Case Digest: Prudential Bank v. Alviar, G.R. No. 150197, July 28, 2005

Commercial Law | After-incurred or future obligations/ Blanket mortgage or dragnet clause

Facts: 

• On July 10, 1975, respondent spouses Don A. Alviar and Georgia B. Alviar, executed a real estate mortgage on a parcel of land in San Juan, Metro Manila in favor of petitioner Prudential Bank to secure a loan of ₱250,000.00.
• This mortgage was annotated at the back of TCT No. 438157.
• It 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 (₱250,000.00) 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 free from all liens and incumbrances. . . 
• Various promissory notes were executed subsequently:
1. August 4, 1975 — PN BD#75/C-252 for ₱250,000.00
• providing that the loan matured on August 4, 1976
• interest rate =12% per annum 
•  service charge = 2% 
• secured by the real estate mortgage
2. October 22, 1976 — PN BD#76/C-345 for ₱2,640,000.00
• secured by a "hold-out" on the mortgagor’s foreign currency savings account with the bank under Account No. 129
•  the mortgagor’s passbook is to be surrendered to the bank until the amount secured by the "hold-out" is settled
3. December 27, 1976 — PN BD#76/C-430 for ₱545,000.00
• executed for Donalco Trading, Inc., of which the husband and wife were President and Chairman of the Board and Vice President
• secured by "Clean-Phase out TOD CA 3923," which means that the temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted into an ordinary loan in compliance with a Central Bank circular directing the discontinuance of overdrafts
• Petitioner approved a straight loan of ₱545,000.00 for Donalco Trading, Inc. to liquidate the outstanding loan of ₱545,000.00 TOD. 
• The securities for the loan were the:
1. Deed of Assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and 
2. Chattel mortgage on various heavy and transportation equipment.
• On March 6, 1979, respondents paid petitioner ₱2,000,000.00, to be applied to the obligations of G.B. Alviar Realty and Development, Inc. and for the release of the real estate mortgage for the ₱450,000.00 loan covering the two (2) lots located at Vam Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. 
• The petitioner acknowledged the payment, releasing the mortgage on two properties.
• On January 15, 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the property in San Juan, Metro Manila, claiming the total obligation of ₱1,608,256.68, covering the three (3) promissory notes: 
1. PN BD#75/C-252 for ₱250,000.00
2. PN BD#76/C-345 for ₱382,680.83, and 
3. PN BD#76/C-340 for ₱545,000.00,
• plus assessed past due interests and penalty charges. 
• The public auction sale of the mortgaged property was set on January 15, 1980(?)
• Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary injunction, claiming that they have paid their principal loan secured by the mortgaged property,
• Petitioner averred that the payment of ₱2,000,000.00 made on March 6, 1979 was not a payment made by respondents, but by G.B. Alviar Realty and Development Inc., which has a separate loan with the bank secured by a separate mortgage.
• RTC-Pasig: Initially dismissed the complaint and ordered the Sheriff to proceed with the extra-judicial foreclosure but subsequently issued an Order setting aside its earlier decision. It found that only:
• The ₱250,000.00 loan is secured by the mortgage on the land in San Juan, Metro Manila.
• The ₱382,680.83 loan is secured by the foreign currency deposit account of Don A. Alviar.
• The ₱545,000.00 obligation was an unsecured loan, being a mere conversion of the temporary overdraft of Donalco Trading, Inc. in compliance with a Central Bank circular. 
• The "blanket mortgage clause" relied upon by petitioner applies only to future loans obtained by the mortgagors, and not by parties other than the said mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as officers thereof.

Issue: 

• Whether the real estate mortgage covers only the promissory note BD#75/C-252 for the sum of ₱250,000.00. NO

Held:

Petitioner maintains that the "blanket mortgage clause" or the "dragnet clause" in the real estate mortgage expressly covers not only the ₱250,000.00 under PN BD#75/C-252, but also the two other promissory notes included in the application for extrajudicial foreclosure of real estate mortgage. Thus, it claims that it acted within the terms of the mortgage contract when it filed its petition for extrajudicial foreclosure of real estate mortgage. Petitioner relies on the cases of Lim Julian v. Lutero, Tad-Y v. Philippine National Bank, Quimson v. Philippine National Bank, C & C Commercial v. Philippine National Bank, Mojica v. Court of Appeals, and China Banking Corporation v. Court of Appeals, all of which upheld the validity of mortgage contracts securing future advancements.

