Credit Transactions Case Doctrines: Chattel Mortgage & Real Estate Mortgage

CREDIT TRANSACTIONS

Reviewer II

Chattel Mortgage and Real Estate Mortgage

Atty. Anthony Peralta

by Olive Cachapero

CHATTEL MORTGAGE

PCI LEASING & FINANCE, INC. V. TROJAN METAL INDUSTRIES INC., ET AL., (2010)

Chattel Mortgage: General Concepts, Art. 2085, Art. 2087, Art. 2140, Art. 2141 

In a true financial leasing, a finance company purchases on behalf of a cash-strapped lessee the equipment the latter wants to buy but, due to financial limitations, is incapable of doing so. The finance company then leases the equipment to the lessee in exchange for the latter’s periodic payment of a fixed amount of rental.

Since the transaction between PCILF and TMI involved equipment already owned by TMI, it cannot be considered as one of financial leasing, as defined by law, but simply a loan secured by a chattel mortgage.

ACME SHOE, RUBBER & PLASTIC CORPORATION V. CA, (1996)

Chattel Mortgage: Obligations Secured, Act. No. 1508, Sec. 5

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred?  

“This mortgage shall also stand as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or after the constitution of this mortgage”

Security contracts

1.       Personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debtor is secured by the personal commitment of another (the guarantor or surety).  

2.      real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property 

a)       in pledge, the placing of movable property in the possession of the creditor;

b)      in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law;

c)       in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and

d)      in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit - upon the essential condition that if the principal obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of the obligation, but that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory character of the agreement.  

As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void.

Pledge, REM, or antichresis	Chattel mortgage
may exceptionally secure after-incurred obligations so long as these future debts are accurately described	can only cover obligations existing at the time the mortgage is constituted

Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either:

a)       by concluding a fresh chattel mortgage or

b)      by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law.

Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed.

Chattel mortgage

A chattel mortgage must comply substantially with the form prescribed by the Chattel Mortgage Law itself.  One of the requisites, under Section 5 thereof, is an affidavit of good faith.  While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persons acting in good faith), the fact, however, that the statute has provided that the parties to the contract must execute an oath that -

“ (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud."

makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated.  

Held: In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3M loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or terminated. There no longer was any chattel mortgage that could cover the new loans that were concluded thereafter.

MAKATI LEASING & FINANCE CORPORATION V. WEAREVER TEXTILE MILLS, INC. & CA, (1983)

Object of Chattel Mortgage, Art. 2124, Art. 417, Act. No. 1508, Sec. 2

Issue: Whether the machinery in suit is real or personal property from the point of view of the parties, with petitioner arguing that it is a personality, while the respondent claiming the contrary, and thus the chattel mortgage constituted thereon is null and void.

If a house of strong materials may be considered as personal property for purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its nature and becomes immobilized only by destination or purpose, may not be likewise treated as such. This is really because one who has so agreed is estopped from denying the existence of the chattel mortgage.

It is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property, as long as no interest of third parties would be prejudiced thereby.

DY V. COURT OF APPEALS, (1991)

Ownership of Collateral

Right of the mortgagor over his mortgaged property

The mortgagor who gave the property as security under a chattel mortgage did not part with the ownership over the same. He had the right to sell it although he was under the obligation to secure the written consent of the mortgagee or he lays himself open to criminal prosecution under the provision of Article 319 par. 2 of the RPC. And even if no consent was obtained from the mortgagee, the validity of the sale would still not be affected.

Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the subject tractor. There is no dispute that the consent of Libra Finance (mortgagee) was obtained in the instant case. Libra allowed the petitioner to purchase the tractor and assume the mortgage debt of his brother. The sale between the brothers was therefore valid and binding as between them and to the mortgagee, as well.

Constructive delivery

Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any of the ways specified in Articles 1497 to 1501 or in any other manner signing an agreement that the possession is transferred from the vendor to the vendee. We agree with the petitioner that Articles 1498 and 1499 are applicable in the case at bar.

Art. 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred.

Article 1499. The delivery of movable property may likewise be made by the mere consent or agreement of the contracting parties, if the thing sold cannot be transferred to the possession of the vendee at the time of the sale, or if the latter already had it in his possession for any other reason.

In the instant case, actual delivery of the subject tractor could not be made. However, there was constructive delivery already upon the execution of the public instrument pursuant to Article 1498 and upon the consent or agreement of the parties when the thing sold cannot be immediately transferred to the possession of the vendee.

