Credit Week 10 Cases - Real Estate Mortgage

670 Phil. 223

FIRST DIVISION

[ G.R. No. 171868, July 27, 2011 ]

SPOUSES FRANCISCO D. YAP AND WHELMA S. YAP, PETITIONERS, VS. SPOUSES ZOSIMO DY, SR. AND NATIVIDAD CHIU DY, SPOUSES MARCELINO MAXINO AND REMEDIOS L. MAXINO, PROVINCIAL SHERIFF OF NEGROS ORIENTAL AND DUMAGUETE RURAL

BANK, INC., RESPONDENTS.

[G.R. NO. 171991]

DUMAGUETE RURAL BANK, INC. (DRBI) HEREIN REPRESENTED BY MR. WILLIAM D.S. DICHOSO, PETITIONERS, VS. SPOUSES ZOSIMO DY, SR. AND NATIVIDAD CHIU DY, SPOUSES MARCELINO MAXINO AND REMEDIOS MAXINO, AND SPOUSES FRANCISCO D. YAP AND

WHELMA S. YAP, RESPONDENTS.

D E C I S I O N

VILLARAMA, JR., J.:

May persons to whom several mortgaged lands were transferred without the knowledge and consent of the creditor redeem only several parcels if all the lands were sold together for a single price at the foreclosure sale? This is the principal issue presented to us for resolution in these two petitions for review on certiorari assailing the May 17, 2005 Decision[1] and March 15, 2006 Resolution[2] of the Court of Appeals (CA) in CA-G.R. C.V. No. 57205.

The antecedents are as follows:

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

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

(2) TCT No. T-20301 Lot 3 of Plan Psu-124376 17,373 sq.m.


(4) TCT No. T-14794 Lot 5 of Plan Psu-124376 2,900 sq.m.


(6) TCT No. T-14783 Lot 8 of Plan Pcs-11728 39,888 sq.m

The Tirambulos likewise own a parcel of land denominated as Lot 846, covered by Tax Declaration No. 08109.

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

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

At the auction sale, DRBI was proclaimed the highest bidder and bought said lots for P216,040.93. The Sheriff's Certificate of Sale [6] stated that the "sale is subject to the rights of redemption of the mortgagor (s) or any other persons authorized by law so to do, within a period of one (1) year from registration hereof."[7] The certificate of sale, however, was not registered until almost a year later, or on June 24, 1983.

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

On August 8, 1983, or well within the redemption period, the Yaps filed a Motion for Writ of Possession [9] alleging that they have acquired all the rights and interests of DRBI over the foreclosed properties and are entitled to immediate possession of the same because the one-year redemption period has lapsed without any redemption being made. Said motion, however, was ordered withdrawn on August 22, 1983 [10] upon motion of the Yaps, who gave no reason therefor.[11] Three days later, or on August 25, 1983, the Yaps again filed a Motion for Writ of Possession. [12] This time the

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motion was granted, and a Writ of Possession[13] over Lots 1, 3 and 6 was issued in favor of the Yaps on September 5, 1983. They were placed in possession of Lots 1, 3 and 6 seven days later.

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

Thus, on May 28, 1984, the Dys and the Maxinos went to the Office of the Sheriff of Negros Oriental and paid P50,625.29 (P40,000.00 for the principal plus P10,625.29 for interests and Sheriff's Commission) to effect the redemption. [15] Noticing that Lot 3 was not included in the foreclosure proceedings, Benjamin V. Diputado, Clerk of Court and Provincial Sheriff, issued a Certificate of Redemption [16] in favor of the Dys and the Maxinos only for Lots 1 and 6, and stated in said certificate that Lot 3 is not included in the foreclosure proceedings. By letter [17] of even date, Atty. Diputado also duly notified the Yaps of the redemption of Lots 1 and 6 by the Dys and the Maxinos, as well as the non-inclusion of Lot 3 among the foreclosed properties. He advised the Yaps to personally claim the redemption money or send a representative to do so.

In a letter to the Provincial Sheriff on May 31, 1984, the Yaps refused to take delivery of the redemption price arguing that one of the characteristics of a mortgage is its indivisibility and that one cannot redeem only some of the lots foreclosed because all the parcels were sold for a single price at the auction sale.[18]

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

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

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

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

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

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

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

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

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

h) That for falsifying the Sheriff's Certificate of Sale and selling unlawfully Lot No. 3, TCT No. T-20301, to its co-defendant Yap, defendant DRBI be condemned to pay to plaintiffs actual damages in the amount of P50,000.00; moral damages in the amount of P200,000.00; and punitive and exemplary damages in the amount of P100,000.00;

i) That defendants be condemned to pay solidarily to plaintiffs attorney's fees in the amount of P50,000.00; other legitimate expenses of litigation in the amount of P30,000.00; and the costs of suit;

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

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

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

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

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

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3 and 6.[22]

Meanwhile, by letter[23] dated June 27, 1984, the Yaps told DRBI that no redemption has been made by the Tirambulos or their successors-in-interest and requested DRBI to consolidate its title over the foreclosed properties by requesting the Provincial Sheriff to execute the final deed of sale in favor of the bank so that the latter can transfer the titles of the two foreclosed properties to them.

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

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

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

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

3. That the Provincial Sheriff be required to execute the final Deed of Sale in favor of the bank and the bank be in turn required to transfer the property to the plaintiffs in accordance with the Deed of Sale with Mortgage.

4. That the court grant such other relief as may be deemed just and equitable under the premises. [26]

Civil Case Nos. 8426 and 8439 were tried jointly.

On October 24, 1985, the Yaps, by counsel, filed a motion to withdraw from the provincial sheriff the redemption money amounting to P50,373.42. [27] Said motion was granted on October 28, 1985 after a Special Power of Attorney executed by Francisco Yap in favor of his brother Valiente Yap authorizing the latter to receive the P50,373.42 redemption money was presented in court. [28]

On February 12, 1997, the trial court rendered decision[29] in favor of the Yaps. The fallo reads:

WHEREFORE, judgment is hereby rendered as follows:

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

2. In Civil Case No. 8439:

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

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

SO ORDERED.[30]

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

Wherefore, judgment is hereby rendered as follows:

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

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

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

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

5. All other claims and counterclaims are hereby dismissed for lack of merit. of 50

SO ORDERED.[31]

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

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

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

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

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

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

4) ...not holding that by withdrawing the redemption money consigned/deposited by plaintiffs to the Court, and turning over possession of the parcels of land to plaintiffs, defendants Yap accepted, ratified, and confirmed redemption by plaintiffs of the parcels of land acquired at foreclosure/auction sale by the Bank and purportedly sold by it to and purchased by Yap;

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

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

7) ...issuing an amended decision after perfection of plaintiff's appeal and without waiting for their comment (declaring the Certificate of Redemption issued by the Provincial Sheriff (Exh. "M") null and void; ordering the Provincial Sheriff of Negros Oriental to execute a Final Deed of Sale of the foreclosed properties in favor of the defendant Dumaguete Rural Bank, Inc., subject to the rights of the Yap spouses acquired in accordance with the Deed of Sale with Mortgage (Exh. "B"-Maxino and Dy; Exh. "1" -Yap); declaring null and void the Deed of Sale dated Oct[ober] 27, 1979, made by Tirambulo and Estorco in favor of the Dys and Maxinos covering all the seven (7) parcels of land in question; in Civil Case No. 8439, declaring the Yap spouses, the exclusive owners of Lot No. 1, covered by TCT No. T-14777, and Lot No. 6, covered by TCT No. T-14781, for failure on the part of the Dy and Maxino spouses, to redeem said properties within (1) year from the date of registration of the auction sale) after plaintiffs had perfected appeal of the 12 February 1997 decision, without hearing or awaiting plaintiffs' comment, and in the face of the records showing that the issues were never raised, much less litigated, insofar as Tirambulo, as well in the face of the foregoing circumstances, especially dismissal of defendants' claims and counterclaims and acquisition of ownership and possession of the parcels of land by plaintiffs as well as disposition and/or loss of defendants rights and interests and cause of action in respect thereof and/or settlement, waiver, and/or extinguishment of their claims, and merger in plaintiffs-appellants, and without stating clearly the facts and the law upon which it is based[; and]

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

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

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

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

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

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

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

All other claims are dismissed.

Costs against the appellees.

SO ORDERED.[33]

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

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

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

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

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

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

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

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

All other claims are dismissed.

Costs against the appellees.

SO ORDERED.[34]

Hence, the consolidated petitions assailing the appellate court's decision.

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

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

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

Thus, the issues to be resolved in the instant case are essentially as follows: (1) Is Lot 3 among the foreclosed properties? (2) To whom should the

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payment of redemption money be made? (3) Did the Dys and Maxinos validly redeem Lots 1 and 6? and (4) Is DRBI liable for damages?

As to the first issue, we find that the CA correctly ruled that the Dys and Maxinos were able to prove their claim that Lot 3 was not among the properties foreclosed and that it was merely inserted by the bank in the Sheriff's Certificate of Sale. As Atty. Diputado, the Provincial Sheriff, testified, the application for foreclosure was only for five parcels of land, namely, Lots 1, 4, 5, 6 and 8. Accordingly, only said five parcels of land were included in the publication and sold at the foreclosure sale. When he was shown a copy of the Sheriff's Certificate of Sale consisting of three pages, he testified that it was altered because Lot 3 and Lot 846 were included beyond the "xxx" that marked the end of the enumeration of the lots foreclosed.[35] Also, a perusal of DRBI's application for foreclosure of real estate mortgage[36] shows that it explicitly refers to only one deed of mortgage to settle the Tirambulos' indebtedness amounting to P216,040.93. This is consistent with the Notice of Extrajudicial Sale of Mortgaged Property, published in the Dumaguete Star Informer on February 18, 25 and March 4, 1982,[37] announcing the sale of Lots 1, 4, 5, 6 and 8 for the satisfaction of the indebtedness amounting to P216,040.93. It is also consistent with the fact that Lots 1, 4, 5, 6 and 8 are covered by only one real estate mortgage, the Real Estate Mortgage[38] dated December 3, 1976. Indeed, that the foreclosure sale refers only to Lots 1, 4, 5, 6 and 8 is clear from the fact that Lots 1, 4, 5, 6 and 8 and Lot 3 are covered by two separate real estate mortgages. DRBI failed to refute these pieces of evidence against it.

As to the second issue regarding the question as to whom payment of the redemption money should be made, Section 31, [39] Rule 39 of the Rules of Court then applicable provides:

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

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

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

The Dys and the Maxinos havelegal personality to redeem the subjectproperties.

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

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

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

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

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

The requisites of a valid redemption are present

The requisites for a valid redemption are: (1) the redemption must be made within twelve (12) months from the time of the registration of the sale in

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

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

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

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

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

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

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

Therefore, the 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.

From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of these guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied.

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

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

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

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

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

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

So what amount should the Dys and Maxinos pay in order for their redemption of the two properties be deemed valid considering that when the five

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properties were auctioned, they were not separately valued?

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

Lot 1 61,371 square meters





TOTAL 148,121 square meters

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

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

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

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

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

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

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

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

There being an award of exemplary damages, the award of attorney's fees is likewise proper as provided in paragraph 1, Article 2208 of the Civil Code.

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

With costs against the petitioners.

SO ORDERED.

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Corona, C.J., (Chairperson), Leonardo-De Castro, Bersamin, and Del Castillo, JJ., concur.

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592 Phil. 611

SECOND DIVISION

[ G.R. No. 177886, November 27, 2008 ]

SPOUSES LEOPOLDO S. VIOLA AND MERCEDITA VIOLA, PETITIONERS, VS. EQUITABLE PCI BANK, INC., RESPONDENT.

D E C I S I O N

CARPIO MORALES, J.:

Via a contract denominated as "CREDIT LINE AND REAL ESTATE MORTGAGE AGREEMENT FOR PROPERTY LINE" [1] (Credit Line Agreement) executed on March 31, 1997, Leo-Mers Commercial, Inc., as the Client, and its officers spouses Leopoldo and Mercedita Viola (petitioners) obtained a loan through a credit line facility in the maximum amount of P4,700,000.00 from the Philippine Commercial International Bank (PCI Bank), which was later merged with Equitable Bank and became known as Equitable PCI Bank, Inc. (respondent).

The Credit Line Agreement stipulated that the loan would bear interest at the "prevailing PCIBank lending rate" per annum on the principal obligation and a "penalty fee of three percent (3%) per month on the outstanding amount."

To secure the payment of the loan, petitioners executed also on March 31, 1997 a "Real Estate Mortgage" [2] in favor of PCIBank over their two parcels of land covered by Transfer Certificates of Title No. N-113861 (consisting of 300 square meters, more or less ) and N-129036 (consisting of 446 square meters, more or less) of the Registry of Deeds of Marikina.

Petitioners availed of the full amount of the loan. Subsequently, they made partial payments which totaled P3,669,210.67. By respondent's claim, petitioner had since November 24, 2000 made no further payments and despite demand, they failed to pay their outstanding obligation which, as of September 30, 2002, totaled P14,024,623.22, broken down as follows:

(a) Principal obligation P4,783,254.69

(b) Past due interest from11/24/00 to 09/30/02at 15% interest P1,345,290.38

(c) Penalty at 3% per monthfrom 03/31/98 to 02/23/02 P7,896,078.15

_____________________

P14,024,623.22[3] (Underscoring supplied)

Respondent thus extrajudicially foreclosed the mortgage before the Office of the Clerk of Court & Ex-Officio Provincial Sheriff of the Regional Trial Court (RTC) of Marikina City. The mortgaged properties were sold on April 10, 2003 for P4,284,000.00 at public auction to respondent, after which a Certificate of Sale dated April 21, 2003[4] was issued.

More than five months later or on October 8, 2003, petitioners filed a complaint [5] for annulment of foreclosure sale, accounting and damages before the Marikina RTC, docketed as Civil Case No. 2003-905-MK and raffled to Branch 192. Petitioners alleged, inter alia, that they had made substantial payments of P3,669,210.67 receipts of which were issued without respondent specifying "whether the payment was for interest, penalty or the principal obligation;" that based on respondent's statement of account, not a single centavo of their payments was applied to the principal obligation; that every time respondent sent them a statement of account and demand letters, they requested for a proper accounting for the purpose of determining their actual obligation, but all their requests were unjustifiably ignored on account of which they were forced to discontinue payment; that "the foreclosure proceedings and auction sale were not only irregularly and prematurely held but were null and void because the mortgage debt is only P2,224,073.31 on the principal obligation and P1,455,137.36 on the interest, or a total of only P3,679,210.67 as of April 15, 2003, but the mortgaged properties were sold to satisfy an inflated and erroneous principal obligation of P4,783,254.69, plus 3% penalty fee per month or 33% per year and 15% interest per year, which amounted to P14,024,623.22 as of September 30, 2002;" that "the parties never agreed and stipulated in the real estate mortgage contract " that the 15% interest per annum on the principal loan and the 3% penalty fee per month on the outstanding amount would be covered or secured by the mortgage; that assuming respondent could impose such interest and penalty fee, the same are "exorbitant, unreasonable, iniquitous and unconscionable, hence, must be reduced;" and that respondent is only allowed to impose the legal rate of interest of 12% per annum on the principal loan absent any stipulation thereon.[6]

In its Answer, respondent denied petitioners' assertions, contending, inter alia, that the absence of stipulation in the mortgage contract securing the payment of 15% interest per annum on the principal loan, as well as the 3% penalty fee per month on the outstanding amount, is immaterial since the mortgage contract is "a mere accessory contract which must take its bearings from the principal Credit Line Agreement."[7]

During the pre-trial conference, the parties defined as sole issue in the case whether the mortgage contract also secured the payment of 15% interest per annum on the principal loan of P4,700,000.00 and the 3% penalty fee per month on the outstanding amount, which interest and penalty fee are stipulated only in the Credit Line Agreement.[8]

By Decision[9] of September 14, 2005, the trial court sustained respondent's affirmative position on the issue but found the questioned interest and

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penalty fee "excessive and exorbitant." Thus, it equitably reduced the interest on the principal loan from 15% to 12% per annum and the penalty fee per month on the outstanding amount from 3% to 1.5% per month.

Accordingly, the court nullified the foreclosure proceedings and the Certificate of Sale subsequently issued, "without prejudice" to the holding anew of foreclosure proceedings based on the "re-computed amount" of the indebtedness, "if the circumstances so warrant."

The dispositive portion of the trial court's Decision reads:

WHEREFORE, judgment is hereby rendered as follows:

1) The interest on the principal loan in the amount of Four Million Seven Hundred Thousand (P4,700,000.00) Pesos should be recomputed at 12% per annum;

2) The 3% per month penalty on delinquent account as stipulated by the parties in the Credit Line Contract dated March 31, 1997 is hereby REDUCED to 1.5% per month;

3) The foreclosure sale conducted on April 10, 2003 by the Clerk of Court and Ex-Officio Sheriff of Marikina, to satisfy the plaintiff's mortgage indebtedness, and the Certificate of Sale issued as a consequence of the said proceedings, are declared NULL and VOID, without prejudice to the conduct of another foreclosure proceedings on the basis of the re-computed amount of the plaintiff's indebtedness, if the circumstances so warrant.

No pronouncement as to costs.

SO ORDERED. (Underscoring supplied)

Petitioners filed a Motion for Partial Reconsideration, [10] contending that the penalty fee per month on the outstanding amount should have been taken out of the coverage of the mortgage contract as it was not stipulated therein. By Order dated December 6, 2005, the trial court denied the motion.