Anent the Court of Appeals’ conclusion that the parties did not intend to include PN BD#76/C-345 in the real estate mortgage because the same was specifically secured by a foreign currency deposit account, petitioner states that there is no law or rule which prohibits an obligation from being covered by more than one security. Besides, respondents even continued to withdraw from the same foreign currency account even while the promissory note was still outstanding, strengthening the belief that it was the real estate mortgage that principally secured all of respondents’ promissory notes.

As for PN BD#76/C-345, which the Court of Appeals found to be exclusively secured by the Clean-Phase out TOD 3923, petitioner posits that such security is not exclusive, as the "dragnet clause" of the real estate mortgage covers all the obligations of the respondents.

Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency of stating that the promissory notes were executed by them not in their personal capacity but as corporate officers. It claims that PN BD#76/C-430 was in fact for home construction and personal consumption of respondents. Thus, it states that there is a need to pierce the veil of corporate fiction. 

Finally, petitioner alleges that the mortgage contract was executed by respondents with knowledge and understanding of the "dragnet clause," being highly educated individuals, seasoned businesspersons, and political personalities. There was no oppressive use of superior bargaining power in the execution of the promissory notes and the real estate mortgage.32

For their part, respondents claim that the "dragnet clause" cannot be applied to the subsequent loans extended to Don Alviar and Donalco Trading, Inc. since these loans are covered by separate promissory notes that expressly provide for a different form of security. They reiterate the holding of the trial court that the "blanket mortgage clause" would apply only to loans obtained jointly by respondents, and not to loans obtained by other parties. Respondents also place a premium on the finding of the lower courts that the real estate mortgage clause is a contract of adhesion and must be strictly construed against petitioner bank. 

The instant case thus poses the following issues pertaining to:

1. the validity of the "blanket mortgage clause" or the "dragnet clause";
2. the coverage of the "blanket mortgage clause"; and consequently,
3. the propriety of seeking foreclosure of the mortgaged property for the non-payment of the three loans.

At this point, it is important to note that one of the loans sought to be included in the "blanket mortgage clause" was obtained by respondents for Donalco Trading, Inc. Indeed, PN BD#76/C-430 was executed by respondents on behalf of Donalco Trading, Inc. and not in their personal capacity. Petitioner asks the Court to pierce the veil of corporate fiction and hold respondents liable even for obligations they incurred for the corporation. 

The mortgage contract states that the mortgage covers "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." Well-settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders. Officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority.  However, the legal fiction that a corporation has a personality separate and distinct from stockholders and members may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues. PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the respondents, is not within the contemplation of the "blanket mortgage clause." Moreover, petitioner is unable to show that respondents are hiding behind the corporate structure to evade payment of their obligations. Save for the notation in the promissory note that the loan was for house construction and personal consumption, there is no proof showing that the loan was indeed for respondents’ personal consumption. Besides, petitioner agreed to the terms of the promissory note. If respondents were indeed the real parties to the loan, petitioner, a big, well-established institution of long standing that it is, should have insisted that the note be made in the name of respondents themselves, and not to Donalco Trading Inc., and that they sign the note in their personal capacity and not as officers of the corporation.

Now on the main issues.

A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, 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.

A "dragnet clause" 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. Indeed, it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.

The "blanket mortgage clause" in the instant case states:

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 (₱250,000.00) 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 free from all liens and incumbrances. . . .

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real estate mortgage to secure not only the ₱250,000.00 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.

The cases cited by petitioner, while affirming the validity of "dragnet clauses" or "blanket mortgage clauses," are of a different factual milieu from the instant case. There, the subsequent loans were not covered by any security other than that for the mortgage deeds which uniformly contained the "dragnet clause."

