The Supreme Court has clarified that entering into a compromise agreement to restructure a loan does not automatically extinguish a creditor’s rights under the original real estate mortgage. This means that if a borrower defaults on the new payment terms outlined in the compromise agreement, the lender can still foreclose on the mortgaged property. This decision reinforces the importance of adhering to the terms of compromise agreements and ensures that lenders retain their security when borrowers fail to meet their obligations.

Mortgage Foreclosure or Compromise: Can a Bank Enforce Its Original Rights?

In Spouses Anthony Rogelio Bernardo and Ma. Martha Bernardo v. Union Bank of the Philippines, the central issue revolved around a loan obtained by the Bernardos from Union Bank, secured by a real estate mortgage on their family home. After the Bernardos defaulted, the bank initiated foreclosure proceedings. The parties then entered into a Compromise Agreement, approved by the Regional Trial Court (RTC), which allowed the Bernardos to buy back the property under a new payment scheme. When the Bernardos again failed to meet their payment obligations, Union Bank sought to consolidate its title over the property, leading to a legal battle over whether the bank could still enforce its rights under the original mortgage.

The petitioners argued that the Compromise Agreement novated the original loan obligation, thus extinguishing Union Bank’s right to foreclose. Novation, under Article 1291 of the Civil Code, requires either a change in the object or principal conditions of the obligation, substitution of the debtor, or subrogation of the creditor. The Supreme Court disagreed, holding that the Compromise Agreement merely modified the payment terms without fundamentally altering the original obligation. The Court emphasized that the agreement itself referred to the payment of the original loan obligation as its very purpose. Since there was no real change in the original obligation, substitution of the person of the debtor, or subrogation of a third person to the rights of the creditor, petitioners’ loan obligation to Union Bank cannot be said to have been extinguished by novation.

The Supreme Court quoted the agreement itself, noting that it explicitly preserved Union Bank’s rights under the real estate mortgage:

8. Failure on the part of [petitioners] to comply with or should [petitioners] violate any of the foregoing terms/provisions of this Compromise Agreement shall entitle [Union Bank] to forfeit all payments made by [petitioners] which shall be applied as rental for [their] use and possession of the Property without the need for any judicial action or notice to or demand upon [petitioners] and without prejudice to such other rights as may be available to and at the option of [Union Bank] such as, but not limited to, bringing an action in court to enforce payment of the Purchase Price or the balance thereof and/or damages, or for any causes of action allowed by law.

9. Any failure on the part of [petitioners] to comply with the terms of this Compromise Agreement shall entitle the aggrieved party to a Writ of Execution for all the amounts due and outstanding under the terms of this Compromise Agreement against the party responsible for the breach or violation, including the exercise by [Union Bank] of its rights and remedies under the Real Estate Mortgage.

The Court found that the RTC committed a grave abuse of discretion by limiting Union Bank’s remedies to merely collecting the balance of the purchase price. The Compromise Agreement clearly stipulated that the bank could also exercise its rights under the real estate mortgage. According to the Court, once a compromise agreement is approved by the court, it becomes a judgment with the force of res judicata, meaning the matter is considered settled and cannot be relitigated. Judges have a ministerial and mandatory duty to enforce such agreements, and cannot modify or impose different terms without gravely abusing their discretion. The Supreme Court thus upheld the Court of Appeals’ decision, affirming Union Bank’s right to foreclose on the property.

The decision underscores the importance of clear and unambiguous language in compromise agreements. Parties must ensure that the terms accurately reflect their intentions, especially regarding the preservation of existing rights and remedies. Furthermore, it reinforces the principle that courts should interpret contracts based on the plain meaning of their words, rather than imposing their own interpretations. This case serves as a reminder that compromise agreements, while intended to resolve disputes, must be meticulously drafted and strictly adhered to, or the consequences can be significant. It is important to remember that a compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced, as per Article 2028 of the Civil Code.

FAQs

What was the key issue in this case?	The central issue was whether a Compromise Agreement novated a loan obligation, thereby extinguishing the bank’s right to foreclose on the mortgaged property after the borrower defaulted on the agreement’s terms.
What is a compromise agreement?	A compromise agreement is a contract where parties make reciprocal concessions to avoid or end a lawsuit, as defined in Article 2028 of the Civil Code. Once approved by a court, it becomes a judgment binding on the parties.
What does it mean for a court order to have the effect of res judicata?	Res judicata means that the matter has been definitively decided by the court and cannot be relitigated in a future case. It prevents parties from re-raising issues that have already been resolved.
What is novation in contract law?	Novation is the extinguishment of an old contractual obligation by the substitution of a new one, which can occur through a change in the object, debtor, or creditor. If a contract is novated then the former contract is basically unenforceable.
Did the Supreme Court find that novation occurred in this case?	No, the Court held that the Compromise Agreement did not novate the original loan obligation because it merely modified the payment terms without changing the fundamental nature of the debt.
What remedies did Union Bank have under the Compromise Agreement?	Union Bank could forfeit payments as rent, seek a writ of execution to enforce the purchase price, and exercise its rights under the real estate mortgage, including foreclosure.
What was the RTC’s error in this case?	The RTC erred by limiting Union Bank’s remedies to collecting the balance of the purchase price and incorrectly concluding that the bank had abandoned its mortgage rights.
What was the ultimate ruling of the Supreme Court?	The Supreme Court affirmed the Court of Appeals’ decision, upholding Union Bank’s right to foreclose on the mortgaged property due to the borrowers’ default on the Compromise Agreement.

This case clarifies the interplay between compromise agreements and mortgage contracts, providing essential guidance for lenders and borrowers alike. Understanding these principles can help parties navigate debt restructuring and avoid potential legal pitfalls.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Spouses Anthony Rogelio Bernardo and Ma. Martha Bernardo, vs. Union Bank of the Philippines and the Hon. Court of Appeals, G.R. No. 208892, September 18, 2019