Issue: The respondent court avers that the vendor must first have control and possession of the thing before he could transfer ownership by constructive delivery.

Here, it was Libra Finance (mortgagee) which was in possession of the subject tractor due to Wilfredo's (mortgagor) failure to pay the amortization as a preliminary step to foreclosure. As mortgagee, he has the right of foreclosure upon default by the mortgagor in the performance of the conditions mentioned in the contract of mortgage. The law implies that the mortgagee is entitled to possess the mortgaged property because possession is necessary in order to enable him to have the property sold.

Held: While it is true that Wilfredo Dy (mortgagor) was not in actual possession and control of the subject tractor, his right of ownership was not divested from him upon his default. Neither could it be said that Libra was the owner of the subject tractor because the mortgagee can not become the owner of or convert and appropriate to himself the property mortgaged. (Article 2088, Civil Code) Said property continues to belong to the mortgagor. The only remedy given to the mortgagee is to have said property sold at public auction and the proceeds of the sale applied to the payment of the obligation secured by the mortgagee. There is no showing that Libra Finance has already foreclosed the mortgage and that it was the new owner of the subject tractor. Undeniably, Libra gave its consent to the sale of the subject tractor to the petitioner. It was aware of the transfer of rights to the petitioner.

Purchase of a third person of the mortgaged property

Petitioner bought the tractor from mortgagor and the latter executed a deed of absolute sale in favor of the petitioner. The said tractor was then in the possession of the mortgagee. Payment was made thru a check and the mortgagee insisted that it be cleared first before it could release the chattels (tractors). Meanwhile, the tractors were foreclosed at a public auction and the respondent GELAC was the winning bidder. It was only when the check was cleared that the petitioner learned about GELAC having already taken custody of the subject tractor. Consequently, the petitioner filed an action to recover the subject tractor against GELAC.

Issue: The respondents claim that at the time of the execution of the deed of sale, no constructive delivery was effected since the consummation of the sale depended upon the clearance and encashment of the check which was issued in payment of the subject tractor.

Where a third person purchases the mortgaged property, he automatically steps into the shoes of the original mortgagor. His right of ownership shall be subject to the mortgage of the thing sold to him. In the case at bar, the petitioner was fully aware of the existing mortgage of the subject tractor to Libra. In fact, when he was obtaining Libra's consent to the sale, he volunteered to assume the remaining balance of the mortgage debt of Wilfredo Dy which Libra undeniably agreed to.

The payment of the check was actually intended to extinguish the mortgage obligation so that the tractor could be released to the petitioner. It was never intended nor could it be considered as payment of the purchase price because the relationship between Libra and the petitioner is not one of sale but still a mortgage. The clearing or encashment of the check which produced the effect of payment determined the full payment of the money obligation and the release of the chattel mortgage. It was not determinative of the consummation of the sale. The transaction between the brothers is distinct and apart from the transaction between Libra and the petitioner. The contention, therefore, that the consummation of the sale depended upon the encashment of the check is untenable.

Constructive delivery

The sale of the subject tractor was consummated upon the execution of the public instrument. At this time constructive delivery was already effected. Hence, the subject tractor was no longer owned by Wilfredo Dy when it was levied upon by the sheriff. Well settled is the rule that only properties unquestionably owned by the judgment debtor and which are not exempt by law from execution should be levied upon or sought to be levied upon. For the power of the court in the execution of its judgment extends only over properties belonging to the judgment debtor.

RCBC V. ROYAL CARGO CORPORATION, (2009)

Right of Redemption

Issue: WON petitioner, as mortgagee, had the duty to notify the respondent of the public auction sale. 

Section 13 of the Chattel Mortgage Law allows the would-be redemptioner thereunder to redeem the mortgaged property only before its sale.  Consider the following pronouncement in Paray: 

·         [T]here is no law in our statute books which vests the right of redemption over personal property.  Act No. 1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to bestow a right of redemption over personal property, since that law governs the extrajudicial sale of mortgaged personal property, but the statute is definitely silent on the point.  

·         the right of redemption applies to real properties, not personal properties, sold on execution.  

Unmistakably, the redemption cited in Section 13 partakes of an equity of redemption, which is the right of the mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the sale of the property to clear it from the encumbrance of the mortgage. It is not the same as right of redemption which is the right of the mortgagor to redeem the mortgaged property after registration of the foreclosure sale, and even after confirmation of the sale.

