martinez vs.Moreno, supra; Russell vs. Davey, 7 Grant Ch., 13; Patterson First National Bank vs. Byard, 26 N. J.Equity, 225)

Under a mortgage to secure the payment of future advancements, the mere fact that therepayments on a particular day equal the amount of the mortgage will not discharge the mortgage beforematurity so long as advancements may be demanded and are being received. (Luengo & Martinez vs.Moreno, supra.)

We now come to the questions (a) What was the real amount of the mortgage given to secure the"advancements" and (b) What amount or amounts have been paid and the balance due, if any?

The appellant contends that the advancements including the interest secured by the mortgageamounts of P36,964.27. The mortgagors admit that the advancements including the interest was equal tothat amount. They also admit that the payments amounts of P14,157.18. They admit that there is abalance due from them to the appellant in the sum of P22,807.09. The contend, however, that themortgage only secures the repayment of the sum of P12,000 and interest and damages. They alsocontend that the payments already made have been more than sufficient to pay the full amount of themortgage.

Contracts must be interpreted from their four corners. It will be observed from what has been saidabove, that the contract of advancements was given to secure the payment of (a) P12,000, interest ,

commissions and damages, etc., and (b) "such other amounts as may be then due" (at the termination ofthe contract), from the mortgagors to the mortgagee. In our judgment the contract of advancements(Exhibit A) therefore not only covers the P12,000, etc., but also all "such other amounts as may be thendue" at the termination of the contract. It has been settled by a long line of decisions that mortgagesgiven to securefuture advancements are valid and legal contract; that the amounts named asconsideration in said contracts of mortgage do not limit the amount for which the mortgage may stand assecurity, if, from the whole instrument, the intent to secure future and other indebtedness can begathered. (Michigan Insurance Co. vs. Brown, 11 Mich., 265; Keyes vs. Bump's Administrator, 59 Vt., 391;Citizens' Savings Bank vs. Kock, 117 Mich., 225; Jones on Mortgages, secs. 364-378; 27 Cyc., pp. 1069-


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1073 and cases cited; Fisher vs. Otis, 3 Pin., 78; Brown vs. Kiefer, 71 N. Y., 610; Hellyer vs. Briggs, 55Iowa, 185.)

It has been decided in many cases that the consideration named in a mortgage for futureadvancements do not limit the amount for which such contract may stand as security, if, from the fourcorners of the document, the intent to secure future indebtedness is apparent. Where, by the plain termsof the contract, such an intent is evident, it will control as against the contention of the mortgagor that itwas the intention of the parties that the mortgage was secured only for the consideration expressly

named (Citizens' Savings Bank vs. Kock, supra.)

And it has been held also that oral proof may be adduced or the purpose of showing the realintent of the parties in contracts of advancements. In the case of the Citizens' Savings Bank vs. Kock theoriginal contract for future advancements was for the sum of $7,000. The contract, however, containedthe provision "that said mortgagors agree to pay said mortgage any sum of money which they may nowor hereafter owe." An action was brought there had been advanced to the mortgagors more than$21,000. The mortgagors contended that but $7,000 could be could be collected. The court held that, bythe terms of the mortgage, the mortgagors were liable for the $21,000 and rendered a judgment inaccordance with that conclusion. (Newkirk vs. Newkirk, 56 Mich., 525; Reed vs. Rochford, 62 N. J. Equity,186; Bowen vs. Ratcliff, 140 Ind., 393.)

A mortgage given to secure advancements is a continuing security and is not discharged byrepayment of the amount named in the bond or mortgage until the full amount of the advancements arepaid. (Shores vs. Doherty, 65 Wis., 153.)

From a full consideration of the terms of the contract or mortgage for advancements and the lawapplicable to such contracts, we must conclude that the said mortgage not only covers the P12,000 withinterest, commissions and damages, but also all the advancements which had been made thereunder.From that conclusion it must follow from the admission of the parties themselves that there is still dueand paid upon said mortgage, due to the advancements, the sum of P22,807.09. That amount, however,may be modified when we come to a consideration of Exhibits 1, 2, and 3. That conclusion disposes of thefirst assignment of error.

We now come to a discussion of the second assignment of error. The appellant contends that thelower court committed an error in giving priority to the mortgage executed and delivered in favor of the"Hospital de San Pablo de Iloilo." (Exhibit AA.) In the first place it may be noted that the alleged mortgageclaimed by said hospital was not executed until long after the mortgage was executed in favor of theappellant and was never registered. It is not a mortgage at all and could not, by any possibility, thereforebe given priority over a former mortgage legally executed and recorded. The contention of the hospitalwould, of coursed, therefore be given but little consideration except for the fact that it claims that it wasgiven priority over the mortgage held by the appellant by virtue of an oral agreement or understanding.