In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: 

• PN BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his foreign currency savings account, 
• while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and eventually by a deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various heavy and transportation equipment. 

The matter of PN BD#76/C-430 has already been discussed. Thus, the critical issue is whether the "blanket mortgage" clause applies even to subsequent advancements for which other securities were intended, or particularly, to PN BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. 

One school advocates that a "dragnet clause" so worded as to be broad enough to cover all other debts in addition to the one specifically secured will be construed to cover a different debt, although such other debt is secured by another mortgage. 

The contrary thinking maintains that a mortgage with such a clause will not secure a note that expresses on its face that it is otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting the security specified therein, such deficiency being an indebtedness within the meaning of the mortgage, in the absence of a special contract excluding it from the arrangement.

The latter school represents the better position. The parties having conformed to the "blanket mortgage clause" or "dragnet clause," it is reasonable to conclude that they also agreed to an implied understanding that subsequent loans need not be secured by other securities, as the subsequent loans will be secured by the first mortgage. 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."

Hence, based on the "reliance on the security test," the California court in the cited case made an inquiry whether the second loan was made in reliance on the original security containing a "dragnet clause." Accordingly, finding a different security was taken for the second loan no intent that the parties relied on the security of the first loan could be inferred, so it was held. The rationale involved, the court said, was that the "dragnet clause" in the first security instrument constituted a continuing offer by the borrower to secure further loans under the security of the first security instrument, and that when the lender accepted a different security he did not accept the offer.

In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the mortgagor to the bank to provide the security of the mortgage for advances of and when they were made. Thus, it was concluded that the "offer" was not accepted by the bank when a subsequent advance was made because:

1. the second note was secured by a chattel mortgage on certain vehicles, and the clause therein stated that the note was secured by such chattel mortgage;
2. there was no reference in the second note or chattel mortgage indicating a connection between the real estate mortgage and the advance;
3. the mortgagor signed the real estate mortgage by her name alone, whereas the second note and chattel mortgage were signed by the mortgagor doing business under an assumed name; and 
4. there was no allegation by the bank, and apparently no proof, that it relied on the security of the real estate mortgage in making the advance. 

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary intention, a mortgage containing a "dragnet clause" will not be extended to cover future advances unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor. 

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of non-payment of all the three promissory notes. 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. 

The foreclosure of the mortgaged property should only be for the ₱250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security for the second promissory note. 

As held in one case, where deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently become due, a balance due on a note, after exhausting the special security given for the payment of such note, was in the absence of a special agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of the special security. This is recognition that while the "dragnet clause" subsists, the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be resorted to.

One other crucial point. The mortgage contract, as well as the promissory notes subject of this case, is a contract of adhesion, to which respondents’ only participation was the affixing of their signatures or "adhesion" thereto. A contract of adhesion is one in which a party imposes a ready-made form of contract which the other party may accept or reject, but which the latter cannot modify. 

The real estate mortgage in issue appears in a standard form, drafted and prepared solely by petitioner, and which, according to jurisprudence must be strictly construed against the party responsible for its preparation.  If the parties intended that the "blanket mortgage clause" shall cover subsequent advancement secured by separate securities, then the same should have been indicated in the mortgage contract. Consequently, any ambiguity is to be taken contra proferentum, that is, construed against the party who caused the ambiguity which could have avoided it by the exercise of a little more care. To be more emphatic, any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it,  which is the petitioner in this case.

Even the promissory notes in issue were made on standard forms prepared by petitioner, and as such are likewise contracts of adhesion. Being of such nature, the same should be interpreted strictly against petitioner and with even more reason since having been accomplished by respondents in the presence of petitioner’s personnel and approved by its manager, they could not have been unaware of the import and extent of such contracts.

Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that respondents have not yet paid the ₱250,000.00, and gave no credence to their claim that they paid the said amount when they paid petitioner ₱2,000,000.00. Thus, the mortgaged property could still be properly subjected to foreclosure proceedings for the unpaid ₱250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been exhausted, subject of course to defenses which are available to respondents.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 59543 is AFFIRMED.