On appeal by petitioners, the Court of Appeals, by Decision[11] of February 21, 2007, dismissed the same for lack of merit, holding that "the Real Estate Mortgage covers not only the principal amount [of P4,700,000.00] but also the `interest and bank charges,' which [phrase bank charges] refers to the penalty charges stipulated in the Credit Line Agreement."[12]

Petitioners' Motion for Reconsideration having been denied by Resolution [13] of May 16, 2007, they filed the present Petition for Review on Certiorari, alleging that -

THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN DECIDING THE CASE NOT IN ACCORD WITH LAW AND APPLICABLE DECISIONS OF THE SUPREME COURT BY RULING THAT THERE IS NO AMBIGUITY IN CONSTRUING TOGETHER THE CREDIT LINE AND MORTGAGE CONTRACTS WHICH PROVIDED CONFLICTING PROVISIONS AS TO INTEREST AND PENALTY.[14]

The only issue is whether the mortgage contract also secured the penalty fee per month on the outstanding amount as stipulated in the Credit Line Agreement.

The Court holds not.

A mortgage must "sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage. [15]

In the case at bar, the parties executed two separate documents on March 31, 1997 - the Credit Line Agreement granting the Client a loan through a credit facility in the maximum amount of P4,700,000.00, and the Real Estate Mortgage contract securing the payment thereof. Undisputedly, both contracts were prepared by respondent and written in fine print, single space.

The Credit Line Agreement contains the following stipulations on interest and delinquency charges:

A. CREDIT FACILITY

9. INTEREST ON AVAILMENTS

The CLIENT shall pay the BANK interest on each availment against the Credit Facility at the rate of:

PREVAILING PCIBANK LENDING RATE

for the first interest period as defined in A(10) hereof. x x x.

x x x x

15. DELINQUENCY

CLIENT's account shall be considered delinquent if the availments exceed the amount of the line and/or in case the Account is debited for unpaid

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interest and the Available Balance is insufficient to cover the amount debited. In such cases, the Available Balance shall become negative and the CLIENT shall pay the deficiency immediately in addition to collection expenses incurred by the BANK and a penalty fee of three percent (3%) per month of the outstanding amount to be computed from the day deficiency is incurred up to the date of full payment thereon.

x x x x.[16] (Underscoring supplied)

The Real Estate Mortgage contract states its coverage, thus:

That for and in consideration of certain loans, credit and other banking facilities obtained x x x from the Mortgagee, the principal amount of which is PESOS FOUR MILLION SEVEN HUNDERED THOUSAND ONLY (P4,700,000.00) Philippine Currency, and for the purpose of securing the payment thereof, including the interest and bank charges accruing thereon, the costs of collecting the same and of taking possession of and keeping the mortgaged propert[ies], and all other expenses to which the Mortgagee may be put in connection with or as an incident to this mortgage, as well as the faithful compliance with the terms and conditions of this agreement and of the separate instruments under which the credits hereby secured were obtained, the Mortgagor does hereby constitute in favor of the Mortgagee, its successors or assigns, a mortgage on the real property particularly described, and the location of which is set forth, in the list appearing at the back hereof and/or appended hereto, of which the Mortgagor declare that he is the absolute owner and the one in possession thereof, free and clear of any liens, encumbrances and adverse claims. [17] (Emphasis and underscoring supplied)

The immediately-quoted provision of the mortgage contract does not specifically mention that, aside from the principal loan obligation, it also secures the payment of "a penalty fee of three percent (3%) per month of the outstanding amount to be computed from the day deficiency is incurred up to the date of full payment thereon," which penalty as the above-quoted portion of the Credit Line Agreement expressly stipulates.

Since an action to foreclose "must be limited to the amount mentioned in the mortgage"[18] and the penalty fee of 3% per month of the outstanding obligation is not mentioned in the mortgage, it must be excluded from the computation of the amount secured by the mortgage.

The ruling of the Court of Appeals in its assailed Decision that the phrase "including the interest and bank charges" in the mortgage contract "refers to the penalty charges stipulated in the Credit Line Agreement" is unavailing.

"Penalty fee" is entirely different from "bank charges." The phrase "bank charges" is normally understood to refer to compensation for services. A "penalty fee" is likened to a compensation for damages in case of breach of the obligation. Being penal in nature, such fee must be specific and fixed by the contracting parties, unlike in the present case which slaps a 3% penalty fee per month of the outstanding amount of the obligation.

Moreover, the "penalty fee" does not belong to the species of obligation enumerated in the mortgage contract, namely: "loans, credit and other banking facilities obtained x x x from the Mortgagee, . . . including the interest and bank charges, . . . the costs of collecting the same and of taking possession of and keeping the mortgaged properties, and all other expenses to which the Mortgagee may be put in connection with or as an incident to this mortgage . . ."

In Philippine Bank of Communications v. Court of Appeals[19] which raised a similar issue, this Court held:

The sole issue in this case is whether, in the foreclosure of a real estate mortgage, the penalties stipulated in two promissory notes secured by the mortgage may be charged against the mortgagors as part of the sums secured, although the mortgage contract does not mention the said penalties.

x x x x

We immediately discern that the mortgage contract does not at all mention the penalties stipulated in the promissory notes. However, the petitioner insists that the penalties are covered by the following provision of the mortgage contract:

This mortgage is given as security for the payment to the MORTGAGEE on demand or at maturity, as the case may be, of all promissory notes, letters of credit, trust receipts, bills of exchange, drafts, overdrafts and all other obligations of every kind already incurred or which hereafter may be incurred....

x x x x

The Court is unconvinced, for the cases relied upon by the petitioner are inapplicable. x x x.

x x x x

The mortgage contract is also one of adhesion as it was prepared solely by the petitioner and the only participation of the other party was the affixing of his signature or "adhesion" thereto. Being a contract of adhesion, the mortgage is to be strictly construed against the petitioner, the party which prepared the agreement.

A reading, not only of the earlier quoted provision, but of the entire mortgage contract yields no mention of penalty charges. Construing this silence strictly against the petitioner, it can fairly be concluded that the petitioner did not intend to include the penalties on the promissory notes in the secured amount. This explains the finding by the trial court, as affirmed by the Court of Appeals, that "penalties and charges are not due for want of stipulation in the mortgage contract."

Indeed, a mortgage must sufficiently describe the debt sought to be secured , which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage. In this case, the mortgage contract provides that it secures notes and other evidences of indebtedness. Under the rule of ejusdem generis, where a description of things of a particular

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class or kind is "accompanied by words of a generic character, the generic words will usually be limited to things of a kindred nature with those particularly enumerated . . . " A penalty charge does not belong to the species of obligations enumerated in the mortgage, hence, the said contract cannot be understood to secure the penalty.[20] (Emphasis and underscoring supplied)

Respondent's contention that the absence in the mortgage contract of a stipulation securing the payment of the 3% penalty fee per month on the outstanding amount is of no consequence, the deed of mortgage being merely an "accessory contract" that "must take its bearings from the principal Credit Line Agreement,"[21] fails. Such absence is significant as it creates an ambiguity between the two contracts, which ambiguity must be resolved in favor of petitioners and against respondent who drafted the contracts. Again, as stressed by the Court in Philippine Bank of Communications:

There is also sufficient authority to declare that any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it.

A mortgage and a note secured by it are deemed parts of one transaction and are construed together, thus, an ambiguity is created when the notes provide for the payment of a penalty but the mortgage contract does not . Construing the ambiguity against the petitioner, it follows that no penalty was intended to be covered by the mortgage . The mortgage contract consisted of three pages with no less than seventeen conditions in fine print; it included provisions for interest and attorney's fees similar to those in the promissory notes; and it even provided for the payment of taxes and insurance charges. Plainly, the petitioner can be as specific as it wants to be, yet it simply did not specify nor even allude to, that the penalty in the promissory notes would be secured by the mortgage. This can then only be interpreted to mean that the petitioner had no design of including the penalty in the amount secured.[22] (Emphasis and underscoring supplied)

WHEREFORE, the assailed Court of Appeals Decision of February 21, 2007 and Resolution of May 16, 2007 in CA-G.R. SP No. CA-G.R. CV No. 86412 affirming the trial court's decision are, in light of the foregoing disquisition, AFFIRMED with MODIFICATION in that the "penalty fee" per month of the outstanding obligation is excluded in the computation of the amount secured by the Real Estate Mortgage executed by petitioners in respondent's favor.

SO ORDERED.

Quisumbing, (Chairperson), Tinga, Velasco, Jr., and Brion, JJ., Concur.

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503 Phil. 723

THIRD DIVISION

[ G.R. NO. 133079, August 09, 2005 ]

SPS. MAXIMO LANDRITO, JR. AND PACITA EDGALANI, PETITIONERS, VS. THE HONORABLE COURT OF APPEALS; SPS. BENJAMIN SAN DIEGO AND CARMENCITA SAN DIEGO; THE EX-OFFICIO SHERIFF AND CLERK OF COURT OF THE REGIONAL TRIAL COURT, MAKATI

CITY; AND THE REGISTER OF DEEDS, MAKATI CITY, RESPONDENTS.

D E C I S I O N

GARCIA, J.:

Herein petitioners, the spouses Maximo Landrito, Jr. and Pacita Landrito, have come to this Court via this petition for review on certiorari under Rule 45 of the Rules of Court to seek the reversal and setting aside of the decision dated 12 December 1997 [1] and resolution dated 10 March 1998[2] of the Court of Appeals in CA-G.R. CV No. 48896, affirming an earlier order of the Regional Trial Court at Makati City which granted the motion to dismiss filed by the herein private respondents, the spouses Benjamin San Diego and Carmencita San Diego, in its Civil Case No. 94-2950, a complaint for annulment of extrajudicial foreclosure and auction sale, thereat commenced by them against the San Diegos, the ex-officio sheriff and the Register of Deeds of Makati City.

The facts:

In July 1990, petitioners obtained a loan of P350,000.00 from respondent Carmencita San Diego. To secure payment thereof, petitioners executed on 02 August 1990 in favor of the same respondent a deed of real estate mortgage over their parcel of land located at Bayanan, Muntinlupa, Rizal and registered in their names under Transfer Certificate of Title No. (432281) S-21000.

After making substantial payments, petitioners again obtained and were granted by Carmencita San Diego an additional loan of One Million Pesos (P1,000,000.00). To secure this additional loan, the parties executed on 13 September 1991 an "Amendment of Real Estate Mortgage", whereunder they stipulated that the loan shall be paid within six (6) months from 16 September 1991, and if not paid within said period, the mortgagee shall have the right to declare the mortgage due and may immediately foreclose the same judicially or extrajudicially, in accordance with law.

It appears that petitioners defaulted in paying their loan and continuously refused to comply with their obligation despite repeated demands therefor, prompting respondent Carmencita San Diego to send them on 27 April 1993, a final notice of demand requiring them to settle their financial obligation which, by then, already amounted to P1,950,000.00.

On 30 June 1993, after her efforts to collect proved futile, respondent Carmencita San Diego filed with the Office of the Clerk of Court and Ex-Officio Sheriff of RTC-Makati, a petition for the extrajudicial foreclosure of the mortgage.

On 06 July 1993, said office sent to the parties a Notice of Sheriff's Sale, therein announcing that petitioners' mortgaged property will be sold in a public auction to be conducted on 11 August 1993 at 10:00 o'clock in the morning, copies of which notice were posted in several conspicuous places within the sheriff's territorial jurisdiction.

As announced, on 11 August 1993, at 10:00 o'clock in the morning, the public auction sale was held and the mortgaged property sold to respondent Carmencita San Diego as the highest bidder for P2,000,000.00, as evidenced by the Sheriff's Certificate of Sale issued in her favor on 07 October 1993.

On 29 October 1993, respondent San Diego caused the registration of the same sheriff's certificate of sale with the Office of the Register of Deeds, Makati City, and duly inscribed on the same date at the dorsal side of the petitioners' TCT No. (432281) S-21000.

With the petitioners having failed to redeem their property within the 1-year redemption period from the date of inscription of the sheriff's certificate of sale, as provided for in Act No. 3135, as amended, the San Diegos caused the consolidation of title over the foreclosed property in their names.

Then, on 09 November 1994, before the Regional Trial Court at Makati City, petitioners filed their complaint for annulment of the extrajudicial foreclosure and auction sale, with damages. In their complaint, thereat docketed as Civil Case No. 94-2950, petitioners alleged that (1) said foreclosure and auction sale were null and void for failure to comply with the requirements of notice and publication, as mandated by Act 3135, as amended; (2) the mortgaged property was illegally foreclosed in the light of the settled rule that an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage document, in this case, P1,000,000.00, which amount was allegedly bloated by respondent Carmencita San Diego to P1,950,000.00; and (3) the San Diegos' application for consolidation of title was premature because the husband, Benjamin San Diego, allegedly granted them an extension of the period of redemption up to 11 November 1994.

To the complaint, respondents interposed a Motion to Dismiss, therein alleging that said complaint failed to state a cause of action as no primary right of the petitioners had been violated since they actually failed to exercise their right of redemption within the one-year redemption period, adding that petitioners never took any action which may stall the running of the same period, thereby leaving them no further right or interest in the property in question.

In an order dated 13 January 1995, the trial court granted respondents' motion to dismiss and accordingly dismissed petitioners' complaint, saying that the latter's cause of action, if any, is already barred by laches on account of their failure or neglect for an unreasonable length of time to do that

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which, by exercising due diligence, could or should have been done earlier. Further, the trial court ruled that petitioners' inaction constituted a waiver on their part.

Therefrom, petitioners went on appeal to the Court of Appeals in CA-G.R. CV No. 48896.

As stated at the outset hereof, the appellate court, in its decision of 12 December 1997, dismissed petitioners' appeal and affirmed in toto the trial court's order of dismissal. With their motion for reconsideration having been denied by the same court in its resolution of 10 March 1998, [3] petitioners are now with us via the present recourse, faulting the Court of Appeals, as follows:

1. The Court of Appeals gravely erred in avoiding to resolve in the assailed Decision and in the questioned Resolution the basic issue as to whether or not the extra-judicial foreclosure and public auction sale of the subject parcel of land are valid and lawful when the amount stated in letter-request or the petition for extra-judicial foreclosure and in the notice of sheriff sale doubled the amount stipulated in the Amendment of Real Estate Mortgage;

2. The Court of Appeals has similarly committed serious error in considering that the complaint of the petitioner is a complaint for redemption when in the caption; in the body; and in the prayer of the complaint, petitioner spouses have sought the nullity as void ab initio the extra-judicial foreclosure and auction sale of the subject property;

3. The respondent Appellate Court likewise incredulously erred to have resolved the admissibility and probative value of the statement of account attached as Annex "E" of the complaint when it was not yet presented in evidence; because the stage of the case at the time the assailed dismissal order was issued, was yet in the period of pleadings;

4. The Court of Appeals has grievously erred in affirming the assailed dismissal order by declaring petitioner spouses to have been guilty of laches in failing to redeem during the legal period of redemption the foreclosed parcel of land; when the cause of the failure to redeem was the illegal increase by 100% of the original obligation, stated in the Amendment of Real Estate Mortgage and bloating of the redemption price from Two Million Pesos (P2,000,000.00) to Three Million Four Hundred Ninety One Thousand Two Hundred Twenty Five & 98/100 Pesos (P3,491,225.98).

We DENY.

The records indubitably show that at the time of the foreclosure sale on 11 August 1993, petitioners were already in default in their loan obligation to respondent Carmencita San Diego.

Much earlier, or on 27 April 1993, a final notice of demand for payment had been sent to them, despite which they still failed to pay. Hence, respondent Carmencita San Diego's resort to extrajudicial foreclosure, provided no less in the parties' "Amendment of Real Estate Mortgage".

The rule has been, and still is, that in real estate mortgage, when the principal obligation is not paid when due, the mortgagee has the right to foreclose on the mortgage and to have the mortgaged property seized and sold with the view of applying the proceeds thereof to the payment of the obligation.[4]

Here, the validity of the extrajudicial foreclosure on 11 August 1993 was virtually confirmed by the trial court when it dismissed petitioners' complaint, and rightly so, what with the fact that petitioners failed to exercise their right of redemption within the 1-year period therefor counted from the registration of the sheriff's certificate of sale.

It is petitioners' main submission, however, that the very reason why they did not avail of their redemption right is because Mrs. San Diego bloated their original loan of P1,000,000.00 to P1,950,000.00, an issue supposedly not considered and/or addressed by the appellate court in the decision under review. In this regard, petitioners argue that the Court of Appeals, in sustaining the extrajudicial foreclosure proceedings, thereby go against the established jurisprudence that an action for foreclosure must be limited to the amount mentioned in the mortgage document, P1,000,000.00 in this case.

We do not take issue with petitioners' submission that a mortgage may be foreclosed only for the amount appearing in the mortgage document, more so where, as here, the mortgage contract entered into by the parties is evidently silent on the payment of interest.

However, contrary to petitioners' claim, the appellate court did pass upon the legal issue raised by them, albeit ruling that petitioners had been barred by laches from raising the same. We quote from the challenged decision:[Petitioners] next argued that the mortgaged property was illegally foreclosed since it is a well settled rule that an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage.

The argument is without merit.

