Credit Transaction

(VV)

Prudential Bank v. Spouses Don and Georgia Alviar

Citation: G.R. No. 150197, July 28, 2005

Doctrine: 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.

Facts:

Spouses Alviar are the registered owners of a parcel of land in San Juan, Metro Manila. They
executed a deed of real estate mortgage of the said property in favor of petitioner Prudential
Bank to secure the payment of a loan worth P250,000.00. (PN BD#75/C-252) was then issued
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 with a “blanket mortgage clause” or the “dragnet clause”.

The spouses thereafter issued other promissory notes (PN): 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 mortgagor’s foreign currency savings account with the bank under Account No.
129. In the name of Donalco Trading, Inc., PN BD#76/C-430 covering P545,000.000 to be
secured by “Clean-Phase out TOD CA 3923. Bank also mentioned in their approval letter that
additional securities for the loan were the deed of assignment on two PNs executed by Bancom
Realty and the chattel mortgage on various heavy and transportation equipment.

Spouses Alviar 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 in San Juan, Metro Manila. The payment was
acknowledged by petitioner who accordingly released the mortgage over the two properties.
Prudential Bank moved for the extrajudicial foreclosure of the mortgage on the property since
respondents had the total obligation of P1,608,256.68, covering the three (3) promissory notes.

Respondents then filed a complaint for damages with a prayer for the issuance of a writ of
preliminary injunction with the RTC of Pasig, claiming that they have paid their principal loan
secured by the mortgaged property, and thus the mortgage should not be foreclosed.

RTC, on its final decision, favored respondents saying that the extrajudicial foreclosure was
improper for the mortgage only covers the first loan of P250,000.

CA affirmed the decision of the RTC.

Issue: Whether or not real estate mortgage secures only the first loan of P250,000.

Held: Yes. While the existence and validity of the “dragnet clause” cannot be denied, there is a
need to respect the existence of the other securities given for the two other promissory notes.
The foreclosure of the mortgaged property should only then be for theP250,000.00 loan
covered by PN BD#75/C-252, and for any amount not covered by the security for the second
promissory note.

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. However, the subsequent loans obtained by respondents
were secured by other securities.

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.”

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. This ambiguity shall be interpreted strictly against petitioner for having drafted the
same.

Petitioner, however, is not without recourse. Both the lower courts found that respondents have
not yet paid the P250,000.00. 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.

Bar Question:

X executed a deed of real estate mortgage in favor of Y Bank for his loan amounting to
P250,000. The mortgage contract includes a dragnet clause which reads as: 'executed in
consideration of loans, overdrafts and other credit accommodations obtained from the
Mortgagee by the Mortgagor as debtors which covers the loan P250,000 and those that
mortgagee extends to mortgagor including interest and expenses or any obligation owing..'
Several months later, X executed another promissory note and secured such loan with his
foreign currency savings account. Another loan was executed by XandZ Incorporated, X being
the president with Y Bank. X made a payment of P2 million to be applied to the debt of XandZ
Inc. and the remaining on his two other debts. The payment was for the release of the
mortgage. Y Bank, after applying the payment to the debts, extrajudicially foreclosed the
property because the second loan was not fully paid pursuant to the dragnet clause attached on
the first loan. Was the foreclosure proper?

Suggested Answer:

No, 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 the other debts. The foreclosure of the
mortgaged property should only be for the P250,000.00 loan 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.