UNIVERSITY OF MINDANAO, INC. vs. BANGKO SENTRAL NG PILIPINAS, ET AL.

G.R. No. 194964-65, January 11, 2016

Leonen, J. Second Division

Topic: Delay; Demand; Unenforceable contract

Nature: Appeal from a Decision of the CA

FACTS:

The University of Mindanao is an Educational Institution. It was chaired by Sps. Torres in the year 1982. Before then, the Sps. Torres incorporated and operated 2 thrift banks, FISLAI and DSLAI. In 1982, BSP issued standby emergency credit for FISLAI and DSLAI. This credit was evidenced by 3 promissory notes (PNs). The University of Mindanao executed a deed of real estate mortgage over its property which served as security for the thrift banks' credit. The mortgage was signed by the Vice President of the university who presented a secretary's certificate showing that he was authorized to enter into the mortgages. FISLAI and DSLAI eventually had to enter rehabilitation and were merged into Mindanao Savings and Loan Association (MSLAI). MSLAI failed to recover and was liquidated. BSP thus informed the University of Mindanao that it would foreclose the mortgaged properties.

Thus, petitioner university filed two complaints for nullification and cancellation of mortgage: one at the RTC of Iligan and another at Davao. The petitioner claims that they never received the proceeds of any loan from BSP and that it never authorized the VP to mortgage any property. Both courts ruled in favor of Petitioner and declared the Real Estate Mortgage void. On appeal, the CA consolidated both cases and ruled in favor of respondent. The CA held that Petitioner was estopped from denying the authority of its VP, that the annotations on the titles of Petitioner’s property served as constructive notice and that there was implied ratification and that since the secretary’s certificates were notarized, they enjoyed a presumption of regularity. Hence this petition for review.

ISSUE:

1. Whether or not the action had prescribed.

2. Whether or not the petitioner had validly delegated the power to mortgage to its VP Petalcorin.

3. Whether or not the act of mortgaging the property was ratified by petitioner.

HELD:

1. NO, the action had not yet prescribed.

Prescription is the mode of acquiring or losing rights through the lapse of time. Its purpose is “to protect the diligent and vigilant, not those who sleep on their rights.” The prescriptive period for actions on mortgages is ten (10) years from the day they may be brought. Actions on mortgages may be brought not upon the execution of the mortgage contract but upon default in payment of the obligation secured by the mortgage.

A debtor is considered in default when he or she fails to pay the obligation on due date and, subject to exceptions, after demands for payment were made by the creditor. Article 1169 of the Civil Code provides:

ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

Article 1193 of the Civil Code provides that an obligation is demandable only upon due date. In other words, as a general rule, a person defaults and prescriptive period for action runs when (1) the obligation becomes due and demandable; and (2) demand for payment has been made. The prescriptive period neither runs from the date of the execution of a contract nor does the prescriptive period necessarily run on the date when the loan becomes due and demandable. Prescriptive period runs from the date of demand, subject to certain exceptions.

In this case, the running of the prescriptive period for respondent’s action on the mortgages did not start when it executed the mortgage contracts with Petitioner in 1982. In view of the termination of the existence of one of the corporations, demand was rendered unnecessary, thus prescription would start to run in 1990, the due date of the contract. Therefore, respondent had until 2000 in order to institute an action on the mortgage contract. However, under Article 1155, respondent actually interrupted, the running of the prescriptive period when it sent its demand letter to petitioner on June 18, 1999.

2. NO. The relationship between a corporation and its representatives is governed by the general principles of agency. Article 1317 of the Civil Code provides that there must be authority from the principal before anyone can act in his or her name. Hence, without delegation by the board of directors or trustees, acts of a person—including those of the corporation’s directors, trustees, shareholders, or officers—executed on behalf of the corporation are generally not binding on the corporation. The effect of a lack of authority is that under Art. 1317 and 1403, the contract becomes unenforceable.

In this case, the trial courts found that the Secretary’s Certificate and board resolution were either non-existent or fictitious and that a board meeting giving the powers never occurred. The court is bound by the findings of fact of the trial courts.

3. NO. Ratification converts an agents unauthorized act, into an act of the principal. It is a voluntary and deliberate confirmation or adoption of a previously unauthorized act. No act by petitioner can be interpreted as anything close to ratification. It was not shown that it issued a resolution ratifying the execution of the mortgage contracts. It was not shown that it received proceeds of the loans secured by the mortgage contracts. There was also no showing that it received any consideration for the execution of the mortgage contracts. It even appears that petitioner was unaware of the mortgage contracts until respondent notified it of its desire to foreclose the mortgaged properties.

WHEREFORE, the Petition is GRANTED. The Court of Appeals' Decision dated December 17, 2009 is REVERSED and SET ASIDE. The Regional Trial Courts' Decisions of November 23, 2001 and December 7, 2001 are REINSTATED.

