In Solid Builders, Inc. vs. China Banking Corporation, the Supreme Court clarified the limits of preliminary injunctions in foreclosure cases, ruling that a debtor cannot prevent foreclosure based solely on claims of excessive interest rates. This decision underscores that while borrowers have rights, they cannot use preliminary injunctions to stall foreclosure proceedings without a clear legal basis. The ruling reinforces the principle that a mortgagee has a right to foreclose when a mortgagor defaults, balancing the protection of borrowers and lenders.

Mortgage Showdown: Can a Borrower Block Foreclosure with Claims of High Interest?

The dispute arose from loans China Banking Corporation (CBC) granted to Solid Builders, Inc. (SBI), secured by properties mortgaged by Medina Foods Industries, Inc. (MFII). After SBI encountered financial difficulties, it proposed restructuring its loans, including a dacion en pago, but the parties could not agree on the terms. CBC eventually demanded full payment, prompting SBI and MFII to file a complaint to prevent foreclosure, arguing that the imposed interests, penalties, and charges were iniquitous and unconscionable. They sought a preliminary injunction, which the trial court initially granted, but the Court of Appeals later reversed, leading to this Supreme Court review.

At the heart of the matter was whether SBI and MFII had a clear legal right to prevent CBC from foreclosing on the mortgaged properties. The Supreme Court emphasized that a preliminary injunction is an extraordinary remedy, only available when the applicant demonstrates a prima facie right and that the acts sought to be enjoined would violate that right, causing irreparable injury. The Court cited Palm Tree Estates, Inc. v. Philippine National Bank, stating:

A preliminary injunction is an order granted at any stage of an action prior to judgment of final order, requiring a party, court, agency, or person to refrain from a particular act or acts. It is a preservative remedy to ensure the protection of a party’s substantive rights or interests pending the final judgment in the principal action.

The Court found that SBI and MFII’s claim of usurious interest rates did not automatically grant them the right to block the foreclosure. Even if the interest rates were deemed usurious, the Court clarified, it would not invalidate the entire loan or the right to foreclose. In a usurious loan with a mortgage, the right to foreclose remains if the debtor fails to pay the principal debt. The Court referenced First Metro Investment Corporation v. Este Del Sol Mountain Reserve, Inc.:

[T]he nullity of the stipulation of usurious interest does not affect the lender’s right to recover the principal loan, nor affect the other terms thereof. Thus, in a usurious loan with mortgage, the right to foreclose the mortgage subsists, and this right can be exercised by the creditor upon failure by the debtor to pay the debt due.

Furthermore, the Court noted that the trial court itself acknowledged the need for a trial on the merits to determine the fairness of the interest rates and penalties, indicating that SBI and MFII’s rights were still disputable. The Supreme Court held that without a clear, actual, and subsisting right, issuing an injunction would be an abuse of discretion. The court explained that the validity of the increase in the loan amount was not yet established, and the right claimed by SBI and MFII remained controversial.

The Court also pointed out that SBI’s issuance of promissory notes totaling P218,540,648.00, which remained unpaid, further weakened their case. The Court emphasized that foreclosure is a consequence of non-payment, citing Equitable PCI Bank, Inc. v. OJ-Mark Trading, Inc.:

Where the parties stipulated in their credit agreements, mortgage contracts and promissory notes that the mortgagee is authorized to foreclose the mortgaged properties in case of default by the mortgagors, the mortgagee has a clear right to foreclosure in case of default, making the issuance of a Writ of Preliminary Injunction improper.

Moreover, SBI’s repeated requests for loan restructuring, without actually settling the debt, showed their inability to fulfill their obligations. This default disqualified them from seeking equitable relief. The accessory obligation of MFII as an accommodation mortgagor was also tied to SBI’s default, further undermining their claim for an injunction.

The Court further rejected the argument based on Article 1229 of the Civil Code, which allows courts to equitably reduce penalties if they are iniquitous or unconscionable. The Court stated that such a determination could only be made after a full hearing and consideration of all relevant circumstances, making any claim under this provision premature.

Addressing the requirement of irreparable injury, the Court found that any damage SBI and MFII might suffer from foreclosure would be monetary and compensable. The Court cited Philippine National Bank v. Castalloy Technology Corporation:

[A]ll is not lost for defaulting mortgagors whose properties were foreclosed by creditors-mortgagees. The respondents will not be deprived outrightly of their property, given the right of redemption granted to them under the law. Moreover, in extrajudicial foreclosures, mortgagors have the right to receive any surplus in the selling price.

Finally, the Court addressed the En Banc Resolution in A.M. No. 99-10-05-0, which provides additional guidelines for foreclosure proceedings. This resolution limits the instances when a writ against foreclosure may be issued, requiring, among other things, that the debtor pay at least twelve percent per annum interest on the principal obligation while the case is pending. The Court stated that reinstating the injunction would allow SBI and MFII to circumvent these guidelines. The court explained that to reverse the decision of the Court of Appeals and reinstate the writ of preliminary injunction issued by the trial court will be to allow SBI and MFII to circumvent the guidelines and conditions provided by the En Banc Resolution in A.M. No. 99-10-05-0 dated February 20, 2007 and prevent CBC from foreclosing on the mortgaged properties based simply on the allegation that the interest on the loan is unconscionable. This Court will not permit such a situation. What cannot be done directly cannot be done indirectly.

FAQs

What was the key issue in this case?	The key issue was whether Solid Builders, Inc. and Medina Foods Industries, Inc. could obtain a preliminary injunction to prevent China Banking Corporation from foreclosing on their mortgaged properties due to allegedly usurious interest rates.
Can a borrower stop foreclosure based solely on claims of high interest?	No, the Supreme Court ruled that claims of usurious interest rates alone are insufficient to justify a preliminary injunction against foreclosure. The borrower must demonstrate a clear legal right beyond the interest rate dispute.
What is a preliminary injunction?	A preliminary injunction is a court order that temporarily prevents a party from taking certain actions, typically to preserve the status quo until a final judgment can be made. It requires demonstrating a prima facie right and potential for irreparable injury.
What happens if interest rates are found to be usurious?	Even if interest rates are usurious, the lender still has the right to recover the principal loan amount, and the mortgage remains valid. The debtor cannot use the usury claim to avoid paying the principal debt.
What is the significance of the En Banc Resolution in A.M. No. 99-10-05-0?	This resolution sets additional guidelines for foreclosure proceedings, including strict conditions for issuing injunctions. It requires the debtor to pay at least 12% per annum interest on the principal obligation while the case is pending.
What constitutes irreparable injury in the context of foreclosure?	Irreparable injury refers to damages that cannot be adequately compensated with money. In foreclosure cases, the loss of property is generally considered compensable through the right of redemption and potential recovery of surplus from the sale.
What options do borrowers have if they default on their mortgage?	Borrowers have the right of redemption after foreclosure, and they may also have a cause of action to recover any surplus from the sale. They can also try to negotiate with the lender for loan restructuring or other arrangements.
What role does equity play in foreclosure cases?	Equity may be considered, but defaulting debtors who have not fulfilled their obligations are often disqualified from seeking equitable remedies like preliminary injunctions. Clean hands are typically required to invoke equity.

This case provides critical guidance for borrowers and lenders alike. It reinforces that while courts may intervene to protect against unfair practices, a clear legal right and potential for irreparable harm must be demonstrated to halt foreclosure proceedings. The decision balances protecting borrowers from unconscionable terms while upholding the contractual rights of lenders.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Solid Builders, Inc. vs. China Banking Corporation, G.R. No. 179665, April 03, 2013