The Supreme Court has affirmed that when a mortgage contract includes a stipulation requiring personal notice to the mortgagor in case of foreclosure, failure to provide such notice invalidates the foreclosure proceedings. This ruling underscores the importance of adhering strictly to the terms agreed upon in contracts, particularly those affecting property rights. It serves as a reminder to financial institutions that they must fulfill all contractual obligations to ensure the legality and fairness of foreclosure actions, thereby protecting the rights of borrowers and upholding the sanctity of contracts.

Loan Default and Foreclosure: Was the Borrower Adequately Notified?

This case revolves around a dispute between Planters Development Bank and Lubiya Agro Industrial Corporation concerning loan agreements secured by real estate mortgages. After Lubiya defaulted on its loans, Planters Bank initiated extrajudicial foreclosure proceedings without providing personal notice to Lubiya. Lubiya then filed a complaint seeking to nullify the foreclosure, arguing that the bank had failed to comply with a contractual obligation to provide notice of any judicial or extrajudicial action. The core legal question is whether the bank’s failure to provide personal notice, as stipulated in the mortgage contracts, invalidated the foreclosure proceedings, despite compliance with general statutory requirements for posting and publication.

As a general rule, under Section 3 of Act No. 3135, concerning extrajudicial foreclosure, personal notice to the mortgagor is typically not required. The law mandates only the posting of the notice of sale in public places and publication in a newspaper of general circulation. However, the Supreme Court has consistently held that parties to a mortgage contract may stipulate additional requirements beyond those mandated by law. In this instance, paragraph 12 of the real estate mortgage contracts contained the following provision:

All correspondence relative to this mortgage, including demand letters, summons, subpoenas, or notification of any judicial or extra-judicial action, shall be sent to the Mortgagor at the above given address or at the address that may hereafter be given in writing by the Mortgagor to the Mortgagee.

Planters Bank argued that sending a demand letter prior to initiating legal action satisfied the notification requirement. However, the Court disagreed, emphasizing that the contractual provision specifically required notification of any extrajudicial action, which includes the foreclosure proceedings themselves.

The Supreme Court’s decision aligns with established jurisprudence, as highlighted in Metropolitan Bank v. Wong, where it was stated that:

Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action which petitioner might take on the subject property, thus according him the opportunity to safeguard his rights. When petitioner failed to send the notice of foreclosure sale to respondent, he committed a contractual breach sufficient to render the foreclosure sale on November 23, 1981 null and void.

This principle has been reiterated in subsequent cases, including Global Holiday Ownership Corporation v. Metropolitan Bank and Trust Company and Carlos Lim v. Development Bank of the Philippines, reinforcing the importance of adhering to contractual stipulations regarding notice in foreclosure proceedings.

The rationale behind these rulings is to ensure that mortgagors are fully informed of any actions that could affect their rights to the mortgaged property, allowing them an opportunity to protect their interests. By failing to provide personal notice of the foreclosure sale, Planters Bank breached its contractual obligations, thereby undermining the validity of the foreclosure proceedings.

Moreover, the Court emphasized that loan agreements and mortgage contracts are often contracts of adhesion, prepared by the lending institution. Any ambiguity in such contracts is construed against the party that drafted the agreement. Therefore, if Planters Bank did not intend to provide personal notice in addition to the statutory requirements, the provision should not have been included in the mortgage contracts.

The Supreme Court underscored that contracts are the law between the parties, and their provisions must be enforced unless they contravene law, morals, good customs, public order, or public policy. In this case, the failure of the bank to send notice of the foreclosure sale to the mortgagor constituted a contractual breach, rendering the foreclosure sale null and void.

FAQs

What was the key issue in this case?	The central issue was whether the lack of personal notice of the extrajudicial foreclosure proceedings upon the mortgagor, as required by the mortgage contract, renders the foreclosure null and void.
What is the general rule regarding personal notice in extrajudicial foreclosures?	Generally, personal notice to the mortgagor is not required in extrajudicial foreclosure proceedings, as Act No. 3135 only mandates posting and publication of the notice of sale.
What is the exception to the general rule?	The exception arises when the parties stipulate in their mortgage contract that personal notice must be given to the mortgagor. Failure to comply with this stipulation invalidates the foreclosure.
What did the mortgage contract in this case stipulate regarding notice?	Paragraph 12 of the mortgage contract required that all correspondence, including notification of any judicial or extrajudicial action, be sent to the mortgagor.
Did the bank’s demand letter satisfy the notice requirement?	No, the Court held that the demand letter did not satisfy the requirement for notification of any extrajudicial action, specifically the foreclosure proceedings.
Why is personal notice important in foreclosure proceedings?	Personal notice allows the mortgagor an opportunity to safeguard their rights and protect their interests in the mortgaged property.
What happens if the mortgagee fails to send the required notice?	The failure by the mortgagee to send the required notice constitutes a contractual breach that renders the foreclosure sale null and void.
What is the significance of contracts of adhesion in this context?	Since loan and mortgage contracts are often contracts of adhesion prepared by the bank, any ambiguity is construed against the bank, reinforcing the need to comply with all stipulated requirements.

This case reaffirms the principle that contractual obligations must be strictly adhered to, especially in matters involving property rights and foreclosure. Financial institutions must ensure compliance with all stipulations in mortgage contracts, including those pertaining to personal notice, to guarantee the validity and fairness of foreclosure proceedings.

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: PLANTERS DEVELOPMENT BANK V. LUBIYA AGRO INDUSTRIAL CORPORATION, G.R. No. 207976, November 14, 2018