Understanding the Prohibition Against Splitting a Cause of Action in Loan and Mortgage Cases

When a borrower defaults on a loan secured by a mortgage, a bank has two main remedies: foreclose on the property or file a collection suit. The Supreme Court has long held that a creditor cannot do both for the same debt—this is the prohibition against splitting a cause of action. But what happens when a borrower has multiple loans under separate agreements, all secured by the same properties?

The case of Asset Pool A (SPV-AMC), Inc. v. Spouses Berris (G.R. No. 203194, April 26, 2021) clarifies this area of law. The Court explained when a bank may pursue both remedies and when it is barred from doing so.

The Facts of the Case

Spouses Buenafrido and Felisa Berris obtained two credit facilities from Far East Bank and Trust Company (FEBTC): a P5 million Loan Agreement dated November 15, 1995, and a Discounting Line facility originally worth P15 million, later increased to P18 million. Both were secured by real estate mortgages over several properties, a chattel mortgage on a rice mill, and a Comprehensive Surety Agreement.

The spouses defaulted on their obligations. On August 19, 1999, FEBTC filed a petition for extrajudicial foreclosure over two properties to satisfy two promissory notes (PNs) under the Discounting Line. Eleven days later, the bank filed a collection suit for five other PNs—one under the Loan Agreement and four under the Discounting Line.

The spouses argued that the foreclosure barred the collection suit because the bank was splitting a single cause of action.

The Issue

The central question was whether the prior filing of foreclosure proceedings barred the subsequent collection suit, given that the obligations arose from two separate loan agreements.

The Ruling

The Supreme Court held that the answer depends on whether the obligations are part of the same or separate causes of action.

The four PNs under the Discounting Line were barred. Because all obligations under the Discounting Line became due and demandable upon default, the bank had to choose one remedy: foreclose the mortgage or file a collection suit. When FEBTC foreclosed on only two PNs under the Discounting Line and later sued to collect the other four PNs under the same facility, it violated the prohibition against splitting a cause of action. The Court ruled that the bank effectively waived its right to recover the amounts covered by the omitted PNs.

The PN under the Loan Agreement was not barred. The Court found that the Loan Agreement and the Discounting Line were separate and distinct contracts. They had different terms, different purposes, and different maturity dates. The fact that both were secured by the same mortgage did not merge them into one obligation. Because they were separate contracts, the bank could pursue foreclosure for the Discounting Line and a collection suit for the Loan Agreement without violating the rule.

The Rule on Splitting a Cause of Action

Section 3, Rule 2 of the Rules of Court provides that a party may not institute more than one suit for a single cause of action. If two or more suits are filed based on the same cause of action, the filing of one or a judgment on the merits in any one is a ground for dismissal of the others.

The test is whether the entire amount arises from one and the same act or contract, or whether the several parts arise from distinct and different acts or contracts. Where there are entirely distinct and separate contracts, they give rise to separate causes of action for which separate actions may be instituted.

The Indivisibility of Mortgage

The Court also addressed Article 2089 of the Civil Code on the indivisibility of mortgage. A mortgage is indivisible—each parcel mortgaged answers for the totality of the debt. However, this rule does not prevent a creditor from pursuing separate actions on distinct obligations, even if both are secured by the same properties.

The Court cited Spouses Tecklo v. Rural Bank of Pamplona: when a bank fails to include a loan in a foreclosure petition despite a blanket or dragnet mortgage clause, it waives its lien on the mortgaged property for that loan. However, the bank may still collect the unpaid loan through an ordinary collection suit.

Practical Takeaways

• A creditor must choose one remedy for a single obligation. A bank cannot foreclose on part of a loan and then file a collection suit for the rest of the same loan.
• Separate loan agreements create separate causes of action. Even if multiple loans are secured by the same mortgage, each distinct contract may be pursued separately.
• Acceleration clauses matter. Once a borrower defaults and all amounts become due, the entire obligation under that facility must be included in one action.
• Mortgage indivisibility does not merge separate debts. The fact that one mortgage secures several loans does not make those loans a single obligation.
• A deficiency claim comes after foreclosure. A creditor may recover any deficiency, but only after the foreclosure proceedings have terminated, not during their pendency.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.