Republic of the Philippines

SUPREME COURT

SECOND DIVISION

G.R. No. 150197 July 28, 2005

PRUDENTIAL BANK, Petitioner,

vs.
DON A. ALVIAR and GEORGIA B. ALVIAR, Respondents.

DECISION

Tinga, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner
Prudential Bank seeks the reversal of the Decision1 of the Court of Appeals dated 27 September
2001 in CA-G.R. CV No. 59543 affirming the Decision of the Regional Trial Court (RTC) of Pasig
City, Branch 160, in favor of respondents.

Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of
land in San Juan, Metro Manila, covered by Transfer Certificate of Title (TCT) No. 438157 of the
Register of Deeds of Rizal. On 10 July 1975, they executed a deed of real estate mortgage in favor
of petitioner Prudential Bank to secure the payment of a loan worth P250,000.00.2 This mortgage
was annotated at the back of TCT No. 438157. On 4 August 1975, respondents executed the
corresponding promissory note, PN BD#75/C-252, covering the said loan, which provides that the
loan matured on 4 August 1976 at an interest rate of 12% per annum with a 2% service charge, and
that the note is secured by a real estate mortgage as aforementioned. 3 Significantly, the real estate
mortgage contained the following clause:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained
from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective
of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be
obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00)
Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether
direct or indirect, principal or secondary as appears in the accounts, books and records of the
Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the
Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on
the back of this document, and/or appended hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . . 4

On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345

for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured by a "hold-out"
on the mortgagors foreign currency savings account with the bank under Account No. 129, and that
the mortgagors passbook is to be surrendered to the bank until the amount secured by the "hold-
out" is settled.5
On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the
husband and wife were President and Chairman of the Board and Vice President, 6 respectively, PN
BD#76/C-430 covering P545,000.000. As provided in the note, the loan is secured by "Clean-Phase
out TOD CA 3923," which means that the temporary overdraft incurred by Donalco Trading, Inc. with
petitioner is to be converted into an ordinary loan in compliance with a Central Bank circular directing
the discontinuance of overdrafts.7

On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a
straight loan of P545,000.00, the proceeds of which shall be used to liquidate the outstanding loan
of P545,000.00 TOD. The letter likewise mentioned that the securities for the loan were the deed of
assignment on two promissory notes executed by Bancom Realty Corporation with Deed of
Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various heavy and
transportation equipment.8

On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the obligations of

G.B. Alviar Realty and Development, Inc. and for the release of the real estate mortgage for
the P450,000.00 loan covering the two (2) lots located at Vam Buren and Madison Streets, North
Greenhills, San Juan, Metro Manila. The payment was acknowledged by petitioner who accordingly
released the mortgage over the two properties.9

On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the
property covered by TCT No. 438157. Per petitioners computation, respondents had the total
obligation of P1,608,256.68, covering the three (3) promissory notes, to wit: PN BD#75/C-252
for P250,000.00, PN BD#76/C-345 for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus
assessed past due interests and penalty charges. The public auction sale of the mortgaged property
was set on 15 January 1980.10

Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary
injunction with the RTC of Pasig,11 claiming that they have paid their principal loan secured by the
mortgaged property, and thus the mortgage should not be foreclosed. For its part, petitioner averred
that the payment of P2,000,000.00 made on 6 March 1979 was not a payment made by
respondents, but by G.B. Alviar Realty and Development Inc., which has a separate loan with the
bank secured by a separate mortgage.12

On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to proceed with
the extra-judicial foreclosure.13 Respondents sought reconsideration of the decision.14 On 24 August
1994, the trial court issued an Order setting aside its earlier decision and awarded attorneys fees to
respondents.15 It found that only the P250,000.00 loan is secured by the mortgage on the land
covered by TCT No. 438157. On the other hand, the P382,680.83 loan is secured by the foreign
currency deposit account of Don A. Alviar, while the P545,000.00 obligation was an unsecured loan,
being a mere conversion of the temporary overdraft of Donalco Trading, Inc. in compliance with a
Central Bank circular. According to the trial court, the "blanket mortgage clause" relied upon by
petitioner applies only to future loans obtained by the mortgagors, and not by parties other than the
said mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as officers
thereof.

On appeal to the Court of Appeals, petitioner made the following assignment of errors:
I. The trial court erred in holding that the real estate mortgage covers only the promissory note
BD#75/C-252 for the sum of P250,000.00.

II. The trial court erred in holding that the promissory note BD#76/C-345 for P2,640,000.00
(P382,680.83 outstanding principal balance) is not covered by the real estate mortgage by
expressed agreement.

III. The trial court erred in holding that Promissory Note BD#76/C-430 for P545,000.00 is not covered
by the real estate mortgage.

IV. The trial court erred in holding that the real estate mortgage is a contract of adhesion.

V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-appellees attorneys fees
for P20,000.00.16

The Court of Appeals affirmed the Order of the trial court but deleted the award of attorneys fees. 17 It
ruled that while a continuing loan or credit accommodation based on only one security or mortgage
is a common practice in financial and commercial institutions, such agreement must be clear and
unequivocal. In the instant case, the parties executed different promissory notes agreeing to a
particular security for each loan. Thus, the appellate court ruled that the extrajudicial foreclosure sale
of the property for the three loans is improper.18

The Court of Appeals, however, found that respondents have not yet paid the P250,000.00 covered
by PN BD#75/C-252 since the payment of P2,000,000.00 adverted to by respondents was issued for
the obligations of G.B. Alviar Realty and Development, Inc. 19

Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in the Court
of Appeals as grounds herein.

Petitioner maintains that the "blanket mortgage clause" or the "dragnet clause" in the real estate
mortgage expressly covers not only the P250,000.00 under PN BD#75/C-252, but also the two other
promissory notes included in the application for extrajudicial foreclosure of real estate
mortgage.20 Thus, it claims that it acted within the terms of the mortgage contract when it filed its
petition for extrajudicial foreclosure of real estate mortgage. Petitioner relies on the cases of Lim
Julian v. Lutero,21 Tad-Y v. Philippine National Bank,22 Quimson v. Philippine National Bank,23 C & C
Commercial v. Philippine National Bank,24 Mojica v. Court of Appeals,25 and China Banking
Corporation v. Court of Appeals,26 all of which upheld the validity of mortgage contracts securing
future advancements.

Anent the Court of Appeals conclusion that the parties did not intend to include PN BD#76/C-345 in
the real estate mortgage because the same was specifically secured by a foreign currency deposit
account, petitioner states that there is no law or rule which prohibits an obligation from being
covered by more than one security.27Besides, respondents even continued to withdraw from the
same foreign currency account even while the promissory note was still outstanding, strengthening
the belief that it was the real estate mortgage that principally secured all of respondents promissory
notes.28 As for PN BD#76/C-345, which the Court of Appeals found to be exclusively secured by the
Clean-Phase out TOD 3923, petitioner posits that such security is not exclusive, as the "dragnet
clause" of the real estate mortgage covers all the obligations of the respondents. 29
Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency of
stating that the promissory notes were executed by them not in their personal capacity but as
corporate officers. It claims that PN BD#76/C-430 was in fact for home construction and personal
consumption of respondents. Thus, it states that there is a need to pierce the veil of corporate
fiction.30

Finally, petitioner alleges that the mortgage contract was executed by respondents with knowledge
and understanding of the "dragnet clause," being highly educated individuals, seasoned
businesspersons, and political personalities.31 There was no oppressive use of superior bargaining
power in the execution of the promissory notes and the real estate mortgage. 32

For their part, respondents claim that the "dragnet clause" cannot be applied to the subsequent
loans extended to Don Alviar and Donalco Trading, Inc. since these loans are covered by separate
promissory notes that expressly provide for a different form of security.33 They reiterate the holding of
the trial court that the "blanket mortgage clause" would apply only to loans obtained jointly by
respondents, and not to loans obtained by other parties. 34Respondents also place a premium on the
finding of the lower courts that the real estate mortgage clause is a contract of adhesion and must be
strictly construed against petitioner bank.35

The instant case thus poses the following issues pertaining to: (i) the validity of the "blanket
mortgage clause" or the "dragnet clause"; (ii) the coverage of the "blanket mortgage clause"; and
consequently, (iii) the propriety of seeking foreclosure of the mortgaged property for the non-
payment of the three loans.

At this point, it is important to note that one of the loans sought to be included in the "blanket
mortgage clause" was obtained by respondents for Donalco Trading, Inc. Indeed, PN BD#76/C-430
was executed by respondents on behalf of Donalco Trading, Inc. and not in their personal capacity.
Petitioner asks the Court to pierce the veil of corporate fiction and hold respondents liable even for
obligations they incurred for the corporation. The mortgage contract states that the mortgage covers
"as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including
interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect,
principal or secondary." Well-settled is the rule that a corporation has a personality separate and
distinct from that of its officers and stockholders. Officers of a corporation are not personally liable for
their acts as such officers unless it is shown that they have exceeded their authority.36 However, the
legal fiction that a corporation has a personality separate and distinct from stockholders and
members may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse
legitimate issues.37 PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the
respondents, is not within the contemplation of the "blanket mortgage clause." Moreover, petitioner is
unable to show that respondents are hiding behind the corporate structure to evade payment of their
obligations. Save for the notation in the promissory note that the loan was for house construction
and personal consumption, there is no proof showing that the loan was indeed for respondents
personal consumption. Besides, petitioner agreed to the terms of the promissory note. If
respondents were indeed the real parties to the loan, petitioner, a big, well-established institution of
long standing that it is, should have insisted that the note be made in the name of respondents
themselves, and not to Donalco Trading Inc., and that they sign the note in their personal capacity
and not as officers of the corporation.

Now on the main issues.

A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one
which is specifically phrased to subsume all debts of past or future origins. Such clauses are
"carefully scrutinized and strictly construed."38 Mortgages of this character enable the parties to
provide continuous dealings, the nature or extent of which may not be known or anticipated at the
time, and they avoid the expense and inconvenience of executing a new security on each new
transaction.39 A "dragnet clause" operates as a convenience and accommodation to the borrowers as
it makes available additional funds without their having to execute additional security documents,
thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et
cetera.40 Indeed, it has been settled in a long line of decisions that mortgages given to secure future
advancements are valid and legal contracts,41 and the amounts named as consideration in said
contracts 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 can be gathered. 42

The "blanket mortgage clause" in the instant case states:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained
from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective
of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be
obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00)
Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor
and/or DEBTOR, including interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books
and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage
unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list
inserted on the back of this document, and/or appended hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .
43
(Emphasis supplied.)

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real
estate mortgage to secure not only the P250,000.00 loan from the petitioner, but also future credit
facilities and advancements that may be obtained by the respondents. The terms of the above
provision being clear and unambiguous, there is neither need nor excuse to construe it otherwise.

The cases cited by petitioner, while affirming the validity of "dragnet clauses" or "blanket mortgage
clauses," are of a different factual milieu from the instant case. There, the subsequent loans were
not covered by any security other than that for the mortgage deeds which uniformly contained the
"dragnet clause."

In the case at bar, the subsequent loans obtained by respondents were secured by other securities,
thus: PN BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his foreign currency
savings account, while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was
secured by "Clean-Phase out TOD CA 3923" and eventually by a deed of assignment on two
promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U.
Valencia and Co., and by a chattel mortgage on various heavy and transportation equipment. The
matter of PN BD#76/C-430 has already been discussed. Thus, the critical issue is whether the
"blanket mortgage" clause applies even to subsequent advancements for which other securities
were intended, or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged on this question. One school
advocates that a "dragnet clause" so worded as to be broad enough to cover all other debts in
addition to the one specifically secured will be construed to cover a different debt, although such
other debt is secured by another mortgage.44The contrary thinking maintains that a mortgage with
such a clause will not secure a note that expresses on its face that it is otherwise secured as to its
entirety, at least to anything other than a deficiency after exhausting the security specified
therein,45 such deficiency being an indebtedness within the meaning of the mortgage, in the absence
of a special contract excluding it from the arrangement.46

The latter school represents the better position. The parties having conformed to the "blanket
mortgage clause" or "dragnet clause," it is reasonable to conclude that they also agreed to an
implied understanding that subsequent loans need not be secured by other securities, as the
subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the first
security is a corollary component of the "dragnet clause." But of course, there is no prohibition, as in
the mortgage contract in issue, against contractually requiring other securities for the subsequent
loans. Thus, when the mortgagor takes another loan for which another security was given it could
not be inferred that such loan was made in reliance solely on the original security with the "dragnet
clause," but rather, on the new security given. This is the "reliance on the security test."

Hence, based on the "reliance on the security test," the California court in the cited case made an
inquiry whether the second loan was made in reliance on the original security containing a "dragnet
clause." Accordingly, finding a different security was taken for the second loan no intent that the
parties relied on the security of the first loan could be inferred, so it was held. The rationale involved,
the court said, was that the "dragnet clause" in the first security instrument constituted a continuing
offer by the borrower to secure further loans under the security of the first security instrument, and
that when the lender accepted a different security he did not accept the offer.47

In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the mortgagor to
the bank to provide the security of the mortgage for advances of and when they were made. Thus, it
was concluded that the "offer" was not accepted by the bank when a subsequent advance was made
because (1) the second note was secured by a chattel mortgage on certain vehicles, and the clause
therein stated that the note was secured by such chattel mortgage; (2) there was no reference in the
second note or chattel mortgage indicating a connection between the real estate mortgage and the
advance; (3) the mortgagor signed the real estate mortgage by her name alone, whereas the second
note and chattel mortgage were signed by the mortgagor doing business under an assumed name;
and (4) there was no allegation by the bank, and apparently no proof, that it relied on the security of
the real estate mortgage in making the advance.48

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a
contrary intention, a mortgage containing a "dragnet clause" will not be extended to cover future
advances unless the document evidencing the subsequent advance refers to the mortgage as
providing security therefor.49

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property
because of non-payment of all the three promissory notes. While the existence and validity of the
"dragnet clause" cannot be denied, there is a need to respect the existence of the other security
given for PN BD#76/C-345. The foreclosure of the mortgaged property should only be for
the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security
for the second promissory note. As held in one case, where deeds absolute in form were executed to
secure any and all kinds of indebtedness that might subsequently become due, a balance due on a
note, after exhausting the special security given for the payment of such note, was in the absence of
a special agreement to the contrary, within the protection of the mortgage, notwithstanding the giving
of the special security.50 This is recognition that while the "dragnet clause" subsists, the security
specifically executed for subsequent loans must first be exhausted before the mortgaged property
can be resorted to.

One other crucial point. The mortgage contract, as well as the promissory notes subject of this case,
is a contract of adhesion, to which respondents only participation was the affixing of their signatures
or "adhesion" thereto.51 A contract of adhesion is one in which a party imposes a ready-made form of
contract which the other party may accept or reject, but which the latter cannot modify.52

The real estate mortgage in issue appears in a standard form, drafted and prepared solely by
petitioner, and which, according to jurisprudence must be strictly construed against the party
responsible for its preparation.53 If the parties intended that the "blanket mortgage clause" shall cover
subsequent advancement secured by separate securities, then the same should have been
indicated in the mortgage contract. Consequently, any ambiguity is to be taken contra proferentum,
that is, construed against the party who caused the ambiguity which could have avoided it by the
exercise of a little more care.54 To be more emphatic, any ambiguity in a contract whose terms are
susceptible of different interpretations must be read against the party who drafted it, 55 which is the
petitioner in this case.

Even the promissory notes in issue were made on standard forms prepared by petitioner, and as
such are likewise contracts of adhesion. Being of such nature, the same should be interpreted
strictly against petitioner and with even more reason since having been accomplished by
respondents in the presence of petitioners personnel and approved by its manager, they could not
have been unaware of the import and extent of such contracts.

Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that
respondents have not yet paid the P250,000.00, and gave no credence to their claim that they paid
the said amount when they paid petitioner P2,000,000.00. Thus, the mortgaged property could still
be properly subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as
mentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been
exhausted, subject of course to defenses which are available to respondents.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No.
59543 is AFFIRMED.

Costs against petitioner.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-17500 May 16, 1967

PEOPLE'S BANK AND TRUST CO. and ATLANTIC GULF AND PACIFIC CO. OF
MANILA, plaintiffs-appellants,
vs.
DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER CORPORATION and
CONNELL BROS. CO. (PHIL.), defendants-appellants.

Angel S. Gamboa for defendants-appellants.

Laurel Law Offices for plaintiffs-appellants.

DIZON, J.:

On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia corporation
licensed to do business in the Philippines hereinafter referred to as ATLANTIC sold and
assigned all its rights in the Dahican Lumber concession to Dahican Lumber Company hereinafter
referred to as DALCO for the total sum of $500,000.00, of which only the amount of $50,000.00
was paid. Thereafter, to develop the concession, DALCO obtained various loans from the People's
Bank & Trust Company hereinafter referred to as the BANK amounting, as of July 13, 1950, to
P200,000.00. In addition, DALCO obtained, through the BANK, a loan of $250,000.00 from the
Export-Import Bank of Washington D.C., evidenced by five promissory notes of $50,000.00 each,
maturing on different dates, executed by both DALCO and the Dahican America Lumber
Corporation, a foreign corporation and a stockholder of DALCO, hereinafter referred to as
DAMCO, all payable to the BANK or its order.

As security for the payment of the abovementioned loans, on July 13, 1950 DALCO executed in
favor of the BANK the latter acting for itself and as trustee for the Export-Import Bank of
Washington D.C. a deed of mortgage covering five parcels of land situated in the province of
Camarines Norte together with all the buildings and other improvements existing thereon and all the
personal properties of the mortgagor located in its place of business in the municipalities of
Mambulao and Capalonga, Camarines Norte (Exhibit D). On the same date, DALCO executed a
second mortgage on the same properties in favor of ATLANTIC to secure payment of the unpaid
balance of the sale price of the lumber concession amounting to the sum of $450,000.00 (Exhibit G).
Both deeds contained the following provision extending the mortgage lien to properties to be
subsequently acquired referred to hereafter as "after acquired properties" by the mortgagor:

All property of every nature and description taken in exchange or replacement, and all
buildings, machinery, fixtures, tools equipment and other property which the Mortgagor may
hereafter acquire, construct, install, attach, or use in, to, upon, or in connection with the
premises, shall immediately be and become subject to the lien of this mortgage in the same
manner and to the same extent as if now included therein, and the Mortgagor shall from time
to time during the existence of this mortgage furnish the Mortgagee with an accurate
inventory of such substituted and subsequently acquired property.

Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In
addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and
9,286 shares of DAMCO to secure the same obligations.

Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK
paid the same to the Export-Import Bank of Washington D.C., and the latter assigned to the former
its credit and the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up
to April 1, 1953 to pay the overdue promissory note.

After July 13, 1950 the date of execution of the mortgages mentioned above DALCO
purchased various machineries, equipment, spare parts and supplies in addition to, or in
replacement of some of those already owned and used by it on the date aforesaid. Pursuant to the
provision of the mortgage deeds quoted theretofore regarding "after acquired properties," the BANK
requested DALCO to submit complete lists of said properties but the latter failed to do so. In
connection with these purchases, there appeared in the books of DALCO as due to Connell Bros.
Company (Philippines) a domestic corporation who was acting as the general purchasing agent of
DALCO thereinafter called CONNELL the sum of P452,860.55 and to DAMCO, the sum of
P2,151,678.34.

On December 16, 1952, the Board of Directors of DALCO, in a special meeting called for the
purpose, passed a resolution agreeing to rescind the alleged sales of equipment, spare parts and
supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of rescission of
sale were executed between DALCO and DAMCO, on the one hand and between DALCO and
CONNELL, on the other.

On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said
agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on February 12,
1953; ATLANTIC and the BANK, commenced foreclosure proceedings in the Court of First Instance
of Camarines Norte against DALCO and DAMCO. On the same date they filed an ex-
parte application for the appointment of a Receiver and/or for the issuance of a writ of preliminary
injunction to restrain DALCO from removing its properties. The court granted both remedies and
appointed George H. Evans as Receiver. Upon defendants' motion, however, the court, in its order of
February 21, 1953, discharged the Receiver.

On March 2, 1953, defendants filed their answer denying the material allegations of the complaint
and alleging several affirmative defenses and a counterclaim.

On March 4 of the same year, CONNELL, filed a motion for intervention alleging that it was the
owner and possessor of some of the equipments, spare parts and supplies which DALCO had
acquired subsequent to the execution of the mortgages sought to be foreclosed and which plaintiffs
claimed were covered by the lien. In its order of March 18,1953 the Court granted the motion, as well
as plaintiffs' motion to set aside the order discharging the Receiver. Consequently, Evans was
reinstated.

On April 1, 1953, CONNELL filed its answer denying the material averment of the complaint, and
asserting affirmative defenses and a counterclaim.

Upon motion of the parties the Court, on September 30, 1953, issued an order transferring the
venue of the action to the Court of First Instance of Manila where it was docketed as Civil Case No.
20987.

On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the machineries,
equipment and supplies of DALCO, and the same were subsequently sold for a total consideration of
P175,000.00 which was deposited in court pending final determination of the action. By a similar
agreement one-half (P87,500.00) of this amount was considered as representing the proceeds
obtained from the sale of the "undebated properties" (those not claimed by DAMCO and CONNELL),
and the other half as representing those obtained from the sale of the "after acquired properties".

After due trial, the Court, on July 15, 1960, rendered judgment as follows:

IN VIEW WHEREFORE, the Court:

1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum of P200,000,00 with
7% interest per annum from July 13, 1950, Plus another sum of P100,000.00 with 5%
interest per annum from July 13, 1950; plus 10% on both principal sums as attorney's fees;

2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum of P900,000.00 with 4%
interest per annum from July 3, 1950, plus 10% on both principal as attorney's fees;

3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum of P425,860.55, and
to pay unto Dahican American Lumber Co. the sum of P2,151,678.24 both with legal interest
from the date of the filing of the respective answers of those parties, 10% of the principals as
attorney's fees;

4. Orders that of the sum realized from the sale of the properties of P175,000.00, after
deducting the recognized expenses, one-half thereof be adjudicated unto plaintiffs, the court
no longer specifying the share of each because of that announced intention under the
stipulation of facts to "pool their resources"; as to the other one-half, the same should be
adjudicated unto both plaintiffs, and defendant Dahican American and Connell Bros. in the
proportion already set forth on page 9, lines 21, 22 and 23 of the body of this decision; but
with the understanding that whatever plaintiffs and Dahican American and Connell Bros.
should receive from the P175,000.00 deposited in the Court shall be applied to the
judgments particularly rendered in favor of each;

5. No other pronouncement as to costs; but the costs of the receivership as to the debated
properties shall be borne by People's Bank, Atlantic Gulf, Connell Bros., and Dahican
American Lumber Co., pro-rata.

On the following day, the Court issued the following supplementary decision:

IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order to add
the following paragraph 6:

6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days, the
Court orders the sale at public auction of the lands object of the mortgages to satisfy the said
mortgages and costs of foreclosure.

From the above-quoted decision, all the parties appealed.

Main contentions of plaintiffs as appellants are the following: that the "after acquired properties" were
subject to the deeds of mortgage mentioned heretofore; that said properties were acquired from
suppliers other than DAMCO and CONNELL; that even granting that DAMCO and CONNELL were
the real suppliers, the rescission of the sales to DALCO could not prejudice the mortgage lien in
favor of plaintiffs; that considering the foregoing, the proceeds obtained from the sale of the "after
acquired properties" as well as those obtained from the sale of the "undebated properties" in the
total sum of P175,000.00 should have been awarded exclusively to plaintiffs by reason of the
mortgage lien they had thereon; that damages should have been awarded to plaintiffs against
defendants, all of them being guilty of an attempt to defraud the former when they sought to rescind
the sales already mentioned for the purpose of defeating their mortgage lien, and finally, that
defendants should have been made to bear all the expenses of the receivership, costs and
attorney's fees.

On the other hand, defendants-appellants contend that the trial court erred: firstly, in not holding that
plaintiffs had no cause of action against them because the promissory note sued upon was not yet
due when the action to foreclose the mortgages was commenced; secondly, in not holding that the
mortgages aforesaid were null and void as regards the "after acquired properties" of DALCO
because they were not registered in accordance with the Chattel Mortgage Law, the court erring, as
a consequence, in holding that said properties were subject to the mortgage lien in favor of plaintiffs;
thirdly, in not holding that the provision of the fourth paragraph of each of said mortgages did not
automatically make subject to such mortgages the "after acquired properties", the only meaning
thereof being that the mortgagor was willing to constitute a lien over such properties; fourthly, in not
ruling that said stipulation was void as against DAMCO and CONNELL and in not awarding the
proceeds obtained from the sale of the "after acquired properties" to the latter exclusively; fifthly, in
appointing a Receiver and in holding that the damages suffered by DAMCO and CONNELL by
reason of the depreciation or loss in value of the "after acquired properties" placed under
receivership was damnum absque injuria and, consequently, in not awarding, to said parties the
corresponding damages claimed in their counterclaim; lastly, in sentencing DALCO and DAMCO to
pay attorney's fees and in requiring DAMCO and CONNELL to pay the costs of the Receivership,
instead of sentencing plaintiffs to pay attorney's fees.

Plaintiffs' brief as appellants submit six assignments of error, while that of defendants also as
appellants submit a total of seventeen. However, the multifarious issues thus before Us may be
resolved, directly or indirectly, by deciding the following issues:

Firstly, are the so-called "after acquired properties" covered by and subject to the deeds of mortgage
subject of foreclosure?; secondly, assuming that they are subject thereto, are the mortgages valid
and binding on the properties aforesaid inspite of the fact that they were not registered in
accordance with the provisions of the Chattel Mortgage Law?; thirdly, assuming again that the
mortgages are valid and binding upon the "after acquired properties", what is the effect thereon, if
any, of the rescission of sales entered into, on the one hand, between DAMCO and DALCO, and
between DALCO and CONNELL, on the other?; and lastly, was the action to foreclose the
mortgages premature?

A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every
nature and description taken in exchange or replacement, as well as all buildings, machineries,
fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install,
attach; or use in, to upon, or in connection with the premises that is, its lumber concession
"shall immediately be and become subject to the lien" of both mortgages in the same manner and to
the same extent as if already included therein at the time of their execution. As the language thus
used leaves no room for doubt as to the intention of the parties, We see no useful purpose in
discussing the matter extensively. Suffice it to say that the stipulation referred to is common, and We
might say logical, in all cases where the properties given as collateral are perishable or subject to
inevitable wear and tear or were intended to be sold, or to be used thus becoming subject to the
inevitable wear and tear but with the understanding express or implied that they shall be
replaced with others to be thereafter acquired by the mortgagor. Such stipulation is neither unlawful
nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the
original value of the properties given as security. Indeed, if such properties were of the nature
already referred to, it would be poor judgment on the part of the creditor who does not see to it that a
similar provision is included in the contract.

B. But defendants contend that, granting without admitting, that the deeds of mortgage in question
cover the "after acquired properties" of DALCO, the same are void and ineffectual because they
were not registered in accordance with the Chattel Mortgage Law. In support of this and of the
proposition that, even if said mortgages were valid, they should not prejudice them, the defendants
argue (1) that the deeds do not describe the mortgaged chattels specifically, nor were they
registered in accordance with the Chattel Mortgage Law; (2) that the stipulation contained in the
fourth paragraph thereof constitutes "mere executory agreements to give a lien" over the "after
acquired properties" upon their acquisition; and (3) that any mortgage stipulation concerning "after
acquired properties" should not prejudice creditors and other third persons such as DAMCO and
CONNELL.

The stipulation under consideration strongly belies defendants contention. As adverted to

hereinbefore, it states that all property of every nature, building, machinery etc. taken in exchange or
replacement by the mortgagor "shall immediately be and become subject to the lien of this mortgage
in the same manner and to the same extent as if now included therein". No clearer language could
have been chosen.

Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third persons, a
chattel mortgage must be registered and must describe the mortgaged chattels or personal
properties sufficiently to enable the parties and any other person to identify them, We say that such
law does not apply to this case.

As the mortgages in question were executed on July 13, 1950 with the old Civil Code still in force,
there can be no doubt that the provisions of said code must govern their interpretation and the
question of their validity. It happens however, that Articles 334 and 1877 of the old Civil Code are
substantially reproduced in Articles 415 and 2127, respectively, of the new Civil Code. It is, therefore,
immaterial in this case whether we take the former or the latter as guide in deciding the point under
consideration.

Article 415 does not define real property but enumerates what are considered as such, among them
being machinery, receptacles, instruments or replacements intended by owner of the tenement for
an industry or works which may be carried on in a building or on a piece of land, and shall tend
directly to meet the needs of the said industry or works.

On the strength of the above-quoted legal provisions, the lower court held that inasmuch as "the
chattels were placed in the real properties mortgaged to plaintiffs, they came within the operation of
Art. 415, paragraph 5 and Art. 2127 of the New Civil Code".

We find the above ruling in agreement with our decisions on the subject:
(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5 of the Civil
Code (old) gives the character of real property to machinery, liquid containers, instruments or
replacements intended by the owner of any building or land for use in connection with any industry
or trade being carried on therein and which are expressly adapted to meet the requirements of such
trade or industry.

(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a mortgage constituted
on a sugar central includes not only the land on which it is built but also the buildings, machinery and
accessories installed at the time the mortgage was constituted as well as the buildings, machinery
and accessories belonging to the mortgagor, installed after the constitution thereof .

It is not disputed in the case at bar that the "after acquired properties" were purchased by DALCO in
connection with, and for use in the development of its lumber concession and that they were
purchased in addition to, or in replacement of those already existing in the premises on July 13,
1950. In Law, therefore, they must be deemed to have been immobilized, with the result that the real
estate mortgages involved herein which were registered as such did not have to be registered
a second time as chattel mortgages in order to bind the "after acquired properties" and affect third
parties.

But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709, claim that
the "after acquired properties" did not become immobilized because DALCO did not own the whole
area of its lumber concession all over which said properties were scattered.

The facts in the Davao Sawmill case, however, are not on all fours with the ones obtaining in the
present. In the former, the Davao Sawmill Company, Inc., had repeatedly treated the machinery
therein involved as personal property by executing chattel mortgages thereon in favor of third
parties, while in the present case the parties had treated the "after acquired properties" as real
properties by expressly and unequivocally agreeing that they shall automatically become subject to
the lien of the real estate mortgages executed by them. In the Davao Sawmill decision it was, in fact,
stated that "the characterization of the property as chattels by the appellant is indicative of intention
and impresses upon the property the character determined by the parties" (61 Phil. 112, emphasis
supplied). In the present case, the characterization of the "after acquired properties" as real property
was made not only by one but by both interested parties. There is, therefore, more reason to hold
that such consensus impresses upon the properties the character determined by the parties who
must now be held in estoppel to question it.

Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central Altagracia, Inc. (225
U.S. 58) where it was held that while under the general law of Puerto Rico, machinery placed on
property by a tenant does not become immobilized, yet, when the tenant places it there pursuant to
contract that it shall belong to the owner, it then becomes immobilized as to that tenant and even as
against his assignees and creditors who had sufficient notice of such stipulation. In the case at bar it
is not disputed that DALCO purchased the "after acquired properties" to be placed on, and be used
in the development of its lumber concession, and agreed further that the same shall become
immediately subject to the lien constituted by the questioned mortgages. There is also abundant
evidence in the record that DAMCO and CONNELL had full notice of such stipulation and had never
thought of disputed validity until the present case was filed. Consequently all of them must be
deemed barred from denying that the properties in question had become immobilized.
What We have said heretofore sufficiently disposes all the arguments adduced by defendants in
support their contention that the mortgages under foreclosure are void, and, that, even if valid, are
ineffectual as against DAMCO and CONNELL.

Now to the question of whether or not DAMCO CONNELL have rights over the "after acquired
properties" superior to the mortgage lien constituted thereon in favor of plaintiffs. It is defendants'
contention that in relation to said properties they are "unpaid sellers"; that as such they had not only
a superior lien on the "after acquired properties" but also the right to rescind the sales thereof to
DALCO.

This contention it is obvious would have validity only if it were true that DAMCO and CONNELL
were the suppliers or vendors of the "after acquired properties". According to the record, plaintiffs did
not know their exact identity and description prior to the filing of the case bar because DALCO, in
violation of its obligation under the mortgages, had failed and refused theretofore to submit a
complete list thereof. In the course of the proceedings, however, when defendants moved to dissolve
the order of receivership and the writ of preliminary injunction issued by the lower court, they
attached to their motion the lists marked as Exhibits 1, 2 and 3 describing the properties aforesaid.
Later on, the parties agreed to consider said lists as identifying and describing the "after acquire
properties," and engaged the services of auditors to examine the books of DALCO so as to bring out
the details thereof. The report of the auditors and its annexes (Exhibits V, V-1 V4) show that
neither DAMCO nor CONNELL had supplied any of the goods of which they respective claimed to be
the unpaid seller; that all items were supplied by different parties, neither of whom appeared to be
DAMCO or CONNELL that, in fact, CONNELL collected a 5% service charge on the net value of all
items it claims to have sold to DALCO and which, in truth, it had purchased for DALCO as the latter's
general agent; that CONNELL had to issue its own invoices in addition to those o f the real suppliers
in order to collect and justify such service charge.

Taking into account the above circumstances together with the fact that DAMCO was a stockholder
and CONNELL was not only a stockholder but the general agent of DALCO, their claim to be the
suppliers of the "after acquired required properties" would seem to be preposterous. The most that
can be claimed on the basis of the evidence is that DAMCO and CONNELL probably financed some
of the purchases. But if DALCO still owes them any amount in this connection, it is clear that,
as financiers, they can not claim any right over the "after acquired properties" superior to the lien
constituted thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the execution of
the rescission of sales mentioned heretofore appears to be but a desperate attempt to better or
improve DAMCO and CONNELL's position by enabling them to assume the role of "unpaid
suppliers" and thus claim a vendor's lien over the "after acquired properties". The attempt, of course,
is utterly ineffectual, not only because they are not the "unpaid sellers" they claim to be but also
because there is abundant evidence in the record showing that both DAMCO and CONNELL had
known and admitted from the beginning that the "after acquired properties" of DALCO were meant to
be included in the first and second mortgages under foreclosure.

The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly or otherwise,
is of no consequence and does not make the rescission valid and legally effective. It must be stated
clearly, however, in justice to Belden, that, as a member of the Board of Directors of DALCO, he
opposed the resolution of December 15, 1952 passed by said Board and the subsequent rescission
of the sales.
Finally, defendants claim that the action to foreclose the mortgages filed on February 12, 1953 was
premature because the promissory note sued upon did not fall due until April 1 of the same year,
concluding from this that, when the action was commenced, the plaintiffs had no cause of action.
Upon this question the lower court says the following in the appealed judgment;

The other is the defense of prematurity of the causes of action in that plaintiffs, as a matter of
grace, conceded an extension of time to pay up to 1 April, 1953 while the action was filed on
12 February, 1953, but, as to this, the Court taking it that there is absolutely no debate that
Dahican Lumber Co., was insolvent as of the date of the filing of the complaint, it should
follow that the debtor thereby lost the benefit to the period.

x x x unless he gives a guaranty or security for the debt . . . (Art. 1198, New Civil Code);

and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the
aggregate, P1,200,000 excluding interest while the aggregate price of the "after-acquired"
chattels claimed by Connell under the rescission contracts was P1,614,675.94, Exh. 1, Exh.
V, report of auditors, and as a matter of fact, almost all the properties were sold afterwards
for only P175,000.00, page 47, Vol. IV, and the Court understanding that when the law
permits the debtor to enjoy the benefits of the period notwithstanding that he is insolvent by
his giving a guaranty for the debt, that must mean a new and efficient guaranty, must
concede that the causes of action for collection of the notes were not premature.

Very little need be added to the above. Defendants, however, contend that the lower court had no
basis for finding that, when the action was commenced, DALCO was insolvent for purposes related
to Article 1198, paragraph 1 of the Civil Code. We find, however, that the finding of the trial court is
sufficiently supported by the evidence particularly the resolution marked as Exhibit K, which shows
that on December 16, 1952 in the words of the Chairman of the Board DALCO was "without
funds, neither does it expect to have any funds in the foreseeable future." (p. 64, record on appeal).

The remaining issues, namely, whether or not the proceeds obtained from the sale of the "after
acquired properties" should have been awarded exclusively to the plaintiffs or to DAMCO and
CONNELL, and if in law they should be distributed among said parties, whether or not the
distribution should be pro-rata or otherwise; whether or not plaintiffs are entitled to damages; and,
lastly, whether or not the expenses incidental to the Receivership should be borne by all the parties
on a pro-rata basis or exclusively by one or some of them are of a secondary nature as they are
already impliedly resolved by what has been said heretofore.

As regard the proceeds obtained from the sale of the of after acquired properties" and the
"undebated properties", it is clear, in view of our opinion sustaining the validity of the mortgages in
relation thereto, that said proceeds should be awarded exclusively to the plaintiffs in payment of the
money obligations secured by the mortgages under foreclosure.

On the question of plaintiffs' right to recover damages from the defendants, the law (Articles 1313
and 1314 of the New Civil Code) provides that creditors are protected in cases of contracts intended
to defraud them; and that any third person who induces another to violate his contract shall be liable
for damages to the other contracting party. Similar liability is demandable under Arts. 20 and 21
which may be given retroactive effect (Arts. 225253) or under Arts. 1902 and 2176 of the Old Civil
Code.
The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after failing to
pay the fifth promissory note upon its maturity, conspired jointly with CONNELL to violate the
provisions of the fourth paragraph of the mortgages under foreclosure by attempting to defeat
plaintiffs' mortgage lien on the "after acquired properties". As a result, the plaintiffs had to go to court
to protect their rights thus jeopardized. Defendants' liability for damages is therefore clear.

However, the measure of the damages suffered by the plaintiffs is not what the latter claim, namely,
the difference between the alleged total obligation secured by the mortgages amounting to around
P1,200,000.00, plus the stipulated interest and attorney's fees, on the one hand, and the proceeds
obtained from the sale of "after acquired properties", and of those that were not claimed neither by
DAMCO nor CONNELL, on the other. Considering that the sale of the real properties subject to the
mortgages under foreclosure has not been effected, and considering further the lack of evidence
showing that the true value of all the properties already sold was not realized because their sale was
under stress, We feel that We do not have before Us the true elements or factors that should
determine the amount of damages that plaintiffs are entitled recover from defendants. It is, however,
our considered opinion that, upon the facts established, all the expenses of the Receivership, which
was deemed necessary to safeguard the rights of the plaintiffs, should be borne by the defendants,
jointly and severally, in the same manner that all of them should pay to the plaintiffs, jointly a
severally, attorney's fees awarded in the appealed judgment.

In consonance with the portion of this decision concerning the damages that the plaintiffs are entitled
to recover from the defendants, the record of this case shall be remanded below for the
corresponding proceedings.

Modified as above indicated, the appealed judgment is affirmed in all other respects. With costs.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 169211 March 6, 2013

STAR TWO (SPV-AMC), INC.,1 Petitioner,

vs.
PAPER CITY CORPORATION OF THE PHILIPPINES, Respondent.