While respondent had attached some of Terrymanila’s assets to secure the satisfaction of a P296,662.16 judgment rendered in another case, what it effectively attached was Terrymanila’s equity of redemption.  That respondent’s claim is much lower than the P1.5 million actual bid of petitioner at the auction sale does not defeat respondent’s equity of redemption.  Top Rate International Services, Inc. v. IAC enlightens:

  

We, therefore, hold that the appellate court did not commit any error in ruling that there was no over-levy on the disputed properties.  What was actually attached by respondents was Consolidated Mines’ right or equity of redemption, an incorporeal and intangible right, the value of which can neither be quantified nor equated with the actual value of the properties upon which it may be exercised.

Held: Having thus attached Terrymanila’s equity of redemption, respondent had to be informed of the date of sale of the mortgaged assets for it to exercise such equity of redemption over some of those foreclosed properties, as provided for in Section 13. 

However, even prior to receiving, through counsel, a mailed notice of the auction sale on the date of the auction sale itself on June 16, 1992, respondent was already put on notice of the impending foreclosure sale of the mortgaged chattels.  Despite its window of opportunity to exercise its equity of redemption, however, respondent chose to be technically shrewd about its chances, preferring instead to seek annulment of the auction sale, which was the result of the foreclosure of the mortgage, permission to conduct which it had early on opposed before the insolvency court.  Its negligence or omission to exercise its equity of redemption within a reasonable time, or even on the day of the auction sale, warrants a presumption that it had either abandoned it or opted not to assert it. Equitable considerations thus sway against it. To now allow respondent have its way in annulling the auction sale and at the same time let it proceed with its claims before the insolvency court would neither rhyme with reason nor with justice.    

In any event, even if respondent would have participated in the auction sale and matched petitioner’s bid, the superiority of petitioner’s (mortgagee) lien over the mortgaged assets would preclude respondent from recovering the chattels. 

It has long been settled by this Court that “the right of those who acquire said properties should not and can not be superior to that of the creditor who has in his favor an instrument of mortgage executed with the formalities of the law, in good faith, and without the least indication of fraud. In purchasing it, with full knowledge that such circumstances existed, it should be presumed that he did so, very much willing to respect the lien existing thereon, since he should not have expected that with the purchase, he would acquire a better right than that which the vendor then had.

It bears noting that the chattel mortgage in favor of petitioner was registered more than two years before the issuance of a writ of attachment over some of Terrymanila’s chattels in favor of respondent. This is significant in determining who between petitioner and respondent should be given preference over the subject properties.  Since the registration of a chattel mortgage is an effective and binding notice to other creditors of its existence and creates a real right or lien that follows the property wherever it may be, the right of respondent, as an attaching creditor or as purchaser, had it purchased the mortgaged chattel at the auction sale, is subordinate to the lien of the mortgagee who has in his favor a valid chattel mortgage.

Held: Petitioner is not liable for constructive fraud for proceeding with the auction sale.  Nor for subsequently selling the chattel.  For foreclosure suits may be initiated even during insolvency proceedings, as long as leave must first be obtained from the insolvency court as what petitioner did.  

SERVICEWIDE SPECIALISTS, INC. V. CA, (1999)

Right to Possession

Rule 60 of the Revised Rules of Court requires that an applicant for replevin must show that he:

1.        “is the owner of the property claimed, particularly describing it, or

2.       is entitled to the possession thereof.”

Northern Motors, Inc. vs. Herrera

“There can be no question that persons having a special right of property in the goods the recovery of which is sought, such as a chattel mortgagee, may maintain an action for replevin therefor.  Where the mortgage authorizes the mortgagee to take possession of the property on default, he may maintain an action to recover possession of the mortgaged chattels from the mortgagor or from any person in whose hands he may find them.”

Thus, in default of the mortgagor, the mortgagee is thereby constituted as attorney-in-fact of the mortgagor, enabling such mortgagee to act for and in behalf of the owner.  That the defendant is not privy to the chattel mortgage should be inconsequential.  By the fact that the object of replevin is traced to his possession, one properly can be a defendant in an action for replevin.  

However, in case the right of possession on the part of the plaintiff, or his authority to claim such possession or that of his principal, is put to great doubt, it could become essential to have other persons involved and impleaded for a complete determination and resolution of the controversy. In this case, it is not disputed that there is an adverse and independent claim of ownership by the respondent as evinced by the existence of a pending case before the CA involving subject motor vehicle between the same parties herein. 