The facts are not disputed that the plaintiff's mortgage was executed on the 15th day of April,1920, and presented to the registrar of deeds on the 20th day of April, 1920, and actually registered onthe 16th day of June, 1920, while the mortgage in favor of the Hospital was not executed until the 17thday of June, 1920. With reference to the alleged oral agreement between a representative of theappellant and the attorneys for the hospital, it may be said that the lower court committed an error inallowing oral evidence upon that question. But even though the evidence admitted may be considered,yet in our opinion it is too indefinite and uncertain to justify the conclusion that the appellant did consentto waive the priority of the lien which he held. We are of the opinion that, aside from the question of theadmissibility of such proof, it is not sufficient to justify the conclusion that the appellant waived thepriority of his lien. The proof is not sufficient to show that the alleged representative of the appellant wasauthorized to act for him in the month of June, 1920. What we have said in relation to the secondassignment of error constitutes an answer to the third and fourth assignments of error.

Our conclusions upon this branch of the case are:


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First.That the alleged oral agreement did not give the alleged second mortgage of the "Hospital deSan Pablo de Iloilo" a priority over the mortgage of the plaintiff.

Second.That whatever may be the rule in other jurisdictions, in this jurisdiction it is anindispensable statutory requirement, in order that the instrument by which it is created be recorded in theregistry of deeds. (Art. 1875 of the Civil Code; Tobias vs. Enrico, 22 Phil., 394, 396; Lozano vs. Tan Suico,23 Phil., 16; Borcelis vs. Golingco, 27 Phil., 560.) In this case (Borcelis vs. Golingco) the late Chief Justice

Arellano said: "This Supreme Court has repeatedly declared that to make a mortgage valid it is necessary

that the document constituting it be inscribed in the property registry." Such documents, however, arevalid subsisting obligations between the parties thereto and may be used as evidence of proof of suchobligations. They do not, however, constitute a mortgage in this jurisdiction.

We now come to a discussion of the mortgage in favor of the Philippine National Bank for the sumof P9,500 for the purpose of determining whether or not said mortgage takes priority over the mortgageof the plaintiff. It will be remembered that the mortgage of the plaintiff was taken with the expressunderstanding that it was subject to a first mortgage in favor of the Philippine National Bank for the sumof P9,500 with interest at 8 per cent per annum for the period of ten years, payable by annualinstallments. The plaintiff thus recognized the existence of said mortgage as a prior lien. The recordshows that the said mortgage of the Philippine National Bank was paid by the intervenor, the "Hospital deSan Pablo de Iloilo," with its money. The intervenor, the "Hospital de San Pablo de Iloilo" therefore stands

in the shoes of the Philippine National Bank and has a right to be paid by the plaintiff out of the proceedsto the foreclosure whatever sum or sums it paid to the Philippine National Bank, with interest thereon at 8per cent from the date of payment until paid.

We find an examination of the record three Exhibits (1, 2, and 3) representing paymentsamounting to P11,088.68 made by the defendant Tiburcio Lutero to the plaintiff Lim Julian. Exhibit 1represents a payment of P6,306.64 for 709.07 picos of sugar. This payment was made on the 24th day ofJanuary, 1921, or more than a year before the commencement of p4,000 for 469.55 picos of sugar. Thispayment was made on the 20th day of August, 1924, during the pendency of the present action. Exhibit 3represents a payment of P782.04 made by Lutero to the plaintiff to apply on his debt of a larger sum. Noreference is made to such exhibits in Exhibit B. The appellee Tiburcio Lutero and his wife made no claimeither in the court below or in his court that the payments represented by Exhibits 1, 2, and 3 should beapplied to the reduction of their total indebtedness in the sum of P22,807.09. The record furnishes noexplanation for their failure to insist upon the application of said payments to the reduction of the totalindebtedness. The failure so to do cannot be understood, if in fact said exhibits do represent paymentsmade in liquidation of their indebtedness in the sum of P11,088.68. If in fact said payments were made toapply on the indebtedness then they should be applied for the purpose of reducing the total amount dueof principal, interest, commission and damages. The mortgagors make no point with reference to the saidpayments. In the interest of justice, however, and to the end that a final determination of the questionbetween the parties hereto may be reached, we deed it necessary to take note of the paymentsrepresented by Exhibit 1, 2, and 3.

After a careful examination of the entire record and the issues presented we have arrived at thefollowing conclusions:

First.That the mortgage (Exhibit A) executed by Tiburcio Lutero and Asuncion Magalona, his wife,to the plaintiff constitutes a lien upon the property mortgaged and is a prior lien over the allegedmortgage executed by the same parties to the "Hospital de San Pablo de Iloilo," provided, however, thatthe "Hospital de San Pablo de Iloilo" shall have a lien prior to that of the plaintiff in whatever sum or sumsit paid, together with 8 per cent interest on the mortgage held by the Philippine National Bank.

Second.That there is still due and unpaid on said mortgage the sum of P22,807.09, which amountperhaps may be reduced by the payments made and represented by Exhibits 1, 2, and 3.

Third.That the cause is remanded to the court whence it came for the purpose of havingdetermined by the lower court whether or not such payments should be applied to the liquidation of thesaid sum of P22,807.09.


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Fourth.That the cause be remanded to the lower court for the purpose of determining the amountpaid by the Hospital de San Pablo de Iloilo" for the mortgage held by the Philippine National Bank.

