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CASE 1: Prudential Bank v. Alviar & Alviar Facts: 1. the Alviars obtained several loans from Prudential Bank and these include: a. loan for the amount of P250,000 as seen in a Promissory note. it was secured by a REAL ESTATE MORTGAGE over a parcel of land and this was duly annotated....

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CASE 1: Prudential Bank v. Alviar & Alviar Facts: 1. the Alviars obtained several loans from Prudential Bank and these include: a. loan for the amount of P250,000.00 as seen in a Promissory note. it was secured by a REAL ESTATE MORTGAGE over a parcel of land and this was duly annotated. b. a loan in the amount of P545K for DOnalco Trading wherein they are the officers. 2. The Real estate mortgage contained the following clause: “That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the

absolute owner incumbrances”

free

from

all

liens

and

3. The Spouses Alviar then paid P2M tp be applied to the obligations of GB Alviar Realty Development and for the release of the Real Estate Mortgage. 4. Extrajudicial Foreclosure: the petitioner then moved for the extrajudicial foreclosure of the mortgage on the property saying that there still obligations remaining to be paid. The Public auction was scheduled. 5. The complaint: the spouses Alviar then filed a complaint for damages and injunction claiming that they have already paid their principa loan secured by the mortgaged property, and thus, the mortgage cannot be foreclosed. a. Answer of the defendant Bank, the P2M payment was made by GB Alviar, which was a separate loan. 6. The trial court Ruled in favour of the plaintiff: and did not allow the foreclosure of the mortgage because according to the court, the mortgage only covered the P250k loan. a. That the other loan referred to by the defendant was secured by a foreign currency deposit b. That the P545k loan was unsecured c. That the Blanket clause alleged by the bank only covered future loans of the spouses Alviar and not to Donalco who were merely officers thereof 7. CA decision: the CA affirmed the decision of the RTC and ruled that: a. It ruled that while a continuing loan or credit accommodation based on only one security or mortgage is a common practice in financial and commercial institutions, such agreement must be clear and unequivocal.

ABBS Digest Group | Credit Transactions | Real Mortgage | Atty. Lotilla |

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b. However, the court found that respondents have not yet paid the P250,000.00 covered by PN BD#75/C-252 since the payment ofP2,000,000.00 adverted to by respondents was issued for the obligations of G.B. Alviar Realty and Development, Inc. 8. Hence, the present action by the petitioner arguing that: a. blanket mortgage clause” or the “dragnet clause” in the real estate mortgage expressly covers not only the P250,000.00 under PN BD#75/C-252, but also the two other promissory notes included in the application for extrajudicial foreclosure of real estate mortgage b. it further argues that there is no law which prohibits an obligation from being covered by 2 or more securities There are three main issues in this case: 1. WON there dragnet clause is valid 2. What does the dragnet clause cove, may it involve obligations which are already covered by other securities? 3. May foreclosure be done? Issue 1: WON the dragnet clause is valid Ruling: the dragnet clause is valid 1. The Provision in this case: “…as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect…” 2. Nature of a Dragnet clause • is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are “carefully scrutinized and strictly construed.” Mortgages of this character enable the parties to

provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. 3. Purpose • operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera 4. hence, in this case, it is clear that the petitioner and the respondent intended the real estate mortgage to secure not only the P250,000.00 loan from the petitioner, but also future credit facilities and advancements that may be obtained by the respondents. The terms of the above provision being clear and unambiguous, there is neither need nor excuse to construe it otherwise. Issue 2: What does the dragnet clause cove, may it involve obligations which are already covered by other securities? Ruling: Yes. However, following the reliance on security test, the mortgage will not secure a note that expresses on its face that is otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting the security specified therein. 1. In other words, the sufficiency of the first security is a corollary component of the “dragnet clause.” But of course, there is no prohibition, as in the mortgage contract in issue, against contractually requiring other securities for the subsequent loans. Thus, when the mortgagor takes another loan for which another security was given it could not be inferred that such loan was made in reliance solely on the original security with the “dragnet clause,” but rather, on the new security given. This is the “reliance on the security test.” Issue 3: Should the foreclosure be granted?