It appears from the evidence on record that despite due notice and publication of the same in a newspaper of general circulation (Exhs. "5", "5-A" and "5-B", pp. 53-55, Record), [petitioners] did not bother to attend the foreclosure sale nor raise any question regarding the propriety of the sale. It was only on November 9, 1994, or more than one year from the registration of the Sheriff's Certificate of Sale, that [petitioners] filed the instant complaint. Clearly, [petitioners] had slept on their rights and are therefore guilty of laches, which is defined as the failure or neglect for an unreasonable or explained length of time to do that which, by exercising due diligence, could or should have been done earlier, failure of which gives rise to the presumption that the person possessed of the right or privilege has abandoned or has declined to assert the same. (Words in bracket added.)

For sure, in the very petition they filed in this case, petitioners have not offered any valid excuse why, despite notice to them of the petition for extrajudicial foreclosure filed by the respondents, they failed to attend the proceedings and there voiced out what they are now claiming. Truly,

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laches has worked against them.

The law on redemption of mortgaged property is clear. Republic Act No. 3135 (An Act to Regulate the Sale of Property Under Special Powers Inserted In Or Annexed to Real Estate Mortgages), as amended by Republic Act No. 4118, provides in Section 6 thereof, thus:

"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; xxx" (Emphasis supplied)

In a long line of cases[5], this Court has consistently ruled that the one-year redemption period should be counted not from the date of foreclosure sale, but from the time the certificate of sale is registered with the Register of Deeds. Here, it is not disputed that the sheriff's certificate of sale was registered on 29 October 1993.

And under Article 13 of the New Civil Code[6], a year is understood to have three hundred sixty-five (365) days each. Thus, excluding the first day and counting from 30 October 1993 (under paragraph 3 of Article 13 of the New Civil Code), and bearing in mind that 1994 was a leap year, petitioners had only until 29 October 1994, the 365th day after registration of the sheriff's certificate of sale on 29 October 1993, within which to redeem the foreclosed property in accordance with law. And since 29 October 1994 fell on a Saturday, petitioners had until the following working day, 31 October 1994, within which to exercise their right of redemption.

From the foregoing, it is clear as day that even the complaint filed by the petitioners with the trial court on 09 November 1994 was instituted beyond the 1-year redemption period. In fact, petitioners no less acknowledged that their complaint for annulment of extrajudicial foreclosure and auction sale was filed about eleven (11) days after the redemption period had already expired on 29 October 1994 [7]. They merely harp on the alleged increase in the redemption price of the mortgaged property as the reason for their failure to redeem the same. However, and as already pointed out herein, they chose not, despite notice, to appear during the foreclosure proceedings.

Of course, petitioners presently insist that they requested for and were granted an extension of time within which to redeem their property, relying on a handwritten note allegedly written by Mrs. San Diego's husband on petitioners' statement of account, indicating therein the date 11 November 1994 as the last day to pay their outstanding account in full. Even assuming, in gratia argumenti, that they were indeed granted such an extension, the hard reality, however, is that at no time at all did petitioners make a valid offer to redeem coupled with a tender of the redemption price.

Even on this score, petitioners' case must fall.

For, in Lazo v. Republic Surety & Insurance Co., Inc.[8], this Court has made it clear that it is only where, by voluntary agreement of the parties, consisting of extensions of the redemption period, followed by commitment by the debtor to pay the redemption price at a fixed date, will the concept of legal redemption be converted into one of conventional redemption.

Here, there is no showing whatsoever that petitioners agreed to pay the redemption price on or before 11 November 1994, as allegedly set by Mrs. San Diego's husband. On the contrary, their act of filing their complaint on 09 November 1994 to declare the nullity of the foreclosure sale is indicative of their refusal to pay the redemption price on the alleged deadline set by the husband. At the very least, if they so believed that their loan obligation was only for P1,000,000.00, petitioners should have made an offer to redeem within one (1) year from the registration of the sheriff's certificate of sale, together with a tender of the same amount. This, they never did.

It must be remembered that the period of redemption is not a prescriptive period but a condition precedent provided by law to restrict the right of the person exercising redemption. Correspondingly, if a person exercising the right of redemption has offered to redeem the property within the period fixed, he is considered to have complied with the condition precedent prescribed by law and may thereafter bring an action to enforce redemption. If, on the other hand, the period is allowed to lapse before the right of redemption is exercised, then the action to enforce redemption will not prosper, even if the action is brought within the ordinary prescriptive period. Moreover, the period within which to redeem the property sold at a sheriff's sale is not suspended by the institution of an action to annul the foreclosure sale. [9] It is clear, then, that petitioners have lost any right or interest over the subject property primarily because of their failure to redeem the same in the manner and within the period prescribed by law. Their belated attempts to question the legality and validity of the foreclosure proceedings and public auction must accordingly fail.

WHEREFORE, the instant petition is DENIED and the challenged decision and resolution of the Court of Appeals AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Panganiban, (Chairman), Sandoval-Gutierrez, and Carpio Morales, JJ., concur.Corona, J., on official leave.

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558 Phil. 715

THIRD DIVISION

[ G.R. NO. 165963, September 03, 2007 ]

SPOUSES NORBERTO OLIVEROS & ELVIRA OLIVEROS, HEREIN REPRESENTED BY HER HUSBAND, NORBERTO OLIVEROS & CABUYAO COMMERCIAL CENTER, INC., PETITIONERS, VS. THE HONORABLE PRESIDING JUDGE, REGIONAL TRIAL COURT, BRANCH

24, BIÑAN, LAGUNA AND METROPOLITAN BANK & TRUST COMPANY, INC., RESPONDENTS.

D E C I S I O N

CHICO-NAZARIO, J.:

This Petition for review on Certiorari under Rule 45[1] of the Rules of Court assails: (1) the 23 August 2004 Decision[2] of the Court of Appeals in CA-G.R. SP No. 80525 denying the petition for Certiorari under Rule 65 filed by the petitioners; and (2) the 5 November 2004 Resolution of the same court denying petitioners' Motion for Reconsideration.

Spouses Norberto and Elvira Oliveros; Benito, Florencia, Rene, and Danilo, all surnamed Nevalga; Cresencia N. Faylona and Felina Ong-Iko and Cabuyao Commercial Center, Inc. (hereinafter collectively referred to as the mortgagors) obtained two loans for the construction of the Cabuyao Commercial Complex in the total principal amount of P58,000,000.00 as evidenced by promissory notes [3] from Metropolitan Bank and Trust Company (Metrobank). To secure the loans, spouses Norberto and Elvira Oliveros and Florencia Nevalga executed a Deed of Real Estate Mortgage[4] dated 30 April 1997 in favor of Metrobank over three parcels of land together with all the buildings and improvements existing thereon located at Provincial Road, Bo. Ditas, Sta. Rosa, Laguna, covered by Transfer Certificates of Title (TCTs) No. T-316615, No. T-316620 and No. T-316668, all registered in the name of Elvira B. Nevalga and issued by the Registry of Deeds of Calamba, Laguna (subject properties).

For failure of the mortgagors to pay their loan obligation under the terms and conditions of the promissory notes, Metrobank instituted extrajudicial foreclosure proceedings over their Real Estate Mortgage under Act No. 3135 [5] and caused the subject properties to be sold at a public auction held on 14 January 2000 for the sum of P5,500,160.00. Metrobank emerged as the highest bidder at the auction sale. The corresponding Certificate of Sale was issued in favor of Metrobank and registered with the Registry of Deeds of Calamba, Laguna, on 4 February 2000. The mortgagors failed to redeem the subject properties from Metrobank within the one-year period from the date of the registration of the Certificate of Sale; thus Metrobank consolidated its title to the subject properties. TCTs No. T-316615, No. T-316620 and No. T-316668 were cancelled and, in lieu thereof, new titles, TCTs No. T-500473, No. T-500473 and No. T-500475, were issued and registered in the name of Metrobank.

Metrobank demanded[6] that the mortgagors turn over actual possession of the subject properties, but the mortgagors failed and refused to do so. This prompted Metrobank to file on 28 February 2003 an Ex Parte Petition for the issuance of a writ of possession before the Regional Trial Court (RTC) of Biñan, Laguna, Branch 24, docketed as LRC Case No. B-3220.[7]

The spouses Norberto and Elvira Oliveros and Cabuyao Commercial Center, petitioners in this case, filed with the RTC an Opposition to the Petition for issuance of writ of possession[8] filed by Metrobank. Petitioners claimed that on 19 February 2001, they filed before the RTC of Biñan, Laguna, Branch 24, a complaint against Metrobank for nullification of foreclosure proceedings with damages docketed as Civil Case No. B-5829.

Petitioners prayed that they be given the opportunity to be heard during the entire proceedings on the Ex Parte Petition of Metrobank and that the writ of possession be withheld or denied.

On 19 March 2003, the trial court issued a Notice of Hearing setting the hearing of the Petition on 28 April 2003. Being unavailable on said date, counsel for the petitioners filed a Motion to Cancel hearing and prayed that the same be reset to 26 May 2003.

On 1 April 2003, Metrobank filed its Reply to the Opposition. Petitioners filed a Rejoinder on 9 April 2003 to which, in turn, petitioner filed its Sur-Rejoinder dated 25 April 2003.

During the hearing on 28 April 2003, the trial court allowed Metrobank to present evidence to prove compliance with the jurisdictional requirements of the petition. But for lack of material time, the trial court issued an Order which set the reception of evidence ex parte on 20 June 2003.

The Order of the trial court dated 28 April 2003 reads:

After counsel for the [Metrobank] marked documents to comply with the jurisdictional requirements and after the petition has been read aloud and nobody opposed it except the opposition filed by spouses Norberto Oliveros and Elvira Oliveros already attached on the record, let the presentation of [Metrobank's] evidence be set on June 20, 2003 at 2:00 p.m.[9]

On 17 June 2003, petitioners filed a Manifestation with Ex Parte Motion to Cancel Hearing and stated therein that the trial court should not have allowed Metrobank to present its evidence until the Opposition to the subject petition was resolved. They also prayed that the scheduled presentation of evidence ex parte be cancelled and reset to 18 July 2003 or on such other date convenient to the trial court, considering that the setting of the same was unilaterally made by the trial court without the concurrence of petitioners' counsel.

Notwithstanding the preceding Manifestation, on 20 June 2003, counsel for the petitioners requested Atty. Ildebrando Cornista to appear for and in their behalf.

After hearing the oral arguments of the contending parties, the trial court denied petitioners' Opposition and allowed respondent Metrobank to of 50

proceed with its presentation of evidence ex parte.

The hearing for Metrobank's presentation of evidence ex parte was held as scheduled on 20 June 2003. Petitioners again filed a Motion for Reconsideration[10] of the RTC Order dated 28 April 2003 substantially reiterating their Opposition to the issuance of the writ of possession.

On 20 June 2003, the RTC issued another Order in which it held:

It appears from the record that the petition filed by the petitioner for the Issuance of Writ of Possession was filed on February 20, 2003, and this was based on the result of the foreclosure proceeding where the Certificate of Sale was allegedly registered. It is clear in several Decisions of the Supreme Court that Issuance of Writ of Possession is not a judgment on the merits and the Issuance of Writ of Possession in Extra-Judicial Foreclosure is merely a ministerial function. That was decided in the case of AD Corporation versus Court of Appeals Vol. 28, SCRA, page 155. There is also a Decision by the Honorable Supreme Court in the case of Honorable Luis Reyes versus UCPB, 193 SCRA, Series 1956 that being ex parte there is no discretion left to the Court. It is stated in said case that upon filing of said motion and approval of the bond it simply directs the Court to issue the Order of Writ of Possession and no discretion is left to the Court. Any question regarding the validity and formality of the said subsequent resolution of the writ is left to be determined in the subsequent proceeding as outlined in Section 8 and since the spouses [Norberto and Elvira Oliveros] are just for opposing the Issuance of the Writ of Possession, the opposition is hereby denied since under the rule, the petition is considered as an ex-parte proceeding. Consequently, the Motion for Reconsideration of the Order dated April 28, 2003, filed by said Spouses is likewise denied.[11]

Petitioners then filed a Petition for Certiorari under Rule 65 of the Rules of Court before the Court of Appeals, docketed as CA-G.R. SP No. 80525.

The Court of Appeals rendered a Decision dated 23 August 2004 denying due course to and dismissing petitioners' petition. The Court of Appeals concluded that the grant of the writ of possession is a ministerial function. Considering that Metrobank already acquired titles to the subject properties, its right to possess said properties as an owner became absolute. Until a court of competent jurisdiction annuls the foreclosure sale, petitioners are bereft of any valid title and right to prevent the issuance of a writ of possession.

Petitioners filed a Motion for Reconsideration of the foregoing Decision which the Court of Appeals likewise denied in a Resolution [12] dated 5 November 2004.

Petitioners are now before this Court via a Petition for Review on Certiorari under Rule 45 of the Rules of Court based on the following grounds:

I

THE HONORABLE COURT OF APPEALS HAS DECIDED THE CASE IN A WAY NOT IN ACCORD WITH LAW, PERTINENT PROVISIONS OF THE 1997 RULES OF CIVIL PROCEDURE AND APPLICABLE DECISIONS OF THIS HONORABLE SUPREME COURT CONSIDERING THAT:

A. THE COURT OF APPEALS SERIOUSLY ERRED IN SUSTAINING THE ASSAILED ORDERS BY THE PUBLIC RESPONDENT IN A PETITION FOR CERTIORARI AS HAVING BEEN ISSUED WITHOUT COMMITTING GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION NOTWITHSTANDING THE FACT THAT INCIDENTS WHICH ARE NOT YET FILED WERE ALREADY RESOLVED.

B. THE COURT OF APPEALS SERIOUSLY ERRED IN SUSTAINING THE ASSAILED ORDERS ISSUED BY THE PUBLIC RESPONDENT NOTWITHSTANDING THE FACT THAT THE SAME WERE IN PATENT VIOLATION OF THE CONSTITUTIONALLY GUARANTEED RIGHT OF THE PETITIONERS TO DUE PROCESS.[13]

The Petition is without merit.

A writ of possession is an order whereby the sheriff is commanded to place a person in possession of a real or personal property. It may be issued under the following instances: (1) land registration proceedings under Section 17 of Act No. 496; (2) judicial foreclosure, provided the debtor is in possession of the mortgaged realty and no third person, not a party to the foreclosure suit, had intervened; (3) pending redemption in an extrajudicial foreclosure of a real estate mortgage under Section 7 of Act No. 3135 as amended by Act No. 4118; and (4) in execution sales under the last paragraph of Section 33, Rule 39 of the Rules of Court. [14]

Section 6 of Act No. 3135, as amended, provides:Sec. 6. Redemption. — In all cases in which an extrajudicial sale is made under the special power herein before 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 anytime within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions of section 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.

Under the said provision, the mortgagor or his successor-in-interest may redeem the foreclosed property within one year from the registration of the sale with the Register of Deeds.

After the one-year redemption period, the mortgagor loses all interest over the foreclosed property. [15] The purchaser, who has a right to possession that extends after the expiration of the redemption period, becomes the absolute owner of the property when no redemption is made. [16] In such a situation, the bond required under Section 7 of Act No. 3135, as amended, is no longer needed. The possession of land becomes an absolute right of the purchaser as confirmed owner.[17] The purchaser can demand possession at any time following the consolidation of ownership in his name and the issuance to him of a new TCT. After the consolidation of title in the purchaser's name for failure of the mortgagor to redeem the property, the writ of possession becomes a matter of right. Its issuance to a purchaser in an extrajudicial foreclosure sale becomes merely a ministerial

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function.[18] As such, the court cannot exercise its discretion.

It bears to stress that after the consolidation of title in the name of the purchaser of the foreclosed property, upon failure of the mortgagor to redeem the property, the writ of possession becomes a matter of right. Its issuance to the purchaser is merely a ministerial function, for which the court exercises neither discretion nor judgment.

A clear line demarcates a discretionary act from a ministerial one —

The distinction between a ministerial and discretionary act is well delineated. A purely ministerial act or duty is one which an officer or tribunal performs in a given state of facts, in a prescribed manner, in obedience to the mandate of a legal authority, without regard to or the exercise of his own judgment upon the propriety or impropriety of the act done. If the law imposes a duty upon a public officer and gives him the right to decide how or when the duty shall be performed, such duty is discretionary and not ministerial. The duty is ministerial only when the discharge of the same requires neither the exercise of official discretion or judgment.[19]

As to the nature of a petition for a writ of possession, it is well to state that the proceeding in a petition for a writ of possession is ex parte and summary in nature. It is a judicial proceeding brought for the benefit of one party only and without notice by the court to any person adverse of interest. It is a proceeding wherein relief is granted without giving the person against whom the relief is sought an opportunity to be heard. [20]

By its very nature, an ex parte petition for issuance of a writ of possession is a non-litigious proceeding authorized under Act No. 3135 as amended.[21]

It is not strictly speaking a judicial process as contemplated in Article 433 of the Civil Code. [22] It is a judicial proceeding for the enforcement of one's right of possession as purchaser in a foreclosure sale. It is not an ordinary suit filed in court, by which one party "sues another for the enforcement of a wrong or protection of a right, or the prevention or redress of a wrong." [23]

The law does not require that a petition for a writ of possession may be granted only after documentary and testimonial evidence shall have been offered to and admitted by the court. As long as a verified petition states the facts sufficient to entitle the petitioner to the relief requested, the court shall issue the writ prayed for. The petitioner need not offer any documentary or testimonial evidence for the court to grant the petition. [24]

In the present case, Metrobank purchased the properties at a public auction following the extrajudicial foreclosure of the subject properties. Certificates of sale over the properties were issued in favor of Metrobank and registered with the Registry of Deeds of Calamba, Laguna, on 4 February 2000. Petitioners as mortgagors failed to redeem the properties within the one-year period of redemption from the registration of the Sheriff's Certificate of Sale thereof with the Registry of Deeds; hence, Metrobank consolidated its ownership over the subject properties.