Subject to the conditions herein stated, it is hereby ordered and decreed (a) that the judgment ofthe lower court be and is hereby revoked; (b) that a judgment be rendered in favor of the plaintiff andagainst the defendants Tiburcio Lutero and Asuncion Magalona for the sum of P22,807.09, with interestuntil paid; (c) that the record be returned to the court whence it came for the purpose of having finallydetermined whether or not said sum P22,807.09) should be reduced by the payments made by the

defendants to the plaintiff, represented by Exhibits 1, 2 and 3. If the lower court shall find, upon suchinvestigation, that said payments should be applied to said sum (P22,807.09) then and in that case it ishereby ordered that a judgment be rendered for whatever balance may be due; (d) that a judgment beentered in favor of the "Hospital de San Pablo de Iloilo," giving it a prior lien on the property in questionover that held by the plaintiff for whatever sum or sums it paid for the mortgage held by the PhilippineNational Bank, with interest; (e) that the record be returned to the lower court for the purpose ofdetermining the amount paid by the "Hospital de San Pablo de Iloilo" for said mortgage, and when thatamount is determined, let a judgment be entered by the lower court for the sum as a prior lien upon theproperty in question to that held by the plaintiff; (f) that after the lower court has complied with theconditions herein composed, that a judgment be entered requiring the defendants Tiburcio Lutero and

Asuncion Magalona to deposit with the clerk of the Court of First Instance of the Province of Iloilowhatever sum or sums may be found to be still due the plaintiff within a period of 90 days, and in default

of compliance therewith, that an order be issued, that the property mortgaged be sold, subject to theprior lien in favor of the "Hospital de San Pablo de Iloilo." In case, however, the property is sold free fromsaid lien than and in that case the "Hospital de San Pablo de Iloilo" shall receive whatever sum or sumswith interest at 8 per cent which it paid or caused to be paid for the mortgage in favor of the PhilippineNational Bank, before any payments are made out of the proceeds to the plaintiff.

There being nothing in the record to show any liability on the part of Rafael Lutero, he is herebyabsolved from all liability under the complaint.

Let a judgment be entered in accordance herewith, without any finding as to costs. So ordered.

Villamor, Romualdez,and Villa-Real, JJ.,concur.

Ostrand, J.,concurs in the result.

[G.R. No. 118552. February 5, 1996.]

PHILIPPINE BANK OF COMMUNICATIONS,petitioner, vs. COURT OF APPEALS andTHE SPOUSES ALEJANDRO and AMPARO CASAFRANCA,respondents.

Rolando M.Lim and Manuel Pastrana for petitioner.

Julius Z.Neri for private respondents.

SYLLABUS

1.CIVIL LAW; CONTRACTS; SPECIAL CONTRACTS; MORTGAGE; AN ACTION TO FORECLOSE A MORTGAGEMUST BE LIMITED TO THE AMOUNT MENTIONED IN THE MORTGAGE. The Court is unconvinced for thecases relied upon by the petitioner are inapplicable. The doctrine first laid down in Lim Julian vs.Lutero(49Phil. 703 [1926]) pertains only to mortgages securing future advancements. The petitioner would not havebeen misled into thinking otherwise had it properly quotedMojicain its petition. The following explanation is


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helpful to distinguish future advancements from the loan in the case at bench: It is not uncommon thatpersons enter into a contract whereby they draw sums of money from their creditors, usually banks, fromtime to time, and as security therefor execute a mortgage on their property. Such contracts are sometimesexecuted for an account smaller or larger than that actually borrowed. Thus, it may appear in the contractthat the loan secured by the mortgage is only for P10,000 when by reason of advancements made by thecreditor to the debtor the amount ultimately drawn and borrowed is P20,000. Under these circumstances it isinequitable to consider that the mortgage can be foreclosed only for the amount of P10,000. Indeed, no bankor creditor would be willing to make such advancements which are in excess of the amount stipulated if thepayment thereof is not secured. . . . The obligation in this case was not a series of indeterminate sumsincurred over a period of time, but two specific amounts procured in a single instance. Thus, theinapplicability of Lim Julian. Instead, what applies here is the general rule that "an action to foreclose amortgage must be limited to the amount mentioned in the mortgage."

2.ID.; ID.; ID.;"DRAGNET" CLAUSE; DEFINED. The mortgage provision relied upon by the petitioner isknown in American jurisprudence as a "dragnet" clause, which is specifically phrased to subsume all debts ofpast or future origin. Such clauses are "carefully scrutinized and strictly construed."

3.ID.; ID.; ID.; A CONTRACT OF ADHESION SUCH AS THE MORTGAGE CONTRACT IN CASE AT BAR SHOULDBE STRICTLY CONSTRUED AGAINST THE PARTY WHO PREPARED THE AGREEMENT. The mortgage

contract is also one of adhesion as it was prepared solely by the petitioner and the only participation of theother party was the affixing of his signature or "adhesion" thereto. Being a contract of adhesion, themortgage is to be strictly construed against the petitioner, the party which prepared the agreement.