ABBS Digest Group | Credit Transactions | Real Mortgage | Atty. Lotilla |

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Ruling: No. the security to the debt due must be exhausted first before the REM with the dragnet clause be used. 1. It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of nonpayment of all the three promissory notes. 2. While the existence and validity of the “dragnet clause” cannot be denied, there is a need to respect the existence of the other security given for PN BD#76/C-345. a. The foreclosure of the mortgaged property should only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security for the second promissory note. CASE 2: People’s Bank & Trust Company & Atlantic Gulf and Pacific Co. of Manila v. Dahican Lumber Company, et al., FACTS: ATLANTIC sold and assigned all its right in the DALCO for the total sum of P500,000.00 of which only the amount of $50,000.00 was paid. DALCO obtained various loans from the People's Bank & Trust Company amounting to P200,000.00. DALCO also obtained, through the Bank, a loan of $250,000.00 from the Export-Import Bank of Washington D.C., evidenced by five promissory notes of $50,000.00 each, maturing on different dates, payable to the BANK or its order. As security for the payment of the loans, DALCO executed in favor of the BANK a deed of mortgage covering live parcels of land situated in the province of Camarines Norte, together with all the buildings and other improvements existing thereon and all the personal properties of themortgagor located in its place of business in the municipalities of Mambulao and Capalonga,Camarines Norte. DALCO executed a second mortgage on the same properties in favor of ATLANTIC to secure payment of the unpaid balance of the sale price of the lumber concession amounting to the sum of $450,000.00. Both deeds contained a provision which stated that it

included essential after-acquired properties such as machineries, fixtures, tools and equiptments. Both mortgages wereregistered in the Office of the Register of Deeds of Camarines Norte. Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK paid the same to the Export-Import Bank of Washington D.C. and the latter assigned to the former its creditand the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to April 1,1953 to pay the overdue promissory note. DALCO purchased various machineries, equipment, spare parts and supplies in addition to, or in replacement of some of those already owned and used by it on the date aforesaid. Pursuant to the provision of the mortgage deeds quoted heretofore regarding "after acquired properties", the BANK requested DALCO to submit complete lists of said properties but the latter failed to do so. On December 16, 1952, the Board of Directors of DALCO in a special meeting called for the purpose, passed a resolution agreeing to rescind the alleged sales of equipment, spare parts and supplies by CONNELL and DAMCO to it. On January 23, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on February 12,1953, ATLANTIC and the BANK, commenced foreclosure proceedings in the CFI of Camarines Norte against DALCO and DAMCO.

ISSUE: (1) WON “after acquired” machinery and equipment of DAMCO are included as subject of the Real Estate mortgage, thus can be foreclosed. (2) WON the deed should be registered in the Chattel Mortgage registry HELD: Yes, it can be foreclosed. (2) No more. RATIO: (1) The after acquired machinery andequipment are included in the executed mortgages. It is not disputed in the case at bar that the "after acquired properties" were purchased by DALCO in

ABBS Digest Group | Credit Transactions | Real Mortgage | Atty. Lotilla |

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connection with, and for use in the development of its lumber concession and that they were purchased in addition to, or in replacement of those already existing in the premises on July 13, 1950. In Law, therefore, they must be deemed to have been immobilized, with the result that the real estate mortgages involved herein which were registered as such did not have to be registered a second time as chattel mortgages in order to bind the "after acquiredproperties" and affect third parties. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and description taken in exchange or replacement, as well as all buildings, machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install, attach; or use in, to upon, or in connection with the premises that is, its lumber concession "shall immediately be and become subject to the lien" of both mortgages in the same manner and to the same extent as if already included therein at the time of their execution. As the language thus used leaves no room for doubt as to the intention of the parties. (2) Since under Articles 415 the new Civil Code, the properties in question being machinery,receptacles, instruments or replacements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and shall tend directly to meet theneeds of the said industry or works, are classified as immovable properties, therefore not covered bythe Chattel Mortgage Law Suffice it to say that the stipulation referred to is common, and we might say logical, in all cases where the properties given as collateral are perishable or subject to inevitable wear and tear or were intended to be sold, or to be used thus becoming subject to the inevitable wear and tear but with the understanding express or implied that they shall be replaced with others to be thereafter acquired by the mortgagor. Such stipulation is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the original value of the properties given assecurity. Indeed, if such properties were of the nature already referred to, it would be poor judgment on the part of the creditor who does not see to it that a similar provision is included inthe contract.

CASE 3 : STAR TWO (SPV-AMC), INC. vs. PAPER CITY CORPORATION OF THE PHILIPPINES FACTS: 1. Rizal Commercial Banking Corporation (RCBC), Metropolitan Bank and Trust Co. (Metrobank) and Union Bank of the Philippines (Union Bank) are banking corporations duly organized and existing under the laws of the Philippines. On the other hand, respondent Paper City is a domestic corporation engaged in the manufacture of paper products particularly cartons, newsprint and clay-coated paper. 2. From 1990-1991, Paper City applied for and was granted four (4) loans and credit accommodations by RCBC, now substituted by Star Two (SPV-AMC), Inc by virtue of Republic Act No. 9182. -The loans were secured by four (4) Deeds of Continuing Chattel Mortgages on its machineries and equipments found inside its paper plants. 3. However, RCBC eventually executed a unilateral Cancellation of Deed of Continuing Chattel Mortgage. 4. In 1992, RCBC, as the trustee bank, together with Metrobank and Union Bank, entered into a Mortgage Trust Indenture (MTI), with Paper City. -In the said MTI, Paper City acquired additional loans secured by five (5) Deed of Real Estate Mortgage, plus real and personal properties in an annex to the MTI, which covered the machineries and equipment of Paper City. 5. The MTI was later on amended and supplemented three (3) times, wherein the loan was increased and included the same mortgages with an additional building and other improvements in the plant site. 6. Paper City was able to comply with the loans but only until 1997 due to an economic crisis. 7. RCBC filed a petition for extra-judicial foreclosure against the real estate executed by Paper City including all the improvements because of payment default. 8. The property was foreclosed and subjected to public auction.

