G.R. No. 145441 . April 26, 2005
Philippine Savings Bank, Petitioner, vs. Sps. Rodolfo C. Mañalac, Jr. and Rosita P. Mañalac, Respondents.

FACTS

Respondent-spouses Mañalac obtained a loan from petitioner Philippine Savings Bank (PSBank), secured by a real estate mortgage over eight parcels of land. Due to payment defaults, the loan was restructured. Subsequently, with PSBank’s consent, the Mañalacs sold three of the mortgaged properties to the spouses Galicia under a Deed of Sale with Assumption of Mortgage, wherein the Galicias assumed a portion (P550,000) of the Mañalacs’ loan obligation. The Mañalacs then paid PSBank a sum corresponding to the value of these three properties, and the bank executed a partial release of the mortgage on them. The Galicias later obtained their own separate loans from PSBank, secured by mortgages that included these three properties.
The Mañalacs defaulted again on their remaining obligation. PSBank extrajudicially foreclosed the mortgage on their five remaining properties, purchased them at auction, and, after the redemption period, consolidated title. Later, the Mañalacs sent PSBank a check for P1.2 million, requesting the release of the titles for the three Galicia properties and one of their own foreclosed properties. PSBank accepted the check but applied the entire amount to the loan accounts of the Galicias and the Mañalacs’ foreclosure expenses, not to release the requested titles. The Mañalacs then filed an action for damages against PSBank.

ISSUE

The core issue is whether PSBank acted in bad faith in foreclosing the Mañalacs’ mortgage and in its handling of the P1.2 million payment, thereby warranting the annulment of the foreclosure sale and an award of damages.

RULING

The Supreme Court ruled that the foreclosure was valid and that the award of damages by the lower courts was improper, except for a limited award of moral damages to Rosita Mañalac. The legal logic is twofold. First, the foreclosure was justified because the Mañalacs were in default on their own restructured loan obligation. The assumption of mortgage by the Galicias did not novate or extinguish the Mañalacs’ original obligation to PSBank; they remained solidarily liable as principal debtors. The bank was not obligated to apply payments in a manner specified by a third-party payor (the Mañalacs paying for the Galicias’ account) without the debtor’s (Galicias’) consent. PSBank’s application of the P1.2 million to the actual outstanding debts was within its rights.
Second, while the foreclosure itself was lawful, PSBank exhibited a lack of care and transparency in its dealings, particularly in accepting the P1.2 million check with a misleading notation that created a false hope of title release. This conduct amounted to wanton disregard of the Mañalacs’ feelings, justifying a moderate award of moral damages specifically to Rosita Mañalac for the bank’s bad faith in this isolated transaction. However, this bad faith did not infect the otherwise valid foreclosure proceeding. The Court reversed the annulment of the foreclosure sale and ordered the issuance of a writ of possession in favor of PSBank, while directing the bank to pay Rosita Mañalac P50,000 as moral damages.