DECISION

PEREZ, J.:

For review before this Court is a Petition for Review on Certiorari filed by Rizal Commercial Banking
Corporation now substituted by Star Two (SPV-AMC), Inc. by virtue of Republic Act No.
91822 otherwise known as the "Special Purpose Vehicle Act of 2002," assailing the 8 March 2005
Decision and 8 August 2005 Resolution of the Special Fourth Division of the Court of Appeals (CA)
in CA-G.R. SP No. 82022 upholding the 15 August 2003 and 1 December 2003 Orders of the
Valenzuela Regional Trial Court (RTC) ruling that the subject machineries and equipments of Paper
City Corporation (Paper City) are movable properties by agreement of the parties and cannot be
considered as included in the extrajudicial foreclosure sale of the mortgaged land and building of
Paper City.3

The facts as we gathered from the records are:

Rizal Commercial Banking Corporation (RCBC), Metropolitan Bank and Trust Co. (Metrobank) and
Union Bank of the Philippines (Union Bank) are banking corporations duly organized and existing
under the laws of the Philippines.

On the other hand, respondent Paper City is a domestic corporation engaged in the manufacture of
paper products particularly cartons, newsprint and clay-coated paper.4

From 1990-1991, Paper City applied for and was granted the following loans and credit
accommodations in peso and dollar denominations by RCBC: P10,000,000.00 on 8 January
1990,5 P14,000,000.00 on 19 July 1990,6P10,000,000.00 on 28 June 1991,7 and P16,615,000.00 on
28 November 1991.8 The loans were secured by four (4) Deeds of Continuing Chattel Mortgages on
its machineries and equipments found inside its paper plants.

On 25 August 1992, a unilateral Cancellation of Deed of Continuing Chattel Mortgage on Inventory

of Merchandise/Stocks-in-Trade was executed by RCBC through its Branch Operation Head Joey P.
Singh and Asst. Vice President Anita O. Abad over the merchandise and stocks-in-trade covered by
the continuing chattel mortgages.9

On 26 August 1992, RCBC, Metrobank and Union Bank (creditor banks with RCBC instituted as the
trustee bank) entered into a Mortgage Trust Indenture (MTI) with Paper City. In the said MTI, Paper
City acquired an additional loan of One Hundred Seventy Million Pesos (P170,000,000.00) from the
creditor banks in addition to the previous loan from RCBC amounting to P110,000,000.00 thereby
increasing the entire loan to a total of P280,000,000.00. The old loan of P110,000,000.00 was partly
secured by various parcels of land covered by TCT Nos. T-157743, V-13515, V-1184, V-1485, V-
13518 and V-13516 situated in Valenzuela City pursuant to five (5) Deeds of Real Estate Mortgage
dated 8 January 1990, 27 February 1990, 19 July 1990, 20 February 1992 and 12 March 1992. 10 The
new loan obligation of P170,000,000.00 would be secured by the same five (5) Deeds of Real Estate
Mortgage and additional real and personal properties described in an annex to MTI, Annex
"B."11 Annex "B" of the said MTI covered the machineries and equipments of Paper City.12

The MTI was later amended on 20 November 1992 to increase the contributions of the RCBC and
Union Bank to P80,000,000.00 and P70,000,000.00, respectively. As a consequence, they executed
a Deed of Amendment to MTI13 but still included as part of the mortgaged properties by way of a first
mortgage the various machineries and equipments located in and bolted to and/or forming part of
buildings generally described as:

Annex "A"

A. Office Building
Building 1, 2, 3, 4, and 5
Boiler House
Workers Quarter/Restroom
Canteen
Guardhouse, Parking Shed, Elevated Guard
Post and other amenities
 B. Pollution Tank Nos. 1 and 2.
Reserve Water Tank and Swimming Pool
Waste Water Treatment Tank
Elevated Concrete Water Tank
And other Improvements listed in Annex "A"

C. Power Plants Nos. 1 and 2

Fabrication Building
Various Fuel, Water Tanks and Pumps
Transformers

Annex "B"

D. D. Material Handling Equipment

Paper Plant No. 3

A Second Supplemental Indenture to the 26 August 1992 MTI was executed on 7 June 1994 to
increase the amount of the loan from P280,000,000.00 to P408,900,000.00 secured against the
existing properties composed of land, building, machineries and equipments and inventories
described in Annexes "A" and "B."14

Finally, a Third Supplemental Indenture to the 26 August 1992 MTI was executed on 24 January
1995 to increase the existing loan obligation of P408,900,000.00 to P555,000,000.00 with an
additional security composed of a newly constructed two-storey building and other improvements,
machineries and equipments located in the existing plant site. 15

Paper City was able to comply with its loan obligations until July 1997. But economic crisis ensued
which made it difficult for Paper City to meet the terms of its obligations leading to payment
defaults.16 Consequently, RCBC filed a Petition for Extrajudicial Foreclosure Under Act No. 3135
Against the Real Estate Mortgage executed by Paper City on 21 October 1998. 17 This petition was
for the extra-judicial foreclosure of eight (8) parcels of land including all improvements thereon
enumerated as TCT Nos. V-9763, V-13515, V-13516, V-13518, V-1484, V-1485, V-6662 and V-6663
included in the MTI dated 26 August 1992, Supplemental

MTI dated 20 November 1992, Second Supplemental Indenture on the MTI dated 7 June 1994 and
Third Supplemental Indenture on the MTI dated 24 January 1995.18 Paper City then had an
outstanding obligation with the creditor banks adding up to Nine Hundred One Million Eight Hundred
One Thousand Four Hundred Eighty-Four and 10/100 Pesos (P901,801,484.10), inclusive of interest
and penalty charges.19

A Certificate of Sale was executed on 8 February 1999 certifying that the eight (8) parcels of land
with improvements thereon were sold on 27 November 1998 in the amount of Seven Hundred Two
Million Three Hundred Fifty-One Thousand Seven Hundred Ninety-Six Pesos and 28/100
(P702,351,796.28) in favor of the creditor banks RCBC, Union Bank and Metrobank as the highest
bidders.20

This foreclosure sale prompted Paper City to file a Complaint 21 docketed as Civil Case No. 164-V-99
on 15 June 1999 against the creditor banks alleging that the extra-judicial sale of the properties and
plants was null and void due to lack of prior notice and attendance of gross and evident bad faith on
the part of the creditor banks. In the alternative, it prayed that in case the sale is declared valid, to
render the whole obligation of Paper City as fully paid and extinguished. Also prayed for was the
return of P5,000,000.00 as excessive penalty and the payment of damages and attorneys fees.
In the meantime, Paper City and Union Bank entered into a Compromise Agreement which was later
approved by the trial court on 19 November 2001. It was agreed that the share of Union Bank in the
proceeds of the foreclosure shall be up to 34.23% of the price and the remaining possible liabilities
of Paper City shall be condoned by the bank. Paper City likewise waived all its claim and counter
charges against Union Bank and agreed to turn-over its proportionate share over the property within
120 days from the date of agreement.22

On the other hand, the negotiations between the other creditor banks and Paper City remained
pending. During the interim, Paper City filed with the trial court a Manifestation with Motion to
Remove and/or Dispose Machinery on 18 December 2002 reasoning that the machineries located
inside the foreclosed land and building were deteriorating. It posited that since the machineries were
not included in the foreclosure of the real estate mortgage, it is appropriate that it be removed from
the building and sold to a third party.23

Acting on the said motion, the trial court, on 28 February 2003 issued an Order denying the prayer
and ruled that the machineries and equipments were included in the annexes and form part of the
MTI dated 26 August 1992 as well as its subsequent amendments. Further, the machineries and
equipments are covered by the Certificate of Sale issued as a consequence of foreclosure, the
certificate stating that the properties described therein with improvements thereon were sold to
creditor banks to the defendants at public auction.24

Paper City filed its Motion for Reconsideration25 on 4 April 2003 which was favorably granted by the
trial court in its Order dated 15 August 2003. The court justified the reversal of its order on the finding
that the disputed machineries and equipments are chattels by agreement of the parties through their
inclusion in the four (4) Deeds of Chattel Mortgage dated 28 January 1990, 19 July 1990, 28 June
1991 and 28 November 1991. It further ruled that the deed of cancellation executed by RCBC on 25
August 1992 was not valid because it was done unilaterally and without the consent of Paper City
and the cancellation only refers to the merchandise/stocks-in-trade and not to machineries and
equipments.26

RCBC in turn filed its Motion for Reconsideration to persuade the court to reverse its 15 August 2003
Order. However, the same was denied by the trial court through its 1 December 2003 Order
reiterating the finding and conclusion of the previous Order.27

Aggrieved, RCBC filed with the CA a Petition for Certiorari under Rule 65 to annul the Orders dated
15 August 2003 and 1 December 2003 of the trial court, 28 for the reasons that:

I. Paper City gave its conformity to consider the subject machineries and equipment as real
properties when the president and Executive Vice President of Paper City signed the
Mortgage Trust Indenture as well as its subsequent amendments and all pages of the
annexes thereto which itemized all properties that were mortgaged. 29

II. Under Section 8 of Act No. 1508, otherwise known as "The Chattel Mortgage Law" the
consent of the mortgagor (Paper City) is not required in order to cancel a chattel mortgage.
Thus the "Cancellation of Deed of Continuing Chattel Mortgage on Inventory of
Merchandise/Stocks-in-Trade" dated August 25, 1992 is valid and binding on the Paper City
even assuming that it was executed unilaterally by petitioner RCBC. 30

III. The four (4) Deeds of Chattel Mortgage that were attached as Annexes "A" to "D" to the
December 18, 2003 "Manifestation with Motion to Remove and/or Dispose of Machinery"
were executed from January 8, 1990 until November 28, 1991. On the other hand, the
"Cancellation of Deed of Continuing Chattel Mortgage" was executed on August 25, 1992
 while the MTI and the subsequent supplemental amendments thereto were executed from
August 26, 1992 until January 24, 1995. It is of the contention of RCBC that Paper Citys
unreasonable delay of ten

(10) years in assailing that the disputed machineries and equipments were personal
amounted to estoppel and ratification of the characterization that the same were real
properties.31

IV. The removal of the subject machineries or equipment is not among the reliefs prayed for
by the Paper City in its June 11, 1999 Complaint. The Paper City sought the removal of the
subject machineries and equipment only when it filed its December 18, 2002 Manifestation
with Motion to Remove and/or Dispose of Machinery.32

V. Paper City did not specify in its various motions filed with the respondent judge the subject
machineries and equipment that are allegedly excluded from the extrajudicial foreclosure
sale.33

VI. The machineries and equipments mentioned in the four (4) Deeds of Chattel Mortgage
that were attached on the Manifestation with Motion to Remove and/or Dispose of Machinery
are the same machineries and equipments included in the MTI and supplemental
amendments, hence, are treated by agreement of the parties as real properties. 34

In its Comment,35 Paper City refuted the claim of RCBC that it gave its consent to consider the
machineries and equipments as real properties. It alleged that the disputed properties remained
within the purview of the existing chattel mortgages which in fact were acknowledged by RCBC in
the MTI particularly in Section 11.07 which reads:

Section 11.07. This INDENTURE in respect of the MORTGAGE OBLIGATIONS in the additional
amount not exceeding TWO HUNDRED TWENTY MILLION SIX HUNDRED FIFTEEN THOUSAND
PESOS (P220,615,000.00) shall be registered with the Register of Deeds of Valenzuela, Metro
Manila, apportioned based on the corresponding loanable value of the MORTGAGED
PROPERTIES, viz:

a. Real Estate Mortgage P206,815,000.00

b. Chattel Mortgage P13,800,000.0036

Paper City argued further that the subject machineries and equipments were not included in the
foreclosure of the mortgage on real properties particularly the eight (8) parcels of land. Further, the
Certificate of Sale of the Foreclosed Property referred only to "lands and improvements" without any
specification and made no mention of the inclusion of the subject properties. 37

In its Reply,38 RCBC admitted that there was indeed a provision in the MTI mentioning a chattel
mortgage in the amount of P13,800,000.00. However, it justified that its inclusion in the MTI was
merely for the purpose of ascertaining the amount of the loan to be extended to Paper City.39 It
reiterated its position that the machineries and equipments were no longer treated as chattels but
already as real properties following the MTI.40

On 8 March 2005, the CA affirmed41 the challenged orders of the trial court. The dispositive portion
reads:
WHEREFORE, finding no grave abuse of discretion committed by public respondent, the instant
petition is hereby DISMISSED for lack of merit. The assailed Orders dated 15 August and 2
December 2003, issued by Hon. Judge Floro P. Alejo are hereby AFFIRMED. No costs at this
instance.42

The CA relied on the "plain language of the MTIs:

Undoubtedly, nowhere from any of the MTIs executed by the parties can we find the alleged
"express" agreement adverted to by petitioner. There is no provision in any of the parties MTI, which
expressly states to the effect that the parties shall treat the equipments and machineries as real
property. On the contrary, the plain and unambiguous language of the aforecited MTIs, which
described the same as personal properties, contradicts petitioners claims. 43

It was also ruled that the subject machineries and equipments were not included in the extrajudicial
foreclosure sale. The claim of inclusion was contradicted by the very caption of the petition itself,
"Petition for Extra-Judicial Foreclosure of Real Estate Mortgage Under Act No. 3135 As Amended." It
opined further that this inclusion was further stressed in the Certificate of Sale which enumerated
only the mortgaged real properties bought by RCBC without the subject properties. 44

RCBC sought reconsideration but its motion was denied in the CAs Resolution dated 8 August 2005.

RCBC before this Court reiterated all the issues presented before the appellate court:

1. Whether the unreasonable delay of ten (10) years in assailing that the disputed
machineries and equipments were personal properties amounted to estoppel on the part of
Paper City;

2. Whether the Cancellation of Deed of Continuing Mortgage dated 25 August 1992 is valid
despite the fact that it was executed without the consent of the mortgagor Paper City;

3. Whether the subsequent contracts of the parties such as Mortgage Trust Indenture dated
26 August 1992 as well as the subsequent supplementary amendments dated 20 November
1992, 7 June 1992, and 24 January 1995 included in its coverage of mortgaged properties
the subject machineries and equipment; and

4. Whether the subject machineries and equipments were included in the extrajudicial
foreclosure dated 21 October 1998 which in turn were sold to the creditor banks as
evidenced by the Certificate of Sale dated 8 February 1999.

We grant the petition.

By contracts, all uncontested in this case, machineries and equipments are included in the mortgage
in favor of RCBC, in the foreclosure of the mortgage and in the consequent sale on foreclosure also
in favor of petitioner.

The mortgage contracts are the original MTI of 26 August 1992 and its amendments and
supplements on 20 November 1992, 7 June 1994, and 24 January 1995. The clear agreements
between RCBC and Paper City follow:

The original MTI dated 26 August 1992 states that:

 MORTGAGE TRUST INDENTURE

This MORTGAGE TRUST INDENTURE, executed on this day of August 26, 1992, by and between:

PAPER CITY CORPORATION OF THE PHILIPPINES, x x x hereinafter referred to as the

"MORTGAGOR");

-and-

RIZAL COMMERCIAL BANKING CORPORATION, x x x (hereinafter referred to as the "TRUSTEE").

xxxx

WHEREAS, against the same mortgaged properties and additional real and personal properties
more particularly described in ANNEX "B" hereof, the MORTGAGOR desires to increase their
borrowings to TWO HUNDRED EIGHTY MILLION PESOS (P280,000,000.00) or an increase of
ONE HUNDRED SEVENTY MILLION PESOS (P170,000,000.00) xxx from various banks/financial
institutions;

xxxx

GRANTING CLAUSE

NOW, THEREFORE, this INDENTURE witnesseth:

THAT the MORTGAGOR in consideration of the premises and of the acceptance by the TRUSTEE
of the trust hereby created, and in order to secure the payment of the MORTGAGE OBLIGATIONS
which shall be incurred by the MORTGAGOR pursuant to the terms hereof xxx hereby states that
with the execution of this INDENTURE it will assign, transfer and convey as it has hereby
ASSIGNED, TRANSFERRED and CONVEYED by way of a registered first mortgage unto RCBC x x
x the various parcels of land covered by several Transfer Certificates of Title issued by the Registry
of Deeds, including the buildings and existing improvements thereon, as well as of the machinery
and equipment more particularly described and listed that is to say, the real and personal properties
listed in Annexes "A" and "B" hereof of which the MORTGAGOR is the lawful and registered
owner.45(Emphasis and underlining ours)

The Deed of Amendment to MTI dated 20 November 1992 expressly provides:

NOW, THEREFORE, premises considered, the parties considered have amended and by these
presents do further amend the Mortgage Trust Indenture dated August 26, 1992 including the Real
Estate Mortgage as follows:

xxxx

2. The Mortgage Trust Indenture and the Real Estate Mortgage are hereby amended to include as
part of the Mortgage Properties, by way of a first mortgage and for pari-passu and pro-rata benefit of
the existing and new creditors, various machineries and equipment owned by the Paper City, located
in and bolted to and forming part of the following, generally describes as x x x more particularly
described and listed in Annexes "A" and "B" which are attached and made integral parts of this
Amendment. The machineries and equipment listed in Annexes "A" and "B" form part of the
improvements listed above and located on the parcels of land subject of the Mortgage Trust
Indenture and the Real Estate Mortgage.46 (Emphasis and underlining ours)

A Second Supplemental Indenture to the 26 August 1992 MTI executed on 7 June 1994 to increase
the amount of loan from P280,000,000.00 to P408,900,000.00 also contains a similar provision in
this regard:

WHEREAS, the Paper City desires to increase its borrowings to be secured by the INDENTURE
from PESOS: TWO HUNDRED EIGHTY MILLION (P280,000,000.00) to PESOS: FOUR HUNDRED
EIGHT MILLION NINE HUNDRED THOUSAND (P408,900,000.00) or an increase of PESOS: ONE
HUNDRED TWENTY EIGHT MILLION NINE HUNDRED THOUSAND (P128,900,000.00) x x x
which represents additional loan/s granted to the Paper City to be secured against the existing
properties composed of land, building, machineries and equipment and inventories more particularly
described in Annexes "A" and "B" of the INDENTURE x x x.47

(Emphasis and underlining ours)

Finally, a Third Supplemental Indenture to the 26 August 1992 MTI executed on 24 January 1995
contains a similar provision:

WHEREAS, in order to secure NEW/ADDITIONAL LOAN OBLIGATION under the Indenture, there
shall be added to the collateral pool subject of the Indenture properties of the Paper City composed
of newly constructed two (2)-storey building, other land improvements and machinery and equipment
all of which are located at the existing Plant Site in Valenzuela, Metro Manila and more particularly
described in Annex "A" hereof x x x.48 (Emphasis and underlining ours)

Repeatedly, the parties stipulated that the properties mortgaged by Paper City to RCBC are various
parcels of land including the buildings and existing improvements thereon as well as the machineries
and equipments, which as stated in the granting clause of the original mortgage, are "more
particularly described and listed that is to say, the real and personal properties listed in Annexes A
and B x x x of which the Paper City is the lawful and registered owner." Significantly, Annexes "A"
and "B" are itemized listings of the buildings, machineries and equipments typed single spaced in
twenty-seven pages of the document made part of the records.

As held in Gateway Electronics Corp. v. Land Bank of the Philippines,49 the rule in this jurisdiction is
that the contracting parties may establish any agreement, term, and condition they may deem
advisable, provided they are not contrary to law, morals or public policy. The right to enter into lawful
contracts constitutes one of the liberties guaranteed by the Constitution.

It has been explained by the Supreme Court in Norton Resources and Development Corporation v.
All Asia Bank Corporation50 in reiteration of the ruling in Benguet Corporation v. Cabildo51 that:

x x x A court's purpose in examining a contract is to interpret the intent of the contracting parties, as
objectively manifested by them. The process of interpreting a contract requires the court to make a
preliminary inquiry as to whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative interpretations. Where the written terms
of the contract are not ambiguous and can only be read one way, the court will interpret the contract
as a matter of law. x x x

Then till now the pronouncement has been that if the language used is as clear as day and readily
understandable by any ordinary reader, there is no need for construction. 52
The case at bar is covered by the rule.

The plain language and literal interpretation of the MTIs must be applied. The petitioner, other
creditor banks and Paper City intended from the very first execution of the indentures that the
machineries and equipments enumerated in Annexes "A" and "B" are included. Obviously, with the
continued increase in the amount of the loan, totaling hundreds of millions of pesos, Paper City had
to offer all valuable properties acceptable to the creditor banks.

The plain and obvious inclusion in the mortgage of the machineries and equipments of Paper City
escaped the attention of the CA which, instead, turned to another "plain language of the MTI" that
"described the same as personal properties." It was error for the CA to deduce from the "description"
exclusion from the mortgage.

1. The MTIs did not describe the equipments and machineries as personal property. Had the CA
looked into Annexes "A" and "B" which were referred to by the phrase "real and personal properties,"
it could have easily noted that the captions describing the listed properties were "Buildings,"
"Machineries and Equipments," "Yard and Outside," and "Additional Machinery and Equipment." No
mention in any manner was made in the annexes about "personal property." Notably, while
"personal" appeared in the granting clause of the original MTI, the subsequent Deed of Amendment
specifically stated that:

x x x The machineries and equipment listed in Annexes "A" and "B" form part of the improvements
listed above and located on the parcels of land subject of the Mortgage Trust Indenture and the Real
Estate Mortgage.

The word "personal" was deleted in the corresponding granting clauses in the Deed of Amendment
and in the First, Second and Third Supplemental Indentures.

2. Law and jurisprudence provide and guide that even if not expressly so stated, the mortgage
extends to the improvements.

Article 2127 of the Civil Code provides:

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and
the rents or income not yet received when the obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue
of expropriation for public use, with the declarations, amplifications and limitations established by
law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a
third person. (Underlining ours)

In the early case of Bischoff v. Pomar and Cia. General de Tabacos,53 the Court ruled that even if the
machinery in question was not included in the mortgage expressly, Article 111 of the old Mortgage
Law provides that chattels permanently located in a building, either useful or ornamental, or for the
service of some industry even though they were placed there after the creation of the mortgage shall
be considered as mortgaged with the estate, provided they belong to the owner of said estate. The
provision of the old Civil Code was cited. Thus:

Article 1877 provides that a mortgage includes the natural accessions, improvements, growing fruits,
and rents not collected when the obligation is due, and the amount of the indemnities granted or due
the owner by the underwriters of the property mortgaged or by virtue of the exercise of eminent
domain by reason of public utility, with the declarations, amplifications, and limitations established by
law, in case the estate continues in the possession of the person who mortgaged it, as well as when
it passes into the hands of a third person.54

The case of Cu Unjieng e Hijos v. Mabalacat Sugar Co. 55 relied on this provision. The issue was
whether the machineries and accessories were included in the mortgage and the subsequent sale
during public auction. This was answered in the affirmative by the Court when it ruled that the
machineries were integral parts of said sugar central hence included following the principle of law
that the accessory follows the principal.

Further, in the case of Manahan v. Hon. Cruz,56 this Court denied the prayer of Manahan to nullify the
order of the trial court including the building in question in the writ of possession following the public
auction of the parcels of land mortgaged to the bank. It upheld the inclusion by relying on the
principles laid upon in Bischoff v. Pomar and Cia. General de Tabacos 57 and Cu Unjieng e Hijos v.
Mabalacat Sugar Co.58

In Spouses Paderes v. Court of Appeals,59 we reiterated once more the Cu Unjieng e Hijos ruling and
approved the inclusion of machineries and accessories installed at the time the mortgage, as well as
all the buildings, machinery and accessories belonging to the mortgagor, installed after the
constitution thereof.

3. Contrary to the finding of the CA, the Extra-Judicial Foreclosure of Mortgage includes the
machineries and equipments of respondent. While captioned as a "Petition for Extra-Judicial
Foreclosure of Real Estate Mortgage Under Act No. 3135 As Amended," the averments state that the
petition is based on "x x x the Mortgage Trust Indenture, the Deed of Amendment to the Mortgage
Trust Indenture, the Second Supplemental Indenture to the Mortgage Trust Indenture, and the Third
Supplemental Indenture to the Mortgage Trust Indenture (hereinafter collectively referred to as the
Indenture) duly notarized and entered as x x x."60 Noting that herein respondent has an outstanding
obligation in the total amount of Nine Hundred One Million Eight Hundred One Thousand Four
Hundred Eighty Four and 10/100 Pesos (P901,801,484.10), the petition for foreclosure prayed that a
foreclosure proceedings "x x x on the aforesaid real properties, including all improvements thereon
covered by the real estate mortgage be undertaken and the appropriate auction sale be conducted x
x x."61

Considering that the Indenture which is the instrument of the mortgage that was foreclosed exactly
states through the Deed of Amendment that the machineries and equipments listed in Annexes "A"
and "B" form part of the improvements listed and located on the parcels of land subject of the
mortgage, such machineries and equipments are surely part of the foreclosure of the "real estate
properties, including all improvements thereon" as prayed for in the petition.

Indeed, the lower courts ought to have noticed the fact that the chattel mortgages adverted to were
dated 8 January 1990, 19 July 1990, 28 June 1991 and 28 November 1991. The real estate
mortgages which specifically included the machineries and equipments were subsequent to the
chattel mortgages dated 26 August 1992, 20 November 1992, 7 June 1994 and 24 January 1995.
Without doubt, the real estate mortgages superseded the earlier chattel mortgages. 1wphi1

The real estate mortgage over the machineries and equipments is even in full accord with the
classification of such properties by the Civil Code of the Philippines as immovable property. Thus:

Article 415. The following are immovable property:

(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
xxxx

(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an
industry or works which may be carried on in a building or on a piece of land, and which tend directly
to meet the needs of the said industry or works;

WHEREFORE, the petition is GRANTED. Accordingly, the Decision and Resolution of the Court of
Appeals dated 8 March 2005 and 8 August 2005 upholding the 15 August 2003 and 1 December
2003 Orders of the Valenzuela Regional Trial Court are hereby REVERSED and SET ASIDE and the
original Order of the trial court dated 28 February 2003 denying the motion of respondent to remove
or dispose of machinery is hereby REINSTATED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 158891 June 27, 2012

PABLO P. GARCIA, Petitioner,

vs.
YOLANDA VALDEZ VILLAR, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

This is a petition for review on certiorari1 of the February 27, 2003 Decision2 and July 2, 2003
Resolution3 of the Court of Appeals in CA-G.R. SP No. 72714, which reversed the May 27, 2002
Decision4 of the Regional Trial Court (RTC), Branch 92 of Quezon City in Civil Case No. Q-99-39139.

Lourdes V. Galas (Galas) was the original owner of a piece of property (subject property) located at
Malindang St., Quezon City, covered by Transfer Certificate of Title (TCT) No. RT-67970(253279). 5

On July 6, 1993, Galas, with her daughter, Ophelia G. Pingol (Pingol), as co-maker, mortgaged the
subject property to Yolanda Valdez Villar (Villar) as security for a loan in the amount of Two Million
Two Hundred Thousand Pesos (P2,200,000.00).6

On October 10, 1994, Galas, again with Pingol as her co-maker, mortgaged the same subject
property to Pablo P. Garcia (Garcia) to secure her loan of One Million Eight Hundred Thousand
Pesos (P1,800,000.00).7

Both mortgages were annotated at the back of TCT No. RT-67970 (253279), to wit:

REAL ESTATE MORTGAGE

Entry No. 6537/T-RT-67970(253279) MORTGAGE In favor of Yolanda Valdez Villar m/to Jaime
Villar to guarantee a principal obligation in the sum of P2,200,000- mortgagees consent necessary
in case of subsequent encumbrance or alienation of the property; Other conditions set forth in Doc.
No. 97, Book No. VI, Page No. 20 of the Not. Pub. of Diana P. Magpantay

Date of Instrument: 7-6-93

Date of Inscription: 7-7-93

SECOND REAL ESTATE MORTGAGE

Entry No. 821/T-RT-67970(253279) MORTGAGE In favor of Pablo Garcia m/to Isabela Garcia to
guarantee a principal obligation in the sum of P1,800,000.00 mortgagees consent necessary in case
of subsequent encumbrance or alienation of the property; Other conditions set forth in Doc. No. 08,
Book No. VII, Page No. 03 of the Not. Pub. of Azucena Espejo Lozada

Date of Instrument: 10/10/94

Date of Inscription: 10/11/94

LRC Consulta No. 1698

On November 21, 1996, Galas sold the subject property to Villar for One Million Five Hundred
Thousand Pesos (P1,500,000.00), and declared in the Deed of Sale9 that such property was "free
and clear of all liens and encumbrances of any kind whatsoever."10

On December 3, 1996, the Deed of Sale was registered and, consequently, TCT No. RT-
67970(253279) was cancelled and TCT No. N-16836111 was issued in the name of Villar. Both
Villars and Garcias mortgages were carried over and annotated at the back of Villars new TCT.12

On October 27, 1999, Garcia filed a Petition for Mandamus with Damages 13 against Villar before the
RTC, Branch 92 of Quezon City. Garcia subsequently amended his petition to a Complaint for
Foreclosure of Real Estate Mortgage with Damages.14 Garcia alleged that when Villar purchased the
subject property, she acted in bad faith and with malice as she knowingly and willfully disregarded
the provisions on laws on judicial and extrajudicial foreclosure of mortgaged property. Garcia further
claimed that when Villar purchased the subject property, Galas was relieved of her contractual
obligation and the characters of creditor and debtor were merged in the person of Villar. Therefore,
Garcia argued, he, as the second mortgagee, was subrogated to Villars original status as first
mortgagee, which is the creditor with the right to foreclose. Garcia further asserted that he had
demanded payment from Villar,15 whose refusal compelled him to incur expenses in filing an action in
court.16

Villar, in her Answer,17 claimed that the complaint stated no cause of action and that the second
mortgage was done in bad faith as it was without her consent and knowledge. Villar alleged that she
only discovered the second mortgage when she had the Deed of Sale registered. Villar blamed
Garcia for the controversy as he accepted the second mortgage without prior consent from her. She
averred that there could be no subrogation as the assignment of credit was done with neither her
knowledge nor prior consent. Villar added that Garcia should seek recourse against Galas and
Pingol, with whom he had privity insofar as the second mortgage of property is concerned.

On May 23, 2000, the RTC issued a Pre-Trial Order18 wherein the parties agreed on the following
facts and issue:
 STIPULATIONS OF FACTS/ADMISSIONS

The following are admitted:

1. the defendant admits the second mortgage annotated at the back of TCT No. RT-67970 of
Lourdes V. Galas with the qualification that the existence of said mortgage was discovered
only in 1996 after the sale;

2. the defendant admits the existence of the annotation of the second mortgage at the back
of the title despite the transfer of the title in the name of the defendant;

3. the plaintiff admits that defendant Yolanda Valdez Villar is the first mortgagee;

4. the plaintiff admits that the first mortgage was annotated at the back of the title of the
mortgagor Lourdes V. Galas; and

5. the plaintiff admits that by virtue of the deed of sale the title of the property was transferred
from the previous owner in favor of defendant Yolanda Valdez Villar.

xxxx

ISSUE

Whether or not the plaintiff, at this point in time, could judicially foreclose the property in question.

On June 8, 2000, upon Garcias manifestation, in open court, of his intention to file a Motion for
Summary Judgment,19 the RTC issued an Order20 directing the parties to simultaneously file their
respective memoranda within 20 days.

On June 26, 2000, Garcia filed a Motion for Summary Judgment with Affidavit of Merit 21 on the
grounds that there was no genuine issue as to any of the material facts of the case and that he was
entitled to a judgment as a matter of law.

On June 28, 2000, Garcia filed his Memorandum22 in support of his Motion for Summary Judgment
and in compliance with the RTCs June 8, 2000 Order. Garcia alleged that his equity of redemption
had not yet been claimed since Villar did not foreclose the mortgaged property to satisfy her claim.

On August 13, 2000, Villar filed an Urgent Ex-Parte Motion for Extension of Time to File Her
Memorandum.23This, however, was denied24 by the RTC in view of Garcias Opposition.25

On May 27, 2002, the RTC rendered its Decision, the dispositive portion of which reads:

WHEREFORE, the foregoing premises considered, judgment is hereby rendered in favor of the
plaintiff Pablo P. Garcia and against the defendant Yolanda V. Villar, who is ordered to pay to the
former within a period of not less than ninety (90) days nor more than one hundred twenty (120)
days from entry of judgment, the sum of P1,800,000.00 plus legal interest from October 27, 1999
and upon failure of the defendant to pay the said amount within the prescribed period, the property
subject matter of the 2nd Real Estate Mortgage dated October 10, 1994 shall, upon motion of the
plaintiff, be sold at public auction in the manner and under the provisions of Rules 39 and 68 of the
1997 Revised Rules of Civil Procedure and other regulations governing sale of real estate under
execution in order to satisfy the judgment in this case. The defendant is further ordered to pay
costs.26

The RTC declared that the direct sale of the subject property to Villar, the first mortgagee, could not
operate to deprive Garcia of his right as a second mortgagee. The RTC said that upon Galass
failure to pay her obligation, Villar should have foreclosed the subject property pursuant to Act No.
3135 as amended, to provide junior mortgagees like Garcia, the opportunity to satisfy their claims
from the residue, if any, of the foreclosure sale proceeds. This, the RTC added, would have resulted
in the extinguishment of the mortgages.27

The RTC held that the second mortgage constituted in Garcias favor had not been discharged, and
that Villar, as the new registered owner of the subject property with a subsisting mortgage, was liable
for it.28

Villar appealed29 this Decision to the Court of Appeals based on the arguments that Garcia had no
valid cause of action against her; that he was in bad faith when he entered into a contract of
mortgage with Galas, in light of the restriction imposed by the first mortgage; and that Garcia, as the
one who gave the occasion for the commission of fraud, should suffer. Villar further asseverated that
the second mortgage is a void and inexistent contract considering that its cause or object is contrary
to law, moral, good customs, and public order or public policy, insofar as she was concerned. 30

Garcia, in his Memorandum,31 reiterated his position that his equity of redemption remained
"unforeclosed" since Villar did not institute foreclosure proceedings. Garcia added that "the
mortgage, until discharged, follows the property to whomever it may be transferred no matter how
many times over it changes hands as long as the annotation is carried over." 32

The Court of Appeals reversed the RTC in a Decision dated February 27, 2003, to wit:

WHEREFORE, the decision appealed from is REVERSED and another one entered DISMISSING
the complaint for judicial foreclosure of real estate mortgage with damages. 33

The Court of Appeals declared that Galas was free to mortgage the subject property even without
Villars consent as the restriction that the mortgagees consent was necessary in case of a
subsequent encumbrance was absent in the Deed of Real Estate Mortgage. In the same vein, the
Court of Appeals said that the sale of the subject property to Villar was valid as it found nothing in
the records that would show that Galas violated the Deed of Real Estate Mortgage prior to the sale. 34

In dismissing the complaint for judicial foreclosure of real estate mortgage with damages, the Court
of Appeals held that Garcia had no cause of action against Villar "in the absence of evidence
showing that the second mortgage executed in his favor by Lourdes V. Galas [had] been violated
and that he [had] made a demand on the latter for the payment of the obligation secured by said
mortgage prior to the institution of his complaint against Villar."35

On March 20, 2003, Garcia filed a Motion for Reconsideration 36 on the ground that the Court of
Appeals failed to resolve the main issue of the case, which was whether or not Garcia, as the
second mortgagee, could still foreclose the mortgage after the subject property had been sold by
Galas, the mortgage debtor, to Villar, the mortgage creditor.

This motion was denied for lack of merit by the Court of Appeals in its July 2, 2003 Resolution.
Garcia is now before this Court, with the same arguments he posited before the lower courts. In his
Memorandum,37 he added that the Deed of Real Estate Mortgage contained a stipulation, which is
violative of the prohibition on pactum commissorium.

Issues

The crux of the controversy before us boils down to the propriety of Garcias demand upon Villar to
either pay Galass debt of P1,800,000.00, or to judicially foreclose the subject property to satisfy the
aforesaid debt. This Court will, however, address the following issues in seriatim:

1. Whether or not the second mortgage to Garcia was valid;

2. Whether or not the sale of the subject property to Villar was valid;

3. Whether or not the sale of the subject property to Villar was in violation of the prohibition
on pactum commissorium;

4. Whether or not Garcias action for foreclosure of mortgage on the subject property can
prosper.

Discussion

Validity of second mortgage to Garcia

and sale of subject property to Villar

At the onset, this Court would like to address the validity of the second mortgage to Garcia and the
sale of the subject property to Villar. We agree with the Court of Appeals that both are valid under the
terms and conditions of the Deed of Real Estate Mortgage executed by Galas and Villar.

While it is true that the annotation of the first mortgage to Villar on Galass TCT contained a
restriction on further encumbrances without the mortgagees prior consent, this restriction was
nowhere to be found in the Deed of Real Estate Mortgage. As this Deed became the basis for the
annotation on Galass title, its terms and conditions take precedence over the standard, stamped
annotation placed on her title. If it were the intention of the parties to impose such restriction, they
would have and should have stipulated such in the Deed of Real Estate Mortgage itself.

Neither did this Deed proscribe the sale or alienation of the subject property during the life of the
mortgages. Garcias insistence that Villar should have judicially or extrajudicially foreclosed the
mortgage to satisfy Galass debt is misplaced. The Deed of Real Estate Mortgage merely provided
for the options Villar may undertake in case Galas or Pingol fail to pay their loan. Nowhere was it
stated in the Deed that Galas could not opt to sell the subject property to Villar, or to any other
person. Such stipulation would have been void anyway, as it is not allowed under Article 2130 of the
Civil Code, to wit:

Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

Prohibition on pactum commissorium

Garcia claims that the stipulation appointing Villar, the mortgagee, as the mortgagors attorney-in-
fact, to sell the property in case of default in the payment of the loan, is in violation of the prohibition
on pactum commissorium, as stated under Article 2088 of the Civil Code, viz:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose
of them. Any stipulation to the contrary is null and void.

The power of attorney provision in the Deed of Real Estate Mortgage reads:

5. Power of Attorney of MORTGAGEE. Effective upon the breach of any condition of this
Mortgage, and in addition to the remedies herein stipulated, the MORTGAGEE is likewise appointed
attorney-in-fact of the MORTGAGOR with full power and authority to take actual possession of the
mortgaged properties, to sell, lease any of the mortgaged properties, to collect rents, to execute
deeds of sale, lease, or agreement that may be deemed convenient, to make repairs or
improvements on the mortgaged properties and to pay the same, and perform any other act which
the MORTGAGEE may deem convenient for the proper administration of the mortgaged properties.
The payment of any expenses advanced by the MORTGAGEE in connection with the purpose
indicated herein is also secured by this Mortgage. Any amount received from the sale, disposal or
administration abovementioned maybe applied by assessments and other incidental expenses and
obligations and to the payment of original indebtedness including interest and penalties thereon. The
power herein granted shall not be revoked during the life of this Mortgage and all acts which may be
executed by the MORTGAGEE by virtue of said power are hereby ratified. 38

The following are the elements of pactum commissorium:

(1) There should be a property mortgaged by way of security for the payment of the principal
obligation; and

(2) There should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated period. 39

Villars purchase of the subject property did not violate the prohibition on pactum commissorium. The
power of attorney provision above did not provide that the ownership over the subject property would
automatically pass to Villar upon Galass failure to pay the loan on time. What it granted was the
mere appointment of Villar as attorney-in-fact, with authority to sell or otherwise dispose of the
subject property, and to apply the proceeds to the payment of the loan. 40 This provision is customary
in mortgage contracts, and is in conformity with Article 2087 of the Civil Code, which reads:

Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes
due, the things in which the pledge or mortgage consists may be alienated for the payment to the
creditor.