SPOUSES JAIME AND MATILDE POON v. PRIME SAVINGS BANK REPRESENTED BY THE PHILIPPINE DEPOSIT INSURANCE CORPORATION AS STATUTORY LIQUIDATOR

G.R. No. 183794; June 13, 2016

Sereno. J., First Division

Topic: Contracts with a penal clause; Fortuitous Event

Nature: Appeal from a decision of the CA

FACTS:

The petitioners owned a commercial building. They executed a 10-year contract of lease over building with respondent Prime Savings Bank for the latter to use it as a branch office. They agreed to a fixed monthly rental with an advance payment. The contract also provided:

Should the lease[d] premises be closed, deserted or vacated by the LESSEE, the LESSOR shall have the right to terminate the lease ...

x x x

The LESSOR shall thereupon have the right to enter into a new contract with another party. All advanced rentals shall be forfeited in favor of the LESSOR.

Three years later, the BSP placed respondent under receivership of the PDIC and eventually ordered its litigation. The respondent vacated petitioner’s building and PDIC then demanded return of the advance rentals. Petitioners refused to return the advanced rentals. Thus respondent commenced this case for rescission of contract and recovery of sum of money.

The RTC ruled in favor of Petitioners and ordered the partial rescission of the contract insofar as the advance payment was forfeited. It held that the PDIC’s closure of their business was a fortuitous event. The CA affirmed but applied Art. 1229 instead.

ISSUE:

1. Whether or not respondent may avail of the remedy of rescission.

2. Whether or not the closure of respondent’s business is a fortuitous event.

3. Whether or not the forfeiture of the advance rentals was a penal clause.

4. Whether or not the penalty may be equitably reduced.

HELD:

1. YES. Respondents are entitled to rescission. The legal remedy of rescission is by no means limited to the situations covered in Arts. 1381 and 1382. The New Civil Code actually uses the term “rescission” in two different contexts. The first refers to breach of contract under Art. 1191, also known as the remedy of “resolution”; the second is rescission by reason of lesion or economic prejudice under Art. 1381. The first is a principal action based on breach of a party, while the second is a subsidiary action. From the allegations of the complaint, it is clear that respondent’s right of action rests on the alleged abuse of petitioner’s right under the contract on the theory that petitioner tenaciously enforced their right to forfeit the advanced rentals which was in bad faith since they knew that respondent was already insolvent. IN other words, respondents are seeking rescission under Art. 1191.

2. NO. The closure of respondent’s business was neither a fortuitous or unforeseen event. In this case, for it to be considered a fortuitous event, there has to be bad faith or arbitrariness on the part of the BSP. Instead, its decision to place respondent under receivership and liquidation was pursuant to R.A. No. 7653, moreover, respondent was partially accountable for closure of its banking business. Neither is this case, a case of unforeseen event under Art. 1267. After all, parties to a contract are presumed to have assumed the risks of unfavorable developments. It is only in absolutely exceptional changes of circumstance therefore that equity demands assistance for the debtor. In Tagaytay Realty vs. Gacutan the requisites for the application of Art. 1267 are:

1. The event could not have been foreseen at the time of the execution of the contract.

2. It makes performance of the contract extremely difficult but not impossible.

3. It must not be due to the act of any of the parties.

4. The contract is for a future prestation.

The case explains that mere inconvenience, unexpected impediments, increased expenses or even pecuniary inability to fulfill an engagement will not relieve the obligor from an undertaking that it has knowingly and freely contracted. In this case, the first and third requisites are lacking. Since the lease was for 10 years, the parties should have considered the possibility of closure of business.

3. YES. The forfeiture clause in the contract is penal in nature. A provision is a penal clause if it calls for the forfeiture of any remaining deposit still in the possession of the lessor without prejudice to any other obligation still owing, in the event of the termination or cancellation of the agreement by reason of the lessee’s violation of any of the terms and conditions thereof. This kind of agreement may be validly entered into the by the parties. In this case, it is evident that the stipulation on the forfeiture of advance rentals is a penal in the sense that it provides for liquidated damages. The penalty for the premature termination of the contract works both ways. The penalty was to compel respondent to complete the 10-year term of the lease. Petitioners, too were similarly obliged to ensure the peaceful use of the building by respondent for the duration of the lease under paid of losing the remaining advance rentals paid by the respondent.