4.ID.; ID.; ID.; ANY AMBIGUITY IN A CONTRACT WHOSE TERMS ARE SUSCEPTIBLE OF DIFFERENTINTERPRETATIONS MUST BE READ AGAINST THE PARTY WHO DRAFTED IT. There is also sufficientauthority to declare that any ambiguity in a contract whose terms are susceptible of different interpretationsmust be read against the party who drafted it. A mortgage and a note secured by it are deemed parts of onetransaction and are construed together, thus, an ambiguity is created when the notes provide for thepayment of a penalty but the mortgage contract does not. Construing the ambiguity against the petitioner, itfollows that no penalty was intended to be covered by the mortgage. The mortgage contract consisted of

three pages with no less than seventeen conditions in fine print; it included provisions for interest andattorney's fees similar to those in the promissory notes; and it even provided for the payment of taxes andinsurance charges. Plainly, the petitioner can be as specific as it wants to be, yet it simply did not specify noreven allude to, that the penalty in the promissory notes would be secured by the mortgage. This can thenonly be interpreted to mean that the petitioner had no design of including the penalty in the amountsecured. SDML

5.RULES OF STATUTORY CONSTRUCTION; EJUSDEM GENERIS;APPLICATION IN CASE AT BAR. A reading,not only of the earlier quoted provision, but of the entire mortgage contract yields no mention of penaltycharges. Construing this silence strictly against the petitioner, it can fairly be concluded that the petitioner didnot intend to include the penalties on the promissory notes in the secured amount. This explains the findingby the trial court, as affirmed by the Court of Appeals, that "penalties and charges are not due for want of

stipulation in the mortgage contract." Indeed, a mortgage must sufficiently describe the debt sought to besecured, which description must not be such as to mislead or deceive, and an obligation is not secured by amortgage unless it comes fairly within the terms of the mortgage. In this case, the mortgage contractprovides that it secures notes and other evidences of indebtedness. Under the rule of ejusdem generis, wherea description of things of a particular class or kind is "accompanied by words of a generic character, thegeneric words will usually be limited to things of a kindred nature with those particularly enumerated. . . ." Apenalty charge does not belong to the species of obligations enumerated in the mortgage, hence, the saidcontract cannot be understood to secure the penalty.


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D E C I S I O N

DAVIDE, JR.,J p:

This petition for review on certiorariseeks: (1) a modification of the decision of 29 April 1994 of the Court ofAppeals in CA-G.R. CV No. 383321affirmingin totothe 20 April 1992 ruling of the Regional Trial Court (RTC)

of Cebu, Branch 16, in Civil Case No. CEB-6779;2and (2) a review of the appellate court's resolution of 4January 19953denying the petitioner's Motion for Partial Reconsideration4of the aforementioned decision.

The sole issue in this case is whether, in the foreclosure of a real estate mortgage, the penalties stipulated intwo promissory notes secured by the mortgage may be charged against the mortgagors as part of the sumssecured, although the mortgage contract does not mention the said penalties.

The Court of Appeals adopted the trial court's findings of facts, to wit:

The following antecedental facts are supported by the pleadings and evidence on record: Plaintiffspouses Alejandro and Amparo Casafranca, used to be the owners of Lot 802-B-2-B-2-F-l of thesubdivision plan Psd-698545, located in Cebu City and covered by TCT No. 32769 (Exh A). On 3

December 1976 they sold the lot to Carlos Po who paid part of the agreed price. The latter, aftersecuring a title in his name (TCT No. 66446), mortgaged the lot to the Philippine Bank ofCommunications (PBCom for short) to secure a loan of P330,000 (Exh B). It appears that in a civilaction that ensued between them, plaintiff spouses obtained a favorable judgment against Carlos Po(Exh C). Later, in an auction sale to satisfy Carlos Po's judgment obligation, plaintiff spouses acquiredthe aforesaid lot and a Certificate of Sale was executed in their favor (Exh D).

Meanwhile, under date of 9 September 1980 PBCom applied for extrajudicial foreclosure of themortgage executed by Carlos Po (Exh E), and in the succeeding auction sale held on 4 November1980, it acquired the lot at its winning bid of P1,006,540.56. The corresponding Certificate of Sale wasthen executed in its favor (Exh F). It appears further that sometime in 1981 plaintiff AmparoCasafranca who had stepped into the shoes of mortgagor Carlos Po by virtue of the auction sale in her

favor (Exh D) offered to redeem the property from PBCom by tendering to its manager, Isidore Falek,a check in the amount of P500,000 which, in her estimate, would be sufficient to settle the account ofCarlos Po. PBCom did not accept the check as it insisted that any such redemption should be at theprice it acquired the lot in the auction sale. In reaction, plaintiffs filed against PBCom Civil Case No. R-

21700 in the RTC of Cebu for nullification of the foreclosure and auction sale (Exh M). In a judgmentwhich became final and executory on 17 September 1986 (Exh H) the Court set aside the extrajudicialforeclosure and auction sale and declared that the obligation secured by the mortgage executed byCarlos Po was only P330,000 plus stipulated interest and charges (Exh G). Subsequently, in a letterdated 4 December 1986 PBCom advised plaintiff spouses to pay the sum of P884,281.38 purportedly

representing Carlos Po's principal account of P330,000, interest and charges thereon, attorney's fee[s]and realty taxes which it paid for the lot (Exh. I). Plaintiffs, however, did not agree with saidStatement of Account and since the account remained unpaid, PBCom again applied for extrajudicial

foreclosure of mortgage (Exh J), which culminated in an auction sale of the lot on 2 April 1987, during

which it was sold to Natalie Limchio for P1,184,000 (Exh L).