ABBS Digest Group | Credit Transactions | Real Mortgage | Atty. Lotilla |

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-The three banks as the highest bidders were issued a Certificate of Sale. 9. Paper City filed a complaint alleging that the sale was null and void due to lack of prior notice. During the pendency of the complaint, Paper City filed a motion to remove machinery out of the foreclosed land and building, that the same were not included in the foreclosure of the real estate mortgage. 10. RTC: The trial court denied the motion, ruling that the machineries and equipment were included. Thereafter, Paper City's Motion for Reconsideration, the trial court granted the same and justified the reversal by finding that the machineries and equipment are chattels by agreement thru the four Deeds of Continuing Chattel Mortgages; and that the deed of cancellation executed by RCBC of said mortgage was not valid because it was one unilaterally. RCBC's Motion for Reconsideration was denied. 11. CA: The case was petitioned at CA: 1. That Paper City gave its consent to consider the disputed machineries and equipment as real properties when they signed the MTI's and all its amendments; 2. That the machineries and equipment are the same as in the MTI's, hence treated by agreement of the parties as real properties. The CA affirmed the orders of the trial court because it relied on the plain language of the MTI's stating that nowhere from any of the MTIs executed by the parties can we find the alleged "express" agreement adverted to by petitioner. There is no provision in any of the parties’ MTI, which expressly states to the effect that the parties shall treat the equipments and machineries as real property. ISSUE/S: WON the subsequent contracts of the parties such as Mortgage Trust Indenture as well as the subsequent supplementary amendments included in its coverage of mortgaged properties the subject machineries and equipment; WON the subject machineries and equipment were considered real properties and should therefore be included in the extra-judicial foreclosure which in turn were sold to the banks. HELD: Yes. Yes. RATIO:

1. Repeatedly, the parties stipulated that the properties mortgaged by Paper City to RCBC are various parcels of land including the buildings and existing improvements thereon as well as the machineries and equipments, which as stated in the granting clause of the original mortgage, are “more particularly described and listed that is to say, the real and personal properties listed in Annexes ‘A’ and ‘B’ x x x of which the [Paper City] is the lawful and registered owner.” Significantly, Annexes “A” and “B” are itemized listings of the buildings, machineries and equipments typed single spaced in twenty-seven pages of the document made part of the records. As held in Gateway Electronics Corp. v. Land Bank of the Philippines, the rule in this jurisdiction is that the contracting parties may establish any agreement, term, and condition they may deem advisable, provided they are not contrary to law, morals or public policy. The right to enter into lawful contracts constitutes one of the liberties guaranteed by the Constitution. Law and jurisprudence provide and guide that even if not expressly so stated, the mortgage extends to the improvements. Article 2127 of the Civil Code provides: The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person. 2. Contrary to the finding of the CA, the Extra-Judicial Foreclosure of Mortgage includes the machineries and equipments of respondent. While captioned as a “Petition for Extra-Judicial Foreclosure of Real Estate Mortgage Under Act No. 3135 As Amended,” the averments state that the petition is based on “x x x the Mortgage Trust Indenture, the Deed of Amendment to the Mortgage Trust Indenture, the Second Supplemental Indenture to the Mortgage Trust Indenture, and the Third Supplemental Indenture to the Mortgage Trust Indenture (hereinafter collectively referred to as the Indenture) duly notarized and entered as x x x.” Noting that herein respondent has an outstanding obligation in the total amount of Nine Hundred One Million Eight Hundred One Thousand Four Hundred Eighty Four and 10/100 Pesos (P901,801,484.10), the petition for foreclosure prayed

ABBS Digest Group | Credit Transactions | Real Mortgage | Atty. Lotilla |

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that a foreclosure proceedings “x x x on the aforesaid real properties, including all improvements thereon covered by the real estate mortgage be undertaken and the appropriate auction sale be conducted x x x.” Considering that the Indenture which is the instrument of the mortgage that was foreclosed exactly states through the Deed of Amendment that the machineries and equipments listed in Annexes “A” and “B” form part of the improvements listed and located on the parcels of land subject of the mortgage, such machineries and equipments are surely part of the foreclosure of the “real estate properties, including all improvements thereon” as prayed for in the petition. Indeed, the lower courts ought to have noticed the fact that the chattel mortgages adverted to were dated 8 January 1990, 19 July 1990, 28 June 1991 and 28 November 1991. The real estate mortgages which specifically included the machineries and equipments were subsequent to the chattel mortgages d...