Metrobank having consolidated its title to the mortgaged properties, is even more entitled now to possession thereof and makes more unmistakable its right to file an ex parte motion for the issuance of a writ of possession. The issuance of the writ of possession becomes a mere ministerial duty on the part of the judge.

Corollary to this, we have extensively ruled in Mamerto Maniquiz Foundation, Inc. v. Pizarro,[25] thus:

It is a settled rule that after the consolidation of title in the buyer's name for failure of the mortgagor to redeem, the writ of possession becomes a matter of right. In the case of Vaca v. Court of Appeals (G.R. No. 109672, 14 July 1994, 234 SCRA 146, 148), this Court held:

"x x x The question raised in this case has already been settled in Vda. de Jacob v. Court of Appeals [184 SCRA 199], in which it was held that the pendency of a separate civil suit questioning the validity of the mortgage cannot bar the issuance of the writ of possession, because the same is a ministerial act of the trial court after title on the property has been consolidated in the mortgagee. The ruling was reiterated in Navarra v. Court of Appeals [204 SCRA 850], in which we held that as a rule any question regarding the validity of the mortgage or its foreclosure cannot be a legal ground for refusing the issuance of a writ of possession."

Indeed, the pendency of an action questioning the validity of a mortgage cannot bar the issuance of the writ of possession after title to the property has been consolidated in the mortgagee. Thus, it follows that at the expiration of the period of redemption, the mortgagee who acquires the property at the foreclosure sale can proceed to have the title consolidated in his name and a writ of possession issued in his favor. More to the point is the case of Ong v. Court of Appeals [G.R. No. 121494, 8 June 2000, 333 SCRA 189, 197-198], where this Court held:

In several cases, the Court has ruled that the issuance of a writ of possession is a ministerial function. "The order for a writ of possession issues as a matter of course upon the filing of the proper motion and the approval of the corresponding bond. The judge issuing the order following these express provisions of law cannot be charged with having acted without jurisdiction or with grave abuse of discretion." Therefore, the issuance of the writ of possession being ministerial in character, the implementation of such writ by the sheriff is likewise ministerial.

Regardless of whether or not there is a pending action for nullification of the sale at public auction, or of the foreclosure itself, or even for the nullification of the real estate mortgage, the purchaser at the public auction is entitled to a writ of possession without prejudice to the outcome of the action filed by the petitioners.[26]

Equally akin is Samson v. Rivera,[27] in which it was ruled that:

Under the provision cited above, the purchaser in a foreclosure sale may apply for a writ of possession during the redemption period by filing for that purpose an ex parte motion under oath, in the corresponding registration or cadastral proceeding in the case of a property with torrens title. Upon the filing of such motion and the approval of the corresponding bond, the court is expressly directed to issue the writ.

This Court has consistently held that the duty of the trial court to grant a writ of possession is ministerial. Such writ issues as a matter of course of 50

upon the filing of the proper motion and the approval of the corresponding bond. No discretion is left to the trial court. Any question regarding the regularity and validity of the sale, as well as the consequent cancellation of the writ, it to be determined in a subsequent proceeding as outlined in Section 8 of Act 3135. Such question cannot be raised to oppose the issuance of the writ, since the proceeding is ex parte. The recourse is available even before the expiration of the redemption period provided by law and the Rules of Court.

The purchaser, who has a right to possession that extends after the expiration of the redemption period, becomes the absolute owner of the property when no redemption is made. Hence, at any time following the consolidation of ownership and the issuance of a new transfer certificate of title in the name of the purchaser, he or she is even more entitled to possession of the property. In such a case, the bond required under Section 7 of Act 3135 is no longer necessary, since possession becomes an absolute right of the purchaser as the confirmed owner.

In Yu v. Philippine Commercial and International Bank,[28] this Court underscored that:

[S]ince the one-year period to redeem the foreclosed properties lapsed on October 1, 1999, title to the foreclosed properties had already been consolidated under the name of the respondent. As the owner of the properties, respondent is entitled to its possession as a matter of right. The issuance of a writ of possession over the properties by the trial court is merely a ministerial function. As such, the trial court neither exercises its official discretion nor judgment. Any question regarding the validity of the mortgage or its foreclosure cannot be a legal ground for refusing the issuance of a writ of possession. Regardless of the pending suit for annulment of the certificate of sale, respondent is entitled to a writ of possession, without prejudice of course to the eventual outcome of said case.

WHEREFORE, premises considered, the instant petition is DENIED for lack of merit. The assailed Decision of the Court of Appeals dated 23 August 2004 and Resolution dated 5 November 2004 are AFFIRMED. Costs against petitioners.

SO ORDERED.

Ynares-Santiago, (Chairperson), Austria-Martinez, Nachura, and Reyes, JJ., concur.

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378 Phil. 145

EN BANC

[ G.R. No. 130722, December 09, 1999 ]

SPS. REYNALDO K. LITONJUA AND ERLINDA P. LITONJUA AND PHIL. WHITE HOUSE AUTO SUPPLY, INC., PETITIONERS, VS. L & R CORPORATION, VICENTE COLOYAN IN HIS CAPACITY AS ACTING REGISTRAR OF THE REGISTER OF DEEDS OF QUEZON CITY THRU

DEPUTY SHERIFF ROBERTO R. GARCIA, RESPONDENTS.

D E C I S I O N

YNARES-SANTIAGO, J.:

May a mortgage contract provide: (a) that the mortgagor cannot sell the mortgaged property without first obtaining the consent of the mortgagee and that, otherwise, the sale made without the mortgagee's consent shall be invalid; and (b) for a right of first refusal in favor of the mortgagee?

The controversy stems from loans obtained by the spouses Litonjua from L & R Corporation in the aggregate sum of P400,000.00; P200,000.00 of which was obtained on August 6, 1974 and the remaining P200,000.00 obtained on March 27, 1978. The loans were secured by a mortgage[1] constituted by the spouses upon their two parcels of land and the improvements thereon located in Cubao, Quezon City covered by Transfer Certificates of Title No. 197232 and 197233, with an area of 599 and 1,436 square meters, respectively. The mortgage was duly registered with the Register of Deeds of Quezon City.

On July 14, 1979, the spouses Litonjua sold to Philippine White House Auto Supply, Inc. (PWHAS) the parcels of land they had previously mortgaged to L & R Corporation for the sum of P430,000.00. [2] The sale was annotated at the back of the respective certificates of title of the properties.[3]

Meanwhile, with the spouses Litonjua having defaulted in the payment of their loans, L & R Corporation initiated extrajudicial foreclosure proceedings with the Ex-Oficio Sheriff of Quezon City. On July 23, 1980, the mortgaged properties were sold at public auction to L & R Corporation as the only bidder for the amount of P221,624.58.[4] When L & R Corporation presented its corresponding Certificate of Sale issued by Deputy Sheriff Roberto B. Garcia, to the Quezon City Register of Deeds for registration on August 15, 1980, it learned for the first time of the prior sale of the properties made by the spouses Litonjua to PWHAS upon seeing the inscription at the back of the certificates of title. Thus, on August 20, 1980, it wrote a letter[5] to the Register of Deeds of Quezon City requesting for the cancellation of the annotation regarding the sale to PWHAS. L & R Corporation invoked a provision in its mortgage contract with the spouses Litonjua stating that the mortgagee's prior written consent was necessary in case of subsequent encumbrance or alienation of the subject properties. Thus, it argued that since the sale to PWHAS was made without its prior written consent, the same should not have been registered and/or annotated.

On March 10, 1981, or seven months after the foreclosure sale, PWHAS, for the account of the spouses Litonjua, tendered payment of the full redemption price to L & R Corporation in the form of China Bank Manager's Check No. HOF-M O12623 in the amount of P238,468.04. [6] See Exhibits "G" & "2", Letter of PWHAS to L & R Corporation, id.6 L & R Corporation, however, refused to accept the payment, hence, PWHAS was compelled to redeem the mortgaged properties through the Ex-Oficio Sheriff of Quezon City. On March 31, 1981, it tendered payment of the redemption price to the Deputy Sheriff through China Bank Manager's Check No. HOF-O14750 in the amount of P240,798.94. [7] The check was deposited with the Branch Clerk of Court who issued Receipt No. 7522484[8] for the full redemption price of the mortgaged properties. Accordingly, the Deputy Sheriff issued a Certificate of Redemption in favor of the spouses Litonjua dated March 31, 1981. [9]

In a letter of the same date, the Deputy Sheriff informed L & R Corporation of the payment by PWHAS of the full redemption price and advised it that it can claim the payment upon surrender of its owner's duplicate certificates of title. [10]

On April 2, 1981, the spouses Litonjua presented for registration the Certificate of Redemption issued in their favor to the Register of Deeds of Quezon City. The Certificate also informed L & R Corporation of the fact of redemption and directed the latter to surrender the owner's duplicate certificates of title within five days.[11]

On April 22, 1981, L & R Corporation wrote a letter to the Sheriff, copy furnished to the Register of Deeds, stating: (1) that the sale of the mortgaged properties to PWHAS was without its consent, in contravention of paragraphs 8 and 9 of their Deed of Real Estate Mortgage; and (2) that it was not the spouses Litonjua, but PWHAS, who was seeking to redeem the foreclosed properties, when under Articles 1236 and 1237 of the New Civil Code, the latter had no legal personality or capacity to redeem the same.[12]

On the other hand, on May 8 and June 8, 1981, the spouses Litonjua asked the Register of Deeds to annotate their Certificate of Redemption as an adverse claim on the titles of the subject properties on account of the refusal of L & R Corporation to surrender the owner's duplicate copies of the titles to the subject properties. With the refusal of the Register of Deeds to annotate their Certificate of Redemption, the Litonjua spouses filed a Petition[13] on July 17, 1981 against L & R Corporation for the surrender of the owner's duplicate of Transfer Certificates of Title No. 197232 and 197233 before the then Court of First Instance of Quezon City, Branch IV, docketed as Civil Case No. 32905.

On August 15, 1981, while the said case was pending, L & R Corporation executed an Affidavit of Consolidation of Ownership. [14] Thereafter, on August 20, 1981, the Register of Deeds cancelled Transfer Certificates of Title No. 197232 and 197233 and in lieu thereof, issued Transfer Certificates of Title No. 280054[15] and 28055[16] in favor of L & R Corporation, free of any lien or encumbrance.

With titles issued in its name, L & R Corporation advised the tenants of the apartments situated in the subject parcels of land that being the new owner, the rental payments should be made to them, and that new lease contracts will be executed with interested tenants before the end of August, 1981.[17] Upon learning of this incident from their tenants, the spouses Litonjua filed an adverse claim [18] and a notice of lis pendens[19] with the Register of Deeds. In the process, they learned that the prior sale of the properties in favor of PWHAS was not annotated on the titles issued to L & R.

A complaint for Quieting of Title, Annulment of Title and Damages with preliminary injunction was filed by the spouses Litonjua and PWHAS against herein respondents before the then Court of First Instance of Quezon City, Branch 9, docketed as Civil Case No. Q-33362. [20] On February 10, 1987, the lower court rendered its Decision[21] dismissing the Complaint upon its finding that the sale between the spouses Litonjua and PWHAS was null and void and unenforceable against L & R Corporation and that the redemption made was also null and void.

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On appeal, the decision of the trial court was set aside by the Court of Appeals in its Decision dated June 22, 1994, [22] on the ground that the sale made to PWHAS as well as the redemption effected by the spouses Litonjua were valid. However, the same was subsequently reconsidered and set aside in an Amended Decision dated September 11, 1997.[23]

Hence, the instant Petition on the following issues:(1) whether or not paragraphs 8 and 9 of the Real Estate Mortgage are valid and enforceable;

(2) whether or not the sale of the mortgaged properties by the spouses Litonjua to PWHAS, without the knowledge and consent of L & R Corporation, is valid and enforceable;

(3) whether or not PWHAS had the right to redeem the foreclosed properties on the account of the spouses Litonjua; and

(4) whether or not there was a valid redemption.

Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as follows -"8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any other manner encumber the real property/properties subject of this mortgage without the prior written consent of the MORTGAGEE;

9. That should the MORTGAGORS decide to sell the real property/properties subject of this mortgage, the MORTGAGEE shall be duly notified thereof by the MORTGAGORS, and should the MORTGAGEE be interested to purchase the same, the latter shall be given priority over all the other prospective buyers;"[24]

There is no question that the spouses Litonjua violated both the aforesaid provisions, selling the mortgaged properties to PWHAS without the prior written consent of L & R Corporation and without giving the latter notice of such sale nor priority over PWHAS.

Re: Validity of prohibition against subsequent sale of mortgaged property without prior written consent of mortgagee and validity of subsequent sale to PWHAS

Petitioners defend the validity of the sale between them by arguing that paragraph 8 violates Article 2130 of the New Civil Code which provides that "(A) stipulation forbidding the owner from alienating the immovable mortgaged shall be void."

In the case of Philippine Industrial Co. v. El Hogar Filipino and Vallejo,[25] a stipulation prohibiting the mortgagor from entering into second or subsequent mortgages was held valid. This is clearly not the same as that contained in paragraph 8 of the subject Deed of Real Estate Mortgage which also forbids any subsequent sale without the written consent of the mortgagee. Yet, in Arancillo v. Rehabilitation Finance Corporation,[26] the case of Philippine Industrial Co., supra, was erroneously cited to have held that the prohibition in a mortgage contract against the encumbrance, sale or disposal of the property mortgaged without the consent of the mortgagee is valid. No similar prohibition forbidding the owner of mortgaged property from (subsequently) mortgaging the immovable mortgaged is found in our laws, making the ruling in Philippine Industrial Co., supra, perfectly valid. On the other hand, to extend such a ruling to include subsequent sales or alienation runs counter not only to Philippine Industrial Co., itself, but also to Article 2130 of the New Civil Code.

Meanwhile in De la Paz v. Macondray & Co., Inc.,[27] it was held that while an agreement of such nature does not nullify the subsequent sale made by the mortgagor, the mortgagee is authorized to bring the foreclosure suit against the mortgagor without the necessity of either notifying the purchaser or including him as a defendant. At the same time, the purchaser of the mortgaged property was deemed not to have lost his equitable right of redemption.

In Bonnevie v. Court of Appeals,[28] where a similar provision appeared in the subject contract of mortgage, the petitioners therein, to whom the mortgaged property were sold without the written consent of the mortgagee, were held as without the right to redeem the said property. No consent having been secured from the mortgagee to the sale with assumption of mortgage by petitioners therein, the latter were not validly substituted as debtors. It was further held that since their rights were never recorded, the mortgagee was charged with the obligation to recognize the right of redemption only of the original mortgagors-vendors. Without discussing the validity of the stipulation in question, the same was, in effect, upheld.

Again, in Cruz v. Court of Appeals,[29] while a similar provision was recognized and applied, no discussion as to its validity was made since the same was not raised as an issue.

On the other hand, in Tambunting v. Rehabilitation Finance Corporation,[30] the validity of a similar provision was specifically raised and discussed and found as invalid. It was there ratiocinated that --"To be sure, the deed of second mortgage executed by the Escuetas in favor of Aurora Tambunting, married to Antonio L. Tambunting, does contain a provision that `the property mortgaged shall not be x x x the subject of any new or subsequent contracts of agreements, saving and excepting those having connection with the first mortgage with the RFC, without first securing the written permission and consent of the MORTGAGEE'. But the provision can only be construed as directed against subsequent mortgages or encumbrances, not to an alienation of the immovable itself. For while covenants prohibiting the owner from constituting a later mortgage over property registered under the Torrens Act have been held to be legally permissible (Phil. Industrial Co. v. El Hogar Filipino, et al., 45 Phil. 336, 341-342; Bank of the Philippines v. Ty Camco Sobrino, 57 Phil. 801), stipulations `forbidding the owner from alienating the immovable mortgaged' are expressly declared void by law (Art. 2130, Civil Code). It is clear that the stipulation against `subsequent agreements' above mentioned had not been breached by the assignment by the Escuetas (to the Hernandezes) of their right of redemption in connection with the mortgage constituted in favor of the R.F.C. The assignment was not a subsequent mortgage or encumbrance, licitly comprehended by the prohibitory stipulation, but was actually a sale or conveyance of all their rights in the encumbered real property - in truth, an alienation of the immovable - which could not lawfully be forbidden. Moreover, since the subject of the assignment to the Hernandezes had `connection with the first assignment with the R.F.C.', it did not fall within, but was explicitly excepted from, the prohibitory stipulation in question. Finally, it should not be forgotten that since the Tambuntings, in their own deed of conditional sale with the R.F.C., had accepted without demur the provision that said contract could be revoked within one (1) year from September 16, 1955 at the option of the RFC, as vendor, should the former owner (Escueta) exercise his right to redeem the property; and that the redemption of the property within said period by `the former owner or his successor-in-interest' would render their instrument of conditional sale `automatically null and void and without effect', they cannot now assume a position inconsistent with said provision. (underscoring, Ours)

Earlier, in PNB v. Mallorca,[31] it was reiterated that a real mortgage is merely an encumbrance; it does not extinguish the title of the debtor, whose right to dispose - a principal attribute of ownership - is not thereby lost. Thus, a mortgagor had every right to sell his mortgaged property, which right the mortgagee cannot oppose.