On 6 April 1988 plaintiffs commenced the present action to nullify the auction sale in favor of NatalieLimchio. It is alleged in the complaint that the second foreclosure was void as it was based on a

bloated account. Plaintiffs further alleged that PBCom refused to turn over the correct amount ofresidue after paying off the mortgage and costs of the sale. Upon plaintiffs' application, the Court

issued on 7 April 1988 a TRO enjoining defendant sheriffs from transferring the title of the lot in favorof defendant Natalie Limchio and the latter, from taking possession of the lot. This was followed by apreliminary injunctive writ which was issued after hearing and upon plaintiffs' filing of a bond.

However, before the pre-trial conference could be held, plaintiffs signified their intention to pursueonly their alternative demand for the residue or balance of the proceeds of the auction sale less the
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correct outstanding account which was secured by the mortgage. For this purpose they filed anamended complaint only against PBCom (pp. 296305, rollo) which was admitted, in which they prayfor recovery of the sum of P625,724.90 as residue after paying off the outstanding account [to] thetune of P558,275.80, realty taxes paid by PBCom and costs of the foreclosure proceeding. Hence,what is left for the Court to ascertain is the true or correct account of Carlos Po as of the auction saleon 2 April 1987 after which, the determination of the residue would follow. . . .5

As to the amounts due the parties, the trial court computed them as follows: RHLY

The mortgage contract (Exh B) explicitly provides for interest of "Twelve per cent (12%) per annum orat such higher rate or rates as may be fixed by the MORTGAGEE from time to time, and shall bepayable at the end of every month or otherwise, as the MORTGAGEE may elect and, if not so paid,shall be added to, and become part of, the principal and shall earn interest at the same rate as theprincipal." It is then evident that the parties agreed to capitalize the interest due and unpaid, which asadded principal, shall earn new interest. Herein lies the discrepancy in the computation respectivelysubmitted by plaintiffs (pp. 190191; 204209, Rollo) and PBCom (pp. 181183, Rollo), for while theformer assessed only conventional or simple interest, the latter computed compound interestconformable to the mortgage contract. In this connection, the Court finds PBCom's computation ofinterest to be in accordance with the contractual stipulations of the parties. It may be stressed thatthe increase in the rate of interest from 12% to 14% as of 1 December 1979 is authorized in themortgage contract itself as sanctioned by CB Circular No. 705 dated 1 December 1979. PBCom isfurther entitled to reimbursement for realty taxes it paid for the lot. But of course, penalties andcharges are not due for want of stipulation in the mortgage contract.

To recapitulate, the principal loan obtained by Carlos Po (now succeeded by plaintiffs) on 15December 1976 was P330,000. Interest thereon for the first year at 12% per annumwas retained ordeducted from the proceeds of the loan. For the next two (2) years or from 25 December 1977 to 30November 1979, compound interests earned at the same rate reached P77,660. And then from 1

December 1979 to 2 April 1987 (date of auction sale) the rate of interest was raised to 14% perannum,as authorized in the mortgage contract. At such rate, compound interests for said periodwould be in the sum of P343,805. Adding both interest earnings to the principal obligation, the total

account would then be P751,465. Additionally, the mortgage contract provides for attorney's fee[s]equivalent to 10% of the amounts due. Hence, the sum of P75,146.50 in the concept of attorney's

fee[s] would raise the account to P826,611.50. Finally, the amount of P83,028.18 representing realtytaxes paid by PBCom for the lot, inclusive of interest, which must be reimbursed, will bring the grandtotal of the account to P909,639.68.

On the other hand, the publication and other expenses incurred in the foreclosure and auction sale

[to] the tune of P707 should be deducted from the amount of P1,184,000 which Natalie Limchio paidfor the lot, leaving net proceeds of P1,183,293. Subtracting therefrom the total account due toPBCom, the residue would be P273,653.32, which must be delivered to plaintiffs. 6

In the light of the above, the trial court thus ruled:

WHEREFORE, foregoing premises considered, judgment is hereby rendered in favor of plaintiffsAlejandro and Amparo Casafranca for the sum of P273,653.32 representing the residue or balance ofthe proceeds of the auction sale conducted on 2 April 1987 after deducting therefrom publicationexpenses and paying off the total account due to defendant Philippine Bank of Communications, and

ordering the latter to pay unto plaintiffs the aforesaid amount.

SO ORDERED.7

Both parties appealed from the above judgment to the Court of Appeals. The petitioner questioned the lowercourt's failure to include in its computation the penalty stipulated in the aforementioned promissory notes. On
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the other hand, the private respondents advanced that: (1) the interest on the sum due to the petitionershould have stopped running on 31 July 1981; (2) the lower court should have allowed twelve percent (12%)interestper annum on the amount awarded to the private respondents from 3 April 1987 until the obligationwas fully paid; and (3) the lower court should have awarded the private respondents moral and exemplarydamages, attorney's fees, and litigation expenses. ELC

The Court of Appeals affirmed the decision of the trial court in totoand subsequently denied the parties'separate motions for reconsideration.