Replevin

In a suit for replevin, a clear right of possession must be established.  A foreclosure under a chattel mortgage may properly be commenced only once there is default on the part of the mortgagor of his obligation secured by the mortgage.  The replevin in this case has been resorted to in order to pave the way for the foreclosure of what is covered by the chattel mortgage.  The conditions essential for such foreclosure would be to show:

1.        the existence of the chattel mortgage and,

2.       the default of the mortgagor.  

Since the mortgagee’s right of possession is conditioned upon the actual fact of default which itself may be controverted, the inclusion of other parties, like the debtor or the mortgagor himself, may be required in order to allow a full and conclusive determination of the case.  When the mortgagee seeks a replevin in order to effect the eventual foreclosure of the mortgage, it is not only the existence of, but also the mortgagor’s default on, the chattel mortgage that, among other things, can properly uphold the right to replevy the property.  The burden to establish a valid justification for such action lies with the plaintiff.  An adverse possessor, who is not the mortgagor, cannot just be deprived of his possession, let alone be bound by the terms of the chattel mortgage contract, simply because the mortgagee brings up an action for replevin.”

PAMECA WOOD TREATMENT PLANT, INC. V. CA, (1999)

Right to Surplus or Deficiency, Act. No 1508, Sec. 14

Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:

The officer making the sale shall, within 30 days thereafter, make in writing a return of his doings and file the same in the office of the Registry of Deeds where the mortgage is recorded, and the Register of Deeds shall record the same.  The fees of the officer for selling the property shall be the same as the case of sale on execution as provided in Act 190, and the amendments thereto, and the fees of the Register of Deeds for registering the officer’s return shall be taxed as a part of the costs of sale, which the officer shall pay to the Register of Deeds.  The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage.  The proceeds of such sale shall be applied to the payment:

1.         first, of the costs and expenses of keeping and sale, and then

2.       to the payment of the demand or obligation secured by such mortgage, and

3.       the residue shall be paid to persons holding subsequent mortgages in their order, and

4.       the balance, after paying the mortgage, shall be paid to the mortgagor or persons holding under him on demand.

Pledge	Chattel Mortgage
Article 2115	Act No. 1508
the sale of the thing pledged extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of the sale in excess of the amount of the principal obligation	entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation and costs

Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in the price at public auction.  

The theory of the lower court would lead to the absurd conclusion that if the chattels mentioned in the mortgage, given as security, should sell for more than the amount of the indebtedness secured, that the creditor would be entitled to the full amount for which it might be sold, even though that amount was greatly in excess of the indebtedness.  Such a result certainly was not contemplated by the legislature when it adopted Act No. 1508.  There seems to be no reason supporting that theory under the provision of the law.  The value of the chattels changes greatly from time to time, and sometimes very rapidly.  If, for example, the chattels should greatly increase in value and a sale under that condition should result in largely overpaying the indebtedness, and if the creditor is not permitted to retain the excess, then the same token would require the debtor to pay the deficiency in case of a reduction in the price of the chattels between the date of the contract and a breach of the condition.

And the fact that Act No. 1508 permits a private sale, such sale is not, in fact, a satisfaction of the debt, to any greater extent than the value of the property at the time of the sale.  The amount received at the time of the sale, of course, always requiring good faith and honesty in the sale, is only a payment, pro tanto, and an action may be maintained for a deficiency in the debt.”

REAL ESTATE MORTGAGE

PRUDENTIAL BANK V. ALVIAR & ALVIAR (2005)

Obligation Secured

A “blanket mortgage clause,” also known as a “dragnet clause” is one which is specifically phrased to subsume all debts of past or future origins. 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.

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.  

        The “blanket mortgage clause” in the instant case states:

…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…

Facts: Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real estate mortgage to secure not only theP250,000.00 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. In the case at bar, the subsequent loans obtained by respondents  were secured by other securities.  

Issue: Whether the “blanket mortgage” clause applies even to subsequent advancements for which other securities were intended (PNs). NO.

Reliance on the security test

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.”

Ratio: 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.

Ø  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.

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.

Held: It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of non-payment of all the 3 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 (PN).  The foreclosure of the mortgaged property should only be for the P250,000.00 loan and for any amount not covered by the security for the second promissory note.  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.

