In Cruz v. [Bank] (G.R. No. 236605, 29 July 2024), the Supreme Court nullified the foreclosure of a mortgaged property due to the lender’s failure to provide a full accounting of the borrowers’ loan payments — a ruling that reinforces the duty of financial institutions to maintain accurate records and uphold transparency.

The case arose from a long-standing credit relationship between the petitioners, business partners Carmelita Cruz and Vilma Low Tay, and their lender. Between 1993 and 2004, they obtained several loans secured by a mortgage over their Pasig property. When financial difficulties ensued, the parties executed a restructuring agreement and a promissory note for P8.6 million. The lender claimed non-payment, while the borrowers alleged they had actually overpaid.

Following an independent audit, the borrowers asserted that they had paid P32.6 million, while the lender had recorded only P20.5 million — leaving a discrepancy of over P12 million. Even after deducting the P8.6 million restructuring amount, the borrowers claimed an overpayment of P3.5 million. They also raised several irregularities, including delayed posting of payments, failure to issue official receipts, unrecorded dacion en pago, and missing check transactions.

In 2004, Cruz et al. filed a case before the Regional Trial Court (RTC) of Marikina, seeking a complete accounting of all loan payments and a refund of their alleged overpayment. The RTC ruled in their favor and ordered the lender to submit a detailed accounting from 1993 to 2004. The lender appealed, and the case remained pending with the Court of Appeals.

Despite this unresolved accounting issue, the lender initiated extrajudicial foreclosure proceedings before the Pasig RTC and acquired the property as the highest bidder. Cruz et al. then filed a separate case to annul the foreclosure, arguing that without a proper accounting, there was no legal basis to declare them in default. The Pasig RTC sided with the borrowers, nullified the foreclosure, and held that the lender could not foreclose in the absence of a definitive finding of unpaid obligation. The Court of Appeals affirmed this decision, and the Supreme Court upheld it with finality.

In a related decision (G.R. 221220, 29 January 2021), the Supreme Court underscored the fiduciary obligation of banks to maintain complete and accurate records: “The bank’s business is imbued with public interest. Its relationship with the borrowers was based on trust and confidence. Correlatively, it had the duty to accurately and promptly record all the payments made by the borrowers, to conduct a precise and thorough accounting of said payments.”

The Court held that the lender’s failure to perform this duty made it impossible to ascertain whether the borrowers had fully satisfied their obligations. The incomplete records precluded a lawful foreclosure and required resolution of the accounting issue before any enforcement action could be taken.

While a lender’s failure to provide an accounting is not, in itself, grounds to annul foreclosure, the Court stressed that a prior, final ruling had already ordered a full accounting. Proceeding with foreclosure before complying with that directive would undermine judicial authority and due process.

The foreclosure was thus annulled, and the High Court emphasized the lender’s duty to exercise extraordinary diligence in commercial dealings. The ruling sends a clear message: mortgages may secure loans, but once the obligation is discharged or in dispute, foreclosure has no leg to stand on.

In banking and finance, trust is currency. Accuracy is its safeguard.

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