FIRST DIVISION

[G.R. No. 177729 : September 28, 2011]

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION (NOW

TRADE AND INVESTMENT DEVELOPMENT CORPORATION OF THE
PHILIPPINES), PETITIONER, VS. AMALGAMATED MANAGEMENT AND
DEVELOPMENT CORPORATION, FELIMON R. CUEVAS, AND JOSE A. SADDUL,
JR., RESPONDENTS.

DECISION

BERSAMIN, J.:

The matter for resolution refers to the liability of persons who agree to be jointly and
solidarily liable with the main obligor.

In its decision rendered on April 30, 2007 in C.A.-G.R. CV No. 78427, [1] the Court of
Appeals (CA) affirmed the decision dated December 27, 2002 of the Regional Trial
Court (RTC), Branch 148, in Makati City in Civil Case No. 94-638, [2] absolving the co-
obligors. Not satisfied with the result, the petitioner is now before us to assail the CA's
decision.

Antecedents

The petitioner, formerly the Philippine Export and Foreign Loan Guarantee Corporation
but now known as the Trade and Investment Development Corporation of the
Philippines, is a government-owned and controlled-corporation created by virtue of
Presidential Decree No. 1080, as amended by Republic Act No. 8497.  Its primary
purpose is to guarantee the foreign loans, in whole or in part, granted to any domestic
entity, enterprise, or corporation, majority of the capital of which is owned by Filipino
citizens.

Respondent Amalgamated Management and Development Corporation (AMDC), a

domestic corporation, had as its main business the hauling of different commodities
within the Middle East countries. Its co-respondents Felimon R. Cuevas (Cuevas) and
Jose A. Saddul, Jr. (Saddul) were, respectively, its President and Vice-President. [3]

In early 1982, AMDC obtained from the National Commercial Bank of Saudi Arabia
(NCBSA) a loan amounting to SR3.3 million (equivalent to P9,000,000.00) to finance
the working capital requirements and the down payment for the trucks to be used in
AMDC's hauling project in the Middle East. On April 23, 1982, the petitioner issued a
letter of guaranty in favor of NCBSA as the lending bank upon the request of AMDC.
[4]
 As the security for the guaranty, Amalgamated Motors Philippines Incorporated
(AMPI), a sister company of AMDC, acted as an accommodation mortgagor, and
executed in favor of the petitioner a real estate mortgage over two parcels of land
located in Dasmariñas, Cavite and covered by Transfer Certificate of Title (TCT) No.
119031 and TCT No.119032 of the Registry of Deeds of Cavite. [5] AMDC also executed
in favor of the petitioner a deed of undertaking dated April 21, 1982, [6] with Cuevas and
Saddul as its co-obligors. In the deed of undertaking, AMDC, Cuevas, and Saddul jointly
and severally bound themselves to pay to the petitioner, as obligee, whatever damages
or liabilities that the petitioner would incur by reason of the guaranty.

AMDC defaulted on the obligation. Upon demand, the petitioner paid the obligation to
NCBSA. By subrogation and pursuant to the Deed of Undertaking, the petitioner then
demanded that AMDC, Cuevas and Saddul should pay the obligation, but its demand
was not complied with. Hence, it extra-judicially foreclosed the real estate mortgage.
[7]
 The Provincial Sheriff of Cavite conducted a public auction, in which the petitioner
acquired the mortgaged properties as the highest bidder for P4,688,482.00 (TCT No.
119031) and P69,518.00 (TCT No. 119032).[8]

On the premise that the proceeds of the foreclosure sale were not sufficient to cover
the guaranty because a balance of P45,839,219.95 plus interest and other charges
remained unpaid, the petitioner sued AMDC, Cuevas and Saddul in the RTC to collect
the deficiency.[9]

In a consolidated answer,[10] AMDC and Cuevas admitted the existence of the real

estate mortgage and deed of undertaking, but raised defenses, as follows: (a) that they
did not receive from the petitioner any demand for the payment of the loan; (b) that
the interests, penalties, fees, charges, and attorney's fees were usurious, exorbitant,
unconscionable, and in violation of law; (c) that the value of the foreclosed properties
was more than sufficient to pay the loan; (d) that the deficiency claim was
unconscionable and unilaterally computed by the petitioner; and (e) that they made
several payments to the petitioner in the form of rental or otherwise.