In upholding the validity of the stipulation in question, the amended Decision relied on the cases of Cruz v. Court of Appeals, supra, and Medida v. Court of Appeals.[32] According to the Court of Appeals, said cases, are not only more recent that that of Tambunting, supra, but are also more

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applicable to the issue at bar.

We are not convinced.

As we have mentioned, although a similar provision was recognized and applied in Cruz v. Court of Appeals, supra, no discussion as to its validity was made since the same was not raised as an issue. Thus, it cannot be said that the specific pronouncement in the Tambunting case that such a stipulation can only be construed as against subsequent mortgages or encumbrances but not to an alienation of the immovable itself, which is prohibited under Article 2130, was abandoned thereby. On the other hand, the facts in the case of Medida v. Court of Appeals, are different from those in the present case for what was in issue in the said case was a second mortgage over a foreclosed property during the period of redemption. Thus, the ruling in Medida quoted in the Amended Decision 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," actually refers to the fact that the only rights which a mortgagor can legally transfer, cede and convey after the foreclosure of his properties are the right to redeem the land, and the possession use and enjoyment of the same during the period of redemption. It has no connection or reference to the right of a mortgagor to sell his mortgaged property without the required consent of the mortgagee. To be sure, there is absolutely nothing in Medida that upholds the validity of the stipulation in controversy.

Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling his mortgaged property without the consent of the mortgagee is concerned, therefore, the ruling in the Tambunting case is still the controlling law. Indeed, we are fully in accord with the pronouncement therein that such a stipulation violates Article 2130 of the New Civil Code. Both the lower court and the Court of Appeals in its Amended Decision rationalize that since paragraph 8 of the subject Deed of Real Estate Mortgage contains no absolute prohibition against the sale of the property mortgaged but only requires the mortgagor to obtain the prior written consent of the mortgagee before any such sale, Article 2130 is not violated thereby. This observation takes a narrow and technical view of the stipulation in question without taking into consideration the end result of requiring such prior written consent. True, the provision does not absolutely prohibit the mortgagor from selling his mortgaged property; but what it does not outrightly prohibit, it nevertheless achieves. For all intents and purposes, the stipulation practically gives the mortgagee the sole prerogative to prevent any sale of the mortgaged property to a third party. The mortgagee can simply withhold its consent and thereby, prevent the mortgagor from selling the property. This creates an unconscionable advantage for the mortgagee and amounts to a virtual prohibition on the owner to sell his mortgaged property. In other words, stipulations like those covered by paragraph 8 of the subject Deed of Real Estate Mortgage circumvent the law, specifically, Article 2130 of the New Civil Code.

Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon the parties. Accordingly, the sale made by the spouses Litonjua to PWHAS, notwithstanding the lack of prior written consent of L & R Corporation, is valid.

Re: Validity of redemption effected by PWHAS on the account of the spouses Litonjua

Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses Litonjua is valid, we rule in the affirmative. The sale by the spouses Litonjua of the mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the spouses Litonjua on account of such sale and was in effect, their successor-in-interest. As such, it had the right to redeem the property foreclosed by L & R Corporation. Again, Tambunting, supra, clarifies that -"x x x. The acquisition by the Hernandezes of the Escuetas' rights over the property carried with it the assumption of the obligations burdening the property, as recorded in the Registry of Property, i.e., the mortgage debts in favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by stepping into the Escuetas' shoes as assignees, had the obligation to pay the mortgage debts, otherwise, these debts would and could be enforced against the property subject of the assignment. Stated otherwise, the Hernandezes, by the assignment, obtained the right to remove the burdens on the property subject thereof by paying the obligations thereby secured; that is to say, they had the right of redemption as regards the first mortgage, to be exercised within the time and in the manner prescribed by law and the mortgage deed; and as regards the second mortgage, sought to be judicially foreclosed but yet unforeclosed, they had the so-called equity of redemption."

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

Re: Validity of redemption madeIt is clear from the records that PWHAS offered to redeem the subject properties seven (7) months after the date of registration of the foreclosure sale, well within the one year period of redemption.

Re: Validity and enforceability of stipulation granting the mortgagee the right of first refusalWhile petitioners question the validity of paragraph 8 of their mortgage contract, they appear to be silent insofar as paragraph 9 thereof is concerned. Said paragraph 9 grants upon L & R Corporation the right of first refusal over the mortgaged property in the event the mortgagor decides to sell the same. We see nothing wrong in this provision. The right of first refusal has long been recognized as valid in our jurisdiction. The consideration for the loan-mortgage includes the consideration for the right of first refusal. L & R Corporation is in effect stating that it consents to lend out money to the spouses Litonjua provided that in case they decide to sell the property mortgaged to it, then L & R Corporation shall be given the right to match the offered purchase price and to buy the property at that price. Thus, while the spouses Litonjua had every right to sell their mortgaged property to PWHAS without securing the prior written consent of L & R Corporation, it had the obligation under paragraph 9, which is a perfectly valid provision, to notify the latter of their intention to sell the property and give it priority over other buyers. It is only upon failure of L & R Corporation to exercise its right of first refusal could the spouses Litonjua validly sell the subject properties to others, under the same terms and conditions offered to L & R Corporation.

What then is the status of the sale made to PWHAS in violation of L & R Corporation's contractual right of first refusal? On this score, we agree with the Amended Decision of the Court of Appeals that the sale made to PWHAS is rescissible. The case of Guzman, Bocaling & Co v. Bonnevie[33] is instructive on this point -"The respondent court correctly held that the Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. The status of creditors could be validly accorded the Bonnevies for they had substantial interests that were prejudiced by the sale of the subject property to the petitioner without recognizing their right of first priority under the Contract of Lease.

According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third persons, to secure reparation for damages caused to them by a contract, even if this should be valid, by means of the restoration of things to their condition at the moment prior to the celebration of said contract. It is a relief allowed for one of the contracting parties and even third persons from all injury and damage the contract may cause, or to protect some incompatible and preferential right created by the contract. Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone that justifies its invalidation for reasons of equity." (underscoring, Ours)

It was then held that the Contract of Sale there, which violated the right of first refusal, was rescissible.

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In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L & R Corporation over the subject properties since the Deed of Real Estate Mortgage containing such a provision was duly registered with the Register of Deeds. As such, PWHAS is presumed to have been notified thereof by registration, which equates to notice to the whole world.

We note that L & R Corporation had always expressed its willingness to buy the mortgaged properties on equal terms as PWHAS. Indeed, in its Answer to the Complaint filed, L & R Corporation expressed that it was ready, willing and able to purchase the subject properties at the same purchase price of P430,000.00, and was agreeable to pay the difference between such purchase price and the redemption price of P249,918.77, computed as of August 13, 1981, the expiration of the one-year period to redeem. That it did not duly exercised its right of first refusal at the opportune time cannot be taken against it, precisely because it was not notified by the spouses Litonjua of their intention to sell the subject property and thereby, to give it priority over other buyers.

All things considered, what then are the relative rights and obligations of the parties? To recapitulate:, the sale between the spouses Litonjua and PWHAS is valid, notwithstanding the absence of L & R Corporation's prior written consent thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its tender of the redemption price, as successor-in-interest of the spouses Litonjua, within the one-year period should have been accepted as valid by L & R Corporation. However, while the sale is, indeed, valid, the same is rescissible because it ignored L & R Corporation's right of first refusal.

Foreseeing a possible rescission of the sale, the spouses Litonjua contend that with the restoration of the original status quo, with no sale having been made, they should now be allowed to redeem the subject properties, the period of redemption having been suspended during the period of litigation. In effect, the spouses Litonjua want to retain ownership of the same. We cannot, however, sanction this belated reversal of the spouses Litonjua's decision to sell. To do so would afford them undue advantage on account of the appreciation of the value of the subject properties in the intervening years when they precisely were the ones who violated and ignored the right of first refusal of L & R Corporation over the same. Moreover, it must be stressed that in rescinding the sale made to PWHAS, the purpose is to uphold and enforce the right of first refusal of L & R Corporation.

WHEREFORE, the Decision appealed from is hereby AFFIRMED with the following MODIFICATIONS:(a) Ordering the rescission of the sale of the mortgaged properties between petitioners spouses Reynaldo and Erlinda Litonjua and

Philippine White House Auto Supply, Inc. and ordering said spouses to return to Philippine White House Auto Supply, Inc. the purchase price of P430,000.00;

(c) Disallowing, due to the rescission of the sale made in its favor, the redemption made by Philippine White House Auto Supply, Inc. and ordering Quezon City Sheriff Roberto Garcia to return to it the "redemption" check of P240,798.94;

(d) Allowing respondent L & R Corporation to retain its consolidated titles to the foreclosed properties but ordering it to pay to the Litonjua spouses the additional sum of P189,201.96 representing the difference from the purchase price of P430,000.00 in the rescinded sale;

(e) Deleting the awards for moral and exemplary damages and attorney's fees to the respondents.No pronouncement as to costs.

SO ORDERED.

Bellosillo, Melo, Puno, Kapunan, Panganiban, Quisumbing, Purisima, Pardo, Buena, Gonzaga-Reyes, and De Leon, Jr., JJ., concur.Vitug, J., see concurring and dissenting.Davide, Jr., C.J., and Mendoza, J., joins J. Vitug in his concurring and dissenting opinion.

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502 Phil. 76

THIRD DIVISION

[ G.R. No. 147074, July 15, 2005 ]

SPOUSES RODRIGO PADERES AND SONIA PADERES, PETITIONERS, VS. THE HON. COURT OF APPEALS, [1] HON. CARLOTA P. VALENZUELA, IN HER CAPACITY AS THE LIQUIDATOR OF BANCO FILIPINO SAVINGS AND MORTGAGE BANK,[2] RESPONDENTS.

[G.R. No. 147075]

SPOUSES ISABELO BERGARDO AND JUANA HERMINIA BERGARDO, PETITIONERS, VS. THE HON. COURT OF APPEALS,[1] HON. CARLOTA P. VALENZUELA, IN HER CAPACITY AS THE LIQUIDATOR OF BANCO FILIPINO SAVINGS AND MORTGAGE BANK, [2]

RESPONDENTS.

D E C I S I O N

CARPIO MORALES, J.:

By their Petition for review on certiorari under Rule 45 of the Rules of Court, petitioners spouses Rodrigo and Sonia Paderes and spouses Isabelo and Juana Bergado seek the reversal of the September 20, 2000 Decision [3] and February 16, 2001 Resolution of the Court of Appeals, which dismissed their original Petition and denied their Motion for Reconsideration, respectively.

On September 14, 1982, Manila International Construction Corporation (MICC) executed a real estate mortgage [4] over 21 registered parcels of land including the improvements thereon in favor of Banco Filipino Savings and Mortgage Bank (Banco Filipino) in order to secure a loan of P1,885,000.00. The mortgage was registered with the Registry of Deeds of Pasay City and annotated on the corresponding transfer certificates of title (TCTs) covering the properties on December 17, 1982.[5]

The 21 mortgaged properties included two lots, one with an area of 264 square meters, and the other with an area of 263, both located in the then Municipality of Parañaque (now Parañaque City) covered by TCT Nos. 61062[6] and 61078,[7] respectively.

Subsequently or in August 1983, MICC sold the lot[8] covered by TCT No. 61078, together with the house[9] thereon, to the petitioners in the first case, the Paderes spouses. And on January 9, 1984, MICC sold the house[10] built on the lot covered by TCT No. 61062 to the petitioners in the second case, the Bergado spouses. Neither sale was registered, however.[11]

On January 25, 1985, for failure of MICC to settle its obligations, Banco Filipino filed a verified Petition [12] for the extrajudicial foreclosure of MICC's mortgage. At the auction sale of the foreclosed properties on March 25, 1985, Banco Filipino submitted a bid of P3,092,547.82 and was declared the highest bidder. A Certificate of Sale[13] was issued in its favor which was registered with the Registry of Deeds and annotated on the corresponding TCTs covering the mortgaged properties on July 29, 1985.

No redemption of the foreclosed mortgage having been made within the reglementary period, Carlota P. Valenzuela, the then Liquidator of Banco Filipino, filed on October 16, 1987 an ex parte Petition[14] for the issuance of a Writ of Possession of the foreclosed properties with the Regional Trial Court (RTC) of Makati. After hearing, the Petition was granted by Order dated September 8, 1988 [15] of Branch 59 of the RTC.

On November 7, 1996, copies of the Writ of Possession dated November 5, 1996, together with a notice addressed to MICC "and/or All persons claiming rights under them" to voluntarily vacate the premises within 7 days from receipt thereof, were served on petitioners. [16]

Instead of vacating the two lots, however, petitioners filed separate petitions before the Court of Appeals, docketed as C.A. G.R. Numbers 42470 and 42471 which were later consolidated,[17] assailing the validity of the Writ of Possession.

On September 20, 2000, the Court of Appeals promulgated its questioned Decision [18] dismissing the consolidated petitions for lack of merit and upholding the validity of the Writ of Possession.

Petitioners' Motion for Reconsideration of the appellate court's decision having been denied by Resolution of February 16, 2001, they jointly come before this Court arguing that: (1) having purchased their respective properties in good faith from MICC, they are third parties whose right thereto are superior to that of Banco Filipino; (2) they are still entitled to redeem the properties and in fact a binding agreement between them and the bank had been reached; (3) their respective houses should not have been included in the auction sale of the mortgaged properties; (4) on the contrary, as builders in good faith, they are entitled to the benefits of Article 448 of the Civil Code; and (5) the writ of possession issued by the RTC in 1996 had already lost its validity and efficacy.

The petition must be denied.

In extra-judicial foreclosures of real estate mortgages, the issuance of a writ of possession, which is an order commanding the sheriff to place a person in possession of the foreclosed property,[19] is governed by Section 7 of Act No. 3135 (an act to regulate the sale of property under special powers inserted in or annexed to real estate mortgages), as amended:Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in the case of property registered under the Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of any other real property encumbered with a mortgage duly registered in the office of any register of deeds in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of such petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately.

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That petitioners purchased their properties from MICC in good faith is of no moment. The purchases took place after MICC's mortgage to Banco Filipino had been registered in accordance with Article 2125[20] of the Civil Code and the provisions of P.D. 1529 (property registry decree). [21] As such, under Articles 1312[22] and 2126[23] of the Civil Code, a real right or lien in favor of Banco Filipino had already been established, subsisting over the properties until the discharge of the principal obligation, whoever the possessor(s) of the land might be.

In rejecting a similar argument, this Court, in Philippine National Bank v. Mallorca,[24] ratiocinated:1. Appellant's stand is that her undivided interest consisting of 20,000 square meters of the mortgaged lot, remained unaffected by the foreclosure and subsequent sale to PNB, and she "neither secured nor contracted a loan" with said bank. What PNB foreclosed, she maintains, "was that portion belonging to Ruperta Lavilles only," not the part belonging to her.

Appellant's position clashes with precepts well-entrenched in law. By Article 2126 of the Civil Code, a "mortgage directly and immediately subjects the property on which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted." Sale or transfer cannot affect or release the mortgage. A purchaser is necessarily bound to acknowledge and respect the encumbrance to which is subjected the purchased thing and which is at the disposal of the creditor "in order that he, under the terms of the contract, may recover the amount of his credit therefrom." For, a recorded real estate mortgage is a right in rem , a lien on the property whoever its owner may be. Because the personality of the owner is disregarded; the mortgage subsists notwithstanding changes of ownership; the last transferee is just as much of a debtor as the first one; and this, independent of whether the transferee knows or not the person of the mortgagee. So it is, that a mortgage lien is inseperable from the property mortgaged. All subsequent purchasers thereof must respect the mortgage, whether the transfer to them be with or without the consent of the mortgagee. For, the mortgage, until discharge, follows the property.[25] (Emphasis and underscoring supplied; italics in the original; citations omitted)

And in Roxas v. Buan[26] this Court held:Contending that petitioner Roxas is a party actually holding the property adversely to the debtor, Arcadio Valentin, petitioners argue that under the provisions of Act No. 3135 they cannot be ordered to vacate the property. Hence, the question of whether, under the circumstances, petitioner Roxas indeed is a party actually holding the property adversely to Valentin.

It will be recalled that Roxas' possession of the property was premised on its alleged sale to him by Valentin for the amount of P100,000.00. Assuming this to be true, it is readily apparent that Roxas holds title to and possesses the property as Valentin's transferee. Any right he has to the property is necessarily derived from that of Valentin. As transferee, he steps into the latter's shoes. Thus, in the instant case, considering that the property had already been sold at public auction pursuant to an extrajudicial foreclosure, the only interest that may be transferred by Valentin to Roxas is the right to redeem it within the period prescribed by law. Roxas is therefore the successor-in-interest of Valentin, to whom the latter had conveyed his interest in the property for the purpose of redemption [Rule 39, Sec. 29 (a) of the Revised Rules of Court; Magno v. Viola, 61 Phil. 80 (1934); Rosete v. Prov. Sheriff of Zambales, 95 Phil. 560 (1954).] Consequently, Roxas' occupancy of the property cannot be considered adverse to Valentin.

Thus, in Belleza v. Zandaga [98 Phil. 702 (1956)], the Court held that where the purchaser in an execution sale has already received the definitive deed of sale, he becomes the owner of the property bought and, as absolute owner, he is entitled to its possession and cannot be excluded therefrom by one who merely claims to be a "successor-in-interest of the judgment debtor," unless it is adjudged that the alleged successor has a better right to the property than the purchaser at the execution sale. Stated differently, the purchaser's right of possession is recognized only as against the judgment debtor and his successor-in-interest but not against persons whose right of possession is adverse to the latter. The rule was reiterated in Guevara v. Ramos [G.R. No. L-24358, March 31, 1971, 38 SCRA 194].