4. YES. A reduction of the penalty agreed upon by the parties is warranted under Article 1229 of the New Civil Code.

The general rule is that courts have no power to ease the burden of obligations voluntarily assumed by parties, just because things did not turn out as expected at the inception of the contract. It must be noted that this case was initiated by the PDIC in furtherance of its statutory role as the fiduciary of Prime Savings Bank. As the state-appointed receiver and liquidator, the PDIC is mandated to recover and conserve the assets of the foreclosed bank on behalf of the latter's depositors and creditors. In other words, at stake in this case are not just the rights of petitioners and the correlative liabilities of respondent lessee. Over and above those rights and liabilities is the interest of innocent debtors and creditors of a delinquent bank establishment. These overriding considerations justify the 50% reduction of the penalty agreed upon by petitioners and respondent lessee in keeping with Article 1229 of the Civil Code, which provides for an equitable reduction of the penalty in some cases.

Under the circumstances, it is neither fair nor reasonable to deprive depositors and creditors of what could be their last chance to recoup whatever bank assets or receivables the PDIC can still legally recover. Strict adherence to the doctrine of freedom of contracts, at the expense of the rights of innocent creditors and investors, will only work injustice rather than promote justice in this case.

WHEREFORE, premises considered, the Petition for Review on Certiorari is DENIED. The Court of Appeals Decision dated 29 November 2007 and its Resolution dated 10 July 2008 in CA-G.R. CV No. 75349 are hereby MODIFIED in that legal interest at the rate of 6% per annum is imposed on the monetary award computed from the finality of this Decision until full payment.

RUTTER vs. ESTEBAN

G.R. No. L-3708; May 18, 1953; 93 Phil. 68

Ponente: Bautista Angelo

Doctrine: Inherent powers of the State; Police Power; The national economy

FACTS:

In August 20, 1941, Rutter sold to Esteban 2 parcels of land in Manila. Esteban paid 3/4ths of the purchase price and they constituted a mortgage over one of the parcels to secure the payment of the balance.

However, the war broke out and somehow, Esteban was not able to pay the balance of the purchase price on the due date and so, on August 2, 1949, Rutter instituted an action to recover the balance with the CFI.

Esteban admitted the averments of the complaint but as a defense, he claimed that his obligation was a pre-war obligation covered by the moratorium embodied in R.A. No. 342.

Section 2 of Republic Act No. 342 provides that “all debts and other monetary obligations contracted before December 8, 1941, any provision in the contract creating the same or any subsequent aggreement affecting such obligation to the contrary notwithstanding, shall not due and demandable for a period of eight (8) years from and after settlement of the war damage claim of the debtor by the Philippine War Damage Commission.”

The CFI ruled in favor of the debtor Esteban. This brings us to the sole issue raised by petitioner on appeal

ISSUE:

Whether or not R.A. No. 342, which declared a moratorium on certain pre-war obligations, is unconstitutional for violation of the Constitutional provision prohibiting the impairment of the obligation of contracts.

HELD:

Yes. R.A. No. 342 is unconstitutional.

Statutes declaring a moratorium on obligations are generally constitutional

Statutes declaring a moratorium on obligations are not new: “For some 1,400 years western civilization has made use of extraordinary devices for saving the credit structure, devices generally known as moratoria. The moratorium is postponement of fulfillment of obligations decreed by the state through the medium of the courts or the legislature. Its essence is the application of the sovereign power.”

Such laws were often passed during or after times of financial distress such as wars and disasters. Similar laws were passed in some US states after the civil war and they have been declared constitutional. Some laws however, were declared unconstitutional where the period of moratorium prescribed is indefinite or unreasonable.

The argument that moratorium laws impair the obligation of contracts does not hold water. It is justified as a valid exercise of the state of it's police power.

In the US case, Home Building and Loan Association vs. Blaisdell, it was held that:

The economic interests of the State may justify the exercise of its continuing and dominant protective power notwithstanding interference with contracts. . . .

x x x

Similarly, where the protective power of the State is exercised in a manner otherwise appropriate in the regulation of a business it is no objection that the performance of existing contracts may be frustrated by the prohibition of injurious practices. . . .

. . . . The question is not whether the legislative action affects contracts incidentally, or directly or indirectly, but whether the legislation is addressed to a legitimate end and the measures taken are reasonable and appropriate to that end.

Thus the “true test” of constitutionality of a moratorium statute “lies in the determination of the period of a suspension of the remedy. It is required that such suspension be definite and reasonable, otherwise it would be violative of the constitution.”

R.A. No. 342 is unconstitutional for being unreasonable

The moratorium law, enacted in 1948, came on the heels of executive orders likewise declaring moratoriums. With its 8 year moratorium period, it is clearly unreasonable for creditors who have to “observe a vigil of 12 years” to collect on debts which have become demandable as early as 1941. And the injustice is more patent when, under the law, the debtor is not even required to pay interest during the operation of the relief.

The court also noted that the reconstruction is paying off and that the Philippines is headed to better times. Hence the Supreme Court declared R.A. No. 342 unreasonable and oppressive and hence, null and void and without effect.

Disposition:

Esteban was ordered to pay the balance with interest at the rate of 7% per annum with 12% attorneys fees.