For his part, Saddul submitted a separate answer,[11] averring that he was not liable to
the petitioner for any amount because he did not benefit from the guaranty; that the
deed of undertaking was unenforceable for being executed without any consideration;
and that the petitioner did not notify him that AMDC had incurred in delay in the
payment of the obligation.

Saddul averred a cross-claim against AMDC.

AMDC, Cuevas, and Saddul all sought the dismissal of the complaint.

Ruling of the RTC

After trial, the RTC rendered its decision on December 27, 2002, [12] decreeing thusly:

WHEREFORE, premises considered judgment is hereby rendered in favor of the plaintiff

and against defendant AMDC. Defendants Cuevas and Saddul are hereby rendered
absolved from the obligation as well as from the deficiency claim as a consequence, the
case against them is hereby dismissed. The cross-claim of defendant/cross-claimant
defendant Saddul against defendant AMDC is hereby dismissed for lack of sufficient
basis to grant the same.

Defendant AMDC is hereby ordered to pay the plaintiff the following:

(1)  The amount P45,839,219.25 as of March 31, 1993, representing deficiency claim;
(2)  The accruing interest of 6% per annum from April 1, 1993 until deficiency claim is
fully paid.

(3)  The accruing penalty charge of 6% per annum from April 1, 1993 until deficiency
claim is fully paid.

(4)  P4,583,921.92 represents attorney's fees equivalent to 10% of the deficiency

claim.

(5)  Costs of suit.

SO ORDERED.

Ruling of the CA

The petitioner appealed to the CA, asserting that Cuevas and Saddul should be held
jointly and severally liable with AMDC on its deficiency claim; and that the rates of
interest and penalty charges on the deficiency claim should each be at 16% per
annum instead of only 6% per annum.

On April 30, 2007, the CA promulgated its assailed decision, [13] viz:

Time and again, We stress the well-settled rule that findings of fact of the trial court as
well as its calibration of the evidence of parties, its assessment of the credibility and
probative weight of the witnesses, and its conclusion based on its findings are accorded
by the appellate court with high respect, if not conclusive effect. In fine, findings of the
trial court should not be disturbed on appeal, unless some facts or circumstances of
substance and value have been overlooked which, if considered, might well affect the
result of the case.

In the extant case, We do not find any fact or circumstance which if considered, might
affect the result of the case.

WHEREFORE, premises considered, the judgment of the Regional Trial Court dated
December 27, 2002 is hereby AFFIRMED in toto.

SO ORDERED.

Issues

Hence, the petitioner appeals, raising the following issues, to wit:

(1) Whether the CA erred in affirming the RTC's ruling that Cuevas and Saddul were
absolved of personal liability on the petitioner's deficiency claim;

(2) Whether the CA erred in ruling that Cuevas and Saddul had not been notified of the
guaranty period extension, and had been thereby exonerated from liability on the
deficiency claim;

(3) Whether the CA erred in holding that Cuevas and Saddul did not receive any
demand letter from the petitioner;

(4) Whether the CA erred in finding that the petitioner's claim against Cuevas and
Saddul, Jr. had already prescribed; and

(5) Whether the CA erred in declaring that AMDC was liable to pay interest and penalty
charge at the rate of only 6% per annum instead of 16% per annum.[14]
Ruling

The appeal is partly meritorious.

I
Pre-trial order is not exclusive about the
issues to be resolved by the trial court

The petitioner posits that based on the RTC's pre-trial order, [15]  the only issue to be
resolved was whether there was a deficiency claim after the foreclosure of the real
estate mortgage; that the liability of Cuevas and Saddul on the deficiency claim was
already an admitted fact under the pre-trial order; and that the RTC improperly
considered and determined their liability. [16]

The Court cannot sustain the petitioner's position.

The pre-trial order nowhere stated that Cuevas and Saddul already admitted their
liability on the petitioner's deficiency claim. Their admission appearing in the pre-trial
order referred only to the fact that they and AMDC had received advances in large
amounts from the petitioner, and that the real estate mortgage securing the loan had
already been foreclosed.