The rule in Belleza, although relating to the possession of property sold in execution sales under what is now Sec. 35, Rule 39 of the Revised Rules of Court, is also applicable to the possession of property sold at extrajudicial foreclosure sales pursuant to Sec. 6 of Act No. 3135 [see IFC Service Leasing and Acceptance Corp. v. Nera, supra]. Thus, as petitioner Roxas is not a party holding the property adversely to Valentin, being the latter's successor-in-interest, there was no bar to the respondent trial court's issuance of a writ of possession upon private respondent Buan's application.

It does not matter that petitioner Roxas was not specifically named in the writ of possession, as he merely stepped into the shoes of Valentin, being the latter's successor-in-interest. On the other hand, petitioner de Guia was occupying the house as Roxas' alleged tenant [Rollo, p. 24]. Moreover, respondent court's decision granting private respondent Buan's petition for the issuance of a writ of possession ordered the Provincial Sheriff of Zambales or any of his deputies to remove Valentin "or any person claiming interest under him" from the property [Rollo, p. 16]. Undeniably, petitioners fell under this category.[27] (Emphasis supplied)

As transferees of mortgagor MICC, petitioners merely stepped into its shoes and are necessarily bound to acknowledge and respect the mortgage it had earlier executed in favor of Banco Filipino.

As for petitioners' argument that they are still entitled to redeem the foreclosed properties, it must be rejected too.

The debtor in extra-judicial foreclosures under Act No. 3135, or his successor-in-interest, has, one year from the date of registration of the Certificate of Sale with the Registry of Deeds, a right to redeem the foreclosed mortgage, [28] hence, petitioners, as MICC's successors-in-interest, had one year from the registration of the Certificate of Sale on July 29, 1985 or until July 29, 1986 for the purpose.

Petitioners, however, failed to do so. Ownership of the subject properties was thus consolidated in favor of Banco Filipino, [29] and TCT Nos. 112352 (in lieu of TCT No. 61078) and 112353 (in lieu of TCT No. 61062) were issued in its name.

As this Court held in F. David Enterprises v. Insular Bank of Asia and America:[30]

It is 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.[31] (Emphasis supplied)

Petitioners assert, however, that a binding agreement for the repurchase of the subject properties was reached with Banco Filipino as, so they claim, reflected in the following exchange of communications:

October 17, 1996

Mrs. Luz B. Dacasin of 50

Asst. Vice-PresidentReal Estate Dept.Banco Filipino Savings and Mortgage Bank101 Paseo De Roxas cro. [sic] Dela Rosa Sts.Makati City

Dear Madam:

I am writing to you, on behalf of spouses Sonia and Rodrigo Paderes re: TCT No. 61078 formerly owned by Manila International Construction Corporation (MICC for short) now TCT No. 112352, registered in the name of Banco Filipino Savings and Mortgage Bank in July 30, 1996 at the Register of Deeds of Parañaque, Metro Manila. Incidentally, the property is denominated as Block 48, Lot 5 located at Leon Florentino St., BF Executive , Parañaque, Metro Manila.

The background facts of TCT No. 61078 are as follows:

In August 1983, the MICC executed a Deed of Absolute Sale of that lot covered by TCT No. 61078 in favor of spouses Sonia and Rodrigo Paderes which was acknowledged before a Notary Public on October 1, 1983. The value of the lot was P115,720.00. In the same year, the parties executed an addendum to the said deed of absolute sale which covered a house valued at P242,874.45. The net package price of the house and lot was fixed at P329,405.75. From this amount, the spouses Sonia and Rodrigo Paderes paid MICC inclusive of equity the amount of P125,437.35 leaving a balance of P212,985.60. The spouses moved in the house in November 1983.

Unknown to the spouses, MICC mortgaged TCT No. 61078 in favor of Banco Filipino Savings and Mortgage Bank for P1,885.00 duly inscribed in TCT No. 112352 on December 12, 1982. It was foreclosed by the bank for P3,092,547.82 pursuant to the certificate of sale executed by the sheriff as inscribed on TCT No. 112352 [should be TCT No. 61078] on July 29, 1985 . . .

Then came the news that Banco Filipino Savings and Mortgage Bank was under conservatorship by the Board of Liquidators. On the other hand, MICC became bankrupt and closed shop. The spouses were [sic] nowhere to go to then at the time to get the title of the property they purchased from MICC.

Until, the spouses received a letter dated April 6, 1987 from the Board of Liquidators via Alberto Reyes, Deputy Liquidator, informing the spouses that the property they purchased from MICC was already foreclosed by the bank. The spouses answered the letter and disclaimed any knowledge of the foreclosure. In their answer to the said letter, they emphasized that their unpaid balance with MICC was P188,985.60.

We are addressing your goodself [sic] to inform the bank that the spouses Sonia and Rodrigo Paderes are exercising their right of redemption as subrogees of the defunct MICC under special laws.

From reliable information, the bank had already made appraisal of the property and from that end, may we be informed [at] the soonest possible time the value of the property to enable the spouses to prepare for such eventuality. And, upon receipt of the said appraisal value we shall immediately inform you [of] our position on the matter.

Thank you very much.

Very truly yours,

[SGD.]LUCIANO D. VALENCIA

Counsel for Spouses PaderesJPA Subdivision, City of Muntinlupa[32]

x x x (Emphasis supplied).

October 25, 1996

Mr. Luciano D. ValenciaCounsel for Sps. PaderesJPA Subdivision, Muntinlupa

Dear Sir:

This is with regard to your letter dated October 17, 1996 concerning the property formerly owned by Manila International Construction Corporation (MICC) foreclosed by the Bank.

Please inform Sps. Rodrigo and Sonia Paderes to come to the bank to discuss said foreclosed property directly with the bank.

Thank you.

Very truly yours,

[SGD.]LUZ B. DACASIN

Assistant Vice-PresidentReal Estate Department[33]

x x x (Emphasis supplied; italics in the original).

November 4, 1996

Mrs. Luz B. Dacasin

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Asst. Vice-PresidentReal Estate Dept., Banco FilipinoMakati City

Dear Madam:

Thank you very much for your letter dated October 25, 1996, which was received on October 31, 1996, the contents of which had been duly noted. Pursuant thereto I advised my clients - spouses Rodrigo and Sonia Paderes to see [you].

With your indulgence, I also advised my other clients - spouses Isabelo and Juana Herminia Bergado to go along with the spouses Paderes, who are similarly situated with spouses Paderes property.

Incidentally, on October 28, 1996, I also wrote your goodself another letter at the behest of spouses Isabelo and Juana Herminia Bergado whose property is equally footed with spouses Paderes.

It is hoped that, out of that conference per your invitation my clients above-named be informed formally the total amounts due the bank as a consequence of the right of redemption extended to them. Of course, whatever appraised value arrived at by the bank on the properties subject of redemption the same shall not be construed as my clients' committed liability.

Thank you very much.

Very truly yours,

[SGD.]LUCIANO D. VALENCIA

Counsel for Spouses PaderesJPA Subdivision, City of Muntinlupa[34]

x x x (Emphasis supplied).

November 8, 1996

Mrs. Luz B. DacasinAsst. Vice-PresidentReal Estate DepartmentBanco Filipino Savings & Mortgage BankMakati City

Re: Lot 18, Block 48 Gamboa St. BF Homes, Parañaque, MM (264 SQ.M.) Occupied by Sps. Isabelo Bergado & Juana Herminia Bergado

Lot 5, Block 48, L. Florentino St. BF Homes, Parañaque, MM (263 SQ.M.) Occupied by Sps. Rodrigo Paderes & Sonia Paderes

Dear Madam Asst. Vice-President:

Pursuant to our conference this morning November 8, 1996, regarding our desire to redeem the properties above-captioned, which your good office accommodated, and per your advi[c]e, we submit the following facts taken out and our proposals:

1. Regarding the lot, you mentioned that, the cost per square meter was P7,500.00. To this price we are no-committal for the said price is high. Although, we are still to have the amount re-negotiated.

2. We appreciate very much your having excluded the house built in the said lot for purposes of fixing the redemption price.

3. Your advi[c]e to subject the properties (house and lot) to a real-estate mortgage with the bank so that the amount to be loaned will be used as payment of the properties to be redeemed is accepted, and we are committed to it.

Thank you very much

Very truly yours,

[SGD.]SPS. SONIA &

RODRIGO PADERES

[SGD.]SPS. ISABELO &

JUANA HERMINIA BERGADO[35]

(Emphasis supplied).

Petitioners' assertion does not pass muster.

Under Article 1318 of the Civil Code, there are three essential requisites which must concur in order to give rise to a binding contract: (1) consent of

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the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is established. "Consent" is further defined in Article 1319 of the Code as follows:Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (Emphasis supplied)

By "offer" is meant a unilateral proposition which one party makes to the other for the celebration of the contract. There is an "offer" in the context of Article 1319 only if the contract can come into existence by the mere acceptance of the offeree, without any further act on the part of the offeror. Hence, the "offer" must be definite, complete and intentional. [36]

With regard to the "acceptance," a learned authority notes that:To produce a contract, the acceptance must not qualify the terms of the offer. There is no acceptance sufficient to produce consent, when a condition in the offer is removed, or a pure offer is accepted with a condition, or when a term is established, or changed, in the acceptance, or when a simple obligation is converted by the acceptance into an alternative one; in other words, when something is desired which is not exactly what is proposed in the offer. It is necessary that the acceptance be unequivocal and unconditional, and the acceptance and the proposition shall be without any variation whatsoever; and any modification or variation from the terms of the offer annuls the latter and frees the offeror. [37]

(Emphasis supplied)

A reading of the above-quoted correspondence reveals the absence of both a definite offer and an absolute acceptance of any definite offer by any of the parties.

The letters dated October 17, 1996 and November 4, 1996, signed by petitioners' counsel, while ostensibly proposing to redeem the foreclosed properties and requesting Banco Filipino to suggest a price for their repurchase, made it clear that any proposal by the bank would be subject to further action on the part of petitioners.

The letter dated October 25, 1996 signed by Luz Dacasin, Assistant Vice-President of Banco Filipino, merely invited petitioners to engage in further negotiations and does not contain a recognition of petitioners' claimed right of redemption or a definite offer to sell the subject properties back to them.

Petitioners emphasize that in item no. 3 of their letter dated November 8, 1996 they committed to "subject the properties (house and lot) to a real-estate mortgage with the bank so that the amount to be loaned will be used as payment of the properties to be redeemed." It is clear from item no. 1 of the same letter, however, that petitioners did not accept Banco Filipino's valuation of the properties at P7,500.00 per square meter and intended to "have the amount [renegotiated]."

Moreover, while purporting to be a memorandum of the matters taken up in the conference between petitioners and Banco Filipino Vice-President Dacasin, petitioners' letter of November 8, 1996 does not contain the concurrence of Ms. Dacasin or any other authorized agent of Banco Filipino. Where the alleged contract document was signed by only one party and the record shows that the other party did not execute or sign the same, there is no perfected contract.[38]

The Court of Appeals, therefore, committed no error in concluding that "nothing concrete came out of the meeting" between petitioners and Banco Filipino.

Respecting petitioners' claim that their houses should have been excluded from the auction sale of the mortgaged properties, it does not lie. The provision of Article 448[39] of the Civil Code, cited by petitioners, which pertain to those who, in good faith, mistakenly build, plant or sow on the land of another, has no application to the case at bar.

Here, the record clearly shows that petitioners purchased their respective houses from MICC, as evidenced by the Addendum to Deed of Sale dated October 1, 1983 and the Deed of Absolute Sale dated January 9, 1984.

Being improvements on the subject properties constructed by mortgagor MICC, there is no question that they were also covered by MICC's real estate mortgage following the terms of its contract with Banco Filipino and Article 2127 of the Civil Code:Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person. (Underscoring supplied).

The early case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.[40] is illustrative. In that case, this Court held:. . . (1) That a mortgage constituted on a sugar central includes not only the land on which it is built but also the buildings, machinery, and accessories installed at the time the mortgage was constituted as well as all the buildings, machinery and accessories belonging to the mortgagor, installed after the constitution thereof (Bischoff vs. Pomar and Compañia General de Tabacos, 12 Phil. 690); (2) that the notice announcing the sale at public auction of all the properties of a sugar central extends to the machinery and accessories acquired and installed in its mill after the constitution of the mortgage; (3) that the court, that has ordered the placing of the mortgaged properties in the hands of a receiver in a foreclosure suit, has jurisdiction to order the sale at public auction of the said mortgaged properties even before the termination of the receivership; and (4) that the fact that the price at which the mortgaged properties were sold at public auction is inadequate, is not in itself sufficient to justify the annulment of the sale.[41] (Emphasis supplied)

Petitioners finally proffer that the issuance, on Banco Filipino's mere motion, of the Writ of Possession on November 5, 1996, more than 8 years since the promulgation of the RTC Order granting its petition on September 8, 1988, violated Section 6, Rule 39 of the Rules of Court, viz:Sec. 6. Execution by motion or by independent action.—A final and executory judgment or order may be executed on motion within five (5) years from the date of its entry. After the lapse of such time, and before it is barred by the statute of limitations, a judgment may be enforced by action. The revived judgment may also be enforced by motion within five (5) years from the date of its entry and thereafter by action before it is barred by the statute of limitations.

Hence, petitioners argue, the writ of possession had lost its validity and efficacy and should therefore be declared null and void.

Petitioners' ultimate argument fails too. In Rodil vs. Benedicto,[42] this Court categorically held that the right of the applicant or a subsequent purchaser to request for the issuance of a writ of possession of the land never prescribes:

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The respondents claim that the petition for the issuance of a writ of possession was filed out of time, the said petition having been filed more than five years after the issuance of the final decree of registration. In support of their contention, the respondents cite the case of Soroñgon vs. Makalintal [80 Phil. 259 (1948)], wherein the following was stated:"It is the law and well settled doctrine in this jurisdiction that a writ of possession must be issued within the same period of time in which a judgment in ordinary civil actions may be summarily executed (section 17, Act 496, as amended), upon the petition of the registered owner or his successors in interest and against all parties who claim a right to or interest in the land registered prior to the registration proceeding."

The better rule, however, is that enunciated in the case of Manlapas and Tolentino vs. Lorente [48 Phil. 298 (1925)], which has not yet been abandoned, that the right of the applicant or a subsequent purchaser to ask for the issuance of a writ of possession of the land never prescribes. . .

x x x

In a later case [Sta. Ana v. Menla, 111 Phil. 947 (1961)], the Court also ruled that the provision in the Rules of Court to the effect that judgment may be enforced within five years by motion, and after five years but within ten years by an action (Section 6, Rule 39) refers to civil actions and is not applicable to special proceedings, such as land registration cases. The Court said:"The second assignment of error is as follows:

'That the lower court erred in ordering that the decision rendered in this land registration case on November 28, 1931 or twenty six years ago, has not yet become final and unenforceable.

We fail to understand the arguments of the appellant in support of the above assignment, except in so far as it supports his theory that after a decision in a land registration case has become final, it may not be enforced after the lapse of a period of 10 years, except by another proceeding to enforce the judgment or decision. Authority for this theory is the provision in the Rules of Court to the effect that judgment may be enforced within 5 years by motion, and after five years but within 10 years, by an action (Sec. 6, Rule 39). This provision of the Rules refers to civil actions and is not applicable to special proceedings, such as a land registration case. This is so because a party in a civil action must immediately enforce a judgment that is secured as against the adverse party, and his failure to act to enforce the same within a reasonable time as provided in the Rules makes the decision unenforceable against the losing party. In special proceedings the purpose is to establish a status, condition or fact; in land registration proceedings, the ownership by a person or a parcel of land is sought to be established. After the ownership has been proved and confirmed by judicial declaration, no further proceeding to enforce said ownership is necessary, except when the adverse or losing party had been in possession of the land and the winning party desires to oust him therefrom.[43] (Emphasis and underscoring supplied)

Petitioners have not supplied any cogent reason for this Court to deviate from the foregoing ruling.

The established doctrine that the issuance of a writ of possession is a ministerial function whereby the issuing court exercises neither discretion nor judgment bears reiterating. The writ issues as a matter of course upon the filing of the proper motion and, if filed before the lapse of the redemption period, the approval of the corresponding bond.[44]

Petitioners, however, are not without remedy. As reflected in the challenged Court of Appeals decision, under Section 8 [45] of Act No. 3135, as amended, petitioners, as successors-in-interest of mortgagor MICC, have 30 days from the time Banco Filipino is given possession of the subject properties to question the validity of the auction sale under any of the two grounds therein stated by filing a petition to set aside the same and cancel the writ of possession.

WHEREFORE, the petition is hereby DENIED.

Costs against petitioners.

SO ORDERED.

Sandoval-Gutierrez, Corona, and Garcia, JJ., concur.Panganiban, J., No part. Former counsel of a party.

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563 Phil. 696

THIRD DIVISION

[ G.R. NO. 159882, November 23, 2007 ]

SPOUSES RUBEN AND VIOLETA SAGUAN, PETITIONERS, VS. PHILIPPINE BANK OF COMMUNICATIONS AND COURT OF APPEALS (SECOND DIVISION), RESPONDENTS.