PEOPLE’S BANK & TRUST COMPANY & ATLANTIC GULF AND PACIFIC CO. OF MANILA V. DAHICAN LUMBER COMPANY, ET AL., (1967)

After Acquired Properties

Facts: As security for the payment of the loans, DALCO executed in favor of the BANK a deed of mortgage covering 5 parcels of land together with all the buildings and other improvements existing thereon and all the personal properties of the mortgagor located in its place of business. 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. 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:

DALCO failed to pay. After the date of execution of the mortgages, DALCO purchased various machineries, equipment, spare parts and supplies. 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. ATLANTIC and the BANK, commenced foreclosure proceedings against DALCO and DAMCO.

·         ATLANTIC and the BANK: that the "after acquired properties" were subject to the deeds of mortgage.

·         DALCO and DAMCO: the mortgages were null and void as regards the "after acquired properties" of DALCO because they were not registered in accordance with the Chattel Mortgage Law, hence said properties were subject to the mortgage lien in favor of plaintiffs.

Issues:

1.        Are the so-called "after acquired properties" covered by and subject to the deeds of mortgage subject of foreclosure? YES.

2.       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?

Defendants DALCO and DAMCO 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.

Held: 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.

Registration of the chattel mortgage

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.

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.

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. In Law, therefore, they must be deemed to have been immobilized, with the result that the REMs 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.

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.

Right to rescind the sales

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". 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 cannot 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.

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.

STAR TWO (SPV-AMC), INC. V. PAPER CITY CORP. OF THE PHIL., 2013

Effect and Extent, Art. 2126, Art. 2127, Art. 2129

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:

1.        to the natural accessions,

2.       to the improvements,

3.       growing fruits, and

4.       the rents or income not yet received when the obligation becomes due, and

5.        to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or

6.       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.

In the early case of Bischoff v. Pomar and Cia. General de Tabacos, 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 case of Cu Unjieng e Hijos v. Mabalacat Sugar Co. 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, 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 and Cu Unjieng e Hijos v. Mabalacat Sugar Co.

Held: 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 the Indenture duly notarized and entered. The petition for foreclosure prayed that a foreclosure proceedings on the aforesaid real properties, including all improvements thereon covered by the real estate mortgage be undertaken and the appropriate auction sale be conducted. 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.

1âwphi1

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;

GARCIA vs. VILLAR

(Right to alienate collateral)

FACTS: Galas mortgaged the subject property to Villar, and the same property was also subsequently mortgaged by the same mortgagor to Gacia. Both REMs provided that the mortgagee’s consent is necessary in case of subsequent encumbrance or alienation of the property. Galas sold said property to Villar. Upon default of Galas, Garcia sought to foreclose the property. Villar opposed saying that the second REM made in favour of Garcia was without her knowledge and consent, hence void.

Issue: WON Garcia could judicially foreclose the subject property.

Held:

1.       Second REM to Garcia and the sale of the subject property to Villar are valid. While it is true that the annotation of the first REM to Villar on contained a restriction on further encumbrances without the mortgagee’s prior consent, this restriction was nowhere to be found in the Deed of REM. If it were the intention of the parties to impose such restriction, they would have and should have stipulated such in the Deed of REM itself. Neither did this Deed proscribe the sale or alienation of the subject property during the life of the mortgages.  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.

2.       Garcia’s action of foreclosure of mortgage cannot prosper

Real nature of a mortgage:

( Article 2126 of the Civil Code)

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.

  

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 it is a right in rem.” 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. In fact, under Art. 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 creditor’s consent. Therefore, the obligation to pay the mortgage indebtedness remains with the original debtors Galas and Pingol.

Effects of a transfer of a mortgaged property to a third person

According to Art. 1879 of this Code, the creditor may demand of the third person in 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 provided 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.)

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.

Reason: 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

KOREA EXCHANGE BANK v. FILKOR BUSINESS INTEGRATED, INC., ET AL (2002)

(Judicial Foreclosure: Judgment on Foreclosure, Rules of Court, Rule 68, Sec. 2)

Petitioner’s action being one for foreclosure of REM, 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.

HUERTA ALBA RESORT, INC. v. CA (2000)

(Right of Redemption)

Equity of redemption	Right of redemption
Exists in judicial foreclosure	GR: Exists only in the case of the extrajudicial foreclosure of the mortgage E: in a judicial foreclosure except only where the mortgagee is the PNB or a bank or banking institution
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.	grants to the mortgagor the right of redemption within 1 year from the registration of the sheriff's certificate of foreclosure sale
Section 2, Rule 68, 1997 Rules of Civil Procedure Section 78 of R.A. No. 337.	Act 3135

Judicial Foreclosure

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 PNB (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.

