Blanket authority

It is a common practice among banking institutions to incorporate in the Real Estate Mortgage (REM) Contract signed by their borrowers-mortgagors, a clause providing that the property mortgaged secures not only the loan or credit accommodation obtained by the borrower but also those that the bank may “hereafter extend to said borrower-mortgagor including interests and expenses or any other obligation” owing to the bank. In this case of a manufacturer and exporter of fuel products (EII), the validity of this clause is questioned.

EII obtained a loan of P500,000 from a bank (PBP) to finance its operation. As security for the loan it executed a REM on its six properties in Marikina covered by TCT Nos. N-68661 to N-68666. The REM provides that said lands are transferred and conveyed by way of mortgage to secure the payment of “certain loans, overdrafts and/or other credit accommodations all of which is hereby fixed at P500,000 as well as those that the mortgagee (PBP) may hereafter extend to the mortgagor including interests and expenses or any other obligation owing to the mortgagee”.

On the strength of said mortgage, EII was granted a loan in the form of bills discounted in the amount of P200,000 of which P110,000 was outstanding. Thereafter EII also obtained a packing credit line supported by a Letter of Credit (L/C) issued by a Korean Bank through its correspondent bank, the BPI, in the amount of $23,000. The L/C was for the account of a Korean commercial company which imported EII’s fuel products.

On March 17, 1987, EII presented to PBP the drafts drawn under the L/C and the corresponding export documents in the amounts of $5,739.76 and $4,585.79. Thus PBP also released to EII the amount for said drafts.

But on April 17, 1987 the Korean Bank which issued the L/C notified PBP that the Korean importer refused to pay EII’s export documents because of typographical discrepancies and thus returned the same to PBP. Despite EII’s efforts to have the Korean importer honor the documents, the latter refused to do so. Thus Korean Bank still returned the said documents.

Hence PBP demanded from EII the payment of the peso equivalent of said documents amounting to P573,225.60. When EII failed to pay them, PBP foreclosed the mortgage for the total bid price of P752,074.63 including EII’s other outstanding loan accommodation in the form of bills discounted. The certificate of sale was registered on March 24, 1988 with PBP as highest bidder. On June 12, 1989, PBP consolidated ownership and obtained title to the property.

On November 17, 1989, EII instituted an action in the Regional Trial Court for the annulment of the extrajudicial foreclosure. It contended among others that the REM only secured the loans already obtained up to P500,000 only. So, according to EII, it does not include the export advances. Was EII correct?

No. The REM executed by EII contains a blanket mortgage clause also known as a dragnet clause. It has been settled in a long line of cases that mortgages given to secure future advances are valid and legal contracts. The amounts fixed as consideration in REM contract 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 is clearly set forth.

A dragnet clause is one which is specifically phrased to subsume all debts of past and future origins. Mortgage of this character enable the parties to provide continuous dealings, the nature and extent of which may not be known or anticipated at the time the REM was signed. Said clause avoids the expense and inconveniences of executing a new security on each transaction. It operates as a convenient accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents thereby saving on costs, extra legal services, registration fees etc (Producers Bank vs. Excelsa Industries Inc. G.R. 1532071, May 8, 2009).

* * *

E-mail: [email protected]