Galass decision to eventually sell the subject property to Villar for an additional P1,500,000.00 was
well within the scope of her rights as the owner of the subject property. The subject property was
transferred to Villar by virtue of another and separate contract, which is the Deed of Sale. Garcia
never alleged that the transfer of the subject property to Villar was automatic upon Galass failure to
discharge her debt, or that the sale was simulated to cover up such automatic transfer.

Propriety of Garcias action

for foreclosure of mortgage

The real nature of a mortgage is described in Article 2126 of the Civil Code, to wit:
Art. 2126. The mortgage directly and immediately subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfillment of the obligation for whose security it was
constituted.

Simply put, a mortgage is a real right, which follows the property, even after subsequent transfers by
the mortgagor. "A registered mortgage lien is considered inseparable from the property inasmuch as
1wphi1

it is a right in rem."41

The sale or transfer of the mortgaged property cannot affect or release the mortgage; thus the
purchaser or transferee is necessarily bound to acknowledge and respect the encumbrance. 42 In
fact, under Article 2129 of the Civil Code, the mortgage on the property may still be foreclosed
despite the transfer, viz:

Art. 2129. The creditor may claim from a third person in possession of the mortgaged property, the
payment of the part of the credit secured by the property which said third person possesses, in terms
and with the formalities which the law establishes.

While we agree with Garcia that since the second mortgage, of which he is the mortgagee, has not
yet been discharged, we find that said mortgage subsists and is still enforceable. However, Villar, in
buying the subject property with notice that it was mortgaged, only undertook to pay such mortgage
or allow the subject property to be sold upon failure of the mortgage creditor to obtain payment from
the principal debtor once the debt matures. Villar did not obligate herself to replace the debtor in the
principal obligation, and could not do so in law without the creditors consent. 43 Article 1293 of the
Civil Code provides:

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may
be made even without the knowledge or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237.

Therefore, the obligation to pay the mortgage indebtedness remains with the original debtors Galas
and Pingol.44The case of E.C. McCullough & Co. v. Veloso and Serna45 is square on this point:

The effects of a transfer of a mortgaged property to a third person are well determined by the Civil
Code. According to article 187946 of this Code, the creditor may demand of the third person in
1wphi1

possession of the property mortgaged payment of such part of the debt, as is secured by the
property in his possession, in the manner and form established by the law. The Mortgage Law in
force at the promulgation of the Civil Code and referred to in the latter, provided, among other things,
that the debtor should not pay the debt upon its maturity after judicial or notarial demand, for
payment has been made by the creditor upon him. (Art. 135 of the Mortgage Law of the Philippines
of 1889.) According to this, the obligation of the new possessor to pay the debt originated only from
the right of the creditor to demand payment of him, it being necessary that a demand for payment
should have previously been made upon the debtor and the latter should have failed to pay. And
even if these requirements were complied with, still the third possessor might abandon the property
mortgaged, and in that case it is considered to be in the possession of the debtor. (Art. 136 of the
same law.) This clearly shows that the spirit of the Civil Code is to let the obligation of the debtor to
pay the debt stand although the property mortgaged to secure the payment of said debt may have
been transferred to a third person. While the Mortgage Law of 1893 eliminated these provisions, it
contained nothing indicating any change in the spirit of the law in this respect. Article 129 of this law,
which provides the substitution of the debtor by the third person in possession of the property, for the
purposes of the giving of notice, does not show this change and has reference to a case where the
action is directed only against the property burdened with the mortgage. (Art. 168 of the
Regulation.)47
This pronouncement was reiterated in Rodriguez v. Reyes 48 wherein this Court, even before quoting
the same above portion in E.C. McCullough & Co. v. Veloso and Serna, held:

We find the stand of petitioners-appellants to be unmeritorious and untenable. The maxim "caveat
emptor" applies only to execution sales, and this was not one such. The mere fact that the purchaser
of an immovable has notice that the acquired realty is encumbered with a mortgage does not render
him liable for the payment of the debt guaranteed by the mortgage, in the absence of stipulation or
condition that he is to assume payment of the mortgage debt. The reason is plain: the mortgage is
merely an encumbrance on the property, entitling the mortgagee to have the property foreclosed,
i.e., sold, in case the principal obligor does not pay the mortgage debt, and apply the proceeds of the
sale to the satisfaction of his credit. Mortgage is merely an accessory undertaking for the
convenience and security of the mortgage creditor, and exists independently of the obligation to pay
the debt secured by it. The mortgagee, if he is so minded, can waive the mortgage security and
proceed to collect the principal debt by personal action against the original mortgagor.49

In view of the foregoing, Garcia has no cause of action against Villar in the absence of evidence to
show that the second mortgage executed in favor of Garcia has been violated by his debtors, Galas
and Pingol, i.e., specifically that Garcia has made a demand on said debtors for the payment of the
obligation secured by the second mortgage and they have failed to pay.

WHEREFORE, this Court hereby AFFIRMS the February 27, 2003 Decision and March 8, 2003
Resolution of the Court of Appeals in CA-G.R. SP No. 72714.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 138292 April 10, 2002

KOREA EXCHANGE BANK, petitioner,

vs.
FILKOR BUSINESS INTEGRATED, INC., KIM EUNG JOE, and LEE HAN SANG, respondents.

QUISUMBING, J.:

This petition assails the order1 dated April 16, 1999 of the Regional Trial Court of Cavite City, Branch
88, in Civil Case No. N-6689. Said order denied petitioner's partial motion for reconsideration of the
trial court's order2 dated March 12, 1999 whereby respondents were ordered to pay petitioner
various sums of U.S. dollars as payment of the former's various loans with interest but omitted to
state that the property mortgaged as security for said loans be foreclosed and sold at public auction
in case respondents fail to pay their obligations to petitioner ninety days from entry of judgment.

The facts are summarized from the findings of the trial court.

On January 9, 1997, respondent Filkor Business Integrated, Inc. (Filkor), borrowed US$140,000
from petitioner Korea Exchange Bank, payable on July 9, 1997. Of this amount, only US$40,000 was
paid by Filkor.3
In addition, Filkor executed nine trust receipts in favor of petitioner, from June 26, 1997 to
September 11, 1997. However, Filkor failed to turn over to petitioner the proceeds from the sale of
the goods, or the goods themselves as required by the trust receipts in case Filkor could not sell
them.4

In the period from June 9, 1997 to October 1, 1997, Filkor also negotiated to petitioner the proceeds
of seventeen letters of credit issued by the Republic Bank of New York and the Banque Leumi
France, S.A. to pay for goods which Filkor sold to Segerman International, Inc. and Davyco, S.A.
When petitioner tried to collect the proceeds of the letters of credit by presenting the bills of
exchange drawn to collect the proceeds, they were dishonored because of discrepancies. 5

Prior to all the foregoing, in order to secure payment of all its obligations, Filkor executed a Real
Estate Mortgage on February 9, 1996. It mortgaged to petitioner the improvements belonging to it
constructed on the lot it was leasing at the Cavite Export Processing Zone Authority.6 Respondents
Kim Eung Joe and Lee Han Sang also executed Continuing Suretyships binding themselves jointly
and severally with respondent Filkor to pay for the latter's obligations to petitioner.7

As respondents failed to make good on their obligations, petitioner filed Civil Case No. N-6689 in the
Regional Trial Court of Cavite City, docketed as "Korea Exchange Bank vs. Filkor Business
Integrated, Inc." In its complaint, petitioner prayed that (a) it be paid by respondents under its twenty-
seven causes of action; (b) the property mortgaged be foreclosed and sold at public auction in case
respondents failed to pay petitioner within ninety days from entry of judgment; and (c) other reliefs
just and equitable be granted.8

Petitioner moved for summary judgment pursuant to Section 1, Rule 35 of the 1997 Rules of Civil
Procedure. On March 12, 1999, the trial court rendered its order granting petitioner's motion,
reasoning as follows:

xxx

It appears that the only reason defendants deny all the material allegations in the complaint
is because the documents attached thereto are mere photocopies and not the originals
thereof. Section 7, Rule 8 of the Rules of Court allows copies of documents to be attached to
the pleading as an exhibit. Defendants are, therefore, deemed to have admitted the
genuineness and due execution of all actionable documents attached to the complaint
inasmuch as they were not specifically denied, pursuant to Section 8 of the Rule 8 of the
Rules of Court.

In the case at bar, there is clearly no substantial triable issue, hence, the motion for summary
judgment filed by plaintiff is proper.

A summary of judgment is one granted by the court upon motion by a party for an
expeditious settlement of the case, there appearing from the pleadings, depositions,
admissions and affidavits that there are no important questions or issues of fact involved
(except as to the amount of damages) and that, therefore, the moving party is entitled to a
judgment as a matter of law (Sections 1, 2, 3, Rule 35, 1997 Rules of Civil Procedure).

The court having taken into account the pleadings of the parties as well as the affidavits
attached to the motion for summary judgment and having found that there is indeed no
genuine issue as to any material fact and that plaintiff is entitled to a summary of judgment
as a matter of law, hereby renders judgment for the plaintiff and against the defendants,
ordering said defendants jointly and severally to pay plaintiff, as follows 9
The trial court then rendered judgment in favor of petitioner, granting its prayers under all its twenty-
seven causes of action. It, however, failed to order that the property mortgaged by respondent Filkor
be foreclosed and sold at public auction in the event that Filkor fails to pay its obligations to
petitioner.

Petitioner filed a motion for partial reconsideration of the trial court's order, praying that the aforesaid
relief of foreclosure and sale at public auction be granted. In an order dated April 16, 1999, the trial
court denied petitioner's motion, ruling as follows:

Plaintiff, in opting to file a civil action for the collection of defendants obligations, has
abandoned its mortgage lien on the property subject of the real estate mortgage.

The issue has already been resolved in Danao vs. Court of Appeals, 154 SCRA 446,
citing Manila Trading and Supply Co. vs. Co Kim, et al., 71 Phil. 448, where the Supreme
Court ruled that:

The rule is now settled that a mortgage creditor may elect to waive his security and
bring, instead, an ordinary action to recover the indebtedness with the right to
execute a judgment thereon on all the properties of the debtor including the subject
matter of the mortgage, subject to the qualification that if he fails in the remedy by
him elected, he cannot pursue further the remedy he has waived.

WHEREFORE, the Partial Motion for Reconsideration filed by the plaintiff of the Court's
Order dated March 12, 1999 is hereby denied for lack of merit.

SO ORDERED.10

Hence, the present petition, where petitioner ascribes the following error to the trial court.

THE REGIONAL TRIAL COURT OF CAVITE CITY ERRED IN RULING THAT PETITIONER
HAD ABANDONED THE REAL ESTATE MORTGAGE IN ITS FAVOR, BECAUSE IT FILED A
SIMPLE COLLECTION CASE.11

The resultant issue is whether or not petitioner's complaint before the trial court was an action for
foreclosure of a real estate mortgage, or an action for collection of a sum of money. In addition, we
must also determine if the present appeal was correctly lodged before us rather than with the Court
of Appeals.

In petitioner's complaint before the trial court, Paragraph 183 thereof alleges:

183. To secure payment of the obligations of defendant Corporation under the First to the
Twenty-Seventh Cause of Action, on February 9, 1996, defendant Corporation executed a
Real Estate Mortgage by virtue of which it mortgaged to plaintiff the improvements standing
on Block 13, Lot 1, Cavite Export Processing Zone, Rosario, Cavite, belonging to defendant
Corporation covered by Tax Declaration No. 5906-1 and consisting of a one-story building
called warehouse and spooling area, the guardhouse, the cutting/sewing area building and
the packing area building. (A copy of the Real Estate Mortgage is attached hereto as Annex
"SS" and made an integral part hereof.)12

This allegation satisfies in part the requirements of Section 1, Rule 68 of the 1997 Rules of Civil
Procedure on foreclosure of real estate mortgage, which provides:
 SECTION 1. Complaint in action for foreclosure. In an action for the foreclosure of a
mortgage or other encumbrance upon real estate, the complaint shall set forth the date and
due execution of the mortgage; its assignments, if any; the names and residences of the
mortgagor and the mortgagee; a description of the mortgaged property; a statement of the
date of the note or other documentary evidence of the obligation secured by the mortgage,
the amount claimed to be unpaid thereon; and the names and residences of all persons
having or claiming an interest in the property subordinate in right to that of the holder of the
mortgage, all of whom shall be made defendants in the action.

In Paragraph 183 above, the date and due execution of the real estate mortgage are alleged. The
properties mortgaged are stated and described therein as well. In addition, the names and
residences of respondent Filkor, as mortgagor, and of petitioner, as mortgagee, are alleged in
paragraphs 1 and 2 of the complaint.13 The dates of the obligations secured by the mortgage and the
amounts unpaid thereon are alleged in petitioner's first to twenty-seventh causes of
action.14 Moreover, the very prayer of the complaint before the trial court reads as follows:

WHEREFORE, it is respectfully prayed that judgment be rendered:

xxx

2. Ordering that the property mortgaged be foreclosed and sold at public auction in case
defendants fail to pay plaintiff within ninety (90) days from entry of judgment.

x x x15

Petitioner's allegations in its complaint, and its prayer that the mortgaged property be foreclosed and
sold at public auction, indicate that petitioner's action was one for foreclosure of real estate
mortgage. We have consistently ruled that what determines the nature of an action, as well as which
court or body has jurisdiction over it, are the allegations of the complaint and the character of the
relief sought.16 In addition, we find no indication whatsoever that petitioner had waived its rights
under the real estate mortgage executed in its favor. Thus, the trial court erred in concluding that
petitioner had abandoned its mortgage lien on Filkor's property, and that what it had filed was an
action for collection of a sum of money.

Petitioner's action being one for foreclosure of real estate mortgage, it was incumbent upon the trial
court to order that the mortgaged property be foreclosed and sold at public auction in the event that
respondent Filkor fails to pay its outstanding obligations. This is pursuant to Section 2 of Rule 68 of
the 1997 Rules of Civil Procedure, which provides:

SEC. 2. Judgment on foreclosure for payment or sale.- If upon the trial in such action the
court shall find the facts set forth in the complaint to be true, it shall ascertain the amount
due to the plaintiff upon the mortgage debt or obligation, including interest and other charges
as approved by the court, and costs, and shall render judgment for the sum so found due
and order that the same be paid to the court or to the judgment obligee within a period of not
less than ninety (90) days nor more than one hundred twenty (120) days from entry of
judgment, and that in default of such payment the property shall be sold at public auction to
satisfy the judgment. (Italics supplied.)

Accordingly, the dispositive portion of the decision of the trial court dated March 12, 1999, must be
modified to comply with the provisions of Section 2 of Rule 68 of the 1997 Rules of Civil Procedure.
This modification is subject to any appeal filed by respondents of said decision.
On the propriety of the present appeal, we note that what petitioner impugns is the determination by
the trial court of the nature of action filed by petitioner, based on the allegations in the complaint.
Such a determination as to the correctness of the conclusions drawn from the pleadings undoubtedly
involves a question of law.17 As the present appeal involves a question of law, petitioner appropriately
filed it with this Court, pursuant to Section 1 of Rule 45 of the 1997 Rules of Civil Procedure, which
provides:

SECTION 1. Filing of petition with Supreme Court. A party desiring to appeal by certiorari
from a judgment or final order or resolution of the Court of Appeals, the Sandiganbayan, the
Regional Trial Court or other courts whenever authorized by law, may file with the Supreme
Court a verified petition for review on certiorari. The petition shall raise only questions of law
which must be distinctly set forth. (Italics supplied).

There is no dispute with respect to the fact that when an appeal raises only pure questions of law,
this Court has jurisdiction to entertain the same.18

WHEREFORE, the petition is GRANTED. The Order dated March 12, 1999, of the Regional Trial
Court of Cavite City, Branch 88, in Civil Case No. N-6689 is hereby MODIFIED, to state that the
mortgaged property of respondent Filkor be ordered foreclosed and sold at public auction in the
event said respondent fails to pay its obligations to petitioner within ninety (90) days from entry of
judgment.

No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT

THIRD DIVISION

G.R. No. 128567 September 1, 2000

HUERTA ALBA RESORT INC., petitioner,

vs.
COURT OF APPEALS and SYNDICATED MANAGEMENT GROUP INC., respondents.

PURISIMA, J.:

Litigation must at some time be terminated, even at the risk of occasional errors. Public policy
dictates that once a judgment becomes final, executory and unappealable, the prevailing party
should not be denied the fruits of his victory by some subterfuge devised by the losing party.
Unjustified delay in the enforcement of a judgment sets at naught the role of courts in disposing
justiciable controversies with finality.

The Case

At bar is a petition assailing the Decision, dated November 14, 1996, and Resolution, dated March
11, 1997, of the Court of Appeals in CA-G.R. No. 38747, which set aside the Order, dated July 21,
1995 and Order, dated September 4, 1997, of the Regional Trial Court of Makati City, in Civil Case
No. 89-5424. The aforesaid orders of the trial court held that petitioner had the right to redeem
subject pieces of property within the one-year period prescribed by Section 78 of Republic Act No.
337 otherwise known as the General Banking Act.

Section 78 of R.A. No. 337 provides that "in case of a foreclosure of a mortgage in favor of a bank,
banking or credit institution, whether judicially or extrajudicially, the mortgagor shall have the right,
within one year after the sale of the real estate as a result of the foreclosure of the respective
mortgage, to redeem the property."

The Facts

The facts that matter are undisputed:

In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on October 19,
1989, docketed as Civil Case No. 89-5424 before the Regional Trial Court of Makati City, the herein
private respondent sought the foreclosure of four (4) parcels of land mortgaged by petitioner to
Intercon Fund Resource, Inc. ("Intercon").

Private respondent instituted Civil Case No. 89-5424 as mortgagee-assignee of a loan amounting to
P8.5 million obtained by petitioner from Intercon, in whose favor petitioner mortgaged the aforesaid
parcels of land as security for the said loan.

In its answer below, petitioner questioned the assignment by Intercon of its mortgage right thereover
to the private respondent, on the ground that the same was ultra vires. Petitioner also questioned
during the trial the correctness of the charges and interest on the mortgage debt in question.

On April 30, 1992, the trial court, through the then Judge now Court of Appeals Justice
Buenaventura J. Guerrero, came out with its decision "granting herein private respondent SMGI's
complaint for judicial foreclosure of mortgage", disposing as follows:

"WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff the

following:

(1) P8,500,000.00 representing the principal of the amount due;

(2) P850,000.00 as penalty charges with interest at 6% per annum, until fully paid;

(3) 22% per annum interest on the above principal from September 6, 1998, until fully
paid;

(4) 5% of the sum total of the above amounts, as reasonable attorney's fees; and,

(5) Costs.

All the above must be paid within a period of not less than 150 days from receipt hereof by
the defendant. In default of such payment, the four parcels of land subject matter of the suit
including its improvements shall be sold to realize the mortgage debt and costs, in the
manner and under the regulations that govern sales of real estate under execution." 1

Petitioner appealed the decision of the trial court to the Court of Appeals, the appeal docketed as
CA-G.R. CV No. 39243 before the Sixth Division of the appellate court, which dismissed the case on
June 29, 1993 on the ground of late payment of docket fees.
Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to this Court via a petition for
certiorari, docketed as G.R. No. 112044, which this court resolved to dismiss on December 13, 1993,
on the finding that the Court of Appeals erred not in dismissing the appeal of petitioner.

Petitioner's motion for reconsideration of the dismissal of its petition in G.R. No. 112044 was denied
with finality in this Court's Resolution promulgated on February 16, 1994. On March 10, 1994, leave
to present a second motion for reconsideration in G.R. No. 112044 or to submit the case for hearing
by the Court en banc was filed, but to no avail. The Court resolved to deny the same on May 11,
1994.

On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No. 112044 became final and
executory and was entered in the Book of Entries of Judgment.

On July 4, 1994, private respondent filed with the trial court of origin a motion for execution of the
Decision promulgated on April 30, 1992 in Civil Case No. 89-5424. The said motion was granted on
July 15, 1994.

Accordingly, on July 15, 1994 a writ of execution issued and, on July 20, 1994, a Notice of Levy and
Execution was issued by the Sheriff concerned, who issued on August 1, 1994 a Notice of Sheriff's
Sale for the auction of subject properties on September 6, 1994.

On August 23, 1994, petitioner filed with the same trial court an Urgent Motion to Quash and Set
Aside Writ of Execution ascribing to it grave abuse of discretion in issuing the questioned Writ of
Execution. To support its motion, petitioner invited attention and argued that the records of the case
were still with the Court of Appeals and therefore, issuance of the writ of execution was premature
since the 150-day period for petitioner to pay the judgment obligation had not yet lapsed and
petitioner had not yet defaulted in the payment thereof since no demand for its payment was made
by the private respondent. In petitioner's own words, the dispute between the parties was "principally
on the issue as to when the 150-day period within which Huerta Alba may exercise its equity of
redemption should be counted."

In its Order of September 2, 1994, the lower court denied petitioner's urgent motion to quash the writ
of execution in Civil Case No. 89-5424, opining that subject judgment had become final and
executory and consequently, execution thereof was a matter of right and the issuance of the
corresponding writ of execution became its ministerial duty.

Challenging the said order granting execution, petitioner filed once more with the Court of Appeals
another petition for certiorari and prohibition with preliminary injunction, docketed as C.A.-G.R. SP
No. 35086, predicated on the same grounds invoked for its Motion to Quash Writ of Execution.

On September 6, 1994, the scheduled auction sale of subject pieces of properties proceeded and
the private respondent was declared the highest bidder. Thus, private respondent was awarded
subject bidded pieces of property. The covering Certificate of Sale issued in its favor was registered
with the Registry of Deeds on October 21, 1994.

On September 7, 1994, petitioner presented an Ex-Parte Motion for Clarification asking the trial court
to "clarify" whether or not the twelve (12) month period of redemption for ordinary execution applied
in the case.
On September 26, 1994, the trial court ruled that the period of redemption of subject property should
be governed by the rule on the sale of judicially foreclosed property under Rule 68 of the Rules of
Court.

Thereafter, petitioner then filed an Exception to the Order dated September 26, 1994 and Motion to
Set Aside Said Order, contending that the said Order materially altered the Decision dated April 30,
1992 "which declared that the satisfaction of the judgment shall be in the manner and under the
regulation that govern sale of real estate under execution."

Meanwhile, in its Decision of September 30, 1994, the Court of Appeals resolved the issues raised
by the petitioner in C.A.-G.R. SP No. 35086, holding that the one hundred-fifty day period within
which petitioner may redeem subject properties should be computed from the date petitioner was
notified of the Entry of Judgment in G.R. No. 112044; and that the 150-day period within which
petitioner may exercise its equity of redemption expired on September 11, 1994.

Thus:

"Petitioner must have received the resolution of the Supreme Court dated February 16, 1994
denying with finality its motion for reconsideration in G.R. No. 112044 before March 14,
1994, otherwise the Supreme Court would not have made an entry of judgment on March 14,
1994. While, computing the 150-day period. Petitioner may have until September 11, 1994.
within which to pay the amounts covered by the judgment, such period has already expired
by this time, and therefore, this Court has no more reason to pass upon the parties' opposing
contentions, the same having become moot and academic." 2 (Emphasis supplied).

Petitioner moved for reconsideration of the Decision of the Court of Appeals in C.A.-G.R. SP No.
35086. In its Motion for Reconsideration dated October 18, 1994, petitioner theorized that the period
of one hundred fifty (150) days should not be reckoned with from Entry of Judgment but from receipt
on or before July 29, 1994 by the trial court of the records of Civil Case No. 89-5424 from the Court
of Appeals. So also, petitioner maintained that it may not be considered in default, even after the
expiration of 150 days from July 29, 1994, because prior demand to pay was never made on it by
the private respondent. According to petitioner, it was therefore, premature for the trial court to issue
a writ of execution to enforce the judgment.

The trial court deferred action on the Motion for Confirmation of the Certificate of Sale in view of the
pendency of petitioner's Motion for Reconsideration in CA-G.R. SP No. 35086.

On December 23, 1994, the Court of Appeals denied petitioner's motion for reconsideration in CA-
G.R. SP No. 35086. Absent any further action with respect to the denial of the subject motion for
reconsideration, private respondent presented a Second Motion for Confirmation of Certificate of
Sale before the trial court.

As regards the Decision rendered on September 30, 1994 by the Court of Appeals in CA G.R. SP
No. 35086 it became final and executory on January 25, 1995.

On February 10, 1995, the lower court confirmed the sale of subject properties to the private
respondent. The pertinent Order declared that all pending incidents relating to the Order dated
September 26, 1994 had become moot and academic. Conformably, the Transfer Certificates of Title
to subject pieces of property were then issued to the private respondent.
On February 27, 1995, petitioner filed with the Court of Appeals a Motion for Clarification seeking
"clarification" of the date of commencement of the one (1) year period for the redemption of the
properties in question.

In its Resolution dated March 20, 1995, the Court of Appeals merely noted such Motion for
Clarification since its Decision promulgated on September 30, 1994 had already become final and
executory; ratiocinating thus:

"We view the motion for clarification filed by petitioner, purportedly signed by its proprietor,
but which we believe was prepared by a lawyer who wishes to hide under the cloak of
anonymity, as a veiled attempt to buy time and to delay further the disposition of this case.

Our decision of September 30, 1994 never dealt on the right and period of redemption of
petitioner, but was merely circumscribed to the question of whether respondent judge could
issue a writ of execution in its Civil Case No. 89-5424 . . .

We further ruled that the one-hundred fifty day period within which petitioner may exercise
its equity of redemption should be counted, not from the receipt of respondent court of the
records of Civil Case No. 89-5424 but from the date petitioner was notified of the entry of
judgment made by the appellate court.

But we never made any pronouncement on the one-year right of redemption of petitioner
because, in the first place, the foreclosure in this case is judicial. and as such the mortgagor
has only the equity not the right of redemption . . . While it may be true that under Section 78
of R.A. 337 as amended, otherwise known as the General Banking Act, a mortgagor of a
bank, banking or credit institution, whether the foreclosure was done judicially or
extrajudicially, has a period of one year from the auction sale within which to redeem the
foreclosed property, the question of whether the Syndicated Management Group,. Inc., is a
bank or credit institution was never brought before us squarely, and it is indeed odd and
strange that petitioner would now sarcastically ask a rhetorical question in its motion for
clarification."3 (Emphasis supplied).

Indeed, if petitioner did really act in good faith, it would have ventilated before the Court of Appeals
in CA-G.R. No. 35086 its pretended right under Section 78 of R.A. No. 337 but it never did so.

At the earliest opportunity, when it filed its answer to the complaint for judicial foreclosure, petitioner
should have averred in its pleading that it was entitled to the beneficial provisions of Section 78 of
R.A. No. 337; but again, petitioner did not make any such allegation in its answer.

From the said Resolution, petitioner took no further step such that on March 31, 1995, the private
respondent filed a Motion for Issuance of Writ of Possession with the trial court.

During the hearing called on April 21, 1995, the counsel of record of petitioner entered appearance
and asked for time to interpose opposition to the Motion for Issuance of Writ of Possession.

On May 2, 1995, in opposition to private respondent's Motion for Issuance of writ of Possession,
petitioner filed a "Motion to Compel Private Respondent to Accept Redemption." It was the first time
petitioner ever asserted the right to redeem subject properties under Section 78 of R.A. No. 337, the
General Banking Act; theorizing that the original mortgagee, being a credit institution, its assignment
of the mortgage credit to petitioner did not remove petitioner from the coverage of Section 78 of R.A.
No. 337. Therefore, it should have the right to redeem subject properties within one year from
registration of the auction sale, theorized the petitioner which concluded that in view of its "right of
redemption," the issuance of the titles over subject parcels of land to the private respondent was
irregular and premature.

In its Order of July 21, 1995, the trial court, presided over by Judge Napoleon Inoturan, denied
private respondent's motion for a writ of possession, opining that Section 78 of the General Banking
Act was applicable and therefore, the petitioner had until October 21, 1995 to redeem the said
parcels of land, said Order ruled as follows:

"It is undisputed that Intercon is a credit institution from which defendant obtained a loan
secured with a real estate mortgage over four (4) parcels of land. Assuming that the
mortgage debt had not been assigned to plaintiff, there is then no question that defendant
would have a right of redemption in case of foreclosure, judicially or extrajudicially, pursuant
to the above quoted Section 78 of RA 337, as amended.

However, the pivotal issue here is whether or not the defendant lost its right of redemption by
virtue of the assignment of its mortgage debt by Intercon to plaintiff, which is not a bank or
credit institution. The issue is resolved in the negative. The right of redemption in this case is
vested by law and is therefore an absolute privilege which defendant may not lose even
though plaintiff-assignee is not a bank or credit institution (Tolentino versus Court of Appeals,
106 SCRA 513). Indeed, a contrary ruling will lead to a possible circumvention of Section 78
because all that may be needed to deprive a defaulting mortgagor of his right of redemption
is to assign his mortgage debt from a bank or credit institution to one which is not. Protection
of defaulting mortgagors, which is the avowed policy behind the provision, would not be
achieved if the ruling were otherwise. Consequently, defendant still possesses its right of
redemption which it may exercise up to October 21, 1995 only, which is one year from the
date of registration of the certificate of sale of subject properties (GSIS versus Iloilo, 175
SCRA 19, citing Limpin versus IAC, 166 SCRA 87).

Since the period to exercise defendant's right of redemption has not yet expired, the
cancellation of defendant's transfer certificates of title and the issuance of new ones in lieu
thereof in favor of plaintiff are therefore illegal for being premature, thereby necessitating
reconveyance (see Sec. 63 (a) PD 1529, as amended).

WHEREFORE, the Court hereby rules as follows:

(1) The Motion for Issuance of Writ of Possession is hereby denied;

(2) Plaintiff is directed to accept the redemption on or before October 21, 1995 in an
amount computed according to the terms stated in the Writ of Execution dated July
15, 1994 plus all other related costs and expenses mentioned under Section 78, RA
337, as amended; and

(3) The Register of Deeds of Valenzuela, Bulacan is directed (a) to reconvey to the
defendant the following titles of the four (4) parcels of land, namely TCT Nos. V-
38878, V-38879, V-38880, and V-38881, now in the name of plaintiff, and (b) to
register the certificate of sale dated October 7, 1994 and the Order confirming the
sale dated February 10, 1995 by a brief memorandum thereof upon the transfer
certificates of title to be issued in the name of defendant, pursuant to Sec. 63 (a) PD
1529, as amended.
 The Omnibus Motion dated June 5, 1995, together with the Opposition thereto, is now
deemed resolved.

SO ORDERED."4

Private respondent interposed a Motion for Reconsideration seeking the reversal of the Order but to
no avail. In its Order dated September 4, 1995, the trial court denied the same.

To attack and challenge the aforesaid order of July 21, 1995 and subsequent Order of September 4,
1995 of the trial court, the private respondent filed with this court a Petition for Certiorari, Prohibition
and Mandamus, docketed as G.R. No. 121893, but absent any special and cogent reason shown for
entertaining the same, the Court referred the petition to the Court of Appeals, for proper
determination.

Docketed as G.R. No. 387457 on November 14, 1996, the Court of Appeals gave due course to the
petition and set aside the trial court's Order dated July 21, 1995 and Order dated September 4,
1995.

In its Resolution of March 11, 1997, the Court of Appeals denied petitioner's Motion for
Reconsideration of the Decision promulgated on November 14, 1996 in CA-G.R. No. 38747.

Undaunted, petitioner has come to this Court via the present petition, placing reliance on the
assignment of errors, that:

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE

COURT OF APPEALS (TWELFTH DIVISION) IN CA G.R. SP NO. 35086 HAD RESOLVED
"WITH FINALITY" THAT PETITIONER HUERTA ALBA HAD NO RIGHT OF REDEMPTION
BUT ONLY THE EQUITY OF REDEMPTION.

II

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN IGNORING THAT

PETITIONER HUERTA ALBA POSSESSES THE ONE-YEAR RIGHT OF REDEMPTION
UNDER SECTION 78, R.A. NO. 337 (THE GENERAL BANKING ACT).

III

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT

PRIVATE RESPONDENT SYNDICATED MANAGEMENT GROUP, INC. IS ENTITLED TO
THE ISSUANCE OF A WRIT OF POSSESSION OVER THE SUBJECT PROPERTY.5

In its comment on the petition, private respondent countered that:

"A. THE HONORABLE COURT OF APPEALS CORRECTLY HELD THAT IT RESOLVED

WITH FINALITY IN C.A.-G.R. SP NO. 35086 THAT PETITIONER ONLY HAD THE RIGHT
OF REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES.

B. THE PETITION IS AN INSIDIOUS AND UNDERHANDED ATTEMPT TO EVADE THE

FINALITY OF VARIOUS DECISIONS, RESOLUTIONS AND ORDERS WHICH HELD THAT,
 PETITIONER ONLY POSSESSES THE EQUITY OF REDEMPTION IN RESPECT OF THE
SUBJECT PROPERTIES.

C. PETITIONER IS BARRED BY ESTOPPEL FROM BELATEDLY RAISING THE ISSUE OF

ITS ALLEGED 'RIGHT OF REDEMPTION. HDAECI

D. IN HOLDING THAT THE PETITIONER HAD THE 'RIGHT OF REDEMPTION' OVER THE
SUBJECT PROPERTIES, THE TRIAL COURT MADE A MOCKERY OF THE 'LAW OF THE
CASE."'6

And by way of Reply, petitioner argued, that:

I.

THE COURT OF APPEALS IN CA G.R. SP NO. 35086 COULD NOT HAVE POSSIBLY
RESOLVED THEREIN WHETHER WITH FINALITY OR OTHERWISE - THE ISSUE OF
PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO.
337.

II.

THERE IS NO ESTOPPEL HERE. PETITIONER HUERTA ALBA INVOKED ITS RIGHT OF

REDEMPTION UNDER SECTION 78, R.A. NO. 337 IN TIMELY FASHION, i.e., AFTER
CONFIRMATION BY THE COURT OF THE FORECLOSURE SALE, AND WITHIN ONE (1)
YEAR FROM THE DATE OF REGISTRATION OF THE CERTIFICATE OF SALE.

III.

THE PRINCIPLE OF 'THE LAW OF THE CASE' HAS ABSOLUTELY NO BEARING HERE:

(1)

THE RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IS IN FACT
PREDICATED UPON THE FINALITY AND CORRECTNESS OF THE DECISION IN CIVIL
CASE NO. 89-5424.

(2)

THUS, THE RTC'S ORDER RECOGNIZING PETITIONER HUERTA ALBA'S RIGHT OF

REDEMPTION UNDER SECTION 78, R.A. NO. 37 DOES NOT IN ANY WAY HAVE THE
EFFECT OF AMENDING, MODIFYING, OR SETTING ASIDE THE DECISION IN CIVIL
CASE NO. 89-5424.

The above arguments and counter-arguments advanced relate to the pivotal issue of whether or not
the petitioner has the one-year right of redemption of subject properties under Section 78 of
Republic Act No. 337 otherwise known as the General Banking Act.

The petition is not visited by merit.

Petitioner's assertion of right of redemption under Section 78 of Republic Act No. 337 is premised on
the submission that the Court of Appeals did not resolve such issue in CA-G.R. SP No. 35086;
contending thus:

(1)

BY NO STRETCH OF LOGIC CAN THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP

NO. 35086 BE INTERPRETED TO MEAN THE COURT OF APPEALS HAD RESOLVED
'WITH FINALITY' THE ISSUE OF WHETHER PETITIONER HUERTA ALBA HAD THE
RIGHT OF REDEMPTION WHEN ALL THAT THE RESOLUTION DID WAS TO MERELY
NOTE THE MOTION FOR CLARIFICATION.

(2)

THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 IS NOT A FINAL

JUDGMENT, ORDER OR DECREE. IT IS NOT EVEN A JUDGMENT OR ORDER TO
BEGIN WITH. IT ORDERS NOTHING; IT ADJUDICATES NOTHING.

(3)

PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO.
37 WAS NOT AN ISSUE AND WAS NOT IN ISSUE, AND COULD NOT HAVE POSSIBLY
BEEN AN ISSUE NOR IN ISSUE, IN CA G.R. SP NO. 35086.

(4)

THE 30 SEPTEMBER 1994 DECISION IN CA G.R. SP NO. 35086 HAVING ALREADY

BECOME FINAL EVEN BEFORE THE FILING OF THE MOTION FOR CLARIFICATION,
THE COURT OF APPEALS NO LONGER HAD ANY JURISDICTION TO ACT OF THE
MOTION OR ANY OTHER MATTER IN CA G.R. SP NO. 35086, EXCEPT TO MERELY
NOTE THE MOTION. EASIHa

II.

IN STARK CONTRAST, THE ISSUE OF PETITIONER HUERTA ALBA'S RIGHT OF

REDEMPTION UNDER SECTION 78, R.A. NO. 337 WAS DIRECTLY RAISED AND JOINED
BY THE PARTIES, AND THE SAME DULY RESOLVED BY THE TRIAL COURT.

III.

THE RIGHT OF REDEMPTION UNDER SECTION 78 OF R.A. NO. 337 IS MANDATORY

AND AUTOMATICALLY EXISTS BY LAW. THE COURTS ARE DUTY-BOUND TO
RECOGNIZE SUCH RIGHT.

IV.

EQUITABLE CONSIDERATIONS WEIGH HEAVILY IN FAVOR OF PETITIONER HUERTA

ALBA, NOT THE LEAST OF WHICH IS THE WELL-SETTLED POLICY OF THE LAW TO
AID RATHER THAN DEFEAT THE RIGHT OF REDEMPTION.

V.
 THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995 ORDERS OF THE TRIAL
COURT ARE VALID AND PROPER IN ACCORDANCE WITH THE MANDATE OF THE LAW.

From the various decisions, resolutions and orders a quo it can be gleaned that what petitioner has
been adjudged to have was only the equity of redemption over subject properties. On the distinction
between the equity of redemption and right of redemption, the case of Gregorio Y. Limpin vs.
Intermediate Appellate Court,7 comes to the fore. Held the Court in the said case:

"The equity of redemption is, to be sure, different from and should not be confused with
the right of redemption.

The right of redemption in relation to a mortgage understood in the sense of a prerogative

to re-acquire mortgaged property after registration of the foreclosure sale exists only in the
case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial
foreclosure except only where the mortgagee is the Philippine National Bank or a bank or
banking institution.

Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of
redemption within one (1) year from the registration of the sheriff's certificate of foreclosure
sale.

Where the foreclosure is judicially effected, however, no equivalent right of redemption

exists. The law declares that a judicial foreclosure sale 'when confirmed be an order of the
court. . . . shall operate to divest the rights of all the parties to the action and to vest their
rights in the purchaser, subject to such rights of redemption as may be allowed by law.' Such
rights exceptionally 'allowed by law' (i.e., even after confirmation by an order of the court) are
those granted by the charter of the Philippine National Bank (Acts No. 2747 and 2938), and
the General Banking Act (R.A. 337). These laws confer on the mortgagor, his successors in
interest or any judgment creditor of the mortgagor, the right to redeem the property sold on
foreclosure after confirmation by the court of the foreclosure sale which right may be
exercised within a period of one (1) year, counted from the date of registration of the
certificate of sale in the Registry of Property.