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." (Emphasis supplied)

Held: Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No. 337. 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. 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 CA repeatedly passed upon the issue of WON petitioner had the right of redemption or equity of redemption over subject properties in the decisions, resolutions and orders, 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.

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. The confirmation of the sale and the issuance of the TCT 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.

GRAND FARMS, INC. v.  CA, (1991)

(Extrajudicial Foreclosure: Requirement of Notice)

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. 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. An additional stipulation between the parties is the law between them and as it not contrary to 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. 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.

Purpose: intended for the mortgagors so that 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.

SPOUSES RABAT v. PNB, 2012

(Conduct of Sale, Act. No. 3135, Sec. 4, Sec. 5, A.M. No. 99-10-05-0)

Inadequacy of bid price

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.

The National Loan and Investment Board v. Meneses:

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

1.       obtain the highest possible price, and

2.      where there is no showing that a better price is obtainable. 

Ratio: 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. 

Act No. 3135, as amended, 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.

Claim of deficiency

Right to recover the deficiency amount:

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 mortgagee’s 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.

GOLDENWAY MERCHANDISING CORP v. EQUITABLE PCIBANK, (2013)

(Right of Redemption, Act No 3135, Sec. 6 A.M. No. 99-10-05-0)

Facts: Petitioner corporation executed a REM in favor of respondent bank. Petitioner failed to settle its loan obligation hence the respondent extrajudicially foreclosed the mortgage on December 13, 2000 and the property was sold to the respondent. Accordingly, a Certificate of Sale was issued to respondent on January 26, 2001. On March 8, 2001, petitioner offered to redeem the foreclosed properties but 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.

Sec. 47, RA 8791	Act 3135
General law pertaining to the banking industry	Special law governing REM and foreclosure
shortens the period of redemption for juridical persons: Juridical persons have the right to redeem the property 1.       Until no more than three (3) months after foreclosure 2.      but not after the registration of the certificate of foreclosure sale with the Register of Deeds whichever is earlier.	1 year redemption period

1.       Act No. 3135, 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, 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 petitioner’s default and the latter’s 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.

2.       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:

Sec. 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. 

Constitutionality of Sec. 47, RA 8791

1.        Did not violate the non-impairment clause: 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.

2.       Did not violate the eual protection clause: 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. 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; for maintaining a safe and sound banking system.

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.

                                                                                   

MEDIDA, ET. AL V. CA, (1992)

(Who may Redeem)

Issue: WON 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. YES.

Rules:

·         If 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.

·         during that same period of twelve months the mortgagor is NOT "divested" of his ownership, otherwise the absurd result would be that the land will consequently be without an owner although it remains registered in the name of the mortgagor.

·         what is divested from the mortgagor is only his "full right as owner thereof to dispose (of) and sell the lands," - 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.

·         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. 

·         A property sold at a public auction, while within the period of redemption, may still be subsequently mortgaged by the mortgagor: 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.

·         Effect: 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.

Held: In the case at bar 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.

SPOUSES YAP v. SPOUSES DY (2011)

(How to redeem)

Issue: To whom payment of the redemption money should be made?

1.        purchaser or redemptioner, or

2.       for him to the officer who made the sale.

Section 31, Rule 39 of the Rules of Court:

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:

1.        he must make the same payments as are required to effect a redemption by a redemptioner,

2.       whereupon the effect of the sale is terminated and

3.       he is restored to his estate, and

4.       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.

Ø  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. 

Litonjua v. L & R Corporation: 

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 person’s right to redeem the foreclosed property (for having assumed the obligation to pay the mortgage debt after buying the mortgaged property), to wit:

Therefore, such third person stepped into the shoes of the mortgagor (seller) 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 the mortgagee

Tambunting, clarifies that –

·         The third persons, by stepping into the mortgagor’s 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:

a)       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

b)      as regards the second mortgage, sought to be judicially foreclosed but yet unforeclosed, they had the so-called equity of redemption.”

The requisites for a valid redemption:

1.        the redemption must be made within 12 months from the time of the registration of the sale in the Office of the Register of Deeds;

2.       payment of the:

a)       purchase price of the property involved,

b)      plus 1% interest per month thereon in addition, up to the time of redemption,

c)       together with the amount of any assessments or taxes which the purchaser may have paid thereon after the purchase,

d)      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.  

          

Doctrine of indivisibility of the mortgage

does not apply once the mortgage is extinguished by a complete foreclosure thereof as in the instant case.