DECISION

NACHURA, J.:

This is a petition for review on certiorari[1] of the Decision[2] dated January 24, 2003 and of the Resolution[3] dated August 21, 2003 of the Court of Appeals (CA) in CA-G.R. SP No. 71775. The Decision affirmed the Orders[4] of the Regional Trial Court (RTC) of Branch 31, Tagum City, Davao: (1) dated November 5, 2001 admitting respondent Philippine Bank of Communications’ Exhibits “A” to “P”; (2) dated March 19, 2002 denying petitioners’, spouses Ruben and Violeta Saguan’s, Motion to Present Evidence, and granting private respondent’s petition for issuance of a writ of possession; and (3) dated May 6, 2002 denying petitioners’ Motion for Reconsideration of the second order.

The facts, as found by the CA, are not in dispute:

[Petitioners] spouses Ruben Saguan and Violeta Saguan obtained a loan of P3 Million from [respondent] Philippine Bank of Communications. To secure the obligation, they mortgaged five parcels of land covered by TCT Nos. 24274, 38894, 37455, 66339 and 19365, all of the Register of Deeds of the Province of Davao, and improvements therein.

Because [petitioners] defaulted in the payment of their mortgage indebtedness, [respondent] extra-judicially foreclosed the mortgage. In the auction sale on 05 January 1998, [respondent] was the only and highest bidder for P6,008,026.74. Sheriff’s certificate of sale dated 12 January 1998 was executed and annotated at the back of [petitioners’] titles on 18 February 1998. As [petitioners] failed to redeem the properties within the one-year period ending on 18 February 1999, TCT Nos. T-154065, T-154066, T-154067, T-154068 and T-154069 were issued in the name of [respondent] in lieu of the old ones. Thus, [respondent] consolidated ownership of the properties in its favor. Since the parcels of land were in physical possession of [petitioners] and other persons [co-petitioners in the petition before the CA], [respondent], after due demand, filed a petition for writ of possession with Branch 31, Regional Trial Court, Tagum City. x x x.[5]

Petitioners filed an Opposition[6] to the petition for writ of possession to which respondent filed a Comment. [7] Petitioners likewise filed a Reply[8] to the Comment.

In their Opposition and Reply, petitioners argued that a writ of possession should not issue considering respondent’s failure to return the excess or surplus proceeds[9] of the extrajudicial foreclosure sale based on our ruling in Sulit v. Court of Appeals.[10] In refutation, respondent points to petitioners’ remaining unsecured obligations with the former to which the excess or surplus proceeds were applied.

After the hearing on respondent’s evidence, the RTC issued two (2) separate orders requiring respondent to file a Formal Offer of Evidence. Respondent failed to comply with the aforesaid orders within the time frame prescribed, thus prompting petitioners to file a motion to dismiss grounded on Section 3,[11] Rule 17 of the Rules of Court.

Thereafter, respondent belatedly filed its Formal Offer of Evidence. Consequently, the RTC issued the first assailed Order [12] admitting respondent’s offer of exhibits thereby rendering petitioners’ motion to dismiss moot and academic. The RTC then issued the Order [13] denying petitioners’ Motion to Present Evidence and granted the petition for writ of possession. The last Order [14] of the RTC denied petitioners’ Motion for Reconsideration.

Upon petition for certiorari and mandamus, the CA rejected petitioners’ allegations of grave abuse of discretion in the lower court’s issuance of the foregoing Orders. The CA affirmed respondent’s entitlement to a writ of possession as a matter of right, the latter having consolidated its ownership over the parcels of land upon expiration of the redemption period. It emphasized that the issue on the failure to return the excess or surplus proceeds of the auction sale had been squarely met by the respondent, and therefore, the case was distinguishable from Sulit v. Court of Appeals. In all, the CA upheld the general rule that the issuance of a writ of possession to a purchaser in an extrajudicial foreclosure sale becomes merely a ministerial function of the court.

Hence, this recourse.

In this appeal, the issues for our resolution are:

1. Whether the RTC should have issued a writ of possession considering respondent’s failure to remit the excess or surplus proceeds of the extrajudicial foreclosure sale.

2. Corollary thereto, whether respondent may unilaterally apply the excess or surplus proceeds of the extrajudicial foreclosure sale to petitioner’s remaining unsecured obligations.

3. Whether the RTC should have granted petitioners’ motion to dismiss the petition for writ of possession based on respondent’s failure to comply with the RTC’s Orders on the filing of a formal offer of evidence.

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A writ of possession is an order enforcing a judgment to allow a person’s recovery of possession of real or personal property. An instance when a writ of possession may issue is under Act No. 3135,[15] as amended by Act No. 4118, on extrajudicial foreclosure of real estate mortgage. [16] Sections 6 and 7 provide, to wit:Section 6. Redemption. – In all cases in which an extrajudicial sale is made under the special power herein before 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 anytime within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions of section 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.

Section 7. Possession during redemption period. – In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of this Act. Such petition shall be made under oath and filed in [the] form of an ex-parte motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in case of property registered under the Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of any other real property encumbered with a mortgage duly registered in the office of any register of deeds in accordance with any existing law, and in each case the clerk of court shall, upon the filing of such petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Number Four hundred and ninety-six, and the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately.

From the foregoing provisions, a writ of possession may be issued either (1) within the one-year redemption period, upon the filing of a bond, or (2) after the lapse of the redemption period, without need of a bond. [17]

Within the redemption period the purchaser in a foreclosure sale may apply for a writ of possession by filing for that purpose an ex-parte motion under oath, in the corresponding registration or cadastral proceeding in the case of property covered by a Torrens title. Upon the filing of an ex-parte motion and the approval of the corresponding bond, the court is expressly directed to issue the order for a writ of possession. [18]

On the other hand, after the lapse of the redemption period, a writ of possession may be issued in favor of the purchaser in a foreclosure sale as the mortgagor is now considered to have lost interest over the foreclosed property. [19] Consequently, the purchaser, who has a right to possession after the expiration of the redemption period, becomes the absolute owner of the property when no redemption is made. [20] In this regard, the bond is no longer needed. The purchaser can demand possession at any time following the consolidation of ownership in his name and the issuance to him of a new TCT. After consolidation of title in the purchaser’s name for failure of the mortgagor to redeem the property, the purchaser’s right to possession ripens into the absolute right of a confirmed owner. At that point, the issuance of a writ of possession, upon proper application and proof of title, to a purchaser in an extrajudicial foreclosure sale becomes merely a ministerial function. [21] Effectively, the court cannot exercise its discretion.

Therefore, the issuance by the RTC of a writ of possession in favor of the respondent in this case is proper. We have consistently held that the duty of the trial court to grant a writ of possession in such instances is ministerial, and the court may not exercise discretion or judgment. [22] The propriety of the issuance of the writ was heightened in this case where the respondent’s right to possession of the properties extended after the expiration of the redemption period, and became absolute upon the petitioners’ failure to redeem the mortgaged properties.

Notwithstanding the foregoing, the petitioners insist that respondent’s failure to return the excess or surplus proceeds of the extrajudicial foreclosure sale converted the issuance of a writ of possession from a ministerial to a discretionary function of the trial court pursuant to our holding in Sulit v. Court of Appeals.[23]

We are not persuaded.

A careful reading of Sulit will readily show that it was decided under a different factual milieu. In Sulit, the plea for a writ of possession was made during the redemption period and title to the property had not, as yet, been consolidated in favor of the purchaser in the foreclosure sale. In stark contrast, the herein petitioners failed to exercise their right of redemption within the one-year reglementary period provided under Section 6 of Act No. 3135, as amended, and ownership over the properties was consolidated in, and corresponding titles issued in favor of, the respondent.

We emphasize that the proceeding in a petition for a writ of possession is ex-parte and summary in nature. It is a judicial proceeding brought for the benefit of one party only and without need of notice to any person claiming an adverse interest. It is a proceeding wherein relief is granted even without giving the person against whom the relief is sought an opportunity to be heard. [24] By its very nature, an ex-parte petition for issuance of a writ of possession is a non-litigious proceeding authorized under Act No. 3135, as amended.

Be that as it may, the debtor or mortgagor is not without recourse. Section 8 of Act No. 3135, as amended, provides:

Section 8. Setting aside of sale and writ of possession. – The debtor may, in the proceedings in which possession was requested, but not later than thirty days after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure provided for in section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it finds the complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession. Either of the parties may appeal from the order of the judge in accordance with section fourteen of Act Numbered Four hundred and ninety-six; but the order of possession shall continue in effect during the pendency of the appeal.

Thus, a party may file a petition to set aside the foreclosure sale and to cancel the writ of possession in the same proceedings where the writ of possession was requested. However, in this case, petitioners do not challenge the validity of the foreclosure nor do they wish to set aside the foreclosure sale. It appears that the only remaining bone of contention is the disposition of the excess or surplus proceeds of the foreclosure sale. In

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short, petitioners do not question the consolidation of ownership in favor of the respondent, but simply demand the payment of the sum of money supposedly still owing them from the latter.

Article 427,[25] in relation to Article 428,[26] of the Civil Code provides that ownership may be exercised over things or rights, and grants the owner of property a right of action for recovery against the holder and possessor thereof.

Thus, even as we rule that the writ of possession was properly issued in favor of respondent as a consequence of its confirmed ownership, we are not unmindful of the fact that the issue of the excess or surplus proceeds of the foreclosure sale remains unsettled.

Respondent’s stance, as sustained by the CA, is that petitioners have remaining unsecured obligations with respondent and the excess or surplus proceeds of the foreclosure sale were validly, albeit unilaterally, applied thereto.

This argument is unacceptable.

We have elucidated on the import of surplus proceeds in the case of Sulit, viz.:

In case of a surplus in the purchase price, however, there is jurisprudence to the effect that while the mortgagee ordinarily is liable only for such surplus as actually comes into his hands, but he sells on credit instead of for cash, he must still account for the proceeds as if the price were paid in cash, and in an action against the mortgagee to recover the surplus, the latter cannot raise the defense that no actual cash was received.

We cannot simply ignore the importance of surplus proceeds because by their very nature, surplus money arising from a sale of land under a decree of foreclosure stands in the place of the land itself with respect to liens thereon or vested rights therein. They are constructively, at least, real property and belong to the mortgagor or his assigns. Inevitably, the right of a mortgagor to the surplus proceeds is a substantial right which must prevail over rules of technicality.

Surplus money, in case of a foreclosure sale, gains much significance where there are junior encumbrancers on the mortgaged property. Jurisprudence has it that when there are several liens upon the premises, the surplus money must be applied to their discharge in the order of their priority. A junior mortgagee may have his rights protected by an appropriate decree as to the application of the surplus, if there be any, after satisfying the prior mortgage. His lien on the land is transferred to the surplus fund. And a senior mortgagee, realizing more than the amount of his debt on a foreclosure sale, is regarded as a trustee for the benefit of junior encumbrancers. [27]

Given the foregoing pronouncement in Sulit, we cannot countenance respondent’s cavalier attitude towards petitioners’ right to the surplus proceeds. To begin with, the foreclosure of petitioners’ properties was meant to answer only the obligation secured by the mortgage. Article 2126 of the Civil Code unequivocally states:

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.

We need not expound on the obvious. Simply put, even if petitioners have remaining obligations with respondent, these obligations, as conceded by respondent itself, were not collateralized by the foreclosed properties.

Furthermore, under Section 1[28] of Act No. 3135 as amended, the special power of attorney authorizing the extrajudicial foreclosure of the real estate mortgage must be either (1) inserted or stated in the mortgage deed itself; or (2) the authority is attached thereto. Thus, petitioners’ supposed remaining obligations which were not secured by the mortgage cannot be made subject, or even susceptible, to the extrajudicial foreclosure of mortgage.

However, petitioners’ remedy lies in a separate civil action for collection of a sum of money. [29] We have previously held that where the mortgagee retains 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.[30] In the same case, both parties can establish their respective rights and obligations to one another, after a proper liquidation of the expenses of the foreclosure sale, and other interests and claims chargeable to the purchase price of the foreclosed property. The court can then determine the proper application of compensation with respect to respondent’s claim on petitioners’ remaining unsecured obligations.[31] In this regard, respondent is not precluded from itself filing a case to collect on petitioners’ remaining debt.

Anent the third issue, we agree with the CA that there was no grave abuse of discretion in the trial court’s liberality in giving ample time and opportunity for respondent to complete the presentation of its evidence. It was a liberality that carried no taint of partiality. Despite the ex-parte nature of the proceedings, the RTC also allowed petitioners to file pleadings to oppose the petition for the issuance of the writ of possession. Clearly, petitioners were not denied due process, and the trial judge acted accordingly in admitting respondent’s uncontroverted evidence.

Finally, we note petitioners’ incorrect remedy of certiorari before the CA, which the latter and both parties have apparently overlooked. A special civil action for certiorari may be availed of only if the lower tribunal has acted without or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and if there is no appeal or any other plain, speedy, and adequate remedy in the ordinary course of law.[32]

Ineluctably, the RTC issued the writ of possession in compliance with the express provisions of Act No. 3135. It cannot, therefore, be charged with grave abuse of discretion as there is no showing that, in the exercise of its judgment, it acted in a capricious, whimsical, arbitrary or despotic manner tantamount to lack of jurisdiction. Absent grave abuse of discretion, petitioners should have filed an ordinary appeal instead of a petition for certiorari. The soundness of the order granting the writ of possession is a matter of judgment with respect to which the remedy of the party aggrieved is ordinary appeal. An error of judgment committed by a court in the exercise of its legitimate jurisdiction is not the same as “grave abuse of discretion.” Errors of judgment are correctible by appeal, while those of jurisdiction are reviewable by certiorari. [33]

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Nonetheless, we have allowed this procedural lapse to pass without incident, and have resolved the issues raised.

WHEREFORE, the Petition is DENIED. The writ of possession in favor of respondent Philippine Bank of Communications is hereby AFFIRMED without prejudice to petitioners’ separate remedy for recovery of the excess or surplus proceeds of the extrajudicial foreclosure sale. Costs against the petitioner.

SO ORDERED.

Ynares-Santiago,(Chairperson), Austria-Martinez, Chico-Nazario, and Reyes, JJ., concur.

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G.R. No. 169211

SECOND DIVISION

[ G.R. No. 169211, March 06, 2013 ]

STAR TWO (SPV-AMC), INC.,[1] PETITIONER, VS. PAPER CITY CORPORATION OF THE PHILIPPINES, RESPONDENT.

D E C I S I O N

PEREZ, J.:

For review before this Court is a Petition for Review on Certiorari filed by Rizal Commercial Banking Corporation now substituted by Star Two (SPV-AMC), Inc. by virtue of Republic Act No. 9182[2] otherwise known as the “Special Purpose Vehicle Act of 2002,” assailing the 8 March 2005 Decision and 8 August 2005 Resolution of the Special Fourth Division of the Court of Appeals (CA) in CA-G.R. SP No. 82022 upholding the 15 August 2003 and 1 December 2003 Orders of the Valenzuela Regional Trial Court (RTC) ruling that the subject machineries and equipments of Paper City Corporation (Paper City) are movable properties by agreement of the parties and cannot be considered as included in the extrajudicial foreclosure sale of the mortgaged land and building of Paper City.[3]

The facts as we gathered from the records are:

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

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

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

On 25 August 1992, a unilateral Cancellation of Deed of Continuing Chattel Mortgage on Inventory of Merchandise/Stocks-in-Trade was executed by RCBC through its Branch Operation Head Joey P. Singh and Asst. Vice President Anita O. Abad over the merchandise and stocks-in-trade covered by the continuing chattel mortgages.[9]

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

The MTI was later amended on 20 November 1992 to increase the contributions of the RCBC and Union Bank to P80,000,000.00 and P70,000,000.00, respectively. As a consequence, they executed a Deed of Amendment to MTI[13] but still included as part of the mortgaged properties by way of a first mortgage the various machineries and equipments located in and bolted to and/or forming part of buildings generally described as:

Annex “A”

A. Office Building

Building 1, 2, 3, 4, and 5Boiler HouseWorkers’ Quarter/RestroomCanteenGuardhouse, Parking Shed, Elevated GuardPost and other amenities

B. Pollution Tank Nos. 1 and 2.

Reserve Water Tank and Swimming PoolWaste Water Treatment TankElevated Concrete Water TankAnd other Improvements listed in Annex “A”

C. Power Plants Nos. 1 and 2

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Fabrication BuildingVarious Fuel, Water Tanks and PumpsTransformersAnnex “B”

D. Material Handling Equipment

Paper Plant No. 3

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

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

Paper City was able to comply with its loan obligations until July 1997. But economic crisis ensued which made it difficult for Paper City to meet the terms of its obligations leading to payment defaults.[16] Consequently, RCBC filed a Petition for Extrajudicial Foreclosure Under Act No. 3135 Against the Real Estate Mortgage executed by Paper City on 21 October 1998.[17] This petition was for the extra-judicial foreclosure of eight (8) parcels of land including all improvements thereon enumerated as TCT Nos. V-9763, V-13515, V-13516, V-13518, V-1484, V-1485, V-6662 and V-6663 included in the MTI dated 26 August 1992, Supplemental MTI dated 20 November 1992, Second Supplemental Indenture on the MTI dated 7 June 1994 and Third Supplemental Indenture on the MTI dated 24 January 1995. [18] Paper City then had an outstanding obligation with the creditor banks adding up to Nine Hundred One Million Eight Hundred One Thousand Four Hundred Eighty-Four and 10/100 Pesos (P901,801,484.10), inclusive of interest and penalty charges.[19]

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

This foreclosure sale prompted Paper City to file a Complaint[21] docketed as Civil Case No. 164-V-99 on 15 June 1999 against the creditor banks alleging that the extra-judicial sale of the properties and plants was null and void due to lack of prior notice and attendance of gross and evident bad faith on the part of the creditor banks. In the alternative, it prayed that in case the sale is declared valid, to render the whole obligation of Paper City as fully paid and extinguished. Also prayed for was the return of P5,000,000.00 as excessive penalty and the payment of damages and attorney’s fees.