But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage
if the mortgagee is not the PNB or a bank or banking institution. In such a case, the
foreclosure sale, 'when confirmed by an order of the court. . . shall operate to divest the
rights of all the parties to the action and to vest their rights in the purchaser.' There then
exists only what is known as the equity of redemption. This is simply the right of the
defendant mortgagor to extinguish the mortgage and retain ownership of the property by
paying the secured debt within the 90-day period after the judgment becomes final, in
accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.

Section 2, Rule 68 provides that

'. . If upon the trial . . the court shall find the facts set forth in the complaint to be true, it shall
ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including
interest and costs, and shall render judgment for the sum so found due and order the same
to be paid into court within a period of not less than ninety (90) days from the date of the
service of such order, and that in default of such payment the property be sold to realize the
mortgage debt and costs.'
 This is the mortgagor's equity (not right) of redemption which, as above stated, may be
exercised by him even beyond the 90-day period 'from the date of service of the order,' and
even after the foreclosure sale itself, provided it be before the order of confirmation of the
sale. After such order of confirmation, no redemption can be effected any
longer."8 (Emphasis supplied)

Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No. 337.

Petitioner avers in its petition that the Intercom, predecessor in interest of the private respondent, is
a credit institution, such that Section 78 of Republic Act No. 337 should apply in this case. Stated
differently, it is the submission of petitioner that it should be allowed to redeem subject properties
within one year from the date of sale as a result of the foreclosure of the mortgage constituted
thereon.

The pivot of inquiry here therefore, is whether the petitioner seasonably invoked its asserted right
under Section 78 of R.A. No. 337 to redeem subject properties.

Petitioner theorizes that it invoked its "right" in "timely fashion", that is, after confirmation by the court
of the foreclosure sale, and within one (1) year from the date of registration of the certificate of sale.
Indeed, the facts show that it was only on May 2, 1995 when, in opposition to the Motion for
Issuance of Writ of Possession, did petitioner file a Motion to Compel Private Respondent to Accept
Redemption, invoking for the very first time its alleged right to redeem subject properties under to
Section 78 of R.A. No. 337.

In light of the aforestated facts, it was too late in the day for petitioner to invoke a right to redeem
under Section 78 of R.A. No. 337. Petitioner failed to assert a right to redeem in several crucial
stages of the proceedings.

For instance, on September 7, 1994, when it filed with the trial court an Ex-part Motion for
Clarification, petitioner failed to allege and prove that private respondent's predecessor in interest
was a credit institution and therefore, Section 78 of R.A. No. 337 was applicable. Petitioner merely
asked the trial court to clarify whether the sale of subject properties was execution sale or judicial
foreclosure sale.

So also, when it presented before the trial court an Exception to the Order and Motion to Set Aside
Said Order dated October 13, 1994, petitioner again was silent on its alleged right under Section 78
of R.A. No. 337, even as it failed to show that private respondent's predecessor in interest is a credit
institution. Petitioner just argued that the aforementioned Order materially altered the trial court's
Decision of April 30, 1992.

Then, too, nothing was heard from petitioner on its alleged right under Section 78 of R.A. No. 337
and of the predecessor in interest of private respondent as a credit institution, when the trial court
came out with an order on February 10, 1995, confirming the sale of subject properties in favor of
private respondent and declaring that all pending incidents with respect to the Order dated
September 26, 1994 had become moot and academic.

Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification with the Court of
Appeals, seeking "clarification" of the date of commencement of the one (1) year redemption period
for the subject properties, petitioner never intimated any alleged right under Section 78 of R.A. No.
337 nor did it invite attention to its present stance that private respondent's predecessor-in-interest
was a credit institution. Consequently, in its Resolution dated March 20, 1995, the Court of Appeals
ruled on the said motion thus:
 "But we never made any pronouncement on the one-year right of redemption of petitioner
because, in the first place, the foreclosure in this case is judicial, and as such. the mortgagor
has only the equity. not the right of redemption . . . While it may be true that under Section 78
of R.A. 337 as amended, otherwise known as the General Banking Act, a mortgagor of a
bank, banking or credit institution, whether the foreclosure was done judicially or
extrajudicially, has a period of one year from the auction sale within which to redeem the
foreclosed property, the question of whether the Syndicated Management Group. Inc., is
bank or credit institution was never brought before us squarely, and it is indeed odd and
strange that petitioner would now sarcastically ask a rhetorical question in its motion for
clarification."9 (Emphasis supplied).

If petitioner were really acting in good faith, it would have ventilated before the Court of Appeals in
CA-G.R. No. 35086 its alleged right under Section 78 of R.A. No. 337; but petitioner never did do so.

Indeed, at the earliest opportunity, when it submitted its answer to the complaint for judicial
foreclosure, petitioner should have alleged that it was entitled to the beneficial provisions of Section
78 of R.A. No. 337 but again, it did not make any allegation in its answer regarding any right
thereunder. It bears stressing that the applicability of Section 78 of R.A. No. 337 hinges on the
factual question of whether or not private respondent's predecessor in interest was a credit
institution. As was held in Limpin, a judicial foreclosure sale, "when confirmed by an order of the
court, . . shall operate to divest the rights of all the parties to the action and to vest their rights in the
purchaser, subject to such rights of redemption as may be allowed by law'," 10 which confer on the
mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem
the property sold on foreclosure after confirmation by the court of the judicial foreclosure sale. Thus,
the claim that petitioner is entitled to the beneficial provisions of Section 78 of R.A. No. 337 since
private respondent's predecessor-in-interest is a credit institution is in the nature of a compulsory
counterclaim which should have been averred in petitioner's answer to the compliant for judicial
foreclosure.

". . . A counterclaim is, most broadly, a cause of action existing in favor of the defendant
against the plaintiff. More narrowly, it is a claim which. if established, will defeat or in some
way qualify a judgment or relief to which plaintiff is otherwise entitled It is sometimes defined
as any cause of action arising in contract available against any action also arising in contract
and existing at the time of the commencement of such an action. It is frequently defined by
the codes as a cause of action arising out of the contract or transaction set forth in the
complaint as the foundation of the plaintiff's claim, or connected with the subject of the
action."11 (emphasis supplied)

"The counterclaim is in itself a distinct and independent cause of action, so that when
properly stated as such, the defendant becomes, in respect to the matters stated by him, an
actor, and there are two simultaneous actions pending between the same parties, wherein
each is at the same time both a plaintiff and a defendant. Counterclaim is an offensive as
well as a defensive plea and is not necessarily confined to the justice of the plaintiff's
claim. It represents the right of the defendant to have the claims of the parties
counterbalanced in whole or in part, and judgment to be entered in excess, if any. A
counterclaim stands on the same footing, and is to be tested be the same rules, as if it were
an independent action."12 (emphasis supplied)

The very purpose of a counterclaim would have been served had petitioner alleged in its answer its
purported right under Section 78 of R.A. No. 337:
 ". . . The rules of counterclaim are designed to enable the disposition of a whole controversy
of interested parties' conflicting claims, at one time and in one action, provided all parties' be
brought before the court and the matter decided without prejudicing the rights of any party." 13

The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A. No. 337
precludes it from so doing at this late stage case. Estoppel may be successfully invoked if the party
fails to raise the question in the early stages of the proceedings.14 Thus, "a party to a case who failed
to invoked his claim in the main case, while having the opportunity to do so, will be precluded,
subsequently, from invoking his claim, even if it were true, after the decision has become final,
otherwise the judgment may be reduced to a mockery and the administration of justice may be
placed in disrepute."15

All things viewed in proper perspective, it is decisively clear that the trial court erred in still allowing
petitioner to introduce evidence that private respondent's predecessor-in-interest was a credit
institution, and to thereafter rule that the petitioner was entitled to avail of the provisions of Section
78 of R.A. No. 337. In effect, the trial court permitted the petitioner to accomplish what the latter
failed to do before the Court of Appeals, that is, to invoke its alleged right under Section 78 of R.A.
No. 337 although the Court of Appeals in CA-G.R. no. 35086 already found that 'the question of
whether the Syndicated Management Council Group, Inc. is a bank or credit institution was never
brought before (the Court of Appeals) squarely." The said pronouncement by the Court of Appeals
unerringly signified that petitioner did not make a timely assertion of any right under Section 78 of
R.A. No. 337 in all the stages of the proceedings below.

Verily, the petitioner has only itself to blame for not alleging at the outset that the predecessor-in-
interest of the private respondent is a credit institution. Thus, when the trial court, and the Court of
Appeals repeatedly passed upon the issue of whether or not petitioner had the right of redemption or
equity of redemption over subject properties in the decisions, resolutions and orders, particularly in
Civil Case no. 89-5424, CA-G.R. CV No. 39243, CA-G.R. SP No. 35086, and CA-G.R. SP No.
38747, it was unmistakable that the petitioner was adjudged to just have the equity of redemption
without any qualification whatsoever, that is, without any right of redemption allowed by law.

The "law of case" holds that petitioner has the equity of redemption without any qualification.

There is, therefore, merit in private respondent's contention that to allow petitioner to belatedly
invoke its right under Section 78 of R.A. No. 337 will disturb the "law of the case." However, private
respondent's statement of what constitutes the "law of the case" is not entirely accurate. The "law of
the case" is not simply that the defendant possesses an equity of redemption. As the Court has
stated, the "law of the case" holds that petitioner has the equity of the redemption without any
qualification whatsoever, that is, without the right of redemption afforded by Section 78 of R.A. No.
337. Whether or not the "law of the case" is erroneous is immaterial, it still remains the "law of the
case". A contrary rule will contradict both the letter and spirit of the rulings of the Court of Appeals in
CA-G.R. SP No. 35086, CA-G.R. CV No. 39243, and CA-G.R. 38747, which clearly saw through the
repeated attempts of petitioner to forestall so simple a matter as making the security given for a just
debt to answer for its payment.

Hence, in conformity with the ruling in Limpin, the sale of the subject properties, as confirmed by the
Order dated February 10, 1995 of the trial court in Civil Case No. 89-5424 operated to divest the
rights of all the parties to the action and to vest their rights in private respondent. There then existed
only what is known as the equity of redemption, which is simply the right of the petitioner to
extinguish the mortgage and retain ownership of the property by paying the secured debt within the
90-day period after the judgment became final. There being an explicit finding on the part of the
Court of Appeals in its Decision of September 30, 1994 in CA-G.R. No. 35086 that the herein
petitioner failed to exercise its equity of redemption within the prescribed period, redemption can no
longer be effected. The confirmation of the sale and the issuance of the transfer certificates of title
covering the subject properties to private respondent was then, in order. The trial court therefore,
has the ministerial duty to place private respondent in the possession of subject properties.

WHEREFORE, the petition is DENIED, and the assailed decision of the Court of Appeals, declaring
null and void the Order dated 21 July 1995 and Order dated 4 September 1997 of the Regional Trial
Court of Makati City in Civil Case No. 89-5424, AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 91779 February 7, 1991

GRAND FARMS, INC. and PHILIPPINE SHARES CORPORATION, petitioners,

vs.
COURT OF APPEALS, JUDGE ADRIAN R. OSORIO, as Presiding Judge of the Regional Trial
Court, Branch 171, Valenzuela, Metro Manila; ESPERANZA ECHIVERRI, as Clerk of Court &
Ex-Officio Sheriff of the Regional Trial Court of Valenzuela, Metro Manila; SERGIO CABRERA,
as Deputy Sheriff-in-Charge; and BANCO FILIPINO SAVINGS AND MORTGAGE
BANK, respondents.

Balgos & Perez for petitioners.

Sycip, Salazar, Hernandez & Gatmaitan for private respondent.

REGALADO, J.:

The propriety of a summary judgment is raised in issue in the instant petition, with herein petitioners
appealing the decision of respondent court in CA-G.R. SP No. 17535, dated November 29, 1989,
1

which found no grave abuse of discretion on the part of respondent judge in denying petitioners'
motion for summary judgment. 2

The antecedents of this case are clear and undisputed. Sometime on April 15, 1988, petitioners filed
Civil Case No. 2816-V88 in the Regional Trial Court of Valenzuela, Metro Manila for annulment
and/or declaration of nullity of the extrajudicial foreclosure proceedings over their mortgaged
properties, with damages, against respondents clerk of court, deputy sheriff and herein private
respondent Banco Filipino Savings and Mortgage Bank. 3

Soon after private respondent had filed its answer to the complaint, petitioners filed a request for
admission by private respondent of the allegation, inter alia, that no formal notice of intention to
foreclose the real estate mortgage was sent by private respondent to petitioners. 4
Private respondent, through its deputy liquidator, responded under oath to the request and
countered that petitioners were "notified of the auction sale by the posting of notices and the
publication of notice in the Metropolitan Newsweek, a newspaper of general circulation in the
province where the subject properties are located and in the Philippines on February 13, 20 and 28,
1988." 5

On the basis of the alleged implied admission by private respondent that no formal notice of
foreclosure was sent to petitioners, the latter filed a motion for summary judgment contending that
the foreclosure was violative of the provisions of the mortgage contract, specifically paragraph (k)
thereof which provides:

k) All correspondence relative to this Mortgage, including demand letters, summons,

subpoena or notifications of any judicial or extrajudical actions shall be sent to the Mortgagor
at the address given above or at the address that may hereafter be given in writing by the
Mortgagor to the Mortgagee, and the mere act of sending any correspondence by mail or by
personal delivery to the said address shall be valid and effective notice to the Mortgagor for
all legal purposes, and the fact that any communication is not actually received by the
Mortgagor, or that it has been returned unclaimed to the Mortgagee, or that no person was
found at the address given, or that the address is fictitious, or cannot be located, shall not
excuse or relieve the Mortgagor from the effects of such notice; 6

The motion was opposed by private respondent which argued that petitioners' reliance on said
paragraph (k) of the mortgage contract fails to consider paragraphs (b) and (d) of the same contract,
which respectively provide as follows:

b) . . . For the purpose of extra-judicial foreclosure, the Mortgagor (plaintiff) hereby appoints
the Mortgagee (BF) his attorney-in-fact to sell the property mortgaged, to sign all documents
and perform any act requisite and necessary to accomplish said purpose and to appoint its
substitutes as such attorney-in-fact, with the same powers as above-specified. The
Mortgagor hereby expressly waives the term of thirty (30) days or any other term granted or
which may hereafter be granted him by law as the period which must elapse before the
Mortgagee shall be entitled to foreclose this mortgage, it being specifically understood and
agreed that the said Mortgagee may foreclose this mortgage at any time after the breach of
any conditions hereof. . . .

xxx xxx xxx

d) Effective upon the breach of any conditions of the mortgage and in addition to the
remedies herein stipulated, the Mortgagee is hereby likewise appointed attorney-in-fact of
the Mortgagor with full powers and authority, with the use of force, if necessary, to take
actual possession of the mortgaged property, without the necessity for any judicial order or
any permission of power to collect rents, to eject tenants, to lease or sell the mortgaged
property, or any part thereof, at public or private sale without previous notice or
adverstisement of any kind and execute the corresponding bills of sale, lease or other
agreement that may be deemed convenient, to make repairs or improvement to the
mortgaged property and pay for the same and perform any other act which the Mortgagor
may deem convenient . . . 7

On February 27, 1989, the trial court issued an order, denying petitioners' motion for summary
judgment. Petitioners' motion for reconsideration was likewise denied by respondent-judge on the
8

ground that genuine and substantial issues exist which require the presentation of evidence during
the trial, to wit: (a) whether or not the loan has matured; (b) whether or not private respondent
notified petitioners of the foreclosure of their mortgage; (c) whether or not the notice by publication of
the foreclosure constitutes sufficient notice to petitioners under the mortgage contract; (d) whether or
not the applicant for foreclosure of the mortgage was a duly authorized representative of private
respondent; and (e) whether or not the foreclosure was enjoined by a resolution of this Court. 9

Petitioners thereafter went on a petition for certiorari to respondent court attacking said orders of
denial as having been issued with grave abuse of discretion. As earlier adverted to, respondent court
dismissed the petition, holding that no personal notice was required to foreclose since private
respondent was constituted by petitioners as their attorney-in-fact to sell the mortgaged property. It
further held that paragraph (k) of the mortgage contract merely specified the address where
correspondence should be sent and did not impose an additional condition on the part of private
respondent to notify petitioners personally of the foreclosure. Respondent court also denied
petitioners motion for reconsideration, hence the instant petition.

We rule for petitioners.

The Rules of Court authorize the rendition of a summary judgment if the pleadings, depositions and
admissions on file, together with the affidavits, show that, except as to the amount of damages, there
is no issue as to any material fact and that the moving party is entitled to a judgment as a matter of
law. Although an issue may be raised formally by the pleadings but there is no genuine issue of
10

fact, and all the facts are within the judicial knowledge of the court, summary judgment may be
granted. 11

The real test, therefore, of a motion for summary judgment is whether the pleadings, affidavits and
exhibits in support of the motion are sufficient to overcome the opposing papers and to justify a
finding as a matter of law that there is no defense to the action or that the claim is clearly
meritorious. 12

Applying said criteria to the case at bar, we find petitioners' action in the court below for annulment
and/or declaration of nullity of the foreclosure proceedings and damages ripe for summary judgment.
Private respondent tacitly admitted in its answer to petitioners' request for admission that it did not
send any formal notice of foreclosure to petitioners. Stated otherwise, and as is evident from the
records, there has been no denial by private respondent that no personal notice of the extrajudicial
foreclosure was ever sent to petitioners prior thereto. This omission, by itself, rendered the
foreclosure defective and irregular for being contrary to the express provisions of the mortgage
contract. There is thus no further necessity to inquire into the other issues cited by the trial court, for
the foreclosure may be annulled solely on the basis of such defect.

While private respondent was constituted as their attorney-in-fact by petitioners, the inclusion of the
aforequoted paragraph (k) in the mortgage contract nonetheless rendered personal notice to the
latter indispensable. As we stated in Community Savings & Loan Association, Inc., et al. vs. Court of
Appeals, et al., where we had the occasion to construe an identical provision:
13

On the other important point that militates against the petitioners' first ground for this petition
is the fact that no notice of the foreclosure proceedings was ever sent by CSLA to the
deceased mortgagor Antonio Esguerra or his heirs in spite of an express stipulation in the
mortgage agreement to that effect. Said Real Estate Mortgage provides, in Sec. 10 thereof
that:

(10) All correspondence relative to this mortgage, including demand letters,

summons, subpoenas, or notifications of any judicial or extrajudicial actions shall be
sent to the Mortgagor at the address given above or at the address that may
 hereafter be given in writing by the Mortgagor to the Mortgagee, and the mere act of
sending any correspondence by mail or by personal delivery to the said
address shall be valid and effective notice to the Mortgagor for all legal purposes, . . .
(Emphasis in the original text.)

The Court of Appeals, in appreciating the foregoing provision ruled that it is an additional
stipulation between the parties. As such, it is the law between them and as it not contrary to
1wphi1

law, morals, good customs and public policy, the same should be complied with faithfully
(Article 1306, New Civil Code of the Philippines). Thus, while publication of the foreclosure
proceedings in the newspaper of general circulation was complied with, personal notice is
still required, as in the case at bar, when the same was mutually agreed upon by the parties
as additional condition of the mortgage contract. Failure to comply with this additional
stipulation would render illusory Article 1306 of the New Civil Code of the Philippines (p.
37, Rollo).

On the issue of whether or not CSLA notified the private respondents of the extrajudicial
foreclosure sale in compliance with Sec. 10 of the mortgage agreement the Court of Appeals
found as follows:

As the record is bereft of any evidence which even impliedly indicate that the
required notice of the extrajudicial foreclosure was ever sent to the deceased debtor-
mortgagor Antonio Esguerra or to his heirs, the extrajudicial foreclosure proceedings
on the property in question are fatally defective and are not binding on the deceased
debtor-mortgagor or to his heirs (p. 37, Rollo)

Hence, even on the premise that there was no attendant fraud in the proceedings, the failure
of the petitioner bank to comply with the stipulation in the mortgage document is fatal to the
petitioners' cause.

We do not agree with respondent court that paragraph (k) of the mortgage contract in question was
intended merely to indicate the address to which the communications stated therein should be sent.
This interpretation is rejected by the very text of said paragraph as above construed. We do not see
any conceivable reason why the interpretation placed on an identically worded provision in the
mortgage contract involved in Community Savings & Loan Association, Inc. should not be adopted
with respect to the same provision involved in the case at bar.

Nor may private respondent validly claim that we are supposedly interpreting paragraph (k) in
isolation and without taking into account paragraphs (b) and (d) of the same contract. There is no
irreconcillable conflict between, as in fact a reconciliation should be made of, the provisions of
paragraphs (b) and (d) which appear first in the mortgage contract and those in paragraph (k) which
follow thereafter and necessarily took into account the provisions of the preceding two
paragraphs. The notices respectively mentioned in paragraphs (d) and (k) are addressed to the
14

particular purposes contemplated therein. Those mentioned in paragraph (k) are specific and
additional requirements intended for the mortgagors so that, thus apprised, they may take the
necessary legal steps for the protection of their interests such as the payment of the loan to prevent
foreclosure or to subsequently arrange for redemption of the property foreclosed.

What private respondent would want is to have paragraph (k) considered as non-existent and
consequently disregarded, a proposition which palpably does not merit consideration. Furthermore, it
bears mention that private respondent having caused the formulation and preparation of the printed
mortgage contract in question, any obscurity that it imputes thereto or which supposedly appears
therein should not favor it as a contracting party. 15
Now, as earlier discussed, to still require a trial notwithstanding private respondent's admission of
the lack of such requisite notice would be a superfluity and would work injustice to petitioners whose
obtention of the relief to which they are plainly and patently entitled would be further delayed. That
undesirable contingency is obviously one of the reasons why our procedural rules have provided for
summary judgments.

WHEREFORE, the decision appealed from is hereby REVERSED and SET ASIDE and this case is
REMANDED to the court of origin for further proceedings in conformity with this decision. This
judgment is immediately executory.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 158755 June 18, 2012

SPOUSES FRANCISCO and MERCED RABAT, Petitioners,

vs.
PHILIPPINE NATIONAL BANK, Respondent.

DECISION

BERSAMIN, J.:

The inadequacy of the bid price in an extrajudicial foreclosure sale of mortgaged properties will not
per se invalidate the sale. Additionally, the foreclosing mortgagee is not precluded from recovering
the deficiency should the proceeds of the sale be insufficient to cover the entire debt.

Antecedents

The parties are before the Court a second time to thresh out an issue relating to the foreclosure sale
of the petitioners mortgaged properties. The first time was in G.R. No. 134406 entitled Philippine
National Bank v. Spouses Francisco and Merced Rabat, decided on November 15, 2000. 1 In G.R.
No. 134406, the Court observed that

The RABATs did not appeal from the decision of the trial court. As a matter of fact, in their Appellees
Brief filed with the Court of Appeals they prayed that said decision be affirmed in toto. As against the
RABATs the trial courts findings of fact and conclusion are already settled and final. More
specifically, they are deemed to have unqualifiedly agreed with the trial court that the foreclosure
proceedings were valid in all respects, except as to the bid price. 2

Accordingly, we extract the antecedent facts from the narrative of the decision in G.R. No. 134406,
as follows:

On 25 August 1979, respondent spouses Francisco and Merced Rabat (hereafter RABATs) applied
for a loan with PNB. Subsequently, the RABATs were granted on 14 January 1980 a medium-term
loan of P4.0 Million to mature three years from the date of implementation.
On 28 January 1980, the RABATs signed a Credit Agreement and executed a Real Estate Mortgage
over twelve (12) parcels of land which stipulated that the loan would be subject to interest at the rate
of 17% per annum, plus the appropriate service charge and penalty charge of 3% per annum on any
amount remaining unpaid or not renewed when due.

On 25 September 1980, the RABATs executed another document denominated as "Amendment to

the Credit Agreement" purposely to increase the interest rate from 17% to 21% per annum, inclusive
of service charge and a penalty charge of 3% per annum to be imposed on any amount remaining
unpaid or not renewed when due. They also executed another Real Estate Mortgage over nine (9)
parcels of land as additional security for their medium-term loan of Four Million (P4.0 M). These
parcels of land are agricultural, commercial and residential lots situated in Mati, Davao Oriental.

The several availments of the loan accommodation on various dates by the RABATs reached the
aggregate amount of THREE MILLION FIVE HUNDRED SEVENTEEN THOUSAND THREE
HUNDRED EIGHTY (P3,517,380), as evidenced by the several promissory notes, all of which were
due on 14 March 1983.

The RABATs failed to pay their outstanding balance on due date.

In its letter of 24 July 1986, in response to the letter of the RABATs of 16 June 1986 requesting for
more time within which to arrive at a viable proposal for the settlement of their account, PNB
informed the RABATs that their request has been denied and gave the RABATs until 30 August 1986
to settle their account. The PNB sent the letter to 197 Wilson Street, San Juan, Metro Manila.

For failure of the RABATs to pay their obligation, the PNB filed a petition for the extrajudicial
foreclosure of the real estate mortgage executed by the RABATs. After due notice and publication,
the mortgaged parcels of land were sold at a public auction held on 20 February 1987 and 14 April
1987. The PNB was the lone and highest bidder with a bid of P3,874,800.00.

As the proceeds of the public auction were not enough to satisfy the entire obligation of the RABATs,
the PNB sent anew demand letters. The letter dated 15 November 1990 was sent to the RABATs at
197 Wilson Street, San Juan, Metro Manila; while another dated 30 August 1991 was sent to the
RABATs at 197 Wilson Street, Greenhills, San Juan, Metro Manila, and also in Mati, Davao Oriental.

Upon failure of the RABATs to comply with the demand to settle their remaining outstanding
obligation which then stood at P14,745,398.25, including interest, penalties and other charges, PNB
eventually filed on 5 May 1992 a complaint for a sum of money before the Regional Trial Court of
Manila. The case was docketed as Civil Case No. 92-61122, which was assigned to Branch 14
thereof.

The RABATs filed their answer with counterclaim on 28 July 1992 to which PNB filed its Reply and
Answer to Counterclaim. On 2 January 1993, the RABATs filed an amended answer. The RABATs
admitted their loan availments from PNB and their default in the payment thereof. However, they
assailed the validity of the auction sales for want of notice to them before and after the foreclosure
sales.

They further added that as residents of Mati, Davao Oriental since 1970 up to the present, they
never received any notice nor heard about the foreclosure proceeding in spite of the claim of PNB
that the foreclosure proceeding had been duly published in the San Pedro Times, which is not a
newspaper of general circulation.
The RABATs likewise averred that the bid price was grossly inadequate and unconscionable.

Lastly, the RABATs attacked the validity of the accumulated interest and penalty charges because
since their properties were sold in 1987, and yet PNB waited until 1992 before filing the case.
Consequently, the RABATs contended that they should not be made to suffer for the interest and
penalty charges from May 1987 up to the present. Otherwise, PNB would be allowed to profit from
its questionable scheme.

The PNB filed on 5 February 1993 its Reply to the Amended Answer and Answer to Counterclaim. 3

On June 14, 1994, the Regional Trial Court, Branch 14, in Manila (RTC) rendered its decision in Civil
Case No. 92-61122,4 disposing thus:

WHEREFORE, and in view of the foregoing considerations, judgment is hereby rendered dismissing
the complaint.

On the counterclaim, the two (2) auction sales of the mortgaged properties are hereby set aside and
ordering the plaintiff to reconvey to the defendants the remaining properties after the sale [of]
sufficient properties for the satisfaction of the obligation of the defendants.

The parties will bear their respective cost.

So ordered.

Only PNB appealed to the CA (CA-G.R. CV No. 49800), assigning the following two errors to the
RTC,5 to wit:

WHETHER OR NOT THE TRIAL COURT ERRED IN NULLIFYING THE SHERIFF'S

AUCTION SALE ON THE GROUND THAT THE PNBS WINNING BID IS VERY LOW.

II

WHETHER OR NOT THE TRIAL COURT ERRED IN RULING THAT THE DEFENDANTS-
APPELLEES ARE NOT LIABLE TO PAY INTEREST AND PENALTY CHARGES AFTER THE
AUCTION SALES UP TO THE FILING OF THIS CASE.

On their part, the Spouses Rabat simply urged in their appellees brief that the decision of the RTC
be entirely affirmed.6

On June 29, 1998, the CA upheld the RTCs decision to nullify the foreclosure sales but rested its
ruling upon a different ground,7 in that the Spouses Rabat could not have known of the foreclosure
sales because they had not actually received personal notices about the foreclosure proceedings.
The CA concluded:

An examination of the exhibits show that the defendant-appellees given address is Mati, Davao
Oriental and not 197 Wilson Street, Greenhills, San Juan, Metro Manila as alleged by the plaintiff-
appellant (Exhibit C to J, pp. 208, 217, 220, 229, 236-239, Records). Records further show that all
subsequent communications by plaintiff-appellant was sent to defendant-appellees address at
Wilson Street, Greenhills, San Juan. This was the very reason why defendant-appellees were not
aware of the foreclosure proceedings.

As correctly found out by the trial court, there is a need for the setting aside of the two (2) auction
sales hence, there is yet no deficiency judgment to speak of.

WHEREFORE, the decision of the trial court dated 14 June 1994, is hereby affirmed in toto.

SO ORDERED.

PNB appealed in due course (G.R. No. 134406), 8 positing:

WHETHER OR NOT THE COURT OF APPEALS MAY REVIEW AND PASS UPON THE TRIAL
COURTS FINDING AND CONCLUSION ON AN ISSUE WHICH WAS NEVER RAISED ON
APPEAL, AND, THEREFORE, HAD ATTAINED FINALITY.

1. THE COURT OF APPEALS HAS SO FAR DEPARTED FROM THE ACCEPTED AND
USUAL COURSE OF JUDICIAL PROCEEDINGS WHEN IT DECIDED AND RESOLVED A
QUESTION OR ISSUE NOT RAISED IN PETITIONER PNBS APPEAL;

2. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION WHEN IT

REVERSED THE FINDING AND CONCLUSION OF THE TRIAL COURT ON AN ISSUE
WHICH HAD ALREADY ATTAINED FINALITY.

PNB argued that it had not raised the issue of lack of notice about the foreclosure sales because the
fact that the Spouses Rabat had not appealed the RTCs ruling as regards the lack of notice but had
in fact prayed for the affirmance of the RTCs judgment had rendered final the RTCs rejection of
their allegation of lack of personal notice; and that, consequently, the CA had committed grave
abuse of discretion in still resolving the issue of lack of notice despite its not having been raised
during the appeal.9

On November 15, 2000, the Court promulgated its decision in G.R. No. 134406, decreeing:

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals of 29 July 1998 in
CA-G.R. CV No. 49800 is hereby SET ASIDE. The Court of Appeals is directed to DECIDE, with
reasonable dispatch, CA-G.R. CV No. 49800 on the basis of the errors raised by petitioner Philippine
National Bank in its Appellants Brief.

No pronouncement as to costs.

SO ORDERED.10

To conform to the decision in G.R. No. 134406, the CA amended its decision on January 24, 2003 by
resolving the errors specifically assigned by PNB in its appellants brief. 11 The CA nonetheless
affirmed the RTCs decision, declaring that the bid price had been very low and observing that the
mortgaged properties might have been sold for a higher value had PNB first conducted a reappraisal
of the properties.

Upon PNBs motion for reconsideration, however, the CA promulgated its questioned second
amended decision on March 26, 2003,12 holding and ruling as follows:
After a thorough and conscientious review of the records and relevant laws and jurisprudence, We
find the motion for reconsideration to be meritorious.

While indeed no evidence was presented by appellant as to whether a reappraisal of the mortgaged
properties was conducted by it before submitting the bid price of P 3,874,800.00 at the auction sale,
said amount approximates the loan value under its original appraisal in 1980, which was P 4 million.

There is no dispute that mere inadequacy of price per se will not set aside a judicial sale of real
property. Nevertheless, where the inadequacy of the price is purely shocking to the conscience such
that the mind revolts at it and such that a reasonable man would neither directly nor indirectly be
likely to consent to it, the sale shall be declared null and void. Said rule, however, does not strictly
apply in the case of extrajudicial foreclosure sales so that when a supposed "unconscionably low
price" paid by the bank-mortgagee for the mortgaged properties at the public auction sale is
assailed, the sale is not thereby readily set aside on account of such low purchase price. It is well-
settled that alleged gross inadequacy of price is not material "when the law gives the owner the right
to redeem as when a sale is made at a public auction, upon the theory that the lesser the price the
easier it is for the owner to effect the redemption." In fact, the property may be sold for less than its
fair market value.

Here, it may be that after the lapse of seven (7) years, the mortgaged properties may have indeed
appreciated in value but under the general rule cited above which had been consistently applied to
extrajudicial foreclosure sales. We are not inclined to invalidate the auction sale of appellees
mortgaged properties solely on the alleged gross inadequacy of purchase price of P 3,874,800.00
which is actually almost the equivalent of the loan value of appellees twenty-one (21) parcels of land
under the "Real Estate Mortgage" executed in favor of appellant PNB in 1980. It has been held that
no such disadvantage is suffered by the mortgagor as he stands to gain with a reduced price
because he possesses the right of redemption. Thus, the re-appraisal of the mortgaged properties
resulting in the appellant PNBs bid price of approximately the original loan value of their mortgaged
properties is beneficial rather than harmful considering the right of redemption granted to appellees
under the law. The claim of financial hardship or losses in their business is not an excuse for
appellees-mortgagors to evade their clear obligation to the bank-mortgagee.

Further, the fact that the mortgaged property is sold at an amount less than its actual market value
should not militate against the right of appellant PNB to the recovery of the deficiency in the loan
obligation of appellees. Our Supreme Court had ruled in several cases that in extrajudicial
foreclosure of mortgage, where the proceeds of the sale are insufficient to pay the debt, the
mortgagee has the right to recover the deficiency from the debtor. A claim of deficiency arising from
the extrajudicial foreclosure sale is allowed. As to appellees claim of allegedly excessive penalty
interest charges, the same is without merit. We note that the promissory notes expressly provide for
a penalty charge of 3% per annum to be imposed on any unpaid amount on due date.

WHEREFORE, premises considered, the present motion for reconsideration is hereby GRANTED.
Consequently, Our Amended Decision of January 24, 2003 is hereby SET ASIDE and a new one is
hereby entered GRANTING the appeal of plaintiff PNB. The decision appealed from in Civil Case
No. 92-61122 is hereby REVERSED and SET ASIDE. Judgment is hereby rendered ordering the
appellees to pay, jointly and severally, to appellant PNB: (1) the amount of P 14,745,398.25 plus
accrued interest, service charge and penalty charge of 3% per annum from February 29, 1992 until
the same shall have been fully paid; (2) Ten Percent (10%) of the total amount due as attorneys
fees; and (3) the costs of suit.

No pronouncement as to costs.
SO ORDERED.13

The Spouses Rabat thereafter moved for the reconsideration of the second amended decision, but
the CA denied their motion.14

Hence, this appeal by the Spouses Rabat.

Issues

The Spouses Rabat frame the following issues for this appeal, thuswise:

WHETHER OR NOT THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY

OF THE SUBJECT AUCTION SALES AND ADJUDGING PAYMENT OF DEFICIENCY SUM,
INTERESTS, PENALTY AND SERVICE CHARGES AND ATTORNEYS FEES, IN
COMPLETE AND ABSOLUTE DISREGARD OF ITS EARLIER PRONOUNCEMENTS, THE
ARGUMENTS OF HEREIN PETITIONERS AND EVIDENCE BORNE IN THE RECORDS OF
THE INSTANT CASE.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN DEPARTING FROM ITS

FINDING OF FACTS AND CONCLUSIONS OF LAW AS STATED IN THE EARLIER
RENDERED FIRST AMENDED DECISION DATED 24 JANUARY 2003.15

The Spouses Rabat insist that the CAs reversal of the amended decision was unjustified. They pray
that the amended decision of the CA (which affirmed the RTCs judgment) be reinstated. They
contend that PNB was not entitled to recover any deficiency due to the invalidity of the forced sales. 16

In its comment,17 PNB counters that the petition for review does not raise a valid question of law; and
that the CAs second amended decision was regularly promulgated because the CA thereby acted
well within its right to correct itself considering that the amended decision did not yet attain finality
under the pertinent rules and jurisprudence.

Accordingly, the Court must pass upon and resolve three distinct issues. The first is whether the
inadequacy of the bid price of PNB invalidated the forced sale of the properties. The second is
whether PNB was entitled to recover any deficiency from the Spouses Rabat. The third is whether
the CA validly rendered its second amended decision.

Ruling

The appeal has no merit.

Anent the first issue, we rule against the Spouses Rabat. We have consistently held that the
inadequacy of the bid price at a forced sale, unlike that in an ordinary sale, is immaterial and does
not nullify the sale; in fact, in a forced sale, a low price is considered more beneficial to the mortgage
debtor because it makes redemption of the property easier.18

In Bank of the Philippine Islands, etc. v. Reyes,19 the Court discoursed on the effect of the
inadequacy of the price in a forced sale, stating:

Throughout a long line of jurisprudence, we have declared that unlike in an ordinary sale,
inadequacy of the price at a forced sale is immaterial and does not nullify a sale since, in a forced
sale, a low price is more beneficial to the mortgage debtor for it makes redemption of the property
easier.

In the early case of The National Loan and Investment Board v. Meneses, we also had the occasion
to state that:

As to the inadequacy of the price of the sale, this court has repeatedly held that the fact that a
property is sold at public auction for a price lower than its alleged value, is not of itself sufficient to
annul said sale, where there has been strict compliance with all the requisites marked out by
law to obtain the highest possible price, and where there is no showing that a better price is
obtainable. (Government of the Philippines vs. De Asis, G. R. No. 45483, April 12, 1939; Guerrero
vs. Guerrero, 57 Phil., 442; La Urbana vs. Belando, 54 Phil., 930; Bank of the Philippine Islands v .
Green, 52 Phil., 491.) (Emphases supplied.)

In Hulst v. PR Builders, Inc., we further elaborated on this principle:

[G]ross inadequacy of price does not nullify an execution sale. In an ordinary sale, for reason of
equity, a transaction may be invalidated on the ground of inadequacy of price, or when such
inadequacy shocks ones conscience as to justify the courts to interfere; such does not follow when
the law gives the owner the right to redeem as when a sale is made at public auction, upon the
theory that the lesser the price, the easier it is for the owner to effect redemption. When there is a
right to redeem, inadequacy of price should not be material because the judgment debtor
may re-acquire the property or else sell his right to redeem and thus recover any loss he
claims to have suffered by reason of the price obtained at the execution sale. Thus,
respondent stood to gain rather than be harmed by the low sale value of the auctioned
properties because it possesses the right of redemption. x x x (Emphasis supplied.)

