G.R. No. 101083
METROPOLITAN BANK AND TRUST COMPANY, petitioner, vs. HON. COURT OF APPEALS AND SPOUSES FORTUNATO and VIRGINIA VILLONCO, respondents.

July 30, 1996

FACTS

Spouses Fortunato and Virginia Villonco obtained a loan from Metropolitan Bank and Trust Company (Metrobank) secured by a real estate mortgage over their property. The mortgage contract contained an “automatic increase” clause stating that the mortgage also secured “any and all other indebtedness of every kind already incurred or which may hereafter be incurred” by the mortgagors to the mortgagee. The Villoncos defaulted on the principal loan. Subsequently, without the Villoncos’ knowledge, Metrobank unilaterally applied the proceeds from the foreclosure sale of the mortgaged property not only to the principal loan but also to cover the indebtedness of a certain “Villonco Enterprises,” a separate entity, claiming the automatic increase clause justified this application.

ISSUE

Whether the “automatic increase” or “dragnet” clause in the real estate mortgage contract legally authorizes Metrobank to apply the foreclosure proceeds to satisfy the obligations of a third party (Villonco Enterprises) not expressly named as a debtor in the mortgage contract.

RULING

No. The Supreme Court ruled in favor of the Villoncos. While dragnet clauses are generally valid, they are strictly construed against the mortgagee bank. For such a clause to encompass future debts beyond the primary obligation secured, these future debts must be of the same kind as, or related to, the primary obligation for which the mortgage was originally executed. The mortgage was executed by the spouses in their personal capacity to secure their personal loan. The obligation of “Villonco Enterprises,” a distinct juridical entity, is not an indebtedness incurred by the mortgagor-spouses themselves. To hold them liable for the debts of a separate corporate entity would violate the doctrine of separate corporate personality. The clause cannot be stretched to cover the debts of a third party not a signatory to the mortgage contract. The bank’s act of unilaterally applying the proceeds to a stranger’s debt was unwarranted.