General Rule: Art. 2089, Civil Code

 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 debtor’s 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 creditor’s 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.

Exception: 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.

What the law (Art. 2089) proscribes:

ü  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.

ü  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.

ü  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.

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.

Piecemeal redemption, allowed.

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:

Castillo v. Nagtalon: 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.

Held: 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.  

HEIRS OF THE LATE SPOUSES MAGLASANG v. MANILA BANKING CORP (2013)

(Right to Deficiency, Rules of Court, Rule 86, Sec. 7.)

Section 7, Rule 86 of the Rules 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:

1.        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

2.       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

3.       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.

Note:

·         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 narrowly apply only to mortgages made by the administrator over any property belonging to the estate of the decedent.

The secured creditor has 3 remedies/options that he may alternatively adopt for the satisfaction of his indebtedness.  under Section 7, Rule 86, 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 (judicial foreclosure)

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. (extrajudicial foreclosure)

Note: These remedies are distinct, independent and mutually exclusive from each other; thus, the election of one effectively bars the exercise of the others.

Bank of America v. American Realty Corporation

·         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.

·         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.

·         Anent the 3rd remedy, it must be mentioned that the same includes the option of extrajudicially 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.

Foreclosure without right to recover deficiency (3^rd remedy)

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

Rule 68 vis-à-vis Act. 3135

·         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.

Act No. 3135	Section 7, Rule 86
after the third option is chosen (in Rule 86), the procedure governing the manner in which the extra-judicial foreclosure should proceed would still be governed by the provisions of Act No. 3135	lays down the options for the secured creditor to claim against the estate and the availment of the third option bars him from claiming any deficiency amount.
sets 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.	governs the parameters and the extent to which a claim may be advanced against the estate
	special rule applicable to claims against the estate
Details 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	Does not detail the procedure for extra-judicial foreclosures

Held: 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. Respondent is now precluded from filing a suit to recover any deficiency amount as earlier discussed.

Rule as to where the auction sale must be held

1.        In case of foreclosure of 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.

2.       Stipulation: 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. As a consequence, the stipulated venue and that provided under Act No. 3135 can be applied alternatively.

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.

SUICO v. PNB (2007)

Right to Surplus

Notice of Sheriff’s Sale

Purpose: 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.

          

Effect of the non-delivery of the bid price or the surplus to the mortgagor 

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.  

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 sheriff’s receipt shall be a sufficient discharge for the amount so paid or directed to be credited by the judgment obligee on the execution.     

Issue: Considering the amount of PNB’s bid of P8,511,000.00 as against the amount of the petitioners’ obligation ofP1,991,770.38 in the Notice of Sale, is the PNB obliged to deliver the excess? YES.

  

          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:

1.        first, pay the costs

2.       secondly, pay off the mortgage debt

3.       thirdly, pay the junior encumbrancers, if any in the order of priority

4.       fourthly, give the balance to the mortgagor, his agent or the person entitled to it.

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 mortgagor’s obligation is an act of payment, not payment by dacion; hence, it is the mortgagee’s duty to return any surplus in the selling price to the mortgagor.  

·         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.

Effect: 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.

        

 CUA LAICHU, ET AL., v. LAQUI & PBCOMM., (2010)     

After Consolidation of Ownership, Rules of Court, Rule 39, Sec. 33

Issue: 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. YES.

Ø  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.

Ø  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.

          

Banco Filipino Savings and Mortgage Bank v. Pardo

Ruled on the right to possession of a purchaser at an extrajudicial foreclosure of a mortgage. This case involved a REM as security for a loan obtained from a bank. Upon the mortgagor’s 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.

Navarra v. CA

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, as amended by Act No. 4118, thus:

         SEC. 7. In any sale made under the provisions of this Act, the purchaser may petition the RTC 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:

1.        shall be made under oath and filed in form of an ex parte motion  and 

2.       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.

Facts: The certificate of sale of the foreclosed property was annotated on the TCT on 7 June 2002. The redemption period thus lapsed on 7 June 2003, one year from the registration of the sale. When private respondent applied for the issuance of a writ of possession on 18 August 2004, the redemption period had long lapsed.  

Held: 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. In the present case, when private respondent applied for the issuance of a writ of possession, it presented a new TCT issued in its name. 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.