It bears also to stress that the mode of forced sale utilized by petitioner was an extrajudicial
foreclosure of real estate mortgage which is governed by Act No. 3135, as amended. An
examination of the said law reveals nothing to the effect that there should be a minimum bid price or
that the winning bid should be equal to the appraised value of the foreclosed property or to the
amount owed by the mortgage debtor. What is clearly provided, however, is that a mortgage debtor
is given the opportunity to redeem the foreclosed property "within the term of one year from and after
the date of sale." In the case at bar, other than the mere inadequacy of the bid price at the
foreclosure sale, respondent did not allege any irregularity in the foreclosure proceedings nor did
she prove that a better price could be had for her property under the circumstances.

At any rate, we consider it notable enough that PNBs bid price of P 3,874,800.00 might not even be
said to be outrageously low as to be shocking to the conscience. As the CA cogently noted in the
second amended decision,20 that bid price was almost equal to both the P 4,000,000.00 applied for
by the Spouses Rabat as loan, and to the total sum of P 3,517,380.00 of their actual availment from
PNB.

Resolving the second issue, we rule that PNB had the legal right to recover the deficiency amount.
In Philippine National Bank v. Court of Appeals,21 we held that:

xxx it is settled that if the proceeds of the sale are insufficient to cover the debt in an extrajudicial
foreclosure of the mortgage, the mortgagee is entitled to claim the deficiency from the debtor. For
when the legislature intends to deny the right of a creditor to sue for any deficiency resulting from
foreclosure of security given to guarantee an obligation it expressly provides as in the case of
pledges [Civil Code, Art. 2115] and in chattel mortgages of a thing sold on installment basis [Civil
Code, Art. 1484(3)]. Act No. 3135, which governs the extrajudicial foreclosure of mortgages, while
silent as to the mortgagees right to recover, does not, on the other hand, prohibit recovery of
deficiency. Accordingly, it has been held that a deficiency claim arising from the extrajudicial
foreclosure is allowed.22

Indeed, as we indicated in Prudential Bank v. Martinez,23 the fact that the mortgaged property was
sold at an amount less than its actual market value should not militate against the right to such
recovery.24

There should be no question that PNB was legally entitled to recover the penalty charge of 3% per
annum and attorneys fees equivalent to 10% of the total amount due. The documents relating to the
loan and the real estate mortgage showed that the Spouses Rabat had expressly conformed to such
additional liabilities; hence, they could not now insist otherwise. To be sure, the law authorizes the
contracting parties to make any stipulations in their covenants provided the stipulations are not
contrary to law, morals, good customs, public order or public policy.25 Equally axiomatic are that a
contract is the law between the contracting parties, and that they have the autonomy to include
therein such stipulations, clauses, terms and conditions as they may want to include. 26Inasmuch as
the Spouses Rabat did not challenge the legitimacy and efficacy of the additional liabilities being
charged by PNB, they could not now bar PNB from recovering the deficiency representing the
additional pecuniary liabilities that the proceeds of the forced sales did not cover.

Lastly, we uphold the CAs promulgation of the second amended decision. Verily, all courts of law
1wphi1

have the unquestioned power to alter, modify, or set aside their decisions before they become final
and unalterable.27 A judgment that has attained finality becomes immutable and unalterable, and
may thereafter no longer be modified in any respect even if the modification is meant to correct
erroneous conclusions of fact or law and whether it will be made by the court that rendered it or by
the highest court of the land.28 The reason for the rule of immutability is that if, on the application of
one party, the court could change its judgment to the prejudice of the other, the court could
thereafter, on application of the latter, again change the judgment and continue this practice
indefinitely. 29 The equity of a particular case must yield to the overmastering need of certainty and
unalterability of judicial pronouncements.30 The doctrine of immutability and inalterability of a final
judgment has a two-fold purpose, namely: (a) to avoid delay in the administration of justice and,
thus, procedurally, to make orderly the discharge of judicial business; and (b) to put an end to judicial
controversies, at the risk of occasional errors, which is precisely why courts exist. Indeed,
controversies cannot drag on indefinitely; the rights and obligations of every litigant must not hang in
suspense for an indefinite period of time.31 As such, the doctrine of immutability is not a mere
technicality to be easily brushed aside, but a matter of public policy as well as a time-honored
principle of procedural law.

It is no different herein. The amended decision that favored the Spouses Rabat would have attained
finality only after the lapse of 15 days from notice thereof to the parties without a motion for
reconsideration being timely filed or an appeal being seasonably taken. 32 Had that happened, the
amended decision might have become final and immutable. However, considering that PNB timely
filed its motion for reconsideration vis--vis the amended decision, the CAs reversal of the amended
decision and its promulgation of the second amended decision were valid and proper.

WHEREFORE, we AFFIRM the SECOND AMENDED DECISION promulgated on March 26, 2003 in
CA-G.R. CV No. 49800 entitled Philippine National Bank v. Spouses Francisco and Merced Rabat.

The petitioners shall pay the costs of suit.

SO ORDERED.
LUCAS P. BERSAMIN

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 195540 March 13, 2013

GOLDENWAY MERCHANDISING CORPORATION, Petitioner,

vs.
EQUITABLE PCI BANK, Respondent.

DECISION

VILLARAMA, JR., J.:

Before the Court is a petition for review on certiorari which seeks to reverse and set aside the
Decision1 dated November 19, 2010 and Resolution2 dated January 31, 2011 of the Court of Appeals
(CA) in CA-G.R. CV No. 91120. The CA affirmed the Decision3 dated January 8, 2007 of the
Regional Trial Court (RTC) of- Valenzuela City, Branch 171 dismissing the complaint in Civil Case
No. 295-V -01.

The facts are undisputed.

On November 29, 1985, Goldenway Merchandising Corporation (petitioner) executed a Real Estate
Mortgage in favor of Equitable PCI Bank (respondent) over its real properties situated in Valenzuela,
Bulacan (now Valenzuela City) and covered by Transfer Certificate of Title (TCT) Nos. T-152630, T-
151655 and T-214528 of the Registry of Deeds for the Province of Bulacan. The mortgage secured
the Two Million Pesos (P2,000,000.00) loan granted by respondent to petitioner and was duly
registered.4

As petitioner failed to settle its loan obligation, respondent extrajudicially foreclosed the mortgage on
December 13, 2000. During the public auction, the mortgaged properties were sold
for P3,500,000.00 to respondent. Accordingly, a Certificate of Sale was issued to respondent on
January 26, 2001. On February 16, 2001, the Certificate of Sale was registered and inscribed on
TCT Nos. T-152630, T-151655 and T-214528.5

In a letter dated March 8, 2001, petitioners counsel offered to redeem the foreclosed properties by
tendering a check in the amount of P3,500,000.00. On March 12, 2001, petitioners counsel met with
respondents counsel reiterating petitioners intention to exercise the right of redemption. 6 However,
petitioner was told that such redemption is no longer possible because the certificate of sale had
already been registered. Petitioner also verified with the Registry of Deeds that title to the foreclosed
properties had already been consolidated in favor of respondent and that new certificates of title
were issued in the name of respondent on March 9, 2001.

On December 7, 2001, petitioner filed a complaint7 for specific performance and damages against
the respondent, asserting that it is the one-year period of redemption under Act No. 3135 which
should apply and not the shorter redemption period provided in Republic Act (R.A.) No. 8791.
Petitioner argued that applying Section 47 of R.A. 8791 to the real estate mortgage executed in 1985
would result in the impairment of obligation of contracts and violation of the equal protection clause
under the Constitution. Additionally, petitioner faulted the respondent for allegedly failing to furnish it
and the Office of the Clerk of Court, RTC of Valenzuela City with a Statement of Account as directed
in the Certificate of Sale, due to which petitioner was not apprised of the assessment and fees
incurred by respondent, thus depriving petitioner of the opportunity to exercise its right of redemption
prior to the registration of the certificate of sale.

In its Answer with Counterclaim,8 respondent pointed out that petitioner cannot claim that it was
unaware of the redemption price which is clearly provided in Section 47 of R.A. No. 8791, and that
petitioner had all the opportune time to redeem the foreclosed properties from the time it received
the letter of demand and the notice of sale before the registration of the certificate of sale. As to the
check payment tendered by petitioner, respondent said that even assuming arguendo such
redemption was timely made, it was not for the amount as required by law.

On January 8, 2007, the trial court rendered its decision dismissing the complaint as well as the
counterclaim. It noted that the issue of constitutionality of Sec. 47 of R.A. No. 8791 was never raised
by the petitioner during the pre-trial and the trial. Aside from the fact that petitioners attempt to
redeem was already late, there was no valid redemption made because Atty. Judy Ann Abat-Vera
who talked to Atty. Joseph E. Mabilog of the Legal Division of respondent bank, was not properly
authorized by petitioners Board of Directors to transact for and in its behalf; it was only a certain
Chan Guan Pue, the alleged President of petitioner corporation, who gave instruction to Atty. Abat-
Vera to redeem the foreclosed properties.9

Aggrieved, petitioner appealed to the CA which affirmed the trial courts decision. According to the
CA, petitioner failed to justify why Section 47 of R.A. No. 8791 should be declared unconstitutional.
Furthermore, the appellate court concluded that a reading of Section 47 plainly reveals the intention
to shorten the period of redemption for juridical persons and that the foreclosure of the mortgaged
properties in this case when R.A. No. 8791 was already in effect clearly falls within the purview of the
said provision.10

Petitioners motion for reconsideration was likewise denied by the CA.

In the present petition, it is contended that Section 47 of R.A. No. 8791 is inapplicable considering
that the contracting parties expressly and categorically agreed that the foreclosure of the real estate
mortgage shall be in accordance with Act No. 3135. Citing Co v. Philippine National Bank 11 petitioner
contended that the right of redemption is part and parcel of the Deed of Real Estate Mortgage itself
and attaches thereto upon its execution, a vested right flowing out of and made dependent upon the
law governing the contract of mortgage and not on the mortgagees act of extrajudicially foreclosing
the mortgaged properties. This Court thus held in said case that "Under the terms of the mortgage
contract, the terms and conditions under which redemption may be exercised are deemed part and
parcel thereof whether the same be merely conventional or imposed by law."

Petitioner then argues that applying Section 47 of R.A. No. 8791 to the present case would be a
substantial impairment of its vested right of redemption under the real estate mortgage contract.
Such impairment would be violative of the constitutional proscription against impairment of
obligations of contract, a patent derogation of petitioners vested right and clearly changes the
intention of the contracting parties. Moreover, citing this Courts ruling in Rural Bank of Davao City,
Inc. v. Court of Appeals12 where it was held that "Section 119 prevails over statutes which provide for
a shorter period of redemption in extrajudicial foreclosure sales", and in Sulit

v. Court of Appeals,13 petitioner stresses that it has always been the policy of this Court to aid rather
than defeat the mortgagors right to redeem his property.
Petitioner further argues that since R.A. No. 8791 does not provide for its retroactive application,
courts therefore cannot retroactively apply its provisions to contracts executed and consummated
before its effectivity. Also, since R.A. 8791 is a general law pertaining to the banking industry while
Act No. 3135 is a special law specifically governing real estate mortgage and foreclosure, under the
rules of statutory construction that in case of conflict a special law prevails over a general law
regardless of the dates of enactment of both laws, Act No. 3135 clearly should prevail on the
redemption period to be applied in this case.

The constitutional issue having been squarely raised in the pleadings filed in the trial and appellate
courts, we shall proceed to resolve the same.

The law governing cases of extrajudicial foreclosure of mortgage is Act No. 3135, 14 as amended by
Act No. 4118. Section 6 thereof provides:

SEC. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore
referred to, the debtor, his successors-in-interest or any judicial creditor or judgment creditor of said
debtor, or any person having a lien on the property subsequent to the mortgage or deed of

trust under which the property is sold, may redeem the same at any time within the term of one year
from and after the date of the sale; and such redemption shall be governed by the provisions of
sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of

Civil Procedure,15 in so far as these are not inconsistent with the provisions of this Act.

The one-year period of redemption is counted from the date of the registration of the certificate of
sale. In this case, the parties provided in their real estate mortgage contract that upon petitioners
default and the latters entire loan obligation becoming due, respondent may immediately foreclose
the mortgage judicially in accordance with the Rules of Court, or extrajudicially in accordance with
Act No. 3135, as amended.

However, Section 47 of R.A. No. 8791 otherwise known as "The General Banking Law of 2000"
which took effect on June 13, 2000, amended Act No. 3135. Said provision reads:

SECTION 47. Foreclosure of Real Estate Mortgage. In the event of foreclosure, whether judicially
or extrajudicially, of any mortgage on real estate which is security for any loan or other credit
accommodation granted, the mortgagor or debtor whose real property has been sold for the full or
partial payment of his obligation shall have the right within one year after the sale of the real estate,
to redeem the property by paying the amount due under the mortgage deed, with interest thereon at
the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution
from the sale and custody of said property less the income derived therefrom. However, the
purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have
the right to enter upon and take possession of such property immediately after the date of the
confirmation of the auction sale and administer the same in accordance with law. Any petition in
court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision
shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the
court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the
restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial
foreclosure, shall have the right to redeem the property in accordance with this provision until, but
not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds
which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners
of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their
redemption rights until their expiration. (Emphasis supplied.)

Under the new law, an exception is thus made in the case of juridical persons which are allowed to
exercise the right of redemption only "until, but not after, the registration of the certificate of
foreclosure sale" and in no case more than three (3) months after foreclosure, whichever comes
first.16

May the foregoing amendment be validly applied in this case when the real estate mortgage contract
was executed in 1985 and the mortgage foreclosed when R.A. No. 8791 was already in effect?

We answer in the affirmative.

When confronted with a constitutional question, it is elementary that every court must approach it
with grave care and considerable caution bearing in mind that every statute is presumed valid and
every reasonable doubt should be resolved in favor of its constitutionality.17 For a law to be nullified, it
must be shown that there is a clear and unequivocal breach of the Constitution. The ground for
nullity must be clear and beyond reasonable doubt. 18Indeed, those who petition this Court to declare
a law, or parts thereof, unconstitutional must clearly establish the basis therefor. Otherwise, the
petition must fail.19

Petitioners contention that Section 47 of R.A. 8791 violates the constitutional proscription against
impairment of the obligation of contract has no basis.

The purpose of the non-impairment clause of the Constitution20 is to safeguard the integrity of
contracts against unwarranted interference by the State. As a rule, contracts should not be tampered
with by subsequent laws that would change or modify the rights and obligations of the
parties.21 Impairment is anything that diminishes the efficacy of the contract. There is an impairment
if a subsequent law changes the terms of a contract between the parties, imposes new conditions,
dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of the
parties.22

Section 47 did not divest juridical persons of the right to redeem their foreclosed properties but only
modified the time for the exercise of such right by reducing the one-year period originally provided in
Act No. 3135. The new redemption period commences from the date of foreclosure sale, and expires
upon registration of the certificate of sale or three months after foreclosure, whichever is earlier.
There is likewise no retroactive application of the new redemption period because Section 47
exempts from its operation those properties foreclosed prior to its effectivity and whose owners shall
retain their redemption rights under Act No. 3135.

Petitioners claim that Section 47 infringes the equal protection clause as it discriminates
mortgagors/property owners who are juridical persons is equally bereft of merit.

The equal protection clause is directed principally against undue favor and individual or class
privilege. It is not intended to prohibit legislation which is limited to the object to which it is directed
1wphi1

or by the territory in which it is to operate. It does not require absolute equality, but merely that all
persons be treated alike under like conditions both as to privileges conferred and liabilities
imposed.23 Equal protection permits of reasonable classification. 24We have ruled that one class may
be treated differently from another where the groupings are based on reasonable and real
distinctions.25 If classification is germane to the purpose of the law, concerns all members of the
class, and applies equally to present and future conditions, the classification does not violate the
equal protection guarantee.26
We agree with the CA that the legislature clearly intended to shorten the period of redemption for
juridical persons whose properties were foreclosed and sold in accordance with the provisions of Act
No. 3135.27

The difference in the treatment of juridical persons and natural persons was based on the nature of
the properties foreclosed whether these are used as residence, for which the more liberal one-year
redemption period is retained, or used for industrial or commercial purposes, in which case a shorter
term is deemed necessary to reduce the period of uncertainty in the ownership of property and
enable mortgagee-banks to dispose sooner of these acquired assets. It must be underscored that
the General Banking Law of 2000, crafted in the aftermath of the 1997 Southeast Asian financial
crisis, sought to reform the General Banking Act of 1949 by fashioning a legal framework for
maintaining a safe and sound banking system.28 In this context, the amendment introduced by
Section 47 embodied one of such safe and sound practices aimed at ensuring the solvency and
liquidity of our banks. It cannot therefore be disputed that the said provision amending the
1wphi1

redemption period in Act 3135 was based on a reasonable classification and germane to the
purpose of the law.

This legitimate public interest pursued by the legislature further enfeebles petitioners impairment of
contract theory.

The right of redemption being statutory, it must be exercised in the manner prescribed by the
statute,29 and within the prescribed time limit, to make it effective. Furthermore, as with other
individual rights to contract and to property, it has to give way to police power exercised for public
welfare.30 The concept of police power is well-established in this jurisdiction. It has been defined as
the "state authority to enact legislation that may interfere with personal liberty or property in order to
promote the general welfare." Its scope, ever-expanding to meet the exigencies of the times, even to
anticipate the future where it could be done, provides enough room for an efficient and flexible
response to conditions and circumstances thus assuming the greatest benefits. 31

The freedom to contract is not absolute; all contracts and all rights are subject to the police power of
the State and not only may regulations which affect them be established by the State, but all such
regulations must be subject to change from time to time, as the general well-being of the community
may require, or as the circumstances may change, or as experience may demonstrate the
necessity.32 Settled is the rule that the non-impairment clause of the Constitution must yield to the
loftier purposes targeted by the Government. The right granted by this provision must submit to the
demands and necessities of the States power of regulation.33 Such authority to regulate businesses
extends to the banking industry which, as this Court has time and again emphasized, is undeniably
imbued with public interest.34

Having ruled that the assailed Section 47 of R.A. No. 8791 is constitutional, we find no reversible
error committed by the CA in holding that petitioner can no longer exercise the right of redemption
over its foreclosed properties after the certificate of sale in favor of respondent had been registered.

WHEREFORE, the petition for review on certiorari is DENIED for lack of merit. The Decision dated
November 19, 2010 and Resolution dated January 31, 2011 of the Court of Appeals in CA-G.R. CV
No. 91120 are hereby AFFIRMED.

With costs against the petitioner.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 98334 May 8, 1992

MANUEL D. MEDIDA, Deputy Sheriff of the Province of Cebu, CITY SAVINGS BANK (formerly
Cebu City Savings and Loan Association, Inc.) and TEOTIMO ABELLANA, petitioners,
vs.
COURT OF APPEALS and SPS. ANDRES DOLINO and PASCUALA DOLINO, respondents.

Gines N. Abellana for petitioners.

Dionisio U. Flores for private respondents.

REGALADO, J.:

The core issue in this case is whether or not a mortgagor, whose property has been extrajudicially
foreclosed and sold at the corresponding foreclosure sale, may validly execute a mortgage contract
over the same property in favor of a third party during the period of redemption.

The present appeal by certiorari assails the decision 1 of respondent Court of Appeals in CA-G.R. CV
No. 12678 where it answered the question posed by the foregoing issue in the negative and modified the
decision 2 of the then Court of First Instance of Cebu in Civil Case No. R-18616 wherein the validity of
said subsequent mortgage was assumed and the case was otherwise disposed of on other grounds.

The facts which gave rise to the institution of the aforesaid civil case in the trial court, as found by
respondent Court of Appeals, are as follows:

On October 10, 1974 plaintiff spouses, alarmed of losing their right of redemption
over lot 4731 of the Cebu City Cadastre and embraced under TCT No. 14272 from
Mr. Juan Gandioncho, purchaser of the aforesaid lot at the foreclosure sale of the
previous mortgage in favor of Cebu City Development Bank, went to Teotimo
Abellana, president of defendant Association, to obtain a loan of P30,000.00. Prior
thereto or on October 3, 1974, their son Teofredo Dolino filed a similar loan
application for Twenty-Five Thousand (P25,000.00) Pesos with lot No. 4731 offered
as security for the Thirty Thousand (P30,000.00) Pesos loan from defendant
association. Subsequently, they executed a promissory note in favor of defendant
association. Both documents indicated that the principal obligation is for Thirty
Thousand (P30,000.00) Pesos payable in one year with interest at twelve (12%)
percent per annum.

When the loan became due and demandable without plaintiff paying the same,
defendant association caused the extrajudicial foreclosure of the mortgage on March
16, 1976. After the posting and publication requirements were complied with, the land
 was sold at public auction on April 19, 1976 to defendant association being the
highest bidder. The certificate of sale was issued on April 20, 1976 and registered on
May 10, 1976 with the Register of Deeds of Cebu.

On May 24, 1971 (sic, 1977), no redemption having been effected by plaintiff, TCT
No. 14272 was cancelled and in lieu thereof TCT No. 68041 was issued in the name
of defendant association. 3

xxx xxx xxx

On October 18, 1979, private respondents filed the aforestated Civil Case No. R-18616 in the
court a quo for the annulment of the sale at public auction conducted on April 19, 1976, as well as
the corresponding certificate of sale issued pursuant thereto.

In their complaint, private respondents, as plaintiffs therein, assailed the validity of the extrajudicial
foreclosure sale of their property, claiming that the same was held in violation of Act No. 3135, as
amended, and prayed, inter alia, for the cancellation of Transfer Certificate of Title No. 68041 issued
in favor of therein defendant City Savings and Loan Association, Inc., now known as City Savings
Bank and one of the petitioners herein.

In its answer, the defendant association therein denied the material allegations of the complaint and
averred, among others, that the present private respondent spouses may still avail of their right of
redemption over the land in question.

On January 12, 1983, after trial on the merits, the court below rendered judgment upholding the
validity of the loan and the real estate mortgage, but annulling the extrajudicial foreclosure sale
inasmuch as the same failed to comply with the notice requirements in Act No. 3135, as amended,
under the following dispositive part:

WHEREFORE, the foregoing premises considered and upon the view taken by the
Court of this case, judgment is hereby rendered, as follows:

1. Declaring ineffective the extrajudicial foreclosure of the mortgage over Lot No.
4731 of the Cadastral Survey of Cebu;

2. Ordering the cancellation of Transfer Certificate of Title No. 68041 of the Registry
of Deeds of the City of Cebu in the name of defendant Cebu City Savings and Loan
Association, Inc. the corresponding issuance of a new transfer certificate to contain
all the annotations made in TCT No. 14272 of the plaintiffs Pascuala Sabellano,
married to Andres Dolino;

3. Ordering the plaintiffs aforenamed to pay the defendant Cebu City Savings and
Loan Association, Inc. the unpaid balance of the loan, plus interest; and reimbursing
said defendant the value of any necessary and useful expenditures on the property
after deducting any income derived by said defendant from the property.

For this purpose, defendant Association is given 15 days from receipt hereof within
which to submit its statement of the amount due it from the plaintiffs Dolino, with
notice to them. The payment to be made by the plaintiffs shall be within ninety (90)
days from their receipt of the order approving the amount due the defendant Cebu
City Savings and Loan Association, Inc.
 No award of damages or costs to either party.

SO ORDERED. 4

Not satisfied therewith, herein private respondents interposed a partial appeal to respondent court
with respect to the second and third paragraphs of the aforequoted decretal portion, contending that
the lower court erred in (1) declaring that the mortgage executed by the therein plaintiff spouses
Dolino is valid; (2) permitting therein Cebu City Savings and Loan Association, Inc. to collect interest
after the same foreclosure proceedings and auction sale which are null and void from the beginning;
(3) not ordering the forfeiture of the capital or balance of the loan with usurious interest; and (4) not
sentencing therein defendant to pay damages and attorney's fees to plaintiffs. 5

On September 28, 1990, respondent Court of Appeals promulgated its decision modifying the
decision of the lower court, with this adjudication:

WHEREFORE, PREMISES CONSIDERED, the decision appealed from is hereby

MODIFIED declaring as void and ineffective the real estate mortgage executed by
plaintiffs in favor of defendant association. With this modification, the decision is
AFFIRMED in other respects. 6

Herein petitioners then filed a motion for reconsideration which was denied by respondent court in its
resolution dated March 5, 1991, hence the present petition which, in synthesis, postulates that
respondent court erred in declaring the real estate mortgage void, and also impugns the judgment of
the trial court declaring ineffective the extrajudicial foreclosure of said mortgage and ordering the
cancellation of Transfer Certificate of Title No. 68041 issued in favor of the predecessor of petitioner
bank. 7

The first submission assailing the judgment of respondent Court of Appeals is meritorious.

Said respondent court declared the real estate mortgage in question null and void for the reason that
the mortgagor spouses, at the time when the said mortgage was executed, were no longer the
owners of the lot, having supposedly lost the same when the lot was sold to a purchaser in the
foreclosure sale under the prior mortgage. This holding cannot be sustained.

Preliminarily, the issue of ownership of the mortgaged property was never alleged in the complaint
nor was the same raised during the trial, hence that issue should not have been taken cognizance of
by the Court of Appeals. An issue which was neither averred in the complaint nor ventilated during
the trial in the court below cannot be raised for the first time on appeal as it would be offensive to the
basic rule of fair play, justice and due process. 8

Nonetheless, since respondent Court took cognizance thereof and, in fact, anchored its modificatory
judgment on its ratiocination of that issue, we are inclined to liberalize the rule so that we can in turn
pass upon the correctness of its conclusion. We may consider such procedure as analogous to the
rule that an unassigned error closely related to an error properly assigned, or upon which the
determination of the question properly assigned is dependent, may be considered by an appellate
court. 9 We adopt this approach since, after all, both lower courts agreed upon the invalidity of the
extrajudicial foreclosure but differed only on the matter of the validity of the real estate mortgage upon
which the extrajudicial foreclosure was based.

In arriving at its conclusion, respondent court placed full reliance on what obviously is an obiter
dictum laid down in the course of the disquisition in Dizon vs. Gaborro, et al. which we shall
analyze. 10 For, as explicitly stated therein by the Court, "(t)he basic issue to be resolved in this case is
whether the 'Deed of Sale with Assumption of Mortgage' and the 'Option to Purchase Real Estate,' two
instruments executed by and between petitioner Jose P. Dizon and Alfredo G. Gaborro (defendant below)
on the same day, October 6, 1959, constitute in truth and in fact an absolute sale of the three parcels of
land therein described or merely an equitable mortgage or conveyance thereof by way of security for
reimbursement or repayment by petitioner Jose P. Dizon of any and all sums which may have been paid
to the Development Bank of the Philippines and the Philippine National Bank by Alfredo G. Gaborro . . . ."
Said documents were executed by the parties and the payments were made by Gaborro for the debt of
Dizon to said banks after the Development Bank of the Philippines had foreclosed the mortgage executed
by Dizon and during the period of redemption after the foreclosure sale of the mortgaged property to said
creditor bank.

The trial court held that the true agreement between the parties therein was that Gaborro would
assume and pay the indebtedness of Dizon to the banks and, in consideration thereof, Gaborro was
given the possession and enjoyment of the properties in question until Dizon shall have reimbursed
him for the amount paid to the creditor banks. Accordingly, the trial court ordered the reformation of
the documents to the extent indicated and such particular relief was affirmed by the Court of
Appeals. This Court held that the agreement between the parties is one of those innominate
contracts under Article 1307 of the Civil Code whereby the parties agreed "to give and to do" certain
rights and obligations, but partaking of the nature of antichresis.

Hence, on appeal to this Court, the judgment of the Court of Appeals in that case was affirmed but
with the following pronouncements:

The two instruments sought to be reformed in this case appear to stipulate rights and
obligations between the parties thereto pertaining to and involving parcels of land
that had already been foreclosed and sold extrajudicially, and purchased by the
mortgage creditor, a third party. It becomes, therefore, necessary, to determine the
legality of said rights and obligations arising from the foreclosure and sale
proceedings not only between the two contracting parties to the instruments
executed between them but also in so far as the agreement affects the rights of the
third party, the purchaser Bank.

xxx xxx xxx

Under the Revised Rules of Court, Rule 39, Section 33, the judgment debtor remains
in possession of the property foreclosed and sold, during the period of redemption. If
the judgment debtor is in possession of the property sold, he is entitled to retain it,
and receive the fruits, the purchaser not being entitled to such possession. (Riosa vs.
Verzosa, 26 Phil. 86; Velasco vs. Rosenberg's, Inc., 32 Phil. 72; Pabico vs. Pauco,
43 Phil. 572; Power vs. PNB, 54 Phil. 54; Gorospe vs. Gochangco, L-12735, Oct. 30,
1959).

xxx xxx xxx

Upon foreclosure and sale, the purchaser is entitled to a certificate of sale executed
by the sheriff. (Section 27, Revised Rules of Court). After the termination of the
period of redemption and no redemption having been made, the purchaser is entitled
to a deed of conveyance and to the possession of the properties. (Section 35,
Revised Rules of Court). The weight of authority is to the effect that the purchaser of
land sold at public auction under a writ of execution has only an inchoate right to the
property, subject to be defeated and terminated within the period of 12 months from
the date of sale, by a redemption on the part of the owner. Therefore, the judgment
 debtor in possession of the property is entitled to remain therein during the period for
redemption. (Riosa vs. Verzosa, 26 Phil. 86, 89; Gonzales vs. Calimbas, 51 Phil.
355).

In the case before Us, after the extrajudicial foreclosure and sale of his properties,
petitioner Dizon retained the right to redeem the lands, the possession, use and
enjoyment of the same during the period of redemption. And these are the only rights
that Dizon could legally transfer, cede and convey unto respondent Gaborro under
the instrument captioned Deed of Sale with Assumption of Mortgage (Exh. A-
Stipulation), likewise the same rights that said respondent could acquire in
consideration of the latter's promise to pay and assume the loan of petitioner Dizon
with DBP and PNB.

Such an instrument cannot be legally considered a real and unconditional sale of the
parcels of land, firstly, because there was absolutely no money consideration
therefor, as admittedly stipulated, the sum of P131,831.91 mentioned in the
document as the consideration "receipt of which was acknowledged" was not actually
paid; and, secondly, because the properties had already been previously sold by the
sheriff at the foreclosure sale, thereby divesting the petitioner of his full right as
owner thereof to dispose and sell the lands. (Emphasis ours.)

It was apparently the second reason stated by the Court in said case which was relied upon by
respondent court in the present case on which to premise its conclusion. Yet, as demonstrated by
the relevant excerpts above quoted, not only was that obiter therein unnecessary since evidently no
sale was concluded, but even inaccurate, if not inconsistent, when considered in the context of the
discussion in its entirety. If, as admitted, the purchaser at the foreclosure sale merely acquired an
inchoate right to the property which could ripen into ownership only upon the lapse of the redemption
period without his credit having been discharged, it is illogical to hold that during that same period of
twelve months the mortgagor was "divested" of his ownership, since the absurd result would be that
the land will consequently be without an owner although it remains registered in the name of the
mortgagor.

That is why the discussion in said case carefully and felicitously states that what is divested from the
mortgagor is only his "full right as owner thereof to dispose (of) and sell the lands," in effect, merely
clarifying that the mortgagor does not have the unconditional power to absolutely sell the land since
the same is encumbered by a lien of a third person which, if unsatisfied, could result in a
consolidation of ownership in the lienholder but only after the lapse of the period of redemption.
Even on that score, it may plausibly be argued that what is delimited is not the mortgagor's jus
dispodendi, as an attribute of ownership, but merely the rights conferred by such act of disposal
which may correspondingly be restricted.

At any rate, even the foregoing considerations and arguments would have no application in the case
at bar and need not here be resolved since what is presently involved is a mortgage, not a sale, to
petitioner bank. Such mortgage does not involve a transfer, cession or conveyance of the property
but only constitutes a lien thereon. There is no obstacle to the legal creation of such a lien even after
the auction sale of the property but during the redemption period, since no distinction is made
between a mortgage constituted over the property before or after the auction sale thereof.

Thus, a redemptioner is defined as a creditor having a lien by attachment, judgment or mortgage on

the property sold, or on some part thereof, subsequent to the judgment under which the property
was sold. 11 Of course, while in extrajudicial foreclosure the sale contemplated is not under a judgment
but the proceeding pursuant to which the mortgaged property was sold, a subsequent mortgage could
nevertheless be legally constituted thereafter with the subsequent mortgagee becoming and acquiring the
rights of a redemptioner, aside from his right against the mortgagor.

In either case, what bears attention is that since the mortgagor remains as the absolute owner of the
property during the redemption period and has the free disposal of his property, there would be
compliance with the requisites of Article 2085 of the Civil Code for the constitution of another
mortgage on the property. To hold otherwise would create the inequitable situation wherein the
mortgagor would be deprived of the opportunity, which may be his last recourse, to raise funds
wherewith to timely redeem his property through another mortgage thereon.

Coming back to the present controversy, it is undisputed that the real estate mortgage in favor of
petitioner bank was executed by respondent spouses during the period of redemption. We reiterate
that during said period it cannot be said that the mortgagor is no longer the owner of the foreclosed
property since the rule up to now is that the right of a purchaser at a foreclosure sale is merely
inchoate until after the period of redemption has expired without the right being exercised. 12 The title
to land sold under mortgage foreclosure remains in the mortgagor or his grantee until the expiration of the
redemption period and conveyance by the master's deed. 13 To repeat, the rule has always been that it is
only upon the expiration of the redemption period, without the judgment debtor having made use of his
right of redemption, that the ownership of the land sold becomes consolidated in the purchaser. 14

Parenthetically, therefore, what actually is effected where redemption is seasonably exercised by the
judgment or mortgage debtor is not the recovery of ownership of his land, which ownership he never
lost, but the elimination from his title thereto of the lien created by the levy on attachment or
judgment or the registration of a mortgage thereon. The American rule is similarly to the effect that
the redemption of property sold under a foreclosure sale defeats the inchoate right of the purchaser
and restores the property to the same condition as if no sale had been attempted. Further, it does
not give to the mortgagor a new title, but merely restores to him the title freed of the encumbrance of
the lien foreclosed. 15

We cannot rule on the plaint of petitioners that the trial court erred in declaring ineffective the
extrajudicial foreclosure and the sale of the property to petitioner bank. The court below spelled out
at length in its decision the facts which it considered as violative of the provisions of Act No. 3135, as
amended, by reason of which it nullified the extrajudicial foreclosure proceeding and its effects. Such
findings and ruling of the trial court are already final and binding on petitioners and can no longer be
modified, petitioners having failed to appeal therefrom.

An appellee who has not himself appealed cannot obtain from the appellate court any affirmative
relief other than the ones granted in the decision of the court below. 16 He cannot impugn the
correctness of a judgment not appealed from by him. He cannot assign such errors as are designed to
have the judgment modified. All that said appellee can do is to make a counter-assignment of errors or to
argue on issues raised at the trial only for the purpose of sustaining the judgment in his favor, even on
grounds not included in the decision of the court a quo nor raised in the appellant's assignment of errors
or arguments. 17

WHEREFORE, the decision of respondent Court of Appeals, insofar as it modifies the judgment of
the trial court, is REVERSED and SET ASIDE. The judgment of said trial court in Civil Case No. R-
18616, dated January 12, 1983, is hereby REINSTATED.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 171868 July 27, 2011

SPOUSES FRANCISCO D. YAP and WHELMA S. YAP, Petitioners,

vs.
SPOUSES ZOSIMO DY, SR. and NATIVIDAD CHIU DY, SPOUSES MARCELINO MAXINO and
REMEDIOS L. MAXINO, PROVINCIAL SHERIFF OF NEGROS ORIENTAL and DUMAGUETE
RURAL BANK, INC., Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 171991

DUMAGUETE RURAL BANK, INC. (DRBI) herein represented by Mr. William D.S.
Dichoso, Petitioners,
vs.
SPOUSES ZOSIMO DY, SR. and NATIVIDAD CHIU DY, SPOUSES MARCELINO MAXINO and
REMEDIOS MAXINO, and SPOUSES FRANCISCO D. YAP and WHELMA S. YAP, Respondents.

DECISION

VILLARAMA, JR., J.:

May persons to whom several mortgaged lands were transferred without the knowledge and consent
of the creditor redeem only several parcels if all the lands were sold together for a single price at the
foreclosure sale? This is the principal issue presented to us for resolution in these two petitions for
review on certiorari assailing the May 17, 2005 Decision1 and March 15, 2006 Resolution2 of the
Court of Appeals (CA) in CA-G.R. C.V. No. 57205.

The antecedents are as follows:

The spouses Tomas Tirambulo and Salvacion Estorco (Tirambulos) are the registered owners of
several parcels of land located in Ayungon, Negros Oriental, registered under Transfer Certificate of
Title (TCT) Nos. T-14794, T-14777, T-14780, T-14781, T-14783 and T-20301 of the Registry of
Deeds of Negros Oriental, and more particularly designated as follows:

(1) TCT No. T-14777 Lot 1 of Plan Pcs-11728 61,371 sq.m.

(2) TCT No. T-20301 Lot 3 of Plan Psu-124376 17,373 sq.m.
(3) TCT No. T-14780 Lot 4 of Plan Pcs-11728 27,875 sq.m.
(4) TCT No. T-14794 Lot 5 of Plan Psu-124376 2,900 sq.m.
(5) TCT No. T-14781 Lot 6 of Plan Pcs-11728 16,087 sq.m.
(6) TCT No. T-14783 Lot 8 of Plan Pcs-11728 39,888 sq.m
The Tirambulos likewise own a parcel of land denominated as Lot 846, covered by Tax Declaration
No. 08109.

On December 3, 1976, the Tirambulos executed a Real Estate Mortgage 3 over Lots 1, 4, 5, 6 and 8
in favor of the Rural Bank of Dumaguete, Inc., predecessor of Dumaguete Rural Bank, Inc. (DRBI),
to secure a P105,000 loan extended by the latter to them. Later, the Tirambulos obtained a second
loan for P28,000 and also executed a Real Estate Mortgage4 over Lots 3 and 846 in favor of the
same bank on August 3, 1978.

Subsequently, on October 27, 1979, the Tirambulos sold all seven mortgaged lots to the spouses
Zosimo Dy, Sr. and Natividad Chiu (the Dys) and the spouses Marcelino C. Maxino and Remedios
Lasola (the Maxinos) without the consent and knowledge of DRBI. This sale, which was embodied in
a Deed of Absolute Sale,5 was followed by a default on the part of the Tirambulos to pay their loans
to DRBI. Thus, DRBI extrajudicially foreclosed the December 3, 1976 mortgage and had Lots 1, 4, 5,
6 and 8 sold at public auction on March 31, 1982.

At the auction sale, DRBI was proclaimed the highest bidder and bought said lots for P216,040.93.
The Sheriffs Certificate of Sale6 stated that the "sale is subject to the rights of redemption of the
mortgagor (s) or any other persons authorized by law so to do, within a period of one (1) year from
registration hereof."7 The certificate of sale, however, was not registered until almost a year later, or
on June 24, 1983.

On July 6, 1983, or twelve (12) days after the sale was registered, DRBI sold Lots 1, 3 and 6 to the
spouses Francisco D. Yap and Whelma D. Yap (the Yaps) under a Deed of Sale with Agreement to
Mortgage.8 It is important to note, however, that Lot 3 was not among the five properties foreclosed
and bought by DRBI at public auction.