The petitioner and the private respondents then instituted with this Court separate petitionsfor certiorariunder Rule 45 of the Rules of Court. While that of the petitioner was docketed as G.R. No. 11855(this case), that of the private respondents was docketed as G.R. No. 118809 and assigned to the SecondDivision. However, the two actions were not consolidated.

The private respondents in this case filed their Comment 8 to the petition as required in the resolution of 8February 1995.9

On 13 March 1995, the Second Division issued a resolution which dismissed G.R. No. 118809, thus:

[F]or failure to persuasively demonstrate any reversible error in the challenged judgment of the FourthDivision of the Court of Appeals promulgated on April 29, 1994 affirming in toto that of the RegionalTrial Court of Cebu rendered by Judge (now Court of Appeals Justice) Godardo A. Jacinto on April 20,1992 (Civil Case No. CEB-6779) it appearing on the contrary, that both judgments correctlyappreciated the evidence and applied the relevant legal provisions in ruling, essentially, that there hadbeen no valid tender of payment by petitioners of the amount of the mortgage liability burdening theproperty in question, and that the computation of the amount rightly due said petitioners had beencorrectly made in accordance with the law applicable to the case (Act No. 3135, as amended).

Moreover, the record discloses no important and special reason for the exercise by this Court of itsdiscretionary power of review in this case. 10

On 9 May 1995, this Court received the private respondents' Manifestation11drawing our attention to this

resolution.

On 23 August 1995, we gave due course to the petition12and required the parties to submit their respectivememoranda, which they subsequently did. The private respondents contended that "[a]ctually there are nomore issues left for this Honorable Court to decide because all the issues in controversy in this case has [sic]already been decided with finality by the Second Division of the Supreme Court in G.R. No. 118809."13Towhich, petitioner replied14that the G.R. No. 118809 resolution dispensed with only those issues raisedtherein by the private respondents and did not touch on the questions raised in this case.

The petition is not impressed with merit.

The two promissory notes in question, signed by Carlos Po,15are similarly worded and their pertinentprovisions read:

For value received, I/we jointly and severally, promise to pay the Philippine Bank of Communications,at its office in the City of Cebu, Philippines the sum of THREE HUNDRED THOUSAND PESOS(P300,000.00), Philippine Currency, together with interest thereon at the rate of TWELVE % perannumuntil paid, which interest rate the Bank may at any time without notice, raise within the limitsallowed by law, and I/we also agree to pay, jointly and solidarily 12% per annum penalty charge, byway of liquidated damages should this note be unpaid or is not renewed on due date.

xxx xxx xxx
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Should it become necessary to collect this note through an attorney-at-law, I/we hereby expresslyagree to pay, jointly and severally, ten per cent (10%) of the total amount due on this note asattorney's fees which in no case shall be less than P100.00 exclusive of all costs and fees allowed bylaw stipulated in the contract of real estate mortgage if any there be.

while the mortgage contract provides in part:16

This mortgage is given as security for the payment to the MORTGAGEE on demand or at maturity, as

the case may be, of all promissory notes, letters of credit, trust receipts, bills of exchange, drafts,overdrafts and all other obligations of every kind already incurred or which hereafter may be incurredby the MORTGAGOR(S) and Po's All Electrical Supply either as principal debtor(s) or as surety(ies) orin any other capacity, including discounts of Chinese and other drafts, bills of exchange, promissorynotes, even without any further endorsements by the Mortgagor(s), said property or properties tostand security for the payment of the said obligations to the fullest extent and for all that it is (or theyare) worth, to the extent of THREE HUNDRED THIRTY THOUSAND PESOS (P330,000.00) Philippine

Currency.

xxx xxx xxx

This mortgage shall be subject to the following conditions, to wit:

FIRST: The interest on the obligations secured by this mortgage shall be computed atthe rate of Twelve per cent (12%) per annum or at such other or higher rate or rates as maybe fixed by the MORTGAGEE from time to time, and shall be payable at the end of every

month or otherwise, as the MORTGAGEE may elect and if not so paid, shall be added to, andbecome part of, the principal and shall earn interest at the same rate as the principal.

xxx xxx xxx

EIGHTH: The MORTGAGOR(S) shall, during the existence of this mortgage, promptlypay when due all taxes or assessments of every kind that may be levied upon the property or

properties hereby mortgaged and deliver the corresponding tax receipts to the MORTGAGEE, .. . In case of failure on the part of the MORTGAGOR(S) to comply with the provisions of thiscondition, the MORTGAGEE may and is hereby authorized to pay such taxes or assessments

and to have the buildings insured; and any sum or sums so spent by the MORTGAGEE shall befully secured hereby and be subject to the terms hereof . . .

xxx xxx xxx

ELEVENTH: The expenses incurred in the drafting, acknowledgment and theregistration of this mortgage and of its cancellation, shall be for the account of, and shall be

paid by, the MORTGAGOR(S).