Whether Cuevas and Saddul were liable on the deficiency claim was proper for the
ascertainment and determination by the RTC as the trial court and the CA as the
appellate tribunal, notwithstanding the silence of the pre-trial order on it, because such
issue was deemed necessarily included in or inferred from the stated issue of whether
there was a deficiency still to be paid by AMDC, Cuevas and Saddul.

It is true that the issues to be tried between the parties in a case shall be limited to
those defined in the pre-trial order, as Section 7, Rule 18 of the Rules of Court explicitly
provides:

Section 7. Record of pre-trial. -- The proceedings in the pre-trial shall be recorded.

Upon the termination thereof, the court shall issue an order which shall recite in detail
the matters taken up in the conference, the action taken thereon, the amendments
allowed to the pleadings, and the agreements or admissions made by the parties as to
any of the matters considered. Should the action proceed to trial, the order shall
explicitly define and limit the issues to be tried. The contents of the order shall
control the subsequent course of the action, unless modified before trial to
prevent manifest injustice. (5a, R20)

However, a pre-trial order is not intended to be a detailed catalogue of each and every
issue that is to be taken during the trial, for it is unavoidable that there are issues that
are impliedly included among those listed or that may be inferable from those listed by
necessary implication which are as much integral parts of the pre-trial order as those
expressly listed.[17]

At any rate, it remains that the petitioner impleaded Cuevas and Saddul as defendants,
and adduced against them evidence to prove their liabilities. With Cuevas and Saddul
being parties to be affected by the judgment, it was only appropriate for the RTC to
inquire into and determine their liability for the purpose of arriving at a complete
determination of the suit. Thereby, the RTC acted in conformity with the avowed reason
for which the courts are organized, which was to put an end to controversies, to decide
the questions submitted by the litigants, and to settle the rights and obligations of the
parties.[18]

II
Notice on the guaranty period extension

The petitioner insists that Cuevas and Saddul were liable on the deficiency claim despite
the lack of notice to them about the extension of the guaranty.

The insistence of the petitioner has merit.

To start with, the records indicate that on several occasions, Cuevas and Saddul, as
President and Vice-President, respectively, of AMDC, separately wrote to the petitioner
to request the extension of the guaranty period because AMDC could not pay the
obligation on its due date;[19] and that the petitioner granted each request and
correspondingly sent letters to NCBSA informing it of the extensions of the guaranty
period.[20] The letters granting the requests for extension of the guaranty period bore
the approval and signatures of Cuevas and Saddul as President and Vice-President,
respectively, of AMDC.[21] Having thus admitted their letters on the extension of the
guaranty period, Cuevas and Saddul could not anymore feign ignorance of the guaranty
extension.

Moreover, the deed of undertaking specifically stated that the grant of the extension of
the guaranty period did not extinguish or diminish the obligation of Cuevas and Saddul
under the guaranty.[22]  Hence, whether or not the guaranty period was extended, and
whether or not they were notified of the extension, Cuevas and Saddul remained liable
under the guaranty. The stipulation, which was not illegal or immoral, necessarily
bound Cuevas and Saddul. It is worth noting, too, that a solidary obligation existed
among AMDC, Cuevas and Saddul because they had assented to be jointly and
severally liable to the petitioner for whatever damages or liabilities that it might incur
by virtue of the guaranty.[23] In a solidary obligation, each debtor was liable for the
entire obligation.[24] The petitioner could compel any of the solidary obligors to perform
the entire obligation.

III
Demand to pay the deficiency claim

The petitioner claims that it made a demand on Cuevas and Saddul to pay the
deficiency claim,[25] but they still deny the claim.
The petitioner's claim is upheld.

In the deed of undertaking, Cuevas and Saddul bound themselves to reimburse or to

pay to the petitioner their obligation under the guaranty upon the latter's demand.
[26]
 The Civil Code provides that the obligor incurs in delay from the time the
obligee judicially or extrajudicially demands the fulfillment of the obligation, viz:

Article 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.