On August 8, 1983, or well within the redemption period, the Yaps filed a Motion for Writ of
Possession9 alleging that they have acquired all the rights and interests of DRBI over the foreclosed
properties and are entitled to immediate possession of the same because the one-year redemption
period has lapsed without any redemption being made. Said motion, however, was ordered
withdrawn on August 22, 198310 upon motion of the Yaps, who gave no reason therefor.11 Three days
later, or on August 25, 1983, the Yaps again filed a Motion for Writ of Possession. 12 This time the
motion was granted, and a Writ of Possession13 over Lots 1, 3 and 6 was issued in favor of the Yaps
on September 5, 1983. They were placed in possession of Lots 1, 3 and 6 seven days later.

On May 22, 1984, roughly a month before the one-year redemption period was set to expire, the Dys
and the Maxinos attempted to redeem Lots 1, 3 and 6. They tendered the amount of P40,000.00 to
DRBI and the Yaps,14but both refused, contending that the redemption should be for the full amount
of the winning bid of P216,040.93 plus interest for all the foreclosed properties.

Thus, on May 28, 1984, the Dys and the Maxinos went to the Office of the Sheriff of Negros Oriental
and paid P50,625.29 (P40,000.00 for the principal plus P10,625.29 for interests and Sheriffs
Commission) to effect the redemption.15 Noticing that Lot 3 was not included in the foreclosure
proceedings, Benjamin V. Diputado, Clerk of Court and Provincial Sheriff, issued a Certificate of
Redemption16 in favor of the Dys and the Maxinos only for Lots 1 and 6, and stated in said certificate
that Lot 3 is not included in the foreclosure proceedings. By letter 17 of even date, Atty. Diputado also
duly notified the Yaps of the redemption of Lots 1 and 6 by the Dys and the Maxinos, as well as the
non-inclusion of Lot 3 among the foreclosed properties. He advised the Yaps to personally claim the
redemption money or send a representative to do so.
In a letter to the Provincial Sheriff on May 31, 1984, the Yaps refused to take delivery of the
redemption price arguing that one of the characteristics of a mortgage is its indivisibility and that one
cannot redeem only some of the lots foreclosed because all the parcels were sold for a single price
at the auction sale.18

On June 1, 1984, the Provincial Sheriff wrote the Dys and the Maxinos informing them of the Yaps
refusal to take delivery of the redemption money and that in view of said development, the tender of
the redemption money was being considered as a consignation.19

On June 15, 1984, the Dys and the Maxinos filed Civil Case No. 8426 with the Regional Trial Court
of Negros Oriental for accounting, injunction, declaration of nullity (with regard to Lot 3) of the Deed
of Sale with Agreement to Mortgage, and damages against the Yaps and DRBI. In their
complaint,20 they prayed

a) That the Deed of Sale With Agreement to Mortgage be declared null and void ab initio;

b) That defendant Yap[s] possession of Lot No. 3, TCT No. T20301 based as it was on a
void sale, be declared illegal from the very beginning;

c) That defendants be ordered to render to plaintiffs a fair accounting of the harvests and
income which defendants made from said Lot No. 3 and, in addition, be ordered to pay to
plaintiffs damages for wrongfully depriving plaintiffs of the use and enjoyment of said
property;

d) That the redemption which plaintiffs made of Lot No. 1, TCT No. 14777, and Lot No. 6,
TCT No. 14781, through the Provincial Sheriff of Negros Oriental, be declared valid and
binding on the defendants, thereby releasing and freeing said parcels of land from whatever
liens or claims that said defendants might have on them;

e) That defendants be likewise ordered to render to plaintiffs full and fair accounting of all the
harvests, fruits, and income that they or either of them might have derived from said two
parcels of land starting from the time defendant Yap first took possession thereof and
harvested the coconuts in September, 1983;

f) That, after the accounting herein prayed for, defendants be required to deliver to plaintiffs
the net proceeds of the income from the three parcels of land subject of this case, together
with interest at the legal rate;

g) That for his acts of misrepresentation and deceit in obtaining a writ of possession over the
three parcels of land subject of this case, and for the highly irregular and anomalous
procedures and maneuvers employed by defendant Yap in securing said writ, as well as for
harvesting the coconuts even after knowing that plaintiffs had already fully redeemed the
properties in question and, with respect to Lot No. 3, after knowing that the same was not in
fact included in the foreclosure and, therefore, could not have been validly sold by the bank
to him, said defendant Yap be condemned to pay plaintiffs moral damages in the amount
of P200,000.00, plus punitive and exemplary damages in the amount of P100,000.00;

h) That for falsifying the Sheriffs Certificate of Sale and selling unlawfully Lot No. 3, TCT No.
T-20301, to its co-defendant Yap, defendant DRBI be condemned to pay to plaintiffs actual
damages in the amount of P50,000.00; moral damages in the amount of P200,000.00; and
punitive and exemplary damages in the amount of P100,000.00;
 i) That defendants be condemned to pay solidarily to plaintiffs attorneys fees in the amount
of P50,000.00; other legitimate expenses of litigation in the amount of P30,000.00; and the
costs of suit;

j) That pending hearing of this case, a writ of preliminary injunction be issued enjoining and
restraining the defendants, particularly defendant Yap, from disturbing and interfering the
plaintiffs possession and other rights of ownership over the land in question;

k) That pending hearing of the petition for preliminary injunction, a temporary restraining
order be issued against the defendants, particularly against defendant Yap, to serve the
same purpose for which the writ of preliminary injunction is herein prayed for; and

l) That, after hearing of the main case, said preliminary injunction be made permanent.

Furthermore, plaintiffs pray for all other reliefs which may be just and equitable in the premises. 21

Thereafter, on June 19, 1984, the Dys and the Maxinos consigned to the trial court an additional sum
of P83,850.50 plus sheriffs commission fee of P419.25 representing the remaining balance of the
purchase price that the Yaps still owed DRBI by virtue of the sale to them by the DRBI of Lots 1, 3
and 6.22

Meanwhile, by letter23 dated June 27, 1984, the Yaps told DRBI that no redemption has been made
by the Tirambulos or their successors-in-interest and requested DRBI to consolidate its title over the
foreclosed properties by requesting the Provincial Sheriff to execute the final deed of sale in favor of
the bank so that the latter can transfer the titles of the two foreclosed properties to them.

On the same date, the Yaps also wrote the Maxinos informing the latter that during the last harvest
of the lots bought from DRBI, they excluded from the harvest Lot 3 to show their good faith. Also,
they told the Maxinos that they were formally turning over the possession of Lot 3 to the Maxinos,
without prejudice to the final determination of the legal implications concerning Lot 3. As to Lots 1
and 6, however, the Yaps stated that they intended to consolidate ownership over them since there
has been no redemption as contemplated by law. Included in the letter was a liquidation of the copra
proceeds harvested from September 7, 1983 to April 30, 1984 for Lots 1, 3 and 6. 24

Later, on July 5, 1984, the Yaps filed Civil Case No. 8439 for consolidation of ownership, annulment
of certificate of redemption, and damages against the Dys, the Maxinos, the Provincial Sheriff of
Negros Oriental and DRBI. In their complaint,25 the Yaps prayed

1. That [they] be declared the exclusive owners of Lot No. 1 covered by TCT No. T-14777
and Lot No. 6 covered by TCT No. T-14781 for failure on the part of defendants Zosimo Dy,
Sr., and Marcelino Maxino to redeem the properties in question within one (1) year from the
auction sale.

2. That defendants be [declared] solidarily liable to pay moral damages in the amount of
ONE HUNDRED THOUSAND PESOS (P100,000.00), THIRTY[-]FIVE THOUSAND PESOS
(P35,000.00) as attorneys fees and FIFTEEN THOUSAND PESOS (P15,000.00) as
exemplary damages;

3. That the Provincial Sheriff be required to execute the final Deed of Sale in favor of the
bank and the bank be in turn required to transfer the property to the plaintiffs in accordance
with the Deed of Sale with Mortgage.
 4. That the court grant such other relief as may be deemed just and equitable under the
premises.26

Civil Case Nos. 8426 and 8439 were tried jointly.

On October 24, 1985, the Yaps, by counsel, filed a motion to withdraw from the provincial sheriff the
redemption money amounting to P50,373.42.27 Said motion was granted on October 28, 1985 after a
Special Power of Attorney executed by Francisco Yap in favor of his brother Valiente Yap authorizing
the latter to receive the P50,373.42 redemption money was presented in court.28

On February 12, 1997, the trial court rendered decision29 in favor of the Yaps. The fallo reads:

WHEREFORE, judgment is hereby rendered as follows:

1. Dismissing the complaint of Dy and Maxino spouses in Civil Case No. 8426 as well as the
bank and the Yap spouses counterclaim for lack of factual and legal basis;

2. In Civil Case No. 8439:

a) Declaring the Yap spouses, plaintiffs therein, the exclusive owners of Lot No. 1
covered by TCT No. T-14777 and Lot No. 6 covered by TCT No. T-14781 for failure
on the part of the Dy and Maxino spouses, defendants therein, to redeem the
properties in question within one (1) year from the auction sale.

b) Directing the Provincial Sheriff of Negros Oriental to execute the Final Deed of
Sale in favor of the bank and the latter to transfer the subject properties to the Yap
spouses in accordance with the Deed of Sale With Mortgage.

SO ORDERED.30

On March 7, 1997, the trial court amended the above dispositive portion upon motion of DRBI, as
follows:

Wherefore, judgment is hereby rendered as follows:

1. The Certificate of Redemption issued by the Provincial Sheriff (Exh. "M") is hereby
declared null and void;

2. The Provincial Sheriff of Negros Oriental is hereby ordered to execute a Final Deed of
Sale of the foreclosed properties in favor of the defendant Dumaguete Rural Bank, Inc.,
subject to the rights of the Yap spouses acquired in accordance with the Deed of Sale with
Mortgage;

3. The Deed of Sale dated [October] 27, 1979, made by Tirambulo and Estorco in favor of
the Dys and Maxinos covering all the seven (7) parcels of land in question, is hereby
declared null and void;

4. In Civil Case No. 8439, declaring the Yap Spouses, the exclusive owners of Lot No. 1,
covered by TCT No. T-14777, and Lot No. 6, covered by TCT No. T-14781, for failure on the
part of the Dy and Maxino Spouses, to redeem said properties within one (1) year from the
date of the registration of the auction sale;
 5. All other claims and counterclaims are hereby dismissed for lack of merit.

SO ORDERED.31

The trial court held that the Dys and the Maxinos failed to formally offer their evidence; hence, the
court could not consider the same. It also upheld the Deed of Sale with Agreement to Mortgage
between the Yaps and DRBI, ruling that its genuineness and due execution has been admitted by
the Dys and the Maxinos and that it is not contrary to law, morals, good customs, public policy or
public order. Thus, ownership of Lots 1, 3 and 6 was transferred to the Yaps.

The trial court further held that the Dys and the Maxinos failed to exercise their rights of redemption
properly and timely. They merely deposited the amount of P50,625.29 with the Sheriff, whereas the
amount due on the mortgage deed is P216,040.93.

Aggrieved by the above ruling, the Dys and the Maxinos elevated the case to the CA. They argued
that the trial court erred in:

1) ... failing to consider plaintiffs evidence [testimonial, including the testimony of the
Provincial Sheriff of Negros Oriental (Attorney Benjamin V. Diputado) and plaintiff Attorney
Marcelino C. Maxino] and documentary [Exhibits A through TT (admitted under Order of 3
March 1995)];

2) failing to declare void or annul the purported contract of sale by Dumaguete Rural Bank,
Inc. to Francisco D. Yap and Whelma S. Yap of Lots 1, 3, and 6, during the redemption
period [the purported seller (bank) not being the owner thereof, and Lot 3 not being included
in the foreclosure/auction sale and could not have been acquired by the Bank thereat];

3) not holding that the parcels of land had been properly and validly redeemed in good
faith, defendant Yap, the Provincial Sheriff, the Clerk of Court, and Mr. Mario Dy, having
accepted redemption/consignation (or, in not fixing the redemption price and allowing
redemption);

4) not holding that by withdrawing the redemption money consigned/deposited by plaintiffs

to the Court, and turning over possession of the parcels of land to plaintiffs, defendants Yap
accepted, ratified, and confirmed redemption by plaintiffs of the parcels of land acquired at
foreclosure/auction sale by the Bank and purportedly sold by it to and purchased by Yap;

5) not finding and holding that all the parcels of land covered by the foreclosed mortgage
held by Dumaguete Rural Bank had been acquired by and are in the possession of plaintiffs
as owners and that defendants bank and Yap had disposed of and/or lost their rights and
interests and/or any cause of action and their claims had been extinguished and mooted or
otherwise settled, waived and/or merged in plaintiffs-appellants;

6) not holding that defendants Yap have no cause of action to quiet title as they had no title
or possession of the parcels of land in question and in declaring defendants Yap spouses the
exclusive owners of Lot No. 1 covered by TCT No. T-14777 and Lot No. 6 covered by TCT
No. T-14781 and in directing the Provincial Sheriff to execute the final deed of sale in favor of
the bank and the latter to transfer the subject properties to the Yap spouses in accordance
with the Deed of Sale with Mortgage which included Lot No. 3 which was not foreclosed by
the Sheriff and was not included in the certificate of sale issued by him and despite their
 acceptance, ratification, and confirmation of the redemption as well as acknowledgment of
possession of the parcels of land by plaintiffs;

7) issuing an amended decision after perfection of plaintiffs appeal and without waiting for
their comment (declaring the Certificate of Redemption issued by the Provincial Sheriff (Exh.
"M") null and void; ordering the Provincial Sheriff of Negros Oriental to execute a Final Deed
of Sale of the foreclosed properties in favor of the defendant Dumaguete Rural Bank, Inc.,
subject to the rights of the Yap spouses acquired in accordance with the Deed of Sale with
Mortgage (Exh. "B"-Maxino and Dy; Exh. "1" Yap); declaring null and void the Deed of Sale
dated Oct[ober] 27, 1979, made by Tirambulo and Estorco in favor of the Dys and Maxinos
covering all the seven (7) parcels of land in question; in Civil Case No. 8439, declaring the
Yap spouses, the exclusive owners of Lot No. 1, covered by TCT No. T-14777, and Lot No.
6, covered by TCT No. T-14781, for failure on the part of the Dy and Maxino spouses, to
redeem said properties within (1) year from the date of registration of the auction sale) after
plaintiffs had perfected appeal of the 12 February 1997 decision, without hearing or awaiting
plaintiffs comment, and in the face of the records showing that the issues were never raised,
much less litigated, insofar as Tirambulo, as well in the face of the foregoing circumstances,
especially dismissal of defendants claims and counterclaims and acquisition of ownership
and possession of the parcels of land by plaintiffs as well as disposition and/or loss of
defendants rights and interests and cause of action in respect thereof and/or settlement,
waiver, and/or extinguishment of their claims, and merger in plaintiffs-appellants, and without
stating clearly the facts and the law upon which it is based[; and]

8) not finding, holding and ruling that defendants acted in bad faith and in an abusive and
oppressive manner, if not contrary to law; and in not awarding plaintiffs damages. 32

On May 17, 2005, the CA rendered a decision reversing the March 7, 1997 amended decision of the
trial court. The dispositive portion of the assailed CA decision reads:

IN LIGHT OF THE FOREGOING, this appeal is GRANTED. The decision as well as the amended
decision of the Regional Trial Court is REVERSED AND SET ASIDE. In lieu thereof[,] judgment is
hereby rendered as follows:

1. Declaring the sale made by Dumaguete Rural Bank Inc. to Sps. Francisco and Whelma
Yap with respect to Lot No. 3 under TCT No. T-20301 as null and void;

2. Declaring the redemption made by Spouses Dy and Spouses Maxino with regards to Lot
No. 6 under TCT No. T-14781 and Lot No. 1 under TCT No. [T-]14777 as valid;

3. Ordering defendants, Sps. Yap, to deliver the possession and ownership thereof to Sps.
Dy and Sps. Maxino; to give a fair accounting of the proceeds of these three parcels of land
and to tender and deliver the corresponding amount of income from October 24, 1985 until
the finality of this judgment[; and]

4. Condemning the defendant bank to pay damages to Spouses Dy and Spouses Maxino the
amount of P20,000.00 as moral damages and P200,000.00 as exemplary damages and
attorneys fees in the amount of P50,000.00.

All other claims are dismissed.

Costs against the appellees.

SO ORDERED.33

The CA held that the trial court erred in ruling that it could not consider the evidence for the Dys and
the Maxinos allegedly because they failed to formally offer the same. The CA noted that although the
testimonies of Attys. Marcelino C. Maxino and Benjamin V. Diputado were not formally offered, the
procedural lapse was cured when the opposing counsel cross-examined said witnesses. Also, while
the original TSNs of the witnesses for the plaintiffs in Civil Case No. 8426 were burned, the latters
counsel who had copies thereof, furnished the Yaps copies for their scrutiny and comment. The CA
further noted that the trial court also admitted all the documentary exhibits of the Dys and the
Maxinos on March 3, 1995. Unfortunately, however, the trial court simply failed to locate the pertinent
documents in the voluminous records of the cases.

On the merits, the CA ruled that the Dys and the Maxinos had proven their cause of action
sufficiently. The CA noted that their claim that Lot 3 was not among the properties foreclosed was
duly corroborated by Atty. Diputado, the Provincial Sheriff who conducted the foreclosure sale. The
Yaps also failed to rebut their contention regarding the formers acceptance of the redemption
money and their delivery of the possession of the three parcels of land to the Dys and the Maxinos.
The CA also noted that not only did the Yaps deliver possession of Lot 3 to the Dys and the Maxinos,
they also filed a Motion to Withdraw the Redemption Money from the Provincial Sheriff and withdrew
the redemption money.

As to the question whether the redemption was valid or not, the CA found no need to discuss the
issue. It found that the bank was in bad faith and therefore cannot insist on the protection of the law
regarding the need for compliance with all the requirements for a valid redemption while estoppel
and unjust enrichment operate against the Yaps who had already withdrawn the redemption money.

Upon motion for reconsideration of the Yaps, however, the CA amended its decision on March 15,
2006 as follows:

IN LIGHT OF THE FOREGOING, this appeal is GRANTED. The decision as well as the amended
decision of the Regional Trial Court is REVERSED AND SET ASIDE. In lieu thereof[,] judgment is
hereby rendered as follows:

1.Declaring the sale made by Dumaguete Rural Bank Inc. to Sps. Francisco and Whelma
Yap with respect to Lot No. 3 under TCT No. T-20301 null and void;

2.Declaring the redemption made by Spouses Dy and Spouses Maxino with regards to Lot
No. 6 under TCT No. T-14781 and Lot No. 1 under TCT No. [T-]14777 as valid;

3. Condemning the defendant bank to pay damages to Spouses Dy and Spouses Maxino the
amount of P20,000.00 as moral damages and P200,000.00 as exemplary damages and
attorneys fees in the amount of P50,000.00.

All other claims are dismissed.

Costs against the appellees.

SO ORDERED.34

Hence, the consolidated petitions assailing the appellate courts decision.

The Yaps argue in the main that there is no valid redemption of the properties extrajudicially
foreclosed. They contend that the P40,000.00 cannot be considered a valid tender of redemption
since the amount of the auction sale is P216,040.93. They also argue that a valid tender of payment
for redemption can only be made to DRBI since at that time, their rights were subordinate to the final
consolidation of ownership by the bank.

DRBI, aside from insisting that all seven mortgaged properties (which thus includes Lot 3) were
validly foreclosed, argues, for its part, that the appellate court erred in sustaining the redemption
made by the Dys and Maxinos. It anchors its argument on the fact that the sale of the Tirambulos to
the Dys and Maxinos was without the banks consent. The Dys and Maxinos therefore could not
have assumed the character of debtors because a novation of the contract of mortgage between the
Tirambulos and DRBI did not take place as such a novation is proscribed by Article 1293 of the Civil
Code. And there being no valid redemption within the contemplation of law and DRBI being the
highest bidder during the auction sale, DRBI has become the absolute owner of the properties
mortgaged when the redemption period expired.

DRBI further argues that it was unfair and unjust for them to be held liable for damages for
supposedly wrongfully foreclosing on Lot 3, depriving the Dys and the Maxinos of the use of the
land, and registering the Certificate of Sale which included Lot 3 when it should have excluded the
same. DRBI argues that as a juridical person, it only authorized and consented, through its Board of
Directors, to lawful processes. The unlawful acts of the Sheriff, who is considered as an agent of the
bank in the foreclosure proceedings, cannot bind DRBI. Moreover, DRBI cannot be liable for
damages on the basis of an affidavit that was submitted only before the CA as the bank had no
chance to cross-examine the affiant and determine the veracity and propriety of the statements
narrated in said affidavit.

Thus, the issues to be resolved in the instant case are essentially as follows: (1) Is Lot 3 among the
foreclosed properties? (2) To whom should the payment of redemption money be made? (3) Did the
Dys and Maxinos validly redeem Lots 1 and 6? and (4) Is DRBI liable for damages?

As to the first issue, we find that the CA correctly ruled that the Dys and Maxinos were able to prove
their claim that Lot 3 was not among the properties foreclosed and that it was merely inserted by the
bank in the Sheriffs Certificate of Sale. As Atty. Diputado, the Provincial Sheriff, testified, the
application for foreclosure was only for five parcels of land, namely, Lots 1, 4, 5, 6 and 8.
Accordingly, only said five parcels of land were included in the publication and sold at the foreclosure
sale. When he was shown a copy of the Sheriffs Certificate of Sale consisting of three pages, he
testified that it was altered because Lot 3 and Lot 846 were included beyond the "xxx" that marked
the end of the enumeration of the lots foreclosed.35 Also, a perusal of DRBIs application for
foreclosure of real estate mortgage36 shows that it explicitly refers to only one deed of mortgage to
settle the Tirambulos indebtedness amounting to P216,040.93. This is consistent with the Notice of
Extrajudicial Sale of Mortgaged Property, published in the Dumaguete Star Informer on February 18,
25 and March 4, 1982,37announcing the sale of Lots 1, 4, 5, 6 and 8 for the satisfaction of the
indebtedness amounting to P216,040.93. It is also consistent with the fact that Lots 1, 4, 5, 6 and 8
are covered by only one real estate mortgage, the Real Estate Mortgage38 dated December 3, 1976.
Indeed, that the foreclosure sale refers only to Lots 1, 4, 5, 6 and 8 is clear from the fact that Lots 1,
4, 5, 6 and 8 and Lot 3 are covered by two separate real estate mortgages. DRBI failed to refute
these pieces of evidence against it.

As to the second issue regarding the question as to whom payment of the redemption money should
be made, Section 31,39 Rule 39 of the Rules of Court then applicable provides:
SEC. 31. Effect of redemption by judgment debtor, and a certificate to be delivered and recorded
thereupon. To whom payments on redemption made.If the judgment debtor redeem, he must
make the same payments as are required to effect a redemption by a redemptioner, whereupon the
effect of the sale is terminated and he is restored to his estate, and the person to whom the payment
is made must execute and deliver to him a certificate of redemption acknowledged or approved
before a notary public or other officer authorized to take acknowledgments of conveyances of real
property. Such certificate must be filed and recorded in the office of the registrar of deeds of the
province in which the property is situated, and the registrar of deeds must note the record thereof on
the margin of the record of the certificate of sale. The payments mentioned in this and the last
preceding sections may be made to the purchaser or redemptioner, or for him to the officer who
made the sale. (Emphasis supplied.)

Here, the Dys and the Maxinos complied with the above-quoted provision. Well within the
redemption period, they initially attempted to pay the redemption money not only to the purchaser,
DRBI, but also to the Yaps. Both DRBI and the Yaps however refused, insisting that the Dys and
Maxinos should pay the whole purchase price at which all the foreclosed properties were sold during
the foreclosure sale. Because of said refusal, the Dys and Maxinos correctly availed of the
alternative remedy by going to the sheriff who made the sale. As held in Natino v. Intermediate
Appellate Court,40 the tender of the redemption money may be made to the purchaser of the land or
to the sheriff. If made to the sheriff, it is his duty to accept the tender and execute the certificate of
redemption.

But were the Dys and Maxinos entitled to redeem Lots 1 and 6 in the first place? We rule in the
affirmative.

The Dys and the Maxinos have legal personality to redeem the subject properties.

Contrary to petitioners contention, the Dys and Maxinos have legal personality to redeem the
subject properties despite the fact that the sale to the Dys and Maxinos was without DRBIs consent.
In Litonjua v. L & R Corporation,41 this Court declared valid the sale by the mortgagor of mortgaged
property to a third person notwithstanding the lack of written consent by the mortgagee, and likewise
recognized the third persons right to redeem the foreclosed property, to wit:

Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses
Litonjua is valid, we rule in the affirmative. The sale by the spouses Litonjua of the mortgaged
properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the spouses Litonjua on
account of such sale and was in effect, their successor-in-interest. As such, it had the right to
redeem the property foreclosed by L & R Corporation. Again, Tambunting, supra, clarifies that

"x x x. The acquisition by the Hernandezes of the Escuetas rights over the property carried with it
the assumption of the obligations burdening the property, as recorded in the Registry of Property,
i.e., the mortgage debts in favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by
stepping into the Escuetas shoes as assignees, had the obligation to pay the mortgage debts,
otherwise, these debts would and could be enforced against the property subject of the assignment.
Stated otherwise, the Hernandezes, by the assignment, obtained the right to remove the burdens on
the property subject thereof by paying the obligations thereby secured; that is to say, they had the
right of redemption as regards the first mortgage, to be exercised within the time and in the manner
prescribed by law and the mortgage deed; and as regards the second mortgage, sought to be
judicially foreclosed but yet unforeclosed, they had the so-called equity of redemption."

The right of PWHAS to redeem the subject properties finds support in Section 6 of Act 3135 itself
which gives not only the mortgagor-debtor the right to redeem, but also his successors-in-interest.
As vendee of the subject properties, PWHAS qualifies as such a successor-in-interest of the
spouses Litonjua.42

Likewise, we rule that the Dys and the Maxinos validly redeemed Lots 1 and 6.

The requisites of a valid redemption are present

The requisites for a valid redemption are: (1) the redemption must be made within twelve (12)
months from the time of the registration of the sale in the Office of the Register of Deeds; (2)
payment of the purchase price of the property involved, plus 1% interest per month thereon in
addition, up to the time of redemption, together with the amount of any assessments or taxes which
the purchaser may have paid thereon after the purchase, also with 1% interest on such last named
amount; and (3) written notice of the redemption must be served on the officer who made the sale
and a duplicate filed with the Register of Deeds of the province. 43

There is no issue as to the first and third requisites. It is undisputed that the Dys and the Maxinos
made the redemption within the 12-month period from the registration of the sale. The Dys and
Maxinos effected the redemption on May 24, 1984, when they deposited P50,373.42 with the
Provincial Sheriff, and on June 19, 1984, when they deposited an additional P83,850.50. Both dates
were well within the one-year redemption period reckoned from the June 24, 1983 date of
registration of the foreclosure sale. Likewise, the Provincial Sheriff who made the sale was properly
notified of the redemption since the Dys and Maxinos deposited with him the redemption money
after both DRBI and the Yaps refused to accept it.

The second requisite, the proper redemption price, is the main subject of contention of the opposing
parties.

The Yaps argue that P40,000.00 cannot be a valid tender of redemption since the amount of the
auction sale was P216,040.93. They further contend that the mortgage is indivisible so in order for
the tender to be valid and effectual, it must be for the entire auction price plus legal interest.

We cannot subscribe to the Yaps argument on the indivisibility of the mortgage. As held in the case
of Philippine National Bank v. De los Reyes,44 the doctrine of indivisibility of mortgage does not apply
once the mortgage is extinguished by a complete foreclosure thereof as in the instant case. The
Court held:

The parties were accordingly embroiled in a hermeneutic disparity on their aforesaid contending
positions. Yet, the rule on the indivisibility of mortgage finds no application to the case at bar. The
particular provision of the Civil Code referred to provides:

Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the
successors in interest of the debtor or of the creditor.

Therefore, the debtors heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditors heir who received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is excepted the case in which, there being several things given in mortgage or
pledge, each one of these guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially answerable is satisfied.

From the foregoing, it is apparent that what the law proscribes is the foreclosure of only a portion of
the property or a number of the several properties mortgaged corresponding to the unpaid portion of
the debt where before foreclosure proceedings partial payment was made by the debtor on his total
outstanding loan or obligation. This also means that the debtor cannot ask for the release of any
portion of the mortgaged property or of one or some of the several lots mortgaged unless and until
the loan thus, secured has been fully paid, notwithstanding the fact that there has been a partial
fulfillment of the obligation. Hence, it is provided that the debtor who has paid a part of the debt
cannot ask for the proportionate extinguishment of the mortgage as long as the debt is not
completely satisfied.

That the situation obtaining in the case at bar is not within the purview of the aforesaid rule on
indivisibility is obvious since the aggregate number of the lots which comprise the collaterals for the
mortgage had already been foreclosed and sold at public auction. There is no partial payment nor
partial extinguishment of the obligation to speak of. The aforesaid doctrine, which is actually
intended for the protection of the mortgagee, specifically refers to the release of the mortgage which
secures the satisfaction of the indebtedness and naturally presupposes that the mortgage is existing.
Once the mortgage is extinguished by a complete foreclosure thereof, said doctrine of indivisibility
ceases to apply since, with the full payment of the debt, there is nothing more to secure. 45 (Emphasis
supplied.)

Nothing in the law prohibits the piecemeal redemption of properties sold at one foreclosure
proceeding. In fact, in several early cases decided by this Court, the right of the mortgagor or
redemptioner to redeem one or some of the foreclosed properties was recognized.

In the 1962 case of Castillo v. Nagtalon,46 ten parcels of land were sold at public auction. Nagtalon,
who owned three of the ten parcels of land sold, wanted to redeem her properties. Though the
amount she tendered was found as insufficient to effectively release her properties, the Court held
that the tender of payment was made timely and in good faith and thus, in the interest of justice,
Nagtalon was given the opportunity to complete the redemption purchase of three of the ten parcels
of land foreclosed.

Also, in the later case of Dulay v. Carriaga,47 wherein Dulay redeemed eight of the seventeen parcels
of land sold at public auction, the trial court declared the piecemeal redemption of Dulay as void.
Said order, however, was annulled and set aside by the Court on certiorari and the Court upheld the
redemption of the eight parcels of land sold at public auction.

Clearly, the Dys and Maxinos can effect the redemption of even only two of the five properties
foreclosed. And since they can effect a partial redemption, they are not required to pay
the P216,040.93 considering that it is the purchase price for all the five properties foreclosed.

So what amount should the Dys and Maxinos pay in order for their redemption of the two properties
be deemed valid considering that when the five properties were auctioned, they were not separately
valued?

Contrary to the Yaps contention, the amount paid by the Dys and Maxinos within the redemption
period for the redemption of just two parcels of land was not only P40,000.00 but totaled
to P134,223.92 (P50,373.42 paid on May 28, 1984 plus P83,850.50 paid on June 19, 1984). That is
more than 60% of the purchase price for the five foreclosed properties, to think the Dys and Maxinos
were only redeeming two properties. We find that it can be considered a sufficient amount if we were
to base the proper purchase price on the proportion of the size of Lots 1 and 6 with the total size of
the five foreclosed properties, which had the following respective sizes:

Lot 1 61,371 square meters

Lot 6 16,087 square meters
Lot 5 2,900 square meters
Lot 4 27,875 square meters
Lot 8 39,888 square meters
TOTAL 148,121 square meters

The two subject properties to be redeemed, Lots 1 and 6, have a total area of 77,458 square meters
or roughly 52% of the total area of the foreclosed properties. Even with this rough approximation, we
rule that there is no reason to invalidate the redemption of the Dys and Maxinos since they tendered
60% of the total purchase price for properties constituting only 52% of the total area. However, there
is a need to remand the case for computation of the pro-rata value of Lots 1 and 6 based on their
true values at that time of redemption for the purposes of determining if there is any deficiency or
overpayment on the part of the Dys and Maxinos.

As to the award of damages in favor of the Dys and Maxinos, we agree with the appellate court for
granting the same.

The CA correctly observed that the act of DRBI in falsifying the Sheriffs Certificate of Sale to include
Lots 3 and 846, even if said additional lots were not among the properties foreclosed, was the
proximate cause of the pecuniary loss suffered by the Dys and Maxinos in the form of lost income
from Lot 3.

Likewise, the CA also correctly awarded moral damages. Paragraph 10, Article 2219 of the Civil
Code provides that moral damages may be recovered in case of acts and actions referred to in
Article 21 of the same Code. Article 21 reads:

ART. 21 Any person who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.

As previously discussed, DRBIs act of maliciously including two additional properties in the Sheriffs
Certificate of Sale even if they were not included in the foreclosed properties caused the Dys and
Maxinos pecuniary loss. Hence, DRBI is liable to pay moral damages.

The award of exemplary damages is similarly proper. Exemplary or corrective damages are
imposed, by way of example or correction for the public good, in addition to the moral, temperate,
liquidated or compensatory damages.48 We cannot agree more with the following ratio of the
appellate court in granting the same:

Additionally, what is alarming to the sensibilities of the Court is the deception employed by the bank
in adding other properties in the certificate of sale under public auction without them being included
in the public auction conducted. It cannot be overemphasized that being a lending institution,
prudence dictates that it should employ good faith and due diligence with the properties entrusted to
it. It was the bank which submitted the properties ought to be foreclosed to the sheriff. It only
submitted five (5) properties for foreclosure. Yet, it caused the registration of the Certificate of Sale
under public auction which listed more properties than what was foreclosed. On this aspect,
exemplary damages in the amount of P200,000.00 are in order.49
There being an award of exemplary damages, the award of attorneys fees is likewise proper as
provided in paragraph 1, Article 2208 of the Civil Code.

WHEREFORE, the petitions for review on certiorari are DENIED for lack of merit. The Decision
dated May 17, 2005 and Resolution dated March 15, 2006 of the Court of Appeals in CA-G.R. C.V.
No. 57205 are hereby AFFIRMED with the MODIFICATION that the case is REMANDED to the
Regional Trial Court of Negros Oriental, Branch 44, Dumaguete City, for the computation of the pro-
rata value of properties covered by TCT No. T-14777 (Lot 1) and TCT No. T-14781 (Lot 6) of the
Registry of Deeds of Negros Oriental at the time of redemption to determine if there is a deficiency to
be settled by or overpayment to be refunded to respondent Spouses Zosimo Dy, Sr. and Natividad
Chiu and Spouses Marcelino C. Maxino and Remedios Lasola with regard to the redemption money
they paid.

With costs against the petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 171206 September 23, 2013

HEIRS OF THE LATE SPOUSES FLA VIANO MAGLASANG and SALUD ADAZA-MAGLASANG,
namely, OSCAR A. MAGLASANG, EDGAR A. MAGLASANG, CONCEPCION CHONA A.
MAGLASANG, GLENDA A. MAGLASANG-ARNAIZ, LERMA A. MAGLASANG, FELMA A.
MAGLASANG, FE DORIS A. MAGLASANG, LEOLINO A. MAGLASANG, MARGIE LEILA A.
MAGLASANG,MA. MILALIE A. MAGLASANG, SALUD A. MAGLASANG, and MA. FLASALIE A.
MAGLASANG, REPRESENTING THE ESTATES OF THEIR AFORE-NAMEDDECEASED
PARENTS, Petitioners,
vs.
MANILA BANKING CORPORATION, now substituted by FIRST SOVEREIGN ASSET
MANAGEMENT SPV-AMC, INC. FSAMI, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated July 20, 2005 and
Resolution3 dated January 4, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 50410 which
dismissed petitioners appeal and affirmed the Decision4 dated April 6, 1987 of the Regional Trial
Court of Ormoc City, Branch 12 (RTC) directing petitioners to jointly and severally pay respondent
Manila Banking Corporation the amount of P434,742.36, with applicable interests, representing the
deficiency of the formers total loan obligation to the latter after the extra-judicial foreclosure of the
real estate mortgage subject of this case, including attorneys fees and costs of suit.

The Facts
On June 16, 1975, spouses Flaviano and Salud Maglasang (Sps.Maglasang) obtained a credit line
from respondent5 in the amount of P350,000.00 which was secured by a real estate
mortgage6 executed over seven of their properties7 located in Ormoc City and the Municipality of
Kananga, Province of Leyte.8 They availed of their credit line by securing loans in the amounts
of P209,790.50 and P139,805.83 on October 24, 1975and March 15, 1976, respectively,9 both of
which becoming due and demandable within a period of one year. Further, the parties agreed that
the said loans would earn interest at 12% per annum (p.a.) and an additional 4% penalty would be
charged upon default.10

After Flaviano Maglasang (Flaviano) died intestate on February 14,1977, his widow Salud
Maglasang (Salud) and their surviving children, herein petitioners Oscar (Oscar), Concepcion
Chona, Lerma, Felma, FeDoris, Leolino, Margie Leila, Ma. Milalie, Salud and Ma. Flasalie, all
surnamed Maglasang, and Glenda Maglasang-Arnaiz, appointed11 their brother petitioner Edgar
Maglasang (Edgar) as their attorney-in-fact.12 Thus, on March 30, 1977, Edgar filed a verified petition
for letters of administration of the intestate estate of Flaviano before the then Court of First Instance
of Leyte, Ormoc City, Branch 5 (probate court), docketed as Sp. Proc. No. 1604-0. 13 On August 9,
1977, the probate court issued an Order14 granting the petition, thereby appointing Edgar as the
administrator15 of Flavianos estate.

In view of the issuance of letters of administration, the probate court, on August 30, 1977, issued a
Notice to Creditors16 for the filing of money claims against Flavianos estate. Accordingly, as one of
the creditors of Flaviano, respondent notified17 the probate court of its claim in the amount
of P382,753.19 as of October 11, 1978, exclusive of interests and charges.

During the pendency of the intestate proceedings, Edgar and Oscar were able to obtain several
loans from respondent, secured by promissory notes18 which they signed.

In an Order19 dated December 14, 1978 (December 14, 1978 Order),the probate court terminated the
proceedings with the surviving heirs executing an extra-judicial partition of the properties of
Flavianos estate. The loan obligations owed by the estate to respondent, however, remained
unsatisfied due to respondents certification that Flavianos account was undergoing a restructuring.
Nonetheless, the probate court expressly recognized the rights of respondent under the mortgage
and promissory notes executed by the Sps. Maglasang, specifically, its "right to foreclose the same
within the statutory period."20

In this light, respondent proceeded to extra-judicially foreclose the mortgage covering the Sps.
Maglasangs properties and emerged as the highest bidder at the public auction for the amount
of P350,000.00.21 There, however, remained a deficiency on Sps. Maglasangs obligation to
respondent. Thus, on June 24, 1981, respondent filed a suit to recover the deficiency amount
of P250,601.05 as of May 31, 1981 against the estate of Flaviano, his widow Salud and petitioners,
docketed as Civil Case No. 1998-0.22

The RTC Ruling and Subsequent Proceedings

After trial on the merits, the RTC (formerly, the probate court)23 rendered a Decision24 on April 6, 1987
directing the petitioners to pay respondent, jointly and severally, the amount of P434,742.36 with
interest at the rate of 12% p.a., plus a 4% penalty charge, reckoned from September 5,1984 until
fully paid.25 The RTC found that it was shown, by a preponderance of evidence, that petitioners, after
the extra-judicial foreclosure of all the properties mortgaged, still have an outstanding obligation in
the amount and as of the date as above-stated. The RTC also found in order the payment of
interests and penalty charges as above-mentioned as well as attorneys fees equivalent to 10% of
the outstanding obligation.26
Dissatisfied, petitioners elevated the case to the CA on appeal, contending, 27 inter alia, that the
remedies available to respondent under Section 7, Rule 86 of the Rules of Court (Rules) are
alternative and exclusive, such that the election of one operates as a waiver or abandonment of the
others. Thus, when respondent filed its claim against the estate of Flaviano in the proceedings
before the probate court, it effectively abandoned its right to foreclose on the mortgage. Moreover,
even on the assumption that it has not so waived its right to foreclose, it is nonetheless barred from
filing any claim for any deficiency amount.