TWELFTH: Should the MORTGAGEE find it necessary to resort to the courts in order tocollect any amount which may be due, the interest thereon or the expenses incurred onaccount of the matters enumerated in the previous paragraphs, or should the MORTGAGEE in

any manner and for any reason be involved in litigation on account of the property orproperties mortgaged, or should foreclosure proceedings be instituted in accordance with thefourth condition hereof or should the MORTGAGOR(S) encumber the property or properties

hereby mortgaged with a second mortgage without the written consent of the MORTGAGEE,the MORTGAGEE shall be allowed a sum equivalent to Ten Per Centum (10%) of all theamounts due, but in no case less than THIRTY THREE THOUSAND PESOS as attorney's fees,

said amount to be considered part of the principal sum hereby secured, this mortgageanswering for its payment accordingly. SDML
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We immediately discern that the mortgage contract does not at all mention the penalties stipulated in thepromissory notes. However, the petitioner insists that the penalties are covered by the following provision ofthe mortgage contract:

This mortgage is given as security for the payment to the MORTGAGEE on demand or atmaturity, as the case may be, of all promissory notes, letters of credit, trust receipts, bills ofexchange, drafts, overdrafts and all other obligations of every kind already incurred or whichhereafter may be incurred. . . .

The petitioner's insistence is based on the supposed rule:

[T]hat the determination of the mortgage debt would not be limited on the mortgage contractitself if from the face thereof, it is apparent that other obligations are also intended to besecured.

To bolster its argument, the petitioner relies on the cases represented by Mojica vs. Court of Appeals17whichheld:

It has long been settled by a long line of decisions that mortgages to secure future advancements arevalid and legal contracts; that the amounts named as consideration in said contract do not limit theamount for which the mortgage may stand as security if from the four corners of the instrument the

intent to secure future and other indebtedness can be gathered.18

The Court is unconvinced for the cases relied upon by the petitioner are inapplicable. The doctrine first laiddown in Lim Julian vs. Lutero19pertains only to mortgages securing future advancements.

The petitioner would not have been misled into thinking otherwise had it properly quoted Mojicain itspetition. The following explanation is helpful to distinguish future advancements from the loan in the case atbench:

It is not uncommon that persons enter into a contract whereby they draw sums of money from their

creditors, usually banks, from time to time, and as security therefor execute a mortgage on theirproperty. Such contracts are sometimes executed for an account smaller or larger than that actually

borrowed. Thus, it may appear in the contract that the loan secured by the mortgage is only forP10,000 when by reason of advancements made by the creditor to the debtor the amount ultimatelydrawn and borrowed is P20,000. Under these circumstances it is inequitable to consider that themortgage can be foreclosed only for the amount of P10,000. Indeed, no bank or creditor would bewilling to make such advancements which are in excess of the amount stipulated if the paymentthereof is not secured . . .20

The obligation in this case was not a series of indeterminate sums incurred over a period of time, but twospecific amounts procured in a single instance. Thus, the inapplicability of Lim Julian. Instead, what applieshere is the general rule that "an action to foreclose a mortgage must be limited to the amount mentioned in

the mortgage."21

Aside from the foregoing, other factors militate against the petitioner's stance.

The mortgage provision relied upon by the petitioner is known in American jurisprudence as a "dragnet"clause, which is specifically phrased to subsume all debts of past or future origin. Such clauses are "carefullyscrutinized and strictly construed."22

The mortgage contract is also one of adhesion as it was prepared solely by the petitioner and the onlyparticipation of the other party was the affixing of his signature or "adhesion" thereto. Being a contract of
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adhesion the mortgage is to be strictly construed against the petitioner, the party which prepared theagreement.23

A reading, not only of the earlier quoted provision, but of the entire mortgage contract yields no mention ofpenalty charges.24Construing this silence strictly against the petitioner, it can fairly be concluded that thepetitioner did not intend to include the penalties on the promissory notes in the secured amount. Thisexplains the finding by the trial court, as affirmed by the Court of Appeals, that "penalties and charges arenot due for want of stipulation in the mortgage contract."25

Indeed, a mortgage must sufficiently describe the debt sought to be secured, which description must not besuch as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly withinthe terms of the mortgage.26In this case, the mortgage contract provides that it secures notes and otherevidence of indebtedness. Under therule of ejusdem generis,27where a description of things of a particularclass or kind is "accompanied by words of a generic character, the generic words will usually be limited tothings of a kindred nature with those particularly enumerated. . . ."28A penalty charge does not belong tothe species of obligations enumerated in the mortgage, hence, the said contract cannot be understood tosecure the penalty. LLpr

There is also sufficient authority to declare that any ambiguity in a contract whose terms are susceptible of

different interpretations must be read against the party who drafted it.29

A mortgage and a note secured by it are deemed parts of one transaction and are construedtogether,30thus, an ambiguity is created when the notes provide for the payment of a penalty but themortgage contract does not. Construing the ambiguity against the petitioner, it follows that no penalty wasintended to be covered by the mortgage. The mortgage contract consisted of three pages with no less thanseventeen conditions in fine print; it included provisions for interest and attorney's fees similar to those in thepromissory notes; and it even provided for the payment of taxes and insurance charges. Plainly, thepetitioner can be as specific as it wants to be, yet it simply did not specify nor even allude to, that the penaltyin the promissory notes would be secured by the mortgage. This can then only be interpreted to mean thatthe petitioner had no design of including the penalty in the amount secured.