Questioning the validity of the extrajudicial foreclosure sale, remedy:

not later than 30 days after the purchaser was given possession, petition to:

1.        to have the sale set aside and

2.       the writ of possession cancelled

3.       specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof. (Section 8 of Act No. 3135)

·         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. Petitioners cannot oppose or appeal the court’s order granting the writ of possession in an ex parte proceeding.

·         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.

BPI FAMILY SAVINGS BANK, INC. v. GOLDEN POWER DIESEL SALES CENTER (2011)

When Held by a Third Party, Rules of Court, Rule 39, Sec. 33, Sec. 16

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 Sec. 7 of Act No. 3135, as amended, which provides:

 SEC. 7. In any sale made under the provisions of this Act, the purchaser may

1.        petition the RTC of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period,

2.       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:

a)       made without violating the mortgage or

b)      without complying with the requirements of this Act.

3.       Such petition shall be made under oath and

4.       filed in form of an ex parte motion

a)       in the registration or cadastral proceedings if the property is registered, or

b)      in special proceedings in the case of property registered under the Mortgage Law or under Sec. 194 of the Administrative Code, or

c)       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,

d)      and in each case the clerk of the court shall, upon the filing of such petition, collect the fees specified in paragraph 11 of Sec. 114 of Act No. 496, as amended by Act No. 2866, and

5.        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.

Note: 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.

China Banking Corporation v. Lozada

·         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.  

Writ of Posession

GR: 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.

                               

E: 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.  

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.

Foreclosed property held by the third party adversely to the judgment obligor

·         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.

·         Procedure: is for the trial court to order a hearing to determine the nature of the adverse possession. 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.

Facts: 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.

Issue: WON respondents are third party adversely to the judgment obligor so that the issuance of a writ of execution may be stayed and a hearing shall be conducted to determine their ownership.

Respondentsʼ 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.” 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.”

Roxas v. Buan

 It will be recalled that Roxasʼ 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 Valentinʼs transferee. Any right he has to the property is necessarily derived from that of Valentin. As transferee, he steps into the latterʼs 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, Roxasʼ occupancy of the property cannot be considered adverse to Valentin.

Held: In this case, respondentsʼ 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 CEDECʼs transferees and any right they have over the properties is derived from CEDEC. As transferees of CEDEC, respondents merely stepped into CEDEC’s shoes and are necessarily bound to acknowledge and respect the mortgage CEDEC had earlier executed in favor of BPI Family. Respondents are the successors-in-interest of CEDEC and thus, respondentsʼ occupancy over the properties cannot be considered adverse to CEDEC.

China Bank v. Lozada 

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.

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 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 latterʼs successors-in-interest, there was no reason for the trial court to order the suspension of the implementation of the writ of possession.

Question of validity of foreclosure sale

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. 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. The purchaser is entitled to a writ of possession without prejudice to the outcome of the pending annulment case.

NAGTALON v. UNITED COCONUT PLANTERS BANK, 2013.

When Held by a Third Party, Rules of Court, Rule 39, Sec. 33, Sec. 16

The issuance of a writ of possession is a ministerial function of the court

Rule: We have long recognized the rule that once title to the property has been consolidated in the buyer’s 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 owner and the issuance of the writ becomes a ministerial function that does not admit of the exercise of the court’s discretion. The court, acting on an application for its issuance, should issue the writ as a matter of course and without any delay.

Ø  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.

Writ of possession by filing an ex parte motion

A.       During the one-year redemption period (Section 7 of Act 3135):

1.     a purchaser may apply for a writ of possession by filing an ex parte motion

2.     under oath

3.     Where to file:

a)       in the registration or cadastral proceedings if the property is registered, or

b)      in special proceedings in case the property is registered under the Mortgage Law.

4.     In this case, a bond is required before the court may issue a writ of possession.

B.       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. (Section 6 of Act 3135, in relation to Section 35, Rule 39 of the Revised Rules of Court)

Ø  This time, no bond is necessary for its issuance;

Ø  the mortgagor is now considered to have lost any interest over the foreclosed property.

Ø  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.

Ø  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.

Ø  The issuance of the writ, upon proper application, is a ministerial function that effectively forbids the exercise by the court of any discretion.

Ø  the issuance of the writ is an incident of ownership.

Question regarding the validity of the mortgage or its foreclosure

GR: 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. It is a 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.

E: Exceptions to the rule that issuance of a writ of possession is a ministerial function

1)       Gross inadequacy of purchase price

In Cometa v. IAC 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. IAC, 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. CA in light of the given facts, particularly the mortgagee’s 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.