During the pendency of the appeal, Flavianos widow, Salud, passed away on July 25, 1997. 28

The CA Ruling

In a Decision29 dated July 20, 2005, the CA denied the petitioners appeal and affirmed the RTCs
Decision. At the outset, it pointed out that the probate court erred when it, through the December 14,
1978 Order, closed and terminated the proceedings in Sp. Proc. No. 1604-0 without first satisfying
the claims of the creditors of the estate in particular, respondent in violation of Section 1, Rule 90
of the Rules.30 As a consequence, respondent was not able to collect from the petitioners and
thereby was left with the option of foreclosing the real estate mortgage. 31 Further, the CA held that
Section 7, Rule 86 of the Rules does not apply to the present case since the same does not involve
a mortgage made by the administrator over any property belonging to the estate of the
decedent.32 According to the CA, what should apply is Act No. 313533 which entitles respondent to
claim the deficiency amount after the extra-judicial foreclosure of the real estate mortgage of Sps.
Maglasangs properties.34

Petitioners motion for reconsideration was subsequently denied in a Resolution 35 dated January 4,
2006. Hence, the present recourse.

The Issue Before the Court

The essential issue in this case is whether or not the CA erred in affirming the RTCs award of the
deficiency amount in favor of respondent.

Petitioners assert36 that it is not Act No. 3135 but Section 7, Rule 86of the Rules which applies in this
case. The latter provision provides alternative and exclusive remedies for the satisfaction of
respondents claim against the estate of Flaviano.37 Corollarily, having filed its claim against the
estate during the intestate proceedings, petitioners argue that respondent had effectively waived the
remedy of foreclosure and, even assuming that it still had the right to do so, it was precluded from
filing a suit for the recovery of the deficiency obligation. 38

Likewise, petitioners maintain that the extra-judicial foreclosure of the subject properties was null
and void, not having been conducted in the capital of the Province of Leyte in violation of the
stipulations in the real estate mortgage contract.39 They likewise deny any personal liability for the
loans taken by their deceased parents.40

The Courts Ruling

The petition is partly meritorious.

Claims against deceased persons should be filed during the settlement proceedings of their
estate.41 Such proceedings are primarily governed by special rules found under Rules 73 to 90 of the
Rules, although rules governing ordinary actions may, as far as practicable, apply
suppletorily.42 Among these special rules, Section 7, Rule 86 of the Rules (Section 7, Rule86)
provides the rule in dealing with secured claims against the estate:

SEC. 7. Mortgage debt due from estate. A creditor holding a claim against the deceased secured
by a mortgage or other collateral security, may abandon the security and prosecute his claim in the
manner provided in this rule, and share in the general distribution of the assets of the estate; or he
may foreclose his mortgage or realize upon his security, by action in court, making the executor or
administrator a party defendant, and if there is a judgment for a deficiency, after the sale of the
mortgaged premises, or the property pledged, in the foreclosure or other proceeding to realize upon
the security, he may claim his deficiency judgment in the manner provided in the preceding section;
or he may rely upon his mortgage or other security alone, and foreclose the same at any time within
the period of the statute of limitations, and in that event he shall not be admitted as a creditor, and
shall receive no share in the distribution of the other assets of the estate; but nothing herein
contained shall prohibit the executor or administrator from redeeming the property mortgaged or
pledged, by paying the debt for which it is held as security, under the direction of the court, if the
court shall adjudged it to be for the best interest of the estate that such redemption shall be made.
(Emphasis and underscoring supplied)

As the foregoing generally speaks of "a creditor holding a claim against the deceased secured by a
mortgage or other collateral security" as above-highlighted, it may be reasonably concluded that the
aforementioned section covers all secured claims, whether by mortgage or any other form of
collateral, which a creditor may enforce against the estate of the deceased debtor. On the contrary,
nowhere from its language can it be fairly deducible that the said section would as the CA
interpreted narrowly apply only to mortgages made by the administrator over any property
belonging to the estate of the decedent. To note, mortgages of estate property executed by the
administrator, are also governed by Rule 89 of the Rules, captioned as "Sales, Mortgages, and
Other Encumbrances of Property of Decedent."

In this accord, it bears to stress that the CAs reliance on Philippine National Bank v. CA 43 (PNB) was
misplaced as the said case did not, in any manner, limit the scope of Section 7, Rule 86. It only
stated that the aforesaid section equally applies to cases where the administrator mortgages the
property of the estate to secure the loan he obtained.44 Clearly, the pronouncement was a ruling of
inclusion and not one which created a distinction. It cannot, therefore, be doubted that it is Section 7,
Rule 86which remains applicable in dealing with a creditors claim against the mortgaged property of
the deceased debtor, as in this case, as well as mortgages made by the administrator, as that in the
PNB case.

Jurisprudence breaks down the rule under Section 7, Rule 86 and explains that the secured creditor
has three remedies/options that he may alternatively adopt for the satisfaction of his indebtedness.
In particular, he may choose to: (a) waive the mortgage and claim the entire debt from the estate of
the mortgagor as an ordinary claim; (b) foreclose the mortgage judicially and prove the deficiency as
an ordinary claim; and (c) rely on the mortgage exclusively, or other security and foreclose the same
before it is barred by prescription, without the right to file a claim for any deficiency.45 It must,
however, be emphasized that these remedies are distinct, independent and mutually exclusive from
each other; thus, the election of one effectively bars the exercise of the others. With respect to real
properties, the Court in Bank of America v. American Realty Corporation46 pronounced:

In our jurisdiction, the remedies available to the mortgage creditor are deemed alternative and not
cumulative. Notably, an election of one remedy operates as a waiver of the other. For this purpose, a
remedy is deemed chosen upon the filing of the suit for collection or upon the filing of the complaint
in an action for foreclosure of mortgage, pursuant to the provision of Rule 68 of the 1997 Rules of
Civil Procedure. As to extrajudicial foreclosure, such remedy is deemed elected by the mortgage
creditor upon filing of the petition not with any court of justice but with the Office of the Sheriff of the
province where the sale is to be made, in accordance with the provisions of Act No. 3135, as
amended by Act No.4118.47 (Emphasis supplied)

Anent the third remedy, it must be mentioned that the same includes the option of extra-judicially
foreclosing the mortgage under Act No. 3135,as availed of by respondent in this case. However, the
plain result of adopting the last mode of foreclosure is that the creditor waives his right to recover
any deficiency from the estate.48 These precepts were discussed in the PNB case, citing Perez v.
Philippine National Bank49 which overturned the earlier Pasno v. Ravina ruling:50

Case law now holds that this rule grants to the mortgagee three distinct, independent and mutually
exclusive remedies that can be alternatively pursued by the mortgage creditor for the satisfaction of
his credit in case the mortgagor dies, among them:

(1) to waive the mortgage and claim the entire debt from the estate of the mortgagor as an
ordinary claim;

(2) to foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and

(3) to rely on the mortgage exclusively, foreclosing the same at anytime before it is barred by
prescription without right to file a claim for any deficiency

In Perez v. Philippine National Bank, reversing Pasno vs. Ravina, we held:

The ruling in Pasno v. Ravina not having been reiterated in any other case, we have carefully
reexamined the same, and after mature deliberation have reached the conclusion that the dissenting
opinion is more in conformity with reason and law. Of the three alternative courses that section 7,
Rule 87 (now Rule 86), offers the mortgage creditor, to wit, (1) to waive the mortgage and claim the
entire debt from the estate of the mortgagor as an ordinary claim; (2) foreclose the mortgage
judicially and prove any deficiency as an ordinary claim; and (3) to rely on the mortgage exclusively,
foreclosing the same at any time before it is barred by prescription, without right to file a claim for
any deficiency, the majority opinion in Pasno v. Ravina, in requiring a judicial foreclosure, virtually
wipes out the third alternative conceded by the Rules to the mortgage creditor, and which would
precisely include extra-judicial foreclosures by contrast with the second alternative.

The plain result of adopting the last mode of foreclosure is that the creditor waives his right to
recover any deficiency from the estate. Following the Perez ruling that the third mode includes

extrajudicial foreclosure sales, the result of extrajudicial foreclosure is that the creditor waives any
further deficiency claim. x x x.51 (Emphases and underscoring supplied; italics in the original)

To obviate any confusion, the Court observes that the operation of Act No. 3135 does not entirely
discount the application of Section 7, Rule 86, or vice-versa. Rather, the two complement each other
within their respective spheres of operation. On the one hand, Section 7, Rule 86 lays down the
options for the secured creditor to claim against the estate and, according to jurisprudence, the
availment of the third option bars him from claiming any deficiency amount. On the other hand, after
the third option is chosen, the procedure governing the manner in which the extra-judicial foreclosure
should proceed would still be governed by the provisions of Act No. 3135.Simply put, Section 7, Rule
86 governs the parameters and the extent to which a claim may be advanced against the estate,
whereas Act No. 3135sets out the specific procedure to be followed when the creditor subsequently
chooses the third option specifically, that of extra-judicially foreclosing real property belonging to
the estate. The application of the procedure under Act No. 3135 must be concordant with Section 7,
Rule 86 as the latter is a special rule applicable to claims against the estate, and at the same time,
since Section 7, Rule 86 does not detail the procedure for extra-judicial foreclosures, the formalities
governing the manner of availing of the third option such as the place where the application for
extra-judicial foreclosure is filed, the requirements of publication and posting and the place of sale
must be governed by Act No. 3135.

In this case, respondent sought to extra-judicially foreclose the mortgage of the properties previously
belonging to Sps. Maglasang (and now, their estates) and, therefore, availed of the third option. Lest
it be misunderstood, it did not exercise the first option of directly filing a claim against the estate, as
petitioners assert, since it merely notified52 the probate court of the outstanding amount of its claim
against the estate of Flaviano and that it was currently restructuring the account. 53 Thus, having
unequivocally opted to exercise the third option of extra-judicial foreclosure under Section 7, Rule
86, respondent is now precluded from filing a suit to recover any deficiency amount as earlier
discussed.

As a final point, petitioners maintain that the extra-judicial foreclosure of the subject properties was
null and void since the same was conducted in violation of the stipulation in the real estate mortgage
contract stating that the auction sale should be held in the capital of the province where the
properties are located, i.e., the Province of Leyte.

The Court disagrees.

As may be gleaned from the records, the stipulation under the real estate mortgage 54 executed by
Sps. Maglasang which fixed the place of the foreclosure sale at Tacloban City lacks words of
exclusivity which would bar any other acceptable for a wherein the said sale may be conducted, to
wit:

It is hereby agreed that in case of foreclosure of this mortgage under Act 3135, the auction sale shall
be held at the capital of the province if the property is within the territorial jurisdiction of the province
concerned, or shall be held in the city if the property is within the territorial jurisdiction of the city
concerned; x x x.55

Case law states that absent such qualifying or restrictive words to indicate the exclusivity of the
agreed forum, the stipulated place should only be as an additional, not a limiting venue. 56 As a
consequence, the stipulated venue and that provided under Act No. 3135 can be applied
alternatively.

In particular, Section 2 of Act No. 3135 allows the foreclosure sale to be done within the province
where the property to be sold is situated, viz.:

SEC. 2. Said sale cannot be made legally outside of the province which the property sold is situated;
and in case the place within said province in which the sale is to be made is subject to stipulation,
such sale shall be made in said place or in the municipal building of the municipality in which the
property or part thereof is situated. (Italics supplied) ..

In this regard, since the auction sale was conducted in Ormoc City, which is within the territorial
jurisdiction of the Province of Leyte, then the Court finds sufficient compliance with the above-cited
requirement.
All told, finding that the extra-judicial foreclosure subject of this case was properly conducted in
accordance with the formalities of Act No. 3135,the Court upholds the same as a valid exercise of
respondent's third option under Section 7, Rule 86. To reiterate, respondent cannot, however, file
any suit to recover any deficiency amount since it effectively waived its right thereto when it chose to
avail of extra-judicial foreclosure as jurisprudence instructs.

WHEREFORE, the petition is PARTLY GRANTED. The complaint for the recovery of the deficiency
amount after extra-judicial foreclosure filed by respondent Manila Banking Corporation is hereby
DISMISSED. The extra-judicial foreclosure of the mortgaged properties, however, stands.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 170215 August 28, 2007

SPS. ESMERALDO and ELIZABETH SUICO, Petitioners,

vs.
PHILIPPINE NATIONAL BANK and HON. COURT OF APPEALS, Respondents.

DECISION

CHICO-NAZARIO, J.:

Herein petitioners, Spouses Esmeraldo and Elizabeth Suico, obtained a loan from the Philippine
National Bank (PNB) secured by a real estate mortgage1 on real properties in the name of the
former. The petitioners were unable to pay their obligation prompting the PNB to extrajudicially
foreclose the mortgage over the subject properties before the City Sheriff of Mandaue City under
EJF Case No. 92-5-15.

The petitioners thereafter filed a Complaint against the PNB before the Regional Trial Court (RTC) of
Mandaue City, Branch 55, docketed as Civil Case No. MAN-2793 for Declaration of Nullity of
Extrajudicial Foreclosure of Mortgage.2

The Complaint alleged that on 6 May 1992, PNB filed with the Office of the Mandaue City Sheriff a
petition for the extrajudicial foreclosure of mortgage constituted on the petitioners properties (subject
properties) for an outstanding loan obligation amounting to P1,991,770.38 as of 10 March 1992. The
foreclosure case before the Office of the Mandaue City Sheriff, which was docketed as EJF Case
No. 92-5-15, covered the following properties:

TCT NO. 13196

"A parcel of land (Lot 701, plan 11-5121 Amd-2) situated at Mandaue City, bounded on the NE., and
SE., by lot no. 700; on the SW. by lots nos. 688 and 702; on the NW. by lot no. 714, containing an
area of 2,078 sq. m. more or less."

TAX DECL. NO. 00553

"A parcel of land situated at Tabok, Mandaue City, Cad. Lot No. 700-C-1; bounded on the North by
Lot No. 701 & 700-B; on the South by Lot No. 700-C-3; on the East by lot no. 700-C-3 and on the
West by Lot no. 688, containing an area of 200 square meters, more or less."

TAX DECL. NO. 00721

"Two (2) parcels of land situated at Tabok, Mandaue City, Cad. lot nos. 700-C-3 and 700-C-2;
bounded on the North by Lot Nos. 700-C-1 and 700-B; on the South by Lot No. 700-D; on the East
by Lot Nos. 695 and 694; and on the West by Lot Nos. 688 and 700-C-1, containing an aggregate
area of 1,683 sq. m. more or less."

TAX DECL. NO. 0237

"A parcel of land situated at Tabok, Mandaue City, Cad. Lot no. 700-B. Bounded on the NE. by (Lot
699) 109, (Lot No. 69) 110, on the SE (Lot 700-C) 115, on the NW. (Lot 700-A) 112 and on the SW.
(Lot 701) 113; containing an area of .1785 HA more or less."

TAX DECL. NO. 9267

"A parcel of land situated at Tabok, Mandaue City, Cad. Lot no. 700-A. Bounded on the NE. by (Lot
699) 109, on the South West by (Lot 701) 113, on the SE. by (Lot 700-B) 111, and on the NW. by (lot
714) 040039; containing an area of .1785 HA more or less."3

Petitioners claimed that during the foreclosure sale of the subject properties held on 30 October
1992, PNB, as the lone bidder, offered a bid in the amount of P8,511,000.00. By virtue of the said
bid, a Certificate of Sale of the subject properties was issued by the Mandaue City Sheriff in favor of
PNB. PNB did not pay to the Sheriff who conducted the auction sale the amount of its bid which
was P8,511,000.00 or give an accounting of how said amount was applied against petitioners
outstanding loan, which, as of 10 March 1992, amounted only to P1,991,770.38. Since the amount
of the bid grossly exceeded the amount of petitioners outstanding obligation as stated in the
extrajudicial foreclosure of mortgage, it was the legal duty of the winning bidder, PNB, to deliver to
the Mandaue City Sheriff the bid price or what was left thereof after deducting the amount of
petitioners outstanding obligation. PNB failed to deliver the amount of their bid to the Mandaue City
Sheriff or, at the very least, the amount of such bid in excess of petitioners outstanding obligation.

One year after the issuance of the Certificate of Sale, PNB secured a Certificate of Final Sale from
the Mandaue City Sheriff and, as a result, PNB transferred registration of all the subject properties to
its name.

Owing to the failure of PNB as the winning bidder to deliver to the petitioners the amount of its bid or
even just the amount in excess of petitioners obligation, the latter averred that the extrajudicial
foreclosure conducted over the subject properties by the Mandaue City Sheriff, as well as the
Certificate of Sale and the Certificate of Finality of Sale of the subject properties issued by the
Mandaue City Sheriff, in favor of PNB, were all null and void.

Petitioners, in their Complaint in Civil Case No. MAN-2793, prayed for:

a) Declaring the Nullity of Extra-judicial Foreclosure of Mortgage under EJF Case No. 92-5-
15 including the certificate of sale and the final deed of sale of the properties affected;
 b) Order[ing] the cancellation of the certificates of titles and tax declaration already in the
name of [herein respondent] PNB and revert the same back to herein [petitioners] name;

c) Ordering the [PNB] to pay [petitioners] moral damages amounting to more

than P1,000,000,00; Exemplary damages of P500,000.00; Litigation expenses
of P100,000.00 and attorneys fees of P300,000.00.4

PNB filed a Motion to Dismiss5 Civil Case No. MAN-2793 citing the pendency of another action
between the same parties, specifically Civil Case No. CEB-15236 before the RTC of Cebu City
entitled, PNB v. Sps. Esmeraldo and Elizabeth Suico where PNB was seeking the payment of the
balance of petitioners obligation not covered by the proceeds of the auction sale held on 30 October
1992. PNB argued that these two cases involve the same parties. Petitioners opposed the Motion to
Dismiss filed by PNB.6 Subsequently, the Motion to Dismiss Civil Case No. MAN-2793 was denied in
the Order of the RTC dated 15 July 1997;7 thus, PNB was constrained to file its Answer.8

PNB disputed petitioners factual narration. PNB asserted that petitioners had other loans which had
likewise become due. Petitioners outstanding obligation of P1,991,770.38 as of 10 March 1992 was
exclusive of attorneys fees, and other export related obligations which it did not consider due and
demandable as of said date. PNB maintained that the outstanding obligation of the petitioners under
their regular and export- related loans was already more than the bid price of P8,511,000.00,
contradicting the claim of surplus proceeds due the petitioners. Petitioners were well aware that their
total principal outstanding obligation on the date of the auction sale was P5,503,293.21.

PNB admitted the non-delivery of the bid price to the sheriff and the execution of the final deed of
sale, but claimed that it had not transferred in its name all the foreclosed properties because the
petition to register in its name Transfer Certificates of Title (TCT) No. 37029 and No. 13196 were still
pending.

On 2 February 1999, the RTC rendered its Decision9 in Civil Case No. MAN-2793 for the declaration
of nullity of the extrajudicial foreclosure of mortgage, the dispositive portion of which states:

WHEREFORE, based on the foregoing, judgment is rendered in favor of [herein petitioners] Sps.
Esmeraldo & Elizabeth Suico and against [herein respondent], Philippine National Bank (PNB),
declaring the nullity of Extrajudicial Foreclosure of Mortgage under EJF Case No. 92-5-15, including
the certificate of sale and the final deed of sale of the subject properties; ordering the cancellation of
the certificates of titles and tax declaration already in the name of [respondent] PNB, if any, and
revert the same back to the [petitioners] name; ordering [respondent] PNB to cause a new
foreclosure proceeding, either judicially or extra-judicially.

Furnish parties thru counsels copy of this order.10

In granting the nullification of the extrajudicial foreclosure of mortgage, the RTC reasoned that given
that petitioners had other loan obligations which had not yet matured on 10 March 1992 but became
due by the date of the auction sale on 30 October 1992, it does not justify the shortcut taken by PNB
and will not excuse it from paying to the Sheriff who conducted the auction sale the excess bid in the
foreclosure sale. To allow PNB to do so would constitute fraud, for not only is the filing fee in the said
foreclosure inadequate but, worse, the same constitutes a misrepresentation regarding the amount
of the indebtedness to be paid in the foreclosure sale as posted and published in the notice of
sale.11 Such misrepresentation is fatal because in an extrajudicial foreclosure of mortgage, notice of
sale is jurisdictional. Any error in the notice of sale is fatal and invalidates the notice. 12
When the PNB appealed its case to the Court of Appeals,13 the appellate court rendered a
Decision14 dated 12 April 2005, the fallo of which provides:

WHEREFORE, premises considered, the instant appeal is GRANTED. The questioned decision of
the Regional Trial Court of Mandaue City, Branch 55 dated February 2, 1999 is hereby REVERSED
and SET ASIDE. Accordingly, the extra judicial foreclosure of mortgage under EJF 92-5-15 including
the certificate of sale and final deed of sale executed appurtenant thereto are hereby declared to be
valid and binding.15

In justifying reversal, the Court of Appeals held:

A careful scrutiny of the evidence extant on record would show that in a letter dated January 12,
1994, [petitioners] expressly admitted that their outstanding principal obligation amounted to P5.4
Million and in fact offered to redeem the properties at P6.5 Million. They eventually increased their
offer at P7.5 Million as evidenced by that letter dated February 4, 1994. And finally on May 16, 1994,
they offered to redeem the foreclosed properties by paying the whole amount of the obligation by
installment in a period of six years. All those offers made by the [petitioners] not only contradicted
their very assertion that their obligation is merely that amount appearing on the petition for
foreclosure but are also indicative of the fact that they have admitted the validity of the extra judicial
foreclosure proceedings and in effect have cured the impugned defect. Thus, for the [petitioners] to
insist that their obligation is only over a million is unworthy of belief. Oddly enough, it is evident from
their acts that they themselves likewise believe otherwise.

Even assuming that indeed there was a surplus and the [PNB] is retaining more than the proceeds
of the sale than it is entitled, this fact alone will not affect the validity of the sale but simply gives the
[petitioners] a cause of action to recover such surplus. In fine, the failure of the [PNB] to remit the
surplus, if any, is not tantamount to a non-compliance of statutory requisites that could constitute a
jurisdictional defect invalidating the sale. This situation only gives rise to a cause of action on the
part of the [petitioners] to recover the alleged surplus from the [PNB]. This ruling is in harmony with
the decisional rule that in suing for the return of the surplus proceeds, the mortgagor is deemed to
have affirmed the validity of the sale since nothing is due if no valid sale has been made. 16

Petitioners filed a Motion for Reconsideration17 of the foregoing Decision, but the Court of Appeals
was not persuaded. It maintained the validity of the foreclosure sale and, in its Amended Decision
dated 28 September 2005, it merely directed PNB to pay the deficiency in the filing fees, holding
thus:

WHEREFORE, Our decision dated April 12, 2005 is hereby AMENDED. [Herein respondent PNB] is
hereby required to pay the deficiency in the filing fees due on the petition for extra judicial
foreclosure sale to be based on the actual amount of mortgage debts at the time of filing thereof. In
all other respects, Our decision subject of herein petitioners] motion for reconsideration is hereby
AFFIRMED.18

Unflinching, petitioners elevated the case before this Court via the present Petition for Review
essentially seeking the nullification of the extrajudicial foreclosure of the mortgage constituted on the
subject properties. Petitioners forward two reasons for declaring null and void the said extrajudicial
foreclosure: (1) the alleged defect or misrepresentation in the notice of sheriffs sale; and/or (2)
failure of PNB to pay and tender the price of its bid or the surplus thereof to the sheriff.

Petitioners argue that since the Notice of Sheriffs Sale stated that their obligation was
only P1,991,770.38 and PNB bidded P8,511,000.00, the said Notice as well as the consequent sale
of the subject properties were null and void.
It is true that statutory provisions governing publication of notice of mortgage foreclosure sales must
be strictly complied with, and that even slight deviations therefrom will invalidate the notice and
render the sale at least voidable.19 Nonetheless, we must not also lose sight of the fact that the
purpose of the publication of the Notice of Sheriffs Sale is to inform all interested parties of the date,
time and place of the foreclosure sale of the real property subject thereof. Logically, this not only
requires that the correct date, time and place of the foreclosure sale appear in the notice, but also
that any and all interested parties be able to determine that what is about to be sold at the
foreclosure sale is the real property in which they have an interest.20

Considering the purpose behind the Notice of Sheriffs Sale, we disagree with the finding of the RTC
that the discrepancy between the amount of petitioners obligation as reflected in the Notice of Sale
and the amount actually due and collected from the petitioners at the time of the auction sale
constitute fraud which renders the extrajudicial foreclosure sale null and void.

Notices are given for the purpose of securing bidders and to prevent a sacrifice of the property. If
these objects are attained, immaterial errors and mistakes will not affect the sufficiency of the notice;
but if mistakes or omissions occur in the notices of sale, which are calculated to deter or mislead
bidders, to depreciate the value of the property, or to prevent it from bringing a fair price, such
mistakes or omissions will be fatal to the validity of the notice, and also to the sale made pursuant
thereto.21

All these considered, we are of the view that the Notice of Sale in this case is valid. Petitioners failed
to convince this Court that the difference between the amount stated in the Notice of Sale and the
amount of PNBs bid resulted in discouraging or misleading bidders, depreciated the value of the
property or prevented it from commanding a fair price.

The cases cited by the RTC in its Decision do not apply herein. San Jose v. Court of Appeals 22 refers
to a Notice of Sheriffs Sale which did not state the correct number of the transfer certificates of title
of the property to be sold. This Court considered the oversight as a substantial and fatal error which
resulted in invalidating the entire notice. The case of Community Savings and Loan Association, Inc.
v. Court of Appeals23 is also inapplicable, because the said case refers to an extrajudicial foreclosure
tainted with fraud committed by therein petitioners, which denied therein respondents the right to
redeem the property. It actually has no reference to a Notice of Sale.

We now proceed to the effect of the non-delivery by PNB of the bid price or the surplus to the
petitioners.

The following antecedents are not disputed:

For failure to pay their loan obligation secured by a real estate mortgage on the subject properties,
PNB foreclosed the said mortgage. In its petition for foreclosure sale under ACT No. 3135 filed
before the Mandaue City Sheriff, PNB stated therein that petitioners total outstanding obligation
amounted to P1,991,770.38.24 PNB bidded the amount of P8,511,000.00. Admittedly, PNB did not
pay its bid in cash or deliver the excess either to the City Sheriff who conducted the bid or to the
petitioners after deducting the difference between the amount of its bid and the amount of
petitioners obligation in the Notice of Sale. The petitioners then sought to declare the nullity of the
foreclosure, alleging that their loan obligation amounted only to P1,991,770.38 in the Notice of Sale,
and that PNB did not pay its bid in cash or deliver to petitioner the surplus, which is required under
the law.25

On the other hand, PNB claims that petitioners loan obligation reflected in the Notice of Sale dated
10 March 1992 did not include their other obligations, which became due at the date of the auction
sale on 10 October 1992; as well as interests, penalties, other charges, and attorneys fees due on
the said obligation.26

Pertinent provisions under Rule 39 of the Rules of Court on extrajudicial foreclosure sale provide:

SEC. 21. Judgment obligee as purchaser. When the purchaser is the judgment obligee, and no
third-party claim has been filed, he need not pay the amount of the bid if it does not exceed the
amount of his judgment. If it does, he shall pay only the excess. (Emphasis supplied.)

SEC. 39. Obligor may pay execution against obligee. After a writ of execution against property has
been issued, a person indebted to the judgment obligor may pay to the sheriff holding the writ of
execution the amount of his debt or so much thereof as may be necessary to satisfy the judgment, in
the manner prescribed in section 9 of this Rule, and the sheriffs receipt shall be a sufficient
discharge for the amount so paid or directed to be credited by the judgment obligee on the
execution.

Conspicously emphasized under Section 21 of Rule 39 is that if the amount of the loan is equal to
the amount of the bid, there is no need to pay the amount in cash. Same provision mandates that in
the absence of a third-party claim, the purchaser in an execution sale need not pay his bid if it does
not exceed the amount of the judgment; otherwise, he shall pay only the excess. 27 1avvphi1

The raison de etre is that it would obviously be senseless for the Sheriff or the Notary Public
conducting the foreclosure sale to go through the idle ceremony of receiving the money and paying it
back to the creditor, under the truism that the lawmaking body did not contemplate such a pointless
application of the law in requiring that the creditor must bid under the same conditions as any other
bidder. It bears stressing that the rule holds true only where the amount of the bid represents the
total amount of the mortgage debt.28

The question that needs to be addressed in this case is: considering the amount of PNBs bid
of P8,511,000.00 as against the amount of the petitioners obligation of P1,991,770.38 in the Notice
of Sale, is the PNB obliged to deliver the excess?

Petitioners insist that the PNB should deliver the excess. On the other hand PNB counters that on
the date of the auction sale on 30 October 1992, petitioners other loan obligation already exceeded
the amount of P1,991,770.38 in the Notice of Sale.

Rule 68, Section 4 of the Rules of Court provides:

SEC. 4. Disposition of proceeds of sale.- The amount realized from the foreclosure sale of the
mortgaged property shall, after deducting the costs of the sale, be paid to the person foreclosing the
mortgage, and when there shall be any balance or residue, after paying off the mortgage debt due,
the same shall be paid to junior encumbrancers in the order of their priority, to be ascertained by the
court, or if there be no such encumbrancers or there be a balance or residue after payment to them,
then to the mortgagor or his duly authorized agent, or to the person entitled to it.

Under the above rule, the disposition of the proceeds of the sale in foreclosure shall be as follows:

(a) first, pay the costs

(b) secondly, pay off the mortgage debt

 (c) thirdly, pay the junior encumbrancers, if any in the order of priority

(d) fourthly, give the balance to the mortgagor, his agent or the person entitled to it. 29

Based on the foregoing, after payment of the costs of suit and satisfaction of the claim of the first
mortgagee/senior mortgagee, the claim of the second mortgagee/junior mortgagee may be satisfied
from the surplus proceeds. The application of the proceeds from the sale of the mortgaged property
to the mortgagors obligation is an act of payment, not payment by dacion; hence, it is the
mortgagees duty to return any surplus in the selling price to the mortgagor. Perforce, a mortgagee
who exercises the power of sale contained in a mortgage is considered a custodian of the fund and,
being bound to apply it properly, is liable to the persons entitled thereto if he fails to do so. And even
though the mortgagee is not strictly considered a trustee in a purely equitable sense, but as far as
concerns the unconsumed balance, the mortgagee is deemed a trustee for the mortgagor or owner
of the equity of redemption.30

Thus it has been held that if the mortgagee is retaining more of the proceeds of the sale than he is
entitled to, this fact alone will not affect the validity of the sale but simply give the mortgagor a cause
of action to recover such surplus.31

In the case before us, PNB claims that petitioners loan obligations on the date of the auction sale
were already more than the amount of P1,991,770.38 in the Notice of Sale. In fact, PNB claims that
on the date of the auction sale, petitioners principal obligation, plus penalties, interests, attorneys
fees and other charges were already beyond the amount of its bid of P8,511,000.00.

After a careful review of the evidence on record, we find that the same is insufficient to support
PNBs claim. Instead, what is available on record is petitioners Statement of Account as prepared by
PNB and attached as Annex A32 to its Answer with counterclaim.33 In this Statement of Account,
petitioners principal obligation with interest/penalty and attorneys fees as of 30 October 1992
already amounted to P6,409,814.92.

Although petitioners denied the amounts reflected in the Statement of Account from PNB, they did
not interpose any defense to refute the computations therein. Petitioners mere denials, far from
being compelling, had nothing to offer by way of evidence. This then enfeebles the foundation of
petitioners protestation and will not suffice to overcome the computation of their loan obligations as
presented in the Statement of Account submitted by PNB.34

Noticeably, this Statement of Account is the only piece of evidence available before us from which
we can determine the outstanding obligations of petitioners to PNB as of the date of the auction sale
on 10 October 1992.

It did not escape the attention of this Court that petitioners wrote a number of letters to PNB almost
two years after the auction sale,35 in which they offered to redeem the property. In their last letter,
petitioners offered to redeem their foreclosed properties for P9,500,000.00. However, these letters
by themselves cannot be used as bases to support PNBs claim that petitioners obligation is more
than its bid of P8,500,000.00, without any other evidence. There was no computation presented to
show how petitioners obligation already reached P9,500,000.00. Petitioners could very well have
offered such an amount on the basis of the value of the foreclosed properties rather than their total
obligation to PNB. We cannot take petitioners offer to redeem their properties in the amount
of P9,500,000.00 on its face as an admission of the amount of their obligation to PNB without any
supporting evidence.
Given that the Statement of Account from PNB, being the only existing documentary evidence to
support its claim, shows that petitioners loan obligations to PNB as of 30 October 1992 amounted
to P6,409,814.92, and considering that the amount of PNBs bid is P8,511,000.00, there is clearly an
excess in the bid price which PNB must return, together with the interest computed in accordance
with the guidelines laid down by the court in Eastern Shipping Lines v. Court of Appeals, 36 regarding
the manner of computing legal interest, viz:

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.

In Philippine National Bank v. Court of Appeals,37 it was held that:

The rate of 12% interest referred to in Cir. 416 applies only to:

Loan or forbearance of money, or to cases where money is transferred from one person to another
and the obligation to return the same or a portion thereof is adjudged. Any other monetary judgment
which does not involve or which has nothing to do with loans or forbearance of any, money, goods or
credit does not fall within its coverage for such imposition is not within the ambit of the authority
granted to the Central Bank. When an obligation not constituting a loan or forbearance of money is
breached then an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum in accordance with Art. 2209 of the Civil Code. Indeed, the
monetary judgment in favor of private respondent does not involve a loan or forbearance of money,
hence the proper imposable rate of interest is six (6%) per cent.

Using the above rule as yardstick, since the responsibility of PNB arises not from a loan or
forbearance of money which bears an interest rate of 12%, the proper rate of interest for the amount
which PNB must return to the petitioners is only 6%. This interest according to Eastern Shipping
shall be computed from the time of the filing of the complaint. However, once the judgment becomes
final and executory, the "interim period from the finality of judgment awarding a monetary claim and
until payment thereof, is deemed to be equivalent to a forbearance of credit." Thus, in accordance
with the pronouncement in Eastern Shipping, the rate of 12% per annum should be imposed, to be
computed from the time the judgment becomes final and executory until fully satisfied.

It must be emphasized, however, that our holding in this case does not preclude PNB from proving
and recovering in a proper proceeding any deficiency in the amount of petitioners loan obligation
that may have accrued after the date of the auction sale.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated 12 April 2005 is
MODIFIED in that the PNB is directed to return to the petitioners the amount of P2,101,185.08 with
interest computed at 6% per annum from the time of the filing of the complaint until its full payment
before finality of judgment. Thereafter, if the amount adjudged remains unpaid, the interest rate shall
be 12% per annum computed from the time the judgment became final and executory until fully
satisfied. Costs against private respondent.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 169190 February 11, 2010

CUA LAI CHU, CLARO G. CASTRO, and JUANITA CASTRO, Petitioners,

vs.
HON. HILARIO L. LAQUI, Presiding Judge, Regional Trial Court, Branch 218, Quezon City and
PHILIPPINE BANK OF COMMUNICATION, Respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for review1 of the 29 April 2005 and 4 August 2005 Resolutions2 of the Court of
Appeals in CA-G.R. SP No. 88963. In its 29 April 2005 Resolution, the Court of Appeals dismissed
the petition for certiorari3 of petitioner spouses Claro G. Castro and Juanita Castro and petitioner
Cua Lai Chu (petitioners). In its 4 August 2005 Resolution, the Court of Appeals denied petitioners
motion for reconsideration.

The Facts

In November 1994, petitioners obtained a loan in the amount of P3,200,000 from private respondent
Philippine Bank of Communication. To secure the loan, petitioners executed in favor of private
respondent a Deed of Real Estate Mortgage4 over the property of petitioner spouses covered by
Transfer Certificate of Title No. 22990. In August 1997, petitioners executed an Amendment to the
Deed of Real Estate Mortgage5 increasing the amount of the loan by P1,800,000, bringing the total
loan amount to P5,000,000.
For failure of petitioners to pay the full amount of the outstanding loan upon demand, 6 private
respondent applied for the extrajudicial foreclosure of the real estate mortgage. 7 Upon receipt of a
notice8 of the extrajudicial foreclosure sale, petitioners filed a petition to annul the extrajudicial
foreclosure sale with a prayer for temporary restraining order (TRO). The petition for annulment was
filed in the Regional Trial Court of Quezon City and docketed as Q-02-46184. 9

The extrajudicial foreclosure sale did not push through as originally scheduled because the trial court
granted petitioners prayer for TRO. The trial court subsequently lifted the TRO and reset the
extrajudicial foreclosure sale on 29 May 2002. At the foreclosure sale, private respondent emerged
as the highest bidder. A certificate of sale10was executed on 4 June 2002 in favor of private
respondent. On 7 June 2002, the certificate of sale was annotated as Entry No. 1855 11 on TCT No.
22990 covering the foreclosed property.

After the lapse of the one-year redemption period, private respondent filed in the Registry of Deeds
of Quezon City an affidavit of consolidation to consolidate its ownership and title to the foreclosed
property. Forthwith, on 8 July 2003, the Register of Deeds cancelled TCT No. 22990 and issued in
its stead TCT No. 25183512 in the name of private respondent.

On 18 August 2004, private respondent applied for the issuance of a writ of possession of the
foreclosed property.13 Petitioners filed an opposition.14 The trial court granted private respondents
motion for a declaration of general default and allowed private respondent to present
evidence ex parte. The trial court denied petitioners notice of appeal.

Undeterred, petitioners filed in the Court of Appeals a petition for certiorari. The appellate court
dismissed the petition. It also denied petitioners motion for reconsideration.

The Orders of the Trial Court

The 8 October 2004 Order15 granted private respondents motion for a declaration of general default
and allowed private respondent to present evidence ex parte. The 6 January 2005 Order16 denied
petitioners motion for reconsideration of the prior order. The 24 February 2005 Order 17 denied
petitioners notice of appeal.