However, the demand by the creditor shall not be necessary in order that delay may
exist:

(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his
power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him. From the
moment one of the parties fulfills his obligation, delay by the other begins. (1100a)

It is noted that the petitioner's complaint to recover its deficiency claim from obligors
AMDC, Cuevas and Saddul, being a judicial demand, sufficed to render Cuevas and
Saddul in delay in the payment of the deficiency claim.

IV
When prescriptive period for the
deficiency claim began to run

There is no dispute that the prescriptive period of the petitioner's deficiency claim is ten
years under Article 1144 of the Civil Code.[27] What remains in issue was the date when
the prescriptive period began to run. The petitioner submits that the 10-year period
should be reckoned from the date of the foreclosure. [28]

The petitioner is correct.

In Quirino Gonzales Logging Concessionaire v. Court of Appeals,[29] we have ruled that

the 10-year period to recover a deficiency claim starts to run upon the foreclosure of
the property mortgaged, viz:

With respect to the first to the fifth causes of action, as can be gleaned from the
complaint, the Bank seeks the recovery of the deficient amount of the obligation after
the foreclosure of the mortgage. Such suit is in the nature of a mortgage action
because its purpose is precisely to enforce the mortgage contract. A mortgage action
prescribes after ten years from the time the right of action accrued.

The law gives the mortgagee the right to claim for the deficiency resulting from the
price obtained in the sale of the property at public auction and the outstanding
obligation at the time of the foreclosure proceedings. In the present case, the Bank,
as mortgagee, had the right to claim payment of the deficiency after it had
foreclosed the mortgage in 1965. In other words, the prescriptive period
started to run against the Bank in 1965. As it filed the complaint only on January
27, 1977, more than ten years had already elapsed, hence, the action on its first to fifth
causes had by then prescribed. No other conclusion can be reached even if the suit is
considered as one upon a written contract or upon an obligation to pay the
deficiency which is created by law, the prescriptive period of both being also
ten years (citing Article 1144 of the Civil Code). (emphasis supplied) [30]

In view of the real property mortgage having been foreclosed on February 22, 1988 and
March 24, 1988,[31] the petitioner's filing on February 17, 1994 of its complaint to
recover the deficiency claim was well within the 10-year prescriptive period.

V
Rate of interest and penalty charge

The petitioner submits that the interest rate and penalty charge on the amount of the
deficiency claim should each be 16% per annum, not 6% per annum, as the RTC and
CA both ruled.[32]

We do not subscribe to the petitioner's submission.

In contracts, the law empowers the courts to reduce interest rates and penalty charges
that are iniquitous, unconscionable and exorbitant.[33] Whether an interest rate or
penalty charge is reasonable or excessive is addressed to the sound discretion of the
courts. In determining what is iniquitous and unconscionable, courts must consider the
circumstances of the case.[34]

Although the market value of the two parcels of land at the time of the foreclosure sale
and acquisition by the petitioner totaled P15,225,000.00, [35] the parcels were sold to the
petitioner for only P4,758,000.00, a price much lower than the market value. The huge
disparity between the market value and the price realized at the foreclosure sale
obviously gave a clear financial advantage to the petitioner, and this did not escape the
attention of both the RTC and the CA. The disparity became more defined considering
that the original amount of the guaranteed obligation was only P9,000,000.00.  These
circumstances notwithstanding, the RTC and the CA still granted the petitioner's
deficiency claim for P45,839,219.95, plus interest and attorney's fees. In view of these,
to still fix the interest rate and penalty charge at 16% per annum each would be plainly
inequitable and oppressive. The Court agrees with the CA and the RTC that reducing
the interest rate and penalty charge from 16% per annum to 6% per annum was
justified.

WHEREFORE, we AFFIRM the decision the Court of Appeals promulgated on April 30,

2007, subject to the MODIFICATION that respondents FELIMON R.
CUEVAS and JOSE A. SADDUL, JR. are DECLARED jointly and solidarily liable
with AMALGAMATED MANAGEMENT AND DEVELOPMENT CORPORATION on the
petitioner's deficiency claim, interest, penalty charges, and attorney's fees.

The respondents shall pay the costs of suit.

SO ORDERED.