It should also be noted that the private respondents consistently excluded penalty charges in theircomputation of the amount due to the petitioner,31while the petitioner seemed indecisive in including thesaid charges.

In its Manifestation32of 14 May 1988 before the trial court, the petitioner computed the penalty charge asfollows:

Penalty charge on the principal

amount of P330,000.00 from

Dec. 25, 1977 to April 2, 1987

at the rate of 8% per annum(P)248,233.33

The promissory notes provided for a 12%per annum penalty,33not eight percent (8%). The petitionerexplained this discrepancy in its Memorandum34submitted to the trial court, claiming:

On the contrary, the bank's computation of the actual amount of the mortgage debt should be upheld.In fact, the bank was lenient on the spouses in computing the amount of the debt. For instance, therate of charges stipulated is 12% per annum. . . Yet the bank computed the charges at a much lesserrate . . . thereby lessening the actual amount of the mortgage debt.35
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The petitioner, however, included in its Offer of Exhibits:36

14.EXHIBIT "14"Promissory Note No. 3838

dated 25 October 1977.

"14-A"Stipulation on penalty/bank charges.

PURPOSE:

. . . 3) It is stipulated that PBCom could impose penalty charges of 12% per annum; and 4) PBComwas liberal on plaintiffs as it did not impose the full extent of the stipulated charges.

Far then from being a display of leniency or liberality, the above circumstances evince the petitioner'suncertainty as to whether penalty charges were actually due it. In fact, in a statement of account37signed bythe petitioner's Senior Vice-President, Isidore Falek, there was no mention of a penalty charge, althoughthere was an entry stating:

Interest

xxx xxx xxx

8% Bank chargesP 248,233.33

Furthermore, the promissory notes are clear that the penalty shall be at 12%per annum, neither more norless. Thus, when the petitioner claims that under the same notes it could impose, as in fact it did, the lowerpenalty of 8% contrary to what was covenanted the petitioner only reveals that it is wont to stipulatewhat it does not mean. The private respondent then should not be faulted for the petitioner's imperfection,and the latter must bear the consequences of its failings.

It is interesting to note that the petition in this case did not include a computation of the sum due as penalty

which is the very matter in dispute. The petitioner merely pegged its claim at "12% per annumon theprincipal amount of P330,000.00 computed from 1977," 38 which was likewise a departure from the 8%interest rate which it insisted upon during trial.

After interpreting the mortgage contract strictly against the petitioner, considering the intention of the partiesas evidenced by their various pleadings and assertions, the inescapable conclusion is that the mortgagecontract did not authorize the petitioner to include in the secured amount the penalty stipulated in thepromissory notes. The mortgage contract did not contain a trace of the said penalty and, proceeding by therule that "an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage," suchpenalty can not be recovered on the foreclosure of the mortgage.

WHEREFORE, finding no reversible error on the part of respondent Court of Appeals, its challenged decisionof 29 April 1994 in CA-G.R. CV No. 38332 is hereby AFFIRMED in toto.

Costs against the petitioner. LexLibris

SO ORDERED.

Narvasa, C.J., Melo, Francisco,and Panganiban, JJ.,concur.
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[G.R. No. 150197. July 28, 2005.]

PRUDENTIAL BANK,petitioner, vs. DON A. ALVIAR and GEORGIA B.ALVIAR,respondents.

Gella Danguilan Nabaza & Associates for petitioner.

Manuel M. Lazaro & Associates for respondents.

SYLLABUS

1.MERCANTILE LAW; PRIVATE CORPORATIONS; CORPORATION HAS A PERSONALITY SEPARATE ANDDISTINCT FROM THAT OF ITS OFFICERS AND STOCKHOLDERS. Well-settled is the rule that a corporationhas a personality separate and distinct from that of its officers and stockholders. Officers of a corporation arenot personally liable for their acts as such officers unless it is shown that they have exceeded their authority.

However, the legal fiction that a corporation has a personality separate and distinct from stockholders andmembers may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as a vehicle forthe evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues. PNBD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the respondents, is not within thecontemplation of the "blanket mortgage clause." Moreover, petitioner is unable to show that respondents arehiding behind the corporate structure to evade payment of their obligations. Save for the notation in thepromissory note that the loan was for house construction and personal consumption, there is no proofshowing that the loan was indeed for respondents' personal consumption. Besides, petitioner agreed to theterms of the promissory note. If respondents were indeed the real parties to the loan, petitioner, a big, well-established institution of long standing that it is, should have insisted that the note be made in the name ofrespondents themselves, and not to Donalco Trading, Inc., and that they sign the note in their personal

capacity and not as officers of the corporation.

2.CIVIL LAW; OBLIGATIONS AND CONTRACTS; LOAN; "BLANKET MORTGAGE CLAUSE"; ELUCIDATED. A"blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which isspecifically phrased to subsume all debts of past or future origins. Such clauses are "carefully scrutinized andstrictly construed."

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