SPS. VIOLA vs. EQUITABLE PCI BANK, G.R. N0. 177886 28 November 2008 Sec Trans.

, REM cases, 2nd set, case # 1 FACTS: Petitioners obtained a credit line agreement in the amount of P4,700,000 from respondent bank. The Credit Line Agreement stipulated that the loan would bear interest at the prevailing PCIBank lending rate per annum on the principal obligation and a penalty fee of three percent (3%) per month on the outstanding amount. This loan was secured by a Real Estate Mortgage over the properties of petitioners. Petitioners availed of the full amount of the loan. Subsequently, they made partial payments which totaled P3,669,210.67. By respondents claim, petitioner had since November 24, 2000 made no further payments and despite demand, they failed to pay their outstanding obligation which, as of September 30, 2002, totaled P14,024,623.22 which include the principal obligation, 15% interest, and penalty at 3% per month. For nonpayment, respondent foreclosed the REM. Petitioners filed a petition to annul the foreclosure sale on the ground that the REM was erroneously foreclosed since the principal obligation alleged by respondent was erroneous in that petitioners already made substantial payment of that alleged obligation. In addition, they assail the inclusion of the 15% interest per annum and penalty at 3% per month since according to them, it is not secured by the REM. The RTC ruled in favor of respondent but lowered the interest to 13% and the penalty to 1.5%. The RTC also dismissed the MR filed by petitioners. On appeal, the petitioners still failed to obtain a favorable judgment. Hence, this appeal. ISSUE: whether the mortgage contract also secured the penalty fee per month on the outstanding amount as stipulated in the Credit Line Agreement. RULING: NO. A mortgage must sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage. Since an action to foreclose must be limited to the amount mentioned in the mortgage1[18] and the penalty fee of 3% per month of the outstanding obligation is not mentioned in the mortgage, it must be excluded from the computation of the amount secured by the mortgage. The ruling of the Court of Appeals in its assailed Decision that the phrase including the interest and bank charges in the mortgage contract refers to the penalty charges stipulated in the Credit Line Agreement is unavailing. Penalty fee is entirely different from bank charges. The phrase bank charges is normally understood to refer to compensation for services. A penalty fee is likened to a compensation for damages in case of breach of the obligation. Being penal in nature, such fee must be specific and fixed by the contracting parties, unlike in the present case which slaps a 3% penalty fee per month of the outstanding amount of the obligation. Moreover, the penalty fee does not belong to the species of obligation enumerated in the mortgage contract, namely: loans, credit and other banking facilities obtained x x x from the Mortgagee, . . . including the interest and bank charges, . . . the costs of collecting the same and

of taking possession of and keeping the mortgaged properties, and all other expenses to which the Mortgagee may be put in connection with or as an incident to this mortgage . . .