The Ruling of the Court of Appeals

The Court of Appeals dismissed on both procedural and substantive grounds the petition for
certiorari filed by petitioners. The appellate court noted that the counsel for petitioners failed to
indicate in the petition the updated PTR Number, a ground for outright dismissal of the petition under
Bar Matter No. 1132. Ruling on the merits, the appellate court held that a proceeding for the
issuance of a writ of possession is ex parte in nature. As such, petitioners right to due process was
not violated even if they were not given a chance to file their opposition. The appellate court also
ruled that there was no violation of the rule against forum shopping since the application for the
issuance of a writ of possession is not affected by a pending case questioning the validity of the
extrajudicial foreclosure sale.

The Issue

Petitioners raise the question of whether the writ of possession was properly issued despite the
pendency of a case questioning the validity of the extrajudicial foreclosure sale and despite the fact
that petitioners were declared in default in the proceeding for the issuance of a writ of possession.
 The Courts Ruling

The petition has no merit.

Petitioners contend they were denied due process of law when they were declared in default despite
the fact that they had filed their opposition to private respondents application for the issuance of a
writ of possession. Further, petitioners point out that the issuance of a writ of possession will deprive
them not only of the use and possession of their property, but also of its ownership. Petitioners cite
Bustos v. Court of Appeals18 and Vda. De Legaspi v. Avendao19 in asserting that physical
possession of the property should not be disturbed pending the final determination of the more
substantial issue of ownership. Petitioners also allege forum shopping on the ground that the
application for the issuance of a writ of possession was filed during the pendency of a case
questioning the validity of the extrajudicial foreclosure sale.

Private respondent, on the other hand, maintains that the application for the issuance of a writ of
possession in a foreclosure proceeding is ex parte in nature. Hence, petitioners right to due process
was not violated even if they were not given a chance to file their opposition. Private respondent
argues that the issuance of a writ of possession may not be stayed by a pending case questioning
the validity of the extrajudicial foreclosure sale. It contends that the former has no bearing on the
latter; hence, there is no violation of the rule against forum shopping. Private respondent asserts that
there is no judicial determination involved in the issuance of a writ of possession; thus, the same
cannot be the subject of an appeal.

At the outset, we must point out that the authorities relied upon by petitioners are not in point and
have no application here. In Bustos v. Court of Appeals,20 the Court simply ruled that the issue of
possession was intertwined with the issue of ownership in the consolidated cases of unlawful
detainer and accion reinvindicatoria. In Vda. De Legaspi v. Avendao,21 the Court merely stated that
in a case of unlawful detainer, physical possession should not be disturbed pending the resolution of
the issue of ownership. Neither case involved the right to possession of a purchaser at an
extrajudicial foreclosure of a mortgage.

Banco Filipino Savings and Mortgage Bank v. Pardo22 squarely ruled on the right to possession of a
purchaser at an extrajudicial foreclosure of a mortgage. This case involved a real estate mortgage
as security for a loan obtained from a bank. Upon the mortgagors default, the bank extrajudicially
foreclosed the mortgage. At the auction sale, the bank was the highest bidder. A certificate of sale
was duly issued and registered. The bank then applied for the issuance of a writ of possession,
which the lower court dismissed. The Court reversed the lower court and held that the purchaser at
the auction sale was entitled to a writ of possession pending the lapse of the redemption period upon
a simple motion and upon the posting of a bond. 1avvphi1

In Navarra v. Court of Appeals,23 the purchaser at an extrajudicial foreclosure sale applied for a writ
of possession after the lapse of the one-year redemption period. The Court ruled that the purchaser
at an extrajudicial foreclosure sale has a right to the possession of the property even during the one-
year redemption period provided the purchaser files an indemnity bond. After the lapse of the said
period with no redemption having been made, that right becomes absolute and may be demanded
by the purchaser even without the posting of a bond. Possession may then be obtained under a writ
which may be applied for ex parte pursuant to Section 7 of Act No. 3135,24 as amended by Act No.
4118,25 thus:

SEC. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of
First Instance of the province or place where the property or any part thereof is situated, to give him
possession thereof during the redemption period, furnishing bond in an amount equivalent to the use
of the property for a period of twelve months, to indemnify the debtor in case it be shown that the
sale was made without violating the mortgage or without complying with the requirements of this Act.
Such petition shall be made under oath and filed in form of an ex parte motion x x x and the court
shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the
province in which the property is situated, who shall execute said order immediately. (Emphasis
supplied)

In the present case, the certificate of sale of the foreclosed property was annotated on TCT No.
22990 on 7 June 2002. The redemption period thus lapsed on 7 June 2003, one year from the
registration of the sale.26 When private respondent applied for the issuance of a writ of possession on
18 August 2004, the redemption period had long lapsed. Since the foreclosed property was not
redeemed within one year from the registration of the extrajudicial foreclosure sale, private
respondent had acquired an absolute right, as purchaser, to the writ of possession. It had become
the ministerial duty of the lower court to issue the writ of possession upon mere motion pursuant to
Section 7 of Act No. 3135, as amended.

Moreover, once ownership has been consolidated, the issuance of the writ of possession becomes a
ministerial duty of the court, upon proper application and proof of title. 27 In the present case, when
private respondent applied for the issuance of a writ of possession, it presented a new transfer
certificate of title issued in its name dated 8 July 2003. The right of private respondent to the
possession of the property was thus founded on its right of ownership. As the purchaser of the
property at the foreclosure sale, in whose name title over the property was already issued, the right
of private respondent over the property had become absolute, vesting in it the corollary right of
possession.

Petitioners are wrong in insisting that they were denied due process of law when they were declared
in default despite the fact that they had filed their opposition to the issuance of a writ of possession.
The application for the issuance of a writ of possession is in the form of an ex parte motion. It issues
as a matter of course once the requirements are fulfilled. No discretion is left to the court. 28

Petitioners cannot oppose or appeal the courts order granting the writ of possession in an ex parte
proceeding. The remedy of petitioners is to have the sale set aside and the writ of possession
cancelled in accordance with Section 8 of Act No. 3135, as amended, to wit:

SEC. 8. The debtor may, in the proceedings in which possession was requested, but not later than
thirty days after the purchaser was given possession, petition that the sale be set aside and the writ
of possession cancelled, specifying the damages suffered by him, because the mortgage was not
violated or the sale was not made in accordance with the provisions hereof. x x x

Any question regarding the validity of the extrajudicial foreclosure sale and the resulting cancellation
of the writ may be determined in a subsequent proceeding as outlined in Section 8 of Act No. 3135,
as amended. Such question should not be raised as a justification for opposing the issuance of a writ
of possession since under Act No. 3135, as amended, the proceeding for this is ex parte.

Further, the right to possession of a purchaser at an extrajudicial foreclosure sale is not affected by a
pending case questioning the validity of the foreclosure proceeding. The latter is not a bar to the
former. Even pending such latter proceeding, the purchaser at a foreclosure sale is entitled to the
possession of the foreclosed property.29

Lastly, we rule that petitioners claim of forum shopping has no basis. Under Act No. 3135, as
amended, a writ of possession is issued ex parte as a matter of course upon compliance with the
requirements. It is not a judgment on the merits that can amount to res judicata, one of the essential
elements in forum shopping.30

The Court of Appeals correctly dismissed the petition for certiorari filed by petitioners for lack of
merit.

WHEREFORE, we DENY the petition for review. We AFFIRM the 29 April 2005 and 4 August 2005
Resolutions of the Court of Appeals in CA-G.R. SP No. 88963.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 176019 January 12, 2011

BPI FAMILY SAVINGS BANK, INC., Petitioner,

vs.
GOLDEN POWER DIESEL SALES CENTER, INC. and RENATO C. TAN, Respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for review1 of the 13 March 2006 Decision2 and 19 December 2006 Resolution3 of
the Court of Appeals in CA-G.R. SP No. 78626. In its 13 March 2006 Decision, the Court of Appeals
denied petitioner BPI Family Savings Bank, Inc.s (BPI Family) petition for mandamus and certiorari.
In its 19 December 2006 Resolution, the Court of Appeals denied BPI Familys motion for
reconsideration.

The Facts

On 26 October 1994, CEDEC Transport, Inc. (CEDEC) mortgaged two parcels of land covered by
Transfer Certificate of Title (TCT) Nos. 134327 and 134328 situated in Malibay, Pasay City, including
all the improvements thereon (properties), in favor of BPI Family to secure a loan of P6,570,000. On
the same day, the mortgage was duly annotated on the titles under Entry No. 94-2878. On 5 April
and 27 November 1995, CEDEC obtained from BPI Family additional loans of P2,160,000
and P1,140,000, respectively, and again mortgaged the same properties. These latter mortgages
were duly annotated on the titles under Entry Nos. 95-6861 and 95-11041, respectively, on the same
day the loans were obtained.

Despite demand, CEDEC defaulted in its mortgage obligations. On 12 October 1998, BPI Family
filed with the ex-officio sheriff of the Regional Trial Court of Pasay City (RTC) a verified petition for
extrajudicial foreclosure of real estate mortgage over the properties under Act No. 3135, as
amended.4
On 10 December 1998, after due notice and publication, the sheriff sold the properties at public
auction. BPI Family, as the highest bidder, acquired the properties for P13,793,705.31. On 14 May
1999, the Certificate of Sheriffs Sale, dated 24 February 1999, was duly annotated on the titles
covering the properties.

On 15 May 1999, the one-year redemption period expired without CEDEC redeeming the properties.
Thus, the titles to the properties were consolidated in the name of BPI Family. On 13 September
2000, the Registry of Deeds of Pasay City issued new titles, TCT Nos. 142935 and 142936, in the
name of BPI Family.

However, despite several demand letters, CEDEC refused to vacate the properties and to surrender
possession to BPI Family. On 31 January 2002, BPI Family filed an Ex-Parte Petition for Writ of
Possession over the properties with Branch 114 of the Regional Trial Court of Pasay City (trial court).
In its 27 June 2002 Decision, the trial court granted BPI Familys petition. 5 On 12 July 2002, the trial
court issued the Writ of Possession.

On 29 July 2002, respondents Golden Power Diesel Sales Center, Inc. and Renato C.
Tan6 (respondents) filed a Motion to Hold Implementation of the Writ of Possession. 7 Respondents
alleged that they are in possession of the properties which they acquired from CEDEC on 10
September 1998 pursuant to the Deed of Absolute Sale with Assumption of Mortgage (Deed of
Sale).8 Respondents argued that they are third persons claiming rights adverse to CEDEC, the
judgment obligor and they cannot be deprived of possession over the properties. Respondents also
disclosed that they filed a complaint before Branch 111 of the Regional Trial Court of Pasay City,
docketed as Civil Case No. 99-0360, for the cancellation of the Sheriffs Certificate of Sale and an
order to direct BPI Family to honor and accept the Deed of Absolute Sale between CEDEC and
respondents.9

On 12 September 2002, the trial court denied respondents motion.10 Thereafter, the trial court issued
an alias writ of possession which was served upon CEDEC and all other persons claiming rights
under them.

However, the writ of possession expired without being implemented. On 22 January 2003, BPI
Family filed an Urgent Ex-Parte Motion to Order the Honorable Branch Clerk of Court to Issue Alias
Writ of Possession. In an Order dated 27 January 2003, the trial court granted BPI Familys motion.

Before the alias writ could be implemented, respondent Renato C. Tan filed with the trial court an
Affidavit of Third Party Claim11 on the properties. Instead of implementing the writ, the sheriff referred
the matter to the trial court for resolution.

On 11 February 2003, BPI Family filed an Urgent Motion to Compel Honorable Sheriff and/or his
Deputy to Enforce Writ of Possession and to Break Open the properties. In its 7 March 2003
Resolution, the trial court denied BPI Familys motion and ordered the sheriff to suspend the
implementation of the alias writ of possession.12 According to the trial court, "the order granting the
alias writ of possession should not affect third persons holding adverse rights to the judgment
obligor." The trial court admitted that in issuing the first writ of possession it failed to take into
consideration respondents complaint before Branch 111 claiming ownership of the property. The trial
court also noted that respondents were in actual possession of the properties and had been
updating the payment of CEDECs loan balances with BPI Family. Thus, the trial court found it
necessary to amend its 12 September 2002 Order and suspend the implementation of the writ of
possession until Civil Case No. 99-0360 is resolved.
BPI Family filed a motion for reconsideration. In its 20 June 2003 Resolution, the trial court denied
the motion.13

BPI Family then filed a petition for mandamus and certiorari with application for a temporary
restraining order or preliminary injunction before the Court of Appeals. BPI Family argued that the
trial court acted with grave abuse of discretion amounting to lack or excess of jurisdiction when it
ordered the suspension of the implementation of the alias writ of possession. According to BPI
Family, it was the ministerial duty of the trial court to grant the writ of possession in its favor
considering that it was now the owner of the properties and that once issued, the writ should be
implemented without delay.

The Court of Appeals dismissed BPI Familys petition. The dispositive portion of the 13 March 2006
Decision reads:

WHEREFORE, the instant Petition for Writ of Mandamus and Writ of Certiorari with Application for a
TRO and/or Preliminary Injunction is hereby DENIED. The twin Resolutions dated March 7, 2003
and June 20, 2003, both issued by the public respondent in LRC Case No. 02-0003, ordering the
sheriff to suspend the implementation of the Alias Writ of Possession issued in favor of the petitioner,
and denying its Urgent Omnibus Motion thereof, respectively, are hereby AFFIRMED.

SO ORDERED.14

BPI Family filed a motion for reconsideration. In its 19 December 2006 Resolution, the Court of
Appeals denied the motion.

The Ruling of the Court of Appeals

The Court of Appeals ruled that the trial court did not commit grave abuse of discretion in
suspending the implementation of the alias writ of possession because respondents were in actual
possession of the properties and are claiming rights adverse to CEDEC, the judgment obligor.
According to the Court of Appeals, the principle that the implementation of the writ of possession is a
mere ministerial function of the trial court is not without exception. The Court of Appeals held that the
obligation of the court to issue an ex parte writ of possession in favor of the purchaser in an
extrajudicial foreclosure sale ceases to be ministerial once it appears that there is a third party in
possession of the property who is claiming a right adverse to that of the debtor or mortgagor.

The Issues

BPI Family raises the following issues:

A.

The Honorable Court of Appeals seriously erred in upholding the finding of the Honorable Regional
Trial Court that despite the fact that private respondents merely stepped into the shoes of mortgagor
CEDEC, being the vendee of the properties in question, they are categorized as third persons in
possession thereof who are claiming a right adverse to that of the debtor/mortgagor CEDEC.

B.

The Honorable Court of Appeals gravely erred in sustaining the aforementioned twin orders
suspending the implementation of the writ of possession on the ground that the annulment case filed
by private respondents is still pending despite the established ruling that pendency of a case
questioning the legality of a mortgage or auction sale cannot be a ground for the non-issuance
and/or non-implementation of a writ of possession.15

The Ruling of the Court

The petition is meritorious.

BPI Family argues that respondents cannot be considered "a third party who is claiming a right
adverse to that of the debtor or mortgagor" because respondents, as vendee, merely stepped into
the shoes of CEDEC, the vendor and judgment obligor. According to BPI Family, respondents are
mere extensions or successors-in-interest of CEDEC. BPI Family also argues that the pendency of
an action questioning the validity of a mortgage or auction sale cannot be a ground to oppose the
implementation of a writ of possession.

On the other hand, respondents insist that they are third persons who claim rights over the
properties adverse to CEDEC. Respondents argue that the obligation of the court to issue an ex
parte writ of possession in favor of the purchaser in an extrajudicial foreclosure sale ceases to be
ministerial once it appears that there is a third party in possession of the property who is claiming a
right adverse to that of the judgment obligor.

In extrajudicial foreclosures of real estate mortgages, the issuance of a writ of possession is

governed by Section 7 of Act No. 3135, as amended, which provides:

SECTION 7. In any sale made under the provisions of this Act, the purchaser may petition the Court
of First Instance (Regional Trial Court) of the province or place where the property or any part
thereof is situated, to give him possession thereof during the redemption period, furnishing bond in
an amount equivalent to the use of the property for a period of twelve months, to indemnify the
debtor in case it be shown that the sale was made without violating the mortgage or without
complying with the requirements of this Act. Such petition shall be made under oath and filed in form
of an ex parte motion in the registration or cadastral proceedings if the property is registered, or in
special proceedings in the case of property registered under the Mortgage Law or under section one
hundred and ninety-four of the Administrative Code, or of any other real property encumbered with a
mortgage duly registered in the office of any register of deeds in accordance with any existing law,
and in each case the clerk of the court shall, upon the filing of such petition, collect the fees
specified in paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred
and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and the court
shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of
the province in which the property is situated, who shall execute said order immediately.

This procedure may also be availed of by the purchaser seeking possession of the foreclosed
property bought at the public auction sale after the redemption period has expired without
redemption having been made.16

In China Banking Corporation v. Lozada,17 we ruled:

It is thus settled that the buyer in a foreclosure sale becomes the absolute owner of the property
purchased if it is not redeemed during the period of one year after the registration of the sale. As
such, he is entitled to the possession of the said property and can demand it at any time following
the consolidation of ownership in his name and the issuance to him of a new transfer certificate of
title. The buyer can in fact demand possession of the land even during the redemption period except
that he has to post a bond in accordance with Section 7 of Act No. 3135, as amended. No such bond
is required after the redemption period if the property is not redeemed. Possession of the land
then becomes an absolute right of the purchaser as confirmed owner. Upon proper
application and proof of title, the issuance of the writ of possession becomes a ministerial
duty of the court.18 (Emphasis supplied)

Thus, the general rule is that a purchaser in a public auction sale of a foreclosed property is entitled
to a writ of possession and, upon an ex parte petition of the purchaser, it is ministerial upon the trial
court to issue the writ of possession in favor of the purchaser.

There is, however, an exception. Section 33, Rule 39 of the Rules of Court provides:

Section 33. Deed and possession to be given at expiration of redemption period; by whom executed
or given. - x x x

Upon the expiration of the right of redemption, the purchaser or redemptioner shall be substituted to
and acquire all the rights, title, interest and claim of the judgment obligor to the property as of the
time of the levy. The possession of the property shall be given to the purchaser or last redemptioner
by the same officer unless a third party is actually holding the property adversely to the
judgment obligor. (Emphasis supplied)

Therefore, in an extrajudicial foreclosure of real property, when the foreclosed property is in the
possession of a third party holding the same adversely to the judgment obligor, the issuance by the
trial court of a writ of possession in favor of the purchaser of said real property ceases to be
ministerial and may no longer be done ex parte.19 The procedure is for the trial court to order a
hearing to determine the nature of the adverse possession. 20 For the exception to apply, however,
the property need not only be possessed by a third party, but also held by the third party adversely
to the judgment obligor.

In this case, BPI Family invokes the general rule that they are entitled to a writ of possession
because respondents are mere successors-in-interest of CEDEC and do not possess the properties
adversely to CEDEC. Respondents, on the other hand, assert the exception and insist that they hold
the properties adversely to CEDEC and that their possession is a sufficient obstacle to the ex
parte issuance of a writ of possession in favor of BPI Family.

Respondents argument fails to persuade the Court. It is clear that respondents acquired possession
over the properties pursuant to the Deed of Sale which provides that for P15,000,000 CEDEC will
"sell, transfer and convey" to respondents the properties "free from all liens and encumbrances
excepting the mortgage as may be subsisting in favor of the BPI FAMILY SAVINGS
BANK."21 Moreover, the Deed of Sale provides that respondents bind themselves to assume "the
payment of the unpaid balance of the mortgage indebtedness of the VENDOR (CEDEC) amounting
to P7,889,472.48, as of July 31, 1998, in favor of the aforementioned mortgagee (BPI Family) by the
mortgage instruments and does hereby further agree to be bound by the precise terms and
conditions therein contained."22

In Roxas v. Buan,23 we ruled:

It will be recalled that Roxas possession of the property was premised on its alleged sale to him by
Valentin for the amount of P100,000.00. Assuming this to be true, it is readily apparent that Roxas
holds title to and possesses the property as Valentins transferee. Any right he has to the property is
necessarily derived from that of Valentin. As transferee, he steps into the latter s shoes. Thus, in the
instant case, considering that the property had already been sold at public auction pursuant to an
extrajudicial foreclosure, the only interest that may be transferred by Valentin to Roxas is the right to
redeem it within the period prescribed by law. Roxas is therefore the successor-in-interest of
Valentin, to whom the latter had conveyed his interest in the property for the purpose of redemption.
Consequently, Roxas occupancy of the property cannot be considered adverse to Valentin. 24

In this case, respondents possession of the properties was premised on the sale to them by
CEDEC for the amount of P15,000,000. Therefore, respondents hold title to and possess the
properties as CEDECs transferees and any right they have over the properties is derived from
CEDEC. As transferees of CEDEC, respondents merely stepped into CEDECs shoes and are
necessarily bound to acknowledge and respect the mortgage CEDEC had earlier executed in favor
of BPI Family.25 Respondents are the successors-in-interest of CEDEC and thus, respondents
occupancy over the properties cannot be considered adverse to CEDEC.

Moreover, in China Bank v. Lozada,26 we discussed the meaning of "a third party who is actually
holding the property adversely to the judgment obligor." We stated:

The exception provided under Section 33 of Rule 39 of the Revised Rules of Court contemplates a
situation in which a third party holds the property by adverse title or right, such as that of a co-owner,
tenant or usufructuary. The co-owner, agricultural tenant, and usufructuary possess the property in
their own right, and they are not merely the successor or transferee of the right of possession of
another co-owner or the owner of the property.27

In this case, respondents cannot claim that their right to possession over the properties is analogous
to any of these. Respondents cannot assert that their right of possession is adverse to that of
1avvphi1

CEDEC when they have no independent right of possession other than what they acquired from
CEDEC. Since respondents are not holding the properties adversely to CEDEC, being the latter s
successors-in-interest, there was no reason for the trial court to order the suspension of the
implementation of the writ of possession.

Furthermore, it is settled that a pending action for annulment of mortgage or foreclosure sale does
not stay the issuance of the writ of possession.28 The trial court, where the application for a writ of
possession is filed, does not need to look into the validity of the mortgage or the manner of its
foreclosure.29 The purchaser is entitled to a writ of possession without prejudice to the outcome of
the pending annulment case.30

In this case, the trial court erred in issuing its 7 March 2003 Order suspending the implementation of
the alias writ of possession. Despite the pendency of Civil Case No. 99-0360, the trial court should
not have ordered the sheriff to suspend the implementation of the writ of possession. BPI Family, as
purchaser in the foreclosure sale, is entitled to a writ of possession without prejudice to the outcome
of Civil Case No. 99-0360.

WHEREFORE, we GRANT the petition. We SET ASIDE the 13 March 2006 Decision and the 19
December 2006 Resolution of the Court of Appeals in CA-G.R. SP No. 78626. We SET ASIDE the 7
March and 20 June 2003 Resolutions of the Regional Trial Court, Branch 114, Pasay City.
We ORDER the sheriff to proceed with the implementation of the writ of possession without
prejudice to the outcome of Civil Case No. 99-0360.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
 SECOND DIVISION

G.R. No. 172504 July 31, 2013

DONNA C. NAGTALON, Petitioner,

vs.
UNITED COCONUT PLANTERS BANK, Respondent.

DECISION

BRION, J.:

Before the Court is the petition for review on certiorari,1 filed by Donna C. Nagtalon (petitioner),
assailing the decision2 dated September 23, 2005 and the resolution3 dated April 21;2006 of the
Court of Appeals (CA) in CA-G.R. SP No. 82631. The CA reversed and set aside the orders 4 dated
November 3, 2003 and December 19, 2003 of the Regional Trial Court (RTC), Kalibo, Aklan, Branch
5, in CAD Case No. 2895.

The Factual Antecedents

Roman Nagtalon and the petitioner (Spouses Nagtalon) entered into a credit accommodation
agreement (credit agreement) with respondent United Coconut Planters Bank. In order to secure the
credit agreement, Spouses Nagtalon, together with the Spouses Vicente and Rosita Lao, executed
deeds of real estate mortgage over several properties in Kalibo, Aklan. After the Spouses Nagtalon
failed to abide and comply with the terms and conditions Officio Provincial Sheriff a verified
petition5 for extrajudicial foreclosure of the mortgage, pursuant to Act 3135, as amended. 6

The mortgaged properties were consequently foreclosed and sold at public auction for the sum
of P3,215,880.30 to the respondent which emerged as the sole and highest bidder. After the
issuance of the sheriffs certificate of sale, the respondent caused the entry of the sale in the records
of the Registry of Deeds of Kalibo, Aklan and its annotation on the transfer certificates of titles
(TCTs) on January 6, 1999.7 With the lapse of the one year redemption period and the petitioners
failure to exercise her right to redeem the foreclosed properties, the respondent consolidated the
ownership over the properties, resulting in the cancellation of the titles in the name of the petitioner
and the issuance of TCTs in the name of the respondent, to wit: (a) TCT No. T-29470; (b) TCT No. T-
29472; (c) TCT No. T-29471; (d) TCT No. T-29469; (e) TCT No. T-29474; (f) TCT No. T-29475; and
(g) TCT No. T-29473.8 The new TCTs were registered with the Register of Deeds of Kalibo, Aklan on
April 28, 2000.9

On April 30, 2003, the respondent filed an ex parte petition for the issuance of a writ of possession
with the RTC, docketed as CAD Case No. 2895. In the petition, the respondent alleged that it had
been issued the corresponding TCTs to the properties it purchased, and has the right to acquire the
possession of the subject properties as the current registered owner of these properties.

The petitioner opposed the petition, citing mainly the pendency of Civil Case No. 6602 10 (for
declaration of nullity of foreclosure, fixing of true indebtedness, redemption, damages and injunction
with temporary restraining order) still pending with the RTC. In this civil case, the petitioner
challenged the alleged nullity of the provisions in the credit agreement, particularly the rate of
interest in the promissory notes. She also sought the nullification of the foreclosure and the sale that
followed. To the petitioner, the issuance of a writ of possession was no longer a ministerial duty on
the part of the court in view of the pendency of the case.
 The RTC Ruling

On November 3, 2003, the RTC issued an order,11 holding in abeyance the issuance of the writ of
possession of the properties covered by TCT Nos. T-29470, T-29472, T-29471, T-29469 and T-
29474 on the ground of prematurity. The RTC ruled that due to the pendency of Civil Case No. 6602
where the issue on nullity of the credit agreement and foreclosure have yet to be resolved the
obligation of the court to issue a writ of possession in favor of the purchaser in a foreclosure of
mortgage property ceases to be ministerial.

The respondent filed a motion for reconsideration, but the RTC denied the motion, citing equitable
grounds and substantial justice as reasons.12

The respondent then filed a petition for certiorari13 with the CA.

The CA Ruling

In its September 23, 2005 decision,14 the CA reversed and set aside the RTC orders, noting that
while it is the ministerial duty of the court to issue a writ of possession after the lapse of the one-year
period of redemption, the rule admits of exceptions and the present case at bar was not one of them.

The CA held that equitable and peculiar circumstances must first be shown to exist before the
issuance of a writ of possession may be deferred. The CA then ruled that the petitioner failed to
prove that these equitable circumstances are present in this case, citing for this purpose the ruling in
Vaca v. Court of Appeals.15 Based on the Vaca ruling, the CA ordered the RTC to issue the
corresponding writ of possession.

The Petition

The petitioner submits that the CA erred in its findings; the equitable circumstances present in the
case fully justified the RTCs order16 to hold in abeyance the issuance of the writ of possession. The
petitioner contends that the RTC found prima facie merit in the allegations in Civil Case No. 6602
that the foreclosure and the mortgage were void. The petitioner adds that the CAs reliance on the
Vaca case, in support of its decision, is misplaced because no peculiar circumstances were present
in this cited case which are applicable to the present case.

The petitioner lastly maintains that the CA decision violated her constitutional right to due process of
law, as it deprived her of the possession of her properties without the opportunity of hearing.

The Case for the Respondent

The respondent essentially echoes the pronouncement of this Court in the Vaca case that the CA
adopted and maintains that: (1) the pendency of a civil case challenging the validity of the mortgage
cannot bar the issuance of the writ of possession because such issuance is a ministerial act; (2) the
peculiar and equitable circumstances, which would justify an exception to the rule, are not present in
the present case; and (3) contrary to the allegation of the petitioner, it is the respondent who was
deprived of possession of the properties due to the petitioners persistent efforts to frustrate the
respondents claim.

The Issue
The case presents to us the issue of whether the pendency of a civil case challenging the validity of
the credit agreement, the promissory notes and the mortgage can bar the issuance of a writ of
possession after the foreclosure and sale of the mortgaged properties and the lapse of the one-year
redemption period.

Our Ruling

We see no merit in the petition, and rule that the CA did not commit any reversible error in the
assailed decision.

The issuance of a writ of possession is a ministerial function of the court

The issue this Court is mainly called upon to resolve is far from novel; jurisprudence is replete with
cases holding that the issuance of a writ of possession to a purchaser in a public auction is a
ministerial function of the court, which cannot be enjoined or restrained, even by the filing of a civil
case for the declaration of nullity of the foreclosure and consequent auction sale.

We have long recognized the rule that once title to the property has been consolidated in the buyers
name upon failure of the mortgagor to redeem the property within the one-year redemption period,
the writ of possession becomes a matter of right belonging to the buyer. Consequently, the buyer
can demand possession of the property at anytime. Its right to possession has then ripened into the
right of a confirmed absolute owner17 and the issuance of the writ becomes a ministerial function that
does not admit of the exercise of the courts discretion. 18 The court, acting on an application for its
issuance, should issue the writ as a matter of course and without any delay.

The right to the issuance of a writ of possession is outlined in Sections 6 and 7 of Act 3135, as
amended by Act 4118, to wit:

Sec. 6. In all cases in which an extrajudicial sale is made x x x, the debtor, his successors in interest
or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the
property subsequent to the mortgage or deed of trust under which the property is sold, may redeem
the same at any time within the term of one year from and after the date of the sale; and such
redemption shall be governed by the provisions of sections four hundred and sixty-four to four
hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not
inconsistent with the provisions of this Act.

Sec 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of
First Instance of the province or place where the property or any part thereof is situated, to give him
possession thereof during the redemption period, furnishing bond in an amount equivalent to the use
of the property for a period of twelve months, to indemnify the debtor in case it be shown that the
sale was made without violating the mortgage or without complying with the requirements of this Act.
Such petition shall be made under oath and filed in form of an ex parte motion x x x and the court
shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the
province in which the property is situated, who shall execute said order immediately. [emphasis and
underscore ours]

In Spouses Ruben and Violeta Sagun v. Philippine Bank of Communications and Court of
Appeals,19 the Court laid down the established rule on the issuance of a writ of possession, pursuant
to Act 3135, as amended. The Court said that a writ of possession may be issued either (1) within
the one-year redemption period, upon the filing of a bond, or (2) after the lapse of the redemption
period, without need of a bond.
During the one-year redemption period, as contemplated by Section 7 of the above-mentioned law, a
purchaser may apply for a writ of possession by filing an ex parte motion under oath in the
registration or cadastral proceedings if the property is registered, or in special proceedings in case
the property is registered under the Mortgage Law. In this case, a bond is required before the court
may issue a writ of possession.

On the other hand, upon the lapse of the redemption period, a writ of possession may be issued in
favor of the purchaser in a foreclosure sale, also upon a proper ex parte motion. This time, no bond
is necessary for its issuance; the mortgagor is now considered to have lost any interest over the
foreclosed property.20 The purchaser then becomes the owner of the foreclosed property, and he can
demand possession at any time following the consolidation of ownership of the property and the
issuance of the corresponding TCT in his/her name. It is at this point that the right of possession of
the purchaser can be considered to have ripened into the absolute right of a confirmed owner. The
issuance of the writ, upon proper application, is a ministerial function that effectively forbids the
exercise by the court of any discretion. This second scenario is governed by Section 6 of Act 3135,
in relation to Section 35, Rule 39 of the Revised Rules of Court.21

The correctness of the issuance of the writ in the second scenario is strengthened by the fact that
after the consolidation of ownership and issuance of titles to the purchaser, the latters right to
possession not only finds support in Section 7 of Act 3135, but also on its right to possession as an
incident of ownership.22 The Court, in Espinoza v. United Overseas Bank Philippines,23 noted that the
basis of the right to possession is the purchasers ownership of the property.

Moreover, if the court has the ministerial power to issue a writ of possession even during the
redemption period, upon proper motion and posting of the required bond, as clearly provided by
Section 7 of Act 3135, then with more reason should the court issue the writ of possession after the
expiration of the redemption period, as the purchaser has already acquired an absolute right to
possession on the basis of his ownership of the property.24The right to possess a property follows
ownership.25

Based on these rulings, we find it clear that the law directs in express terms that the court issue a
writ of possession without delay to the purchaser after the latter has consolidated ownership and has
been issued a new TCT over the property. The law then does not provide any room for discretion as
the issuance has become a mere ministerial function of the court.

The petitioner resists the above views with the argument that the nullity of the loan documents due
to the unilateral fixing of the interest and her failure to receive the proceeds of the loan, among
others, are peculiar circumstances that would necessitate the deferment of the issuance of the writ
of possession. These are the same arguments the petitioner propounded in the civil case she filed to
question the nullity of the foreclosure.

We do not find the argument convincing.

Pendency of a civil case questioning the

mortgage and foreclosure not a bar to
the issuance of a writ of execution

The petitioners submitted arguments on the presence of peculiar and equitable circumstances are
of no moment. These peculiar circumstances are nothing but mere allegations raised by the
petitioner in support of her complaint for annulment of mortgage and foreclosure. We have ruled in
the past that any question regarding the validity of the mortgage or its foreclosure is not a legal
ground for refusing the issuance of a writ of execution/writ of possession. 26
In the case of Spouses Montano T. Tolosa and Merlinda Tolosa v. United Coconut Planters Bank, 27 a
case closely similar to the present petition, the Court explained that a pending action for annulment
of mortgage or foreclosure (where the nullity of the loan documents and mortgage had been alleged)
does not stay the issuance of a writ of possession. It reiterated the well-established rule that as a
ministerial function of the court, the judge need not look into the validity of the mortgage or the
manner of its foreclosure, as these are the questions that should be properly decided by a court of
competent jurisdiction in the pending case filed before it. It added that questions on the regularity
and the validity of the mortgage and foreclosure cannot be invoked as justification for opposing the
issuance of a writ of possession in favor of the new owner.

In the cited case, the petitioner, in opposition to the respondents ex parte application for a writ of
possession, likewise pointed to the prima facie merit of the allegations in her complaint for
annulment of mortgage, foreclosure and sale. She alleged that the apparent nullity of the mortgage
obligation and the sale of the properties justify, at the very least, the deferment of the issuance of the
writ of possession.

We pointedly ruled in this cited case that no reason existed to depart from our previous
pronouncements. That the issuance of a writ of possession remains a ministerial duty of the court
until the issues raised in the civil case for annulment of mortgage and/or foreclosure are decided by
a court of competent jurisdiction28 has long been settled. While conceding that the general rule on
the ministerial duty of the courts to issue a writ of possession is not without exceptions, the Court
was quick to add that the Tolosa case29 does not fall under the exceptions.

Exceptions to the rule that issuance of a writ

of possession is a ministerial function

A review of the Courts ruling in the Tolosa case would reveal a discussion of the few jurisprudential
exceptions worth reiterating.

(1)Gross inadequacy of purchase price

In Cometa v. Intermediate Appellate Court30 which involved an execution sale, the court took
exception to the general rule in view of the unusually lower price (P57,396.85 in contrast to its true
value of P500,000.00) for which the subject property was sold at public auction. The Court perceived
that injustice could result in issuing a writ of possession under the given factual scenario and upheld
the deferment of the issuance of the writ.

(2)Third party claiming right adverse to debtor/mortgagor

In Barican v. Intermediate Appellate Court,31 consistent with Section 35, Rule 39 of the Rules of
Court, the Court held that the obligation of a court to issue a writ of possession in favor of the
purchaser in a foreclosure of mortgage case ceases to be ministerial when a third-party in
possession of the property claims a right adverse to that of the debtor-mortgagor. In this case, there
was a pending civil suit involving the rights of third parties who claimed ownership over the disputed
property. The Court found the circumstances to be peculiar, necessitating an exception to the
general rule. It thus ruled that where such third party claim and possession exist, the trial court
should conduct a hearing to determine the nature of the adverse possession.

(3) Failure to pay the surplus proceeds of the sale to mortgagor

We also deemed it proper to defer the issuance of a writ in Sulit v. Court of Appeals 32 in light of the
given facts, particularly the mortgagees failure to return to the mortgagor the surplus from the
proceeds of the sale (equivalent to an excess of approximately 40% of the total mortgage debt). We
ruled that equitable considerations demanded the deferment of the issuance of the writ as it would
be highly unfair and iniquitous for the mortgagor, who as a redemptioner might choose to redeem the
foreclosed property, to pay the equivalent amount of the bid clearly in excess of the total mortgage
debt.

We stress that the petitioners present case is not analogous to any of the above-mentioned
exceptions. The facts are not only different from those cited above; the alleged peculiar
circumstances pertain to the validity of the mortgage, a matter that may be determined by a
competent court after the issuance of the writ of possession. 33

In these lights, we hold that the CA correctly ruled that the present case does not present peculiar
circumstances that would merit an exception from the well-entrenched rule on the issuance of the
writ.

Petitioner was accorded due process

The petitioner lastly argues that the issuance of a writ of possession, despite its "prima-facie
meritorious claim of nullity of loan and mortgage,"34 constitutes a violation of her constitutional right to
due process of law.

The petitioners contention is unmeritorious. We note that the ex parte petition for the issuance of a
writ of possession under Sections 6 and 7 of Act 3135 is not, strictly speaking, a "judicial process."
As discussed in Idolor v. Court of appeals,35 it is not an ordinary suit by which one party "sues
another for the enforcement of a wrong or protection of a right, or the prevention or redress of a
wrong."36 Being ex parte, it is a non-litigious proceeding where the relief is granted without requiring
an opportunity for the person against whom the relief is sought to be heard.

That the petitioner would or could be denied due process if the writ of possession would be issued
before she is given the opportunity to be heard on her prima facie defense of nullity of the loan and
mortgage is clearly out of the question. The law does not require that the writ of possession be
granted only after the issues raised in a civil case on nullity of the loan and mortgage are resolved
and decided with finality. To do so would completely defeat the purpose of an ex parte petition under
Sections 6 and 7 of Act 3135 that, by its nature, should be summary; we stress that it would render
nugatory the right given to a purchaser to acquire possession of the property after the expiration of
the redemption period.

At any rate, the petitioner is not left without a remedy as the same law provides the mortgagor the
right to petition for the nullification of the sale and the cancellation of the writ of possession under
Section 8 of Act. No. 3135, which remedy the petitioner was aware of. In her petition for review, she
averred that "the said Act 3135 x x x does not however prohibit or negate the filing of a separate civil
case for the nullification of loan indebtedness x x x or x x x mortgage contract." 37 Thus, she cannot
claim that she has been denied of due process merely on the basis of the ex parte nature of the
respondent's petition.

WHEREFORE, all premises considered, the instant petition is DENIED for lack of merit. Accordingly,
the decision dated September 23, 2005 and the resolution dated April 21, 2006 of the Court of
Appeals in CA-G.R. SP No. 82631 are AFIRMED in toto.

SO ORDERED.