Remedies for non-payment of loan secured by mortgage and checks

According to the Supreme Court, a creditor has three (3) alternative remedies if the debtor fails (or unjustly refuses) to pay his debt when it falls due and the debt is secured by a mortgage and by a check:

. . . the creditor has three options against the debtor and the exercise of one will bar the exercise of the others. He may pursue either of the three but not all or a combination of them.

First, the creditor may file a collection suit against the debtor. This will open up all the properties of the debtor to attachment and execution, even the mortgaged property itself. Second, the creditor may opt to foreclose on the mortgaged property. In case the debt is not fully satisfied, he may sue the debtor for deficiency judgment (not a collection case for the whole indebtedness), in which case, all the properties of the debtor, other than the mortgaged property, are again opened up for the satisfaction of the deficiency. Lastly, the creditor may opt to sue the debtor for violation of BP 22 if the checks securing the obligation bounce. Circular 57-97 and Section 1(b), Rule 111 of the Rules of Court both provide that the criminal action for violation of BP 22 shall be deemed to necessarily include the corresponding civil action, i.e., a collection suit. No reservation to file such civil action separately shall be allowed or recognized.

Given the special circumstances of the case, the Supreme Court did not apply the above rule in Spouses Simon Yap and Milagros Guevarra vs. First e-Bank, Inc., G.R. No. 169889, September 29, 2009. Here, Sammy Yap obtained a loan from PDCP. As security, his parents executed a third party mortgage covering their land and the warehouse standing on it. In addition, Yap delivered six post dated checks to PDCP.

The checks bounced and PDCP filed a complaint for violation of the Bouncing Checks Law (BP 22). PDCP subsequently filed an application for the extrajudicial foreclosure of mortgage.

On motion of Sammy and without objection from the public prosecutor and PDCP, the BP 22 cases were provisionally dismissed. His parents filed in the Regional Trial Court (RTC) a complaint for injunction (with prayer for the issuance of a temporary restraining order/preliminary injunction), damages and accounting of payments against the bank. The complaint sought to stop the foreclosure sale on the ground that PDCP waived its right to foreclose the mortgage on their property when it filed the BP 22 cases against Sammy.

The RTC ruled in favor of Sammy’s parents. According to the RTC, PDCP had three options when Sammy defaulted in the payment of his loan: enforcement of the promissory note in a collection case, enforcement of the checks under the Negotiable Instruments Law and/or BP 22, or foreclosure of mortgage. The remedies were alternative and the choice of one excluded the others. Thus, PDCP was deemed to have waived its right to foreclose on the property of petitioners when it elected to sue Sammy for violation of BP 22.

PDCP appealed to the Court of Appeals (CA). On February 8, 2005, the CA reversed the RTC. It opined that PDCP was not barred from exercising its right to foreclose on the property of Sammy’s parents despite suing Sammy for violation of BP 22. The purpose of BP 22 was to punish the act of issuing a worthless check, not to force a debtor to pay his debt.

On appeal to the Supreme Court, Sammy’s parents argue that, when Sammy was sued for six counts of violation of BP 22, PDCP should have been deemed to have simultaneously filed for collection of the amount represented by the checks. The civil aspect of the case was naturally an action for collection of Sammy’s obligation to PDCP. PDCP clearly elected a remedy. PDCP should not be allowed to pursue another, like foreclosure of mortgage.

The Supreme Court ruled in favor of PDCP:

First, petitioners anchor their position on Supreme Court Circular 57-97, which provides for the rules and guidelines in the filing and prosecution of criminal cases under BP 22. . .

Sad to say, Circular 57-97 (and, it goes without saying, Section 1(b), Rule 111 of the Rules of Court) was not yet in force when PDCP sued Sammy for violation of BP 22 and when it filed a petition for extrajudicial foreclosure on the mortgaged property of petitioners on February 8, 1993 and May 3, 1993, respectively. In Lo Bun Tiong v. Balboa, Circular 57-97 was not applied because the collection suit and the criminal complaints for violation of BP 22 were filed prior to the adoption of Circular 57-97. The same principle applies here.

Thus, prior to the effectivity of Circular 57-97, the alternative remedies of foreclosure of mortgage and collection suit were not barred even if a suit for BP 22 had been filed earlier, unless a judgment of conviction had already been rendered in the BP 22 case finding the accused debtor criminally liable and ordering him to pay the amount of the check(s).

In this case, no judgment of conviction (which could have declared the criminal and civil liability of Sammy) was rendered because Sammy moved for the provisional dismissal of the case. Hence, PDCP could have still foreclosed on the mortgage or filed a collection suit.

Nonetheless, records show that, during the pendency of the BP 22 case, Sammy had already paid PDCP the total amount of P1,783,582. Thus, to prevent unjust enrichment on the part of the creditor, any foreclosure by PDCP should only be for the unpaid balance.

Second, it is undisputed that the BP 22 cases were provisionally dismissed at Sammy’s instance. In other words, PDCP was prevented from recovering the whole amount by Sammy himself. To bar PDCP from foreclosing on petitioners’ property for the balance of the indebtedness would be to penalize PDCP for the act of Sammy. That would not only be illogical and absurd but would also violate elementary rules of justice and fair play. In sum, PDCP has not yet effectively availed of and fully exhausted its remedy.

While it can be argued that PDCP may revive the BP 22 cases anytime as their dismissal was only provisional, suffice it to state that the law gives the right of choice to PDCP, not to Sammy or to petitioners.

Third, petitioners should be mindful that, by being third party mortgagors, they agreed that their property would stand as collateral to the loan of Sammy until the last centavo is paid to PDCP. That is a risk they willingly assumed. To release the mortgage just because they find it inconvenient would be the height of injustice against PDCP.

All told, PDCP should not be left without recourse for the unsettled loan of Sammy. Otherwise, an iniquitous situation will arise where Sammy and petitioners are unjustly enriched at the expense of PDCP. That we cannot sanction.