PRUDENTIAL BANK, G.R. No.

150197
Petitioner,
Present:

PUNO, J.,
Chairman,
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.
DON A. ALVIAR and GEORGIA
B. ALVIAR,
Respondents. Promulgated:
July 28, 2005

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DECISION

TINGA, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court.
Petitioner Prudential Bank seeks the reversal of the Decision[1] of the Court of
Appeals dated 27 September 2001 in CA-G.R. CV No. 59543 affirming the Decision of
the Regional Trial Court (RTC) of Pasig City, Branch 160, in favor of respondents.

Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners
of a parcel of land in San Juan, Metro Manila, covered by Transfer Certificate of Title
(TCT) No. 438157 of the Register of Deeds of Rizal. On 10 July 1975, they executed a
deed of real estate mortgage in favor of petitioner Prudential Bank to secure the
payment of a loan worth P250,000.00.[2] This mortgage was annotated at the back
of TCT No. 438157. On 4 August 1975, respondents executed the corresponding
promissory note, PN BD#75/C-252, covering the said loan, which provides that the
loan matured on 4 August 1976 at an interest rate of 12% per annum with a 2%
service charge, and that the note is secured by a real estate mortgage as
aforementioned.[3] Significantly, 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 free from all liens and incumbrances. . . .[4]

On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-

345 for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was
secured by a hold-out on the mortgagors foreign currency savings account with the
bank under Account No. 129, and that the mortgagors passbook is to be surrendered
to the bank until the amount secured by the hold-out is settled.[5]
On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of
which the husband and wife were President and Chairman of the Board and Vice
President,[6] respectively, PN BD#76/C-430 covering P545,000.000. As provided in
the note, the loan is 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.[7]

On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its
approval of a straight loan of P545,000.00, the proceeds of which shall be used to
liquidate the outstanding loan of P545,000.00 TOD. The letter likewise mentioned
that the securities for the loan were the 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 the chattel mortgage on various heavy and transportation
equipment.[8]

On 06 March 1979, respondents paid petitioner P2,000,000.00, 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 P450,000.00 loan covering the two (2) lots located at Vam
Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The payment
was acknowledged by petitioner who accordingly released the mortgage over the
two properties.[9]

On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the

mortgage on the property covered by TCT No. 438157. Per petitioners computation,
respondents had the total obligation of P1,608,256.68, covering the three (3)
promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C-345 for
P382,680.83, and PN BD#76/C-340 for P545,000.00, plus assessed past due
interests and penalty charges. The public auction sale of the mortgaged property
was set on 15 January 1980.[10]
Respondents filed a complaint for damages with a prayer for the issuance of a writ
of preliminary injunction with the RTC of Pasig,[11] claiming that they have paid
their principal loan secured by the mortgaged property, and thus the mortgage
should not be foreclosed. For its part, petitioner averred that the payment of
P2,000,000.00 made on 6 March 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.[12]
On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff
to proceed with the extra-judicial foreclosure.[13] Respondents sought
reconsideration of the decision.[14] On 24 August 1994, the trial court issued an
Order setting aside its earlier decision and awarded attorneys fees to respondents.
[15] It found that only the P250,000.00 loan is secured by the mortgage on the land
covered by TCT No. 438157. On the other hand, the P382,680.83 loan is secured by
the foreign currency deposit account of Don A. Alviar, while the P545,000.00
obligation was an unsecured loan, being a mere conversion of the temporary
overdraft of Donalco Trading, Inc. in compliance with a Central Bank circular.
According to the trial court, 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.
On appeal to the Court of Appeals, petitioner made the following assignment of
errors:
I. The trial court erred in holding that the real estate mortgage covers only
the promissory note BD#75/C-252 for the sum of P250,000.00.
II. The trial court erred in holding that the promissory note BD#76/C-345
for P2,640,000.00 (P382,680.83 outstanding principal balance) is not covered by
the real estate mortgage by expressed agreement.
III. The trial court erred in holding that Promissory Note BD#76/C-430 for
P545,000.00 is not covered by the real estate mortgage.
IV. The trial court erred in holding that the real estate mortgage is a contract
of adhesion.
V. The trial court erred in holding defendant-appellant liable to pay
plaintiffs-appellees attorneys fees for P20,000.00.[16]
The Court of Appeals affirmed the Order of the trial court but deleted the award of
attorneys fees.[17] 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. In the
instant case, the parties executed different promissory notes agreeing to a particular
security for each loan. Thus, the appellate court ruled that the extrajudicial
foreclosure sale of the property for the three loans is improper.[18]
The Court of Appeals, however, found that respondents have not yet paid the
P250,000.00 covered by PN BD#75/C-252 since the payment of P2,000,000.00
adverted to by respondents was issued for the obligations of G.B. Alviar Realty and
Development, Inc.[19]
Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors
raised in the Court of Appeals as grounds herein.
Petitioner maintains that the 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.[20] 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,[21] Tad-Y v. Philippine National Bank,[22] Quimson v. Philippine National
Bank,[23] C & C Commercial v. Philippine National Bank,[24] Mojica v. Court of
Appeals,[25] and China Banking Corporation v. Court of Appeals,[26] 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.[27]
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.[28] 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.[29]

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.[30]

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.[31] 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.[33] 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.[34] 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.[35]

The instant case thus poses the following issues pertaining to: (i) the validity of the
blanket mortgage clause or the dragnet clause; (ii) the coverage of the blanket
mortgage clause; and consequently, (iii) 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.[36] 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.[37] 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.[38]
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.[39] 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.[40] Indeed, it has been settled in a
long line of decisions that mortgages given to secure future advancements are valid
and legal contracts,[41] 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.[42]

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
(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 free from all liens and incumbrances. . . .[43] (Emphasis supplied.)

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents
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.

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.[44] 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,[45] such deficiency being an indebtedness within the meaning of
the mortgage, in the absence of a special contract excluding it from the arrangement.
[46]

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.[47]
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.[48]

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.[49]
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 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. 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.[50] 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.[51] 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.[52]

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.[53] 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.[54] 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,[55] 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 petitioners
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 P250,000.00, and gave no
credence to their claim that they paid the said amount when they paid petitioner
P2,000,000.00. Thus, the mortgaged property could still be properly subjected to
foreclosure proceedings for the unpaid P250,000.00 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.
Costs against petitioner.
SO ORDERED.

DANTE O. TINGA Associate Justice

WE CONCUR: