Jurisprudence on Foreclosure Sale

Foreclosure Sale; Effect of failure to send personal notice to the mortgagor, Credit; Loan Interests, Penalty Rates

Carlos Lim, Consolacion Lim, Edmundo Lim, Carlito Lim, Shirley Leodadia Dizon, and Arleen Lim Fernandez, Petitioners, vs. Development Bank of the Philippines, Respondent

G.R. No. 177050; July 01, 2013

Facts:  The petitioners obtained two loans from DBP to finance a cattle-raising business and executed therein a promissory note undertaking to pay the annual amortizations. To secure the loans, the petitioners executed a mortgage in favour of DBP over real properties. However, due to conflict between the government troops and the Muslim rebels in Mindanao, they were forced to abandon their cattle ranch which led to collapse of the business and failure to pay amortizations. Such financial demise of the business led to foreclosure and eventual auction of a part the mortgaged properties. But such auction of properties did not prove sufficient to cover the entire amount loaned as well as the penalties and interests thereof. The bank offered restructuring schemes to the petitioners, which were later on, cancelled by the bank due to failure to comply on the part of the petitioners. Demand letters were sent by the bank, and still, no definite response from petitioners was received, until such time that the remaining properties were auctioned, with DBP also as the highest bidder.

Issue: 

1.   Whether the foreclosure sale made by DBP was valid.
2.  Whether the penalty rates imposed was valid.

Ruling:           

1

1.     The foreclosure sale was not valid due to the bank’s failure to send a notice of foreclosure to petitioners. Such failure of DBP to comply with their actual agreement with petitioner, such as to send a notice, is a breach sufficient to invalidate the foreclosure sale. In this case, the parties stipulated in their contract of mortgage that “all correspondence relative to the mortgage including demand letters, summons or subpoenas or notification of any extra-judicial action shall be sent to the mortgagor. “ it was said that a contract is the law between the parties, and failure to comply with it constitutes a breach.

1. 2      Article 1956 of the Civil code specifically states that “no interest shall be due unless it has been expressly stipulated in writing.” Thus, the payment of interest and penalties in loans is allowed only if the parties agreed to it and reduced their agreement in writing. In this case, the petitioners never agreed to pay additional interest and penalties, thus, penalty rates imposed by DBP are illegal, and thus, void.