In the meantime, Paper City and Union Bank entered into a Compromise Agreement which was later approved by the trial court on 19 November 2001. It was agreed that the share of Union Bank in the proceeds of the foreclosure shall be up to 34.23% of the price and the remaining possible liabilities of Paper City shall be condoned by the bank. Paper City likewise waived all its claim and counter charges against Union Bank and agreed to turn-over its proportionate share over the property within 120 days from the date of agreement. [22]

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

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

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

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

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

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

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

III. The four (4) Deeds of Chattel Mortgage that were attached as Annexes “A” to “D” to the December 18, 2003 “Manifestation with Motion to Remove and/or Dispose of Machinery” were executed from January 8, 1990 until November 28, 1991. On the other hand, the “Cancellation of Deed of Continuing Chattel Mortgage” was executed on August 25, 1992 while the MTI and the subsequent supplemental amendments thereto were executed from August 26, 1992 until January 24, 1995. It is of the contention of RCBC that [Paper City’s] unreasonable delay of ten (10) years in assailing that the disputed machineries and equipments were personal amounted to estoppel and ratification of the characterization that the same were real properties. [31]

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

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

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

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

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

a. Real Estate Mortgage – P206,815,000.00b. Chattel Mortgage – P13,800,000.00[36]

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

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

On 8 March 2005, the CA affirmed[41] the challenged orders of the trial court. The dispositive portion reads:

WHEREFORE, finding no grave abuse of discretion committed by public respondent, the instant petition is hereby DISMISSED for lack of merit. The assailed Orders dated 15 August and 2 December 2003, issued by Hon. Judge Floro P. Alejo are hereby AFFIRMED. No costs at this instance.[42]

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

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

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

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

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

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

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

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

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

We grant the petition.

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

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

The original MTI dated 26 August 1992 states that:

MORTGAGE TRUST INDENTURE

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

PAPER CITY CORPORATION OF THE PHILIPPINES, x x x hereinafter referred to as the “MORTGAGOR”);

-and-

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

x x x x

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

x x x x

GRANTING CLAUSE

NOW, THEREFORE, this INDENTURE witnesseth:

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

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

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

x x x x

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

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

WHEREAS, the [Paper City] desires to increase its borrowings to be secured by the INDENTURE from PESOS: TWO HUNDRED EIGHTY MILLION (P280,000,000.00) to PESOS: FOUR HUNDRED EIGHT MILLION NINE HUNDRED THOUSAND (P408,900,000.00) or an increase of PESOS: ONE HUNDRED TWENTY EIGHT MILLION NINE HUNDRED THOUSAND (P128,900,000.00) x x x which represents additional loan/s granted to

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the [Paper City] to be secured against the existing properties composed of land, building, machineries and equipment and inventories more particularly described in Annexes “A” and “B” of the INDENTURE x x x.[47] (Emphasis and underlining ours)

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

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

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

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

It has been explained by the Supreme Court in Norton Resources and Development Corporation v. All Asia Bank Corporation[50] in reiteration of the ruling in Benguet Corporation v. Cabildo[51] that:

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

Then till now the pronouncement has been that if the language used is as clear as day and readily understandable by any ordinary reader, there is no need for construction. [52]

The case at bar is covered by the rule.

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

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

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

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

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

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

Article 2127 of the Civil Code provides:

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

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

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

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

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

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

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

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

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

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;

x x x x

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

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

SO ORDERED.

Sereno, C.J.* Carpio, (Chairperson), Del Castillo, and Perlas-Bernabe, JJ., concur.

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524 Phil. 92

FIRST DIVISION

[ G.R. NO. 138145, June 15, 2006 ]

SUICO RATTAN & BURI INTERIORS, INC. AND SPOUSES ESMERALDO AND ELIZABETH D. SUICO, PETITIONERS, VS. COURT OF APPEALS AND METROPOLITAN BANK AND TRUST CO., INC., RESPONDENTS.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the Decision[1] of the Court of Appeals (CA) dated January 14, 1999 in CA-G.R. CV No. 48320, which reversed and set aside the Decision [2] of the Regional Trial Court (RTC) of Cebu in Civil Case No. CEB-13156; and the CA Resolution dated April 6, 1999, denying petitioners' motion for reconsideration. [3]

The facts of the case are as follows:

Suico Rattan & Buri Interiors, Inc. (SRBII) is a domestic corporation engaged in the business of export of rattan and buri products. Spouses Esmeraldo and Elizabeth Suico (Suico spouses) are officers of SRBII. On the other hand, Metropolitan Bank and Trust Co., Inc. (Metrobank) is a commercial banking corporation duly organized and existing under the laws of the Philippines.

In the course of its business, SRBII applied for a credit line with Metrobank. On September 5, 1991, SRBII and Metrobank, Mandaue branch, entered into a Credit Line Agreement (Agreement) wherein the latter granted the former a discounting line amounting to P7,000,000.00 and an export bills purchase or draft against payment line (EBP/DP line) P10,000,000.00 for a maximum aggregate principal amount of P17,000,000.00. [4] As provided for under the Agreement, drawings on the credit line are secured by a Continuing Surety Agreement for the sum of P17,500,000.00 executed by the Suico spouses,[5] a Real Estate Mortgage executed on September 5, 1991 by SRBII and the Suico spouses over properties located at Brgy. Tabok, Mandaue City, Cebu and covered by Transfer Certificate of Title (TCT) Nos. 21663 and 21665, and Fire Insurance policies over the properties duly endorsed in favor of Metrobank. The Agreement expressly provides that the EBP/DP line is "clean". [6]

Previous to the execution of the Agreement, the Suico spouses had already incurred loan obligations from Metrobank which are secured by separate Real Estate Mortgages executed on May 8, 1986,[7] March 23, 1987[8] and August 24, 1987[9] over the same properties which are the subject of the Real Estate Mortgage executed on September 5, 1991. Between June 13, 1991 and July 11, 1991, SRBII also incurred obligations with Metrobank by entering into twelve negotiations for the purchase of export bills by the former from the latter. These obligations are evidenced by drafts drawn by SRBII in favor of Metrobank for a sum amounting to US$441,279.25 which has a peso equivalent of P12,218,866.23. [10] As a consequence of these negotiations, Metrobank issued various checks in favor of petitioners totaling P12,194,443.23, [11] the last one of which was dated July 24, 1991.[12]

Subsequently, SRBII and the Suico spouses were unable to pay their obligations prompting Metrobank to extra-judicially foreclose the four mortgages constituted over the subject properties. Metrobank, being the lone and highest bidder, acquired the said properties during the auction sale. A Certificate of Sale dated November 18, 1992 was then issued in its favor. [13]

On November 5, 1992, Metrobank filed an action for the recovery of a sum of money arising from the obligations of SRBII and the Suico spouses on their export bills purchases incurred between June and July, 1991.[14] SRBII and the Suico spouses filed their Answer contending that their indebtedness are secured by a real estate mortgage and that the value of the mortgaged properties is more than enough to answer for all their obligations to Metrobank.[15]

On June 8, 1993, the RTC issued a pre-trial order enumerating the parties' claims, testimonial and documentary evidence to be presented and the issues raised.[16] Thereafter, trial ensued.

After trial, the RTC rendered judgment on September 26, 1994 with the following dispositive portion:

WHEREFORE, foregoing premises considered, the Complaint is hereby dismissed. All obligations of defendants to plaintiffs incurred by the former either as principal, surety or guarantor, which matured and had become due and demandable on the date of the foreclosure of the Real Estate Mortgage are hereby declared already fully paid by the mortgage security.

SO ORDERED.[17]

Aggrieved by the decision of the RTC, Metrobank filed an appeal with the CA.

On January 14, 1999, the CA rendered a Decision disposing as follows:

WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE, and a new one rendered ordering appellees, jointly and severally, to pay appellant the sum of P16,585,286.27 representing the principal obligations and interests as of October 31, 1992, plus interest on the principal sum of P12,218,866.23 at the rate of P26% per annum from November 1, 1992 until the said amounts are fully paid, the sum equivalent to two percent (2%) of the total amount due as and for attorney's fees, and to pay the costs.

SO ORDERED.[18]

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While the CA affirmed the trial court's ruling that under the provisions of the real estate mortgage contracts executed by herein petitioners, the clear intent of the contracting parties is that the mortgages shall not be limited to the amount secured under the said contracts but shall extend to other obligations that they may obtain from Metrobank, including renewals or extensions thereof, the CA ruled that since the proceeds from the foreclosure sale of the mortgaged properties amounted only to P10,383,141.63, the same is not sufficient to answer for the entire obligation of petitioners to Metrobank and that the latter may still recover the deficiency of P16,585,286.27 representing the value of the export bills purchased by herein petitioners.

SRBII and the Suico spouses filed a Motion for Reconsideration but the same was denied by the CA through its Resolution issued on April 6, 1999.[19]

Hence, the present petition with the following Assignment of Errors:

I

THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT THE REAL ESTATE MORTGAGE DATED SEPTEMBER 5, 1991 SERVED AS THE COLLATERAL FOR ALL THE OBLIGATIONS OF THE PETITIONERS.

II

THE RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DECIDING THE CASE BASED ON AN ISSUE NOT RAISED IN THE PLEADINGS OR ADMISSIONS OF THE PARTIES.

III

THE RESPONDENT COURT OF APPEALS ERRED IN NOT TAKING COGNIZANCE THAT RES JUDICATA HAD ALREADY SET IN, IN VIEW OF THE TERMINATION OF THE PROCEEDINGS IN EXTRAJUDICIAL FORECLOSURE SALE.

IV

THE RESPONDENT COURT OF APPEALS ERRED IN ORDERING THE PETITIONERS TO PAY SOLIDARILY THE AMOUNT OF P16,585,286.27 REPRESENTING THE PRINCIPAL OBLIGATION AND INTEREST AS OF OCTOBER 31, 1992 AND TO PAY AN INTEREST ON THE PRINCIPAL SUM OF P12,218,866,23 AT THE RATE OF 26% PER ANNUM FROM NOVEMBER 1, 1992 UNTIL THE SAID AMOUNTS ARE FULLY PAID.

V

THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS SUICO SPOUSES ARE SOLIDARILY LIABLE WITH PETITIONER CORPORATION FOR PAYMENT OF INTEREST PRIOR TO THE FILING OF THE COMPLAINT.

VI

THE RESPONDENT COURT OF APPEALS ERRED IN ORDERING PETITIONERS TO PAY THE SUM EQUIVALENT TO TWO PERCENT (2%) OF THE TOTAL AMOUNT DUE AS AND FOR ATTORNEY'S FEES AND TO PAY THE COSTS. [20]

As to the first assigned error, petitioners claim that the Real Estate Mortgage executed on September 5, 1991 answered for all their obligations to Metrobank. Petitioners contend that the language of the subject mortgage contract is explicit in that it shall secure all other obligations of petitioners of whatever kind or nature, whether direct or indirect, principal or secondary and whether said obligations have been contracted before, during or after the execution of the said mortgage contract. Petitioners also contend that the secured obligations shall include those which were incurred by petitioners from other branches of Metrobank because the properties covered by the subject mortgage contract had earlier been mortgaged to the other branches of Metrobank. Petitioners argue that despite the existence of prior mortgages, Metrobank's acceptance of the mortgaged properties as collateral for their Credit Line Agreement only means that the value of the said properties is sufficient to answer for the previous and present obligations of petitioners and that Metrobank accepts the said properties as continuing collaterals. Petitioners argue that Metrobank is now estopped from claiming that the subject mortgage contract does not answer for all of petitioners' obligations in its favor.

With respect to the second assigned error, petitioners contend that the CA erred in ruling that the bank's cause of action is based on its claim for a deficiency judgment arising from insufficient proceeds of the foreclosure sale of the mortgaged properties; Metrobank's cause of action is for a sum of money; at the time of the filing of the complaint, there is no deficiency judgment to speak of because the complaint was filed on November 5, 1992 while the foreclosure sale was only held on November 18, 1992; the complaint was not amended to include recovery of the deficiency as part of its cause of action.

Anent the third assignment of error, petitioners assert that Metrobank is guilty of splitting a single cause of action when it filed its complaint for a sum of money on November 5, 1992 and, thereafter, on November 18, 1992, foreclosed the properties subject matter of the mortgage. Petitioners contend that in the event that a mortgage debtor fails to pay his obligation, the mortgage creditor has the option to file an action to collect the indebtedness or to foreclose the property subject matter of the mortgage. However, the creditor may not pursue both remedies. Petitioners contend that the present action for a sum of money is already barred by res judicata by reason of the extrajudicial foreclosure sale of the mortgaged properties, as evidenced by the execution of the Definite Deed of Sale in favor of Metrobank on January 21, 1994.

As to the fourth assigned error, petitioners contend that the CA erred in holding that they are still liable to pay the deficiency in their obligation which was not covered by the proceeds of the sale of the foreclosed mortgaged properties. Petitioners assert that in bidding and in subsequently buying

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the subject mortgaged properties during the foreclosure sale for a price which is much lower than their market value, Metrobank effectively prevented petitioners from paying their entire obligation. Petitioners claim that they are not interested in the redemption of the foreclosed properties, rather they are more concerned with the payment of their obligation considering that these properties are the only ones with which they expect to settle their indebtedness. Hence, since Metrobank, in buying the foreclosed properties at a very low price, prevented petitioners from paying their entire obligation, it is already barred by the principle of estoppel, equity and fair play from recovering the remaining balance of petitioners' obligation to it.

With respect to the fifth assigned error, the Suico spouses contend that the CA committed error in holding them solidarily liable with SRBII for the payment of the remaining balance of the latter's obligation plus interest on the ground that they are mere sureties and as such they can only be held liable if the principal does not pay. Absent any showing that SRBII cannot pay, petitioners contend that they are not liable to pay. The Suico spouses also contend that, as sureties, they are liable to pay interest only at the time of the filing of the complaint.

As to the last assigned error, petitioners contend that the CA erred in awarding attorney's fees equivalent to 2% of the total amount due because petitioners did not act in bad faith nor did they willfully refuse to pay their obligation, which allegedly prompted Metrobank to litigate. Moreover, petitioners argue that the award of attorney's fees by the CA is contrary to the general rule that attorney's fees cannot be recovered as part of damages because of the policy that no premium should be placed on the right to litigate.

In its Comment, respondent bank contends that the export bills purchases made by petitioners are not secured by any real estate mortgage. To support its argument respondent bank cites the stipulation contained in the Credit Line Agreement that the export bills purchases are clean or unsecured. Respondent bank further argues that the export bills purchases were availed of by petitioners through the bank's Cebu Downtown Center Branch (otherwise referred to in the records as the Plaridel Branch) while the other loan obligations of petitioners, which were secured by real estate mortgages, were obtained from its Mandaue City Branch. Moreover, respondent bank asserts that petitioners' obligations with the former's Mandaue City Branch are evidenced by documents which are distinct and separate from the documents representing petitioners' export bills purchases with the Metrobank Cebu Downtown Center Branch. In any case, respondent bank contends that even if the real estate mortgage contracts executed by petitioners be considered as securing all of the latter's obligations, including their export bills purchases, the fact remains that the foreclosure of the mortgaged properties generated an amount which is insufficient to answer for all the obligations of petitioners to respondent bank. Respondent bank contends that under the law, it is not prevented from claiming the balance of petitioners' obligation which was not covered by the proceeds of the foreclosure sale. Respondent bank also argues that it is erroneous for petitioners to claim that just because it (Metrobank) did not require petitioners to put up additional security when they availed of subsequent loans, the previous mortgages are already sufficient to secure all their subsequent obligations.

Respondent bank further contends that the CA is correct in ruling that it (Metrobank) is entitled to deficiency judgment considering that petitioners themselves raised the issue that the real estate mortgages they executed secured all their obligations with respondent bank. Respondent argues that the issue on deficiency judgment necessarily arose because the proceeds of the foreclosure sale are not sufficient to answer for all the obligations of petitioners to respondent bank. In any case, respondent bank contends that the CA is clothed with ample authority to resolve an issue even if it is not raised if such resolution is necessary in arriving at a just decision.

Respondent bank asserts that there is no splitting of cause of action because the complaint it filed against petitioners is simply for the purpose of collecting the balance of the latter's obligation which was not covered by the proceeds of the sale of the mortgaged properties.

Respondent bank also contends that the Suico spouses are solidarily liable with SRBII because by reason of their execution of the Continuing Surety Agreement, the spouses' liability became direct, primary and absolute.

As to the attorney's fees awarded by the CA, respondent bank counters that petitioners are guilty of fraud and misrepresentation when they gave their assurance and warranty that documents such as letters of credit and commercial invoices are valid and existing when, in fact, they are not, thereby inducing respondent bank to grant and approve its transactions with petitioners involving the export bills purchases. By reason of such fraud and misrepresentation, respondent bank contends that it was compelled to incur expenses to protect its interest and enforce its claims.

The Court finds the petition partly meritorious.

The issues raised boil down to two basic questions: first, whether the mortgage contract executed on September 5, 1991 serves as security for all the obligations of petitioners to respondent bank; and second, whether the foreclosure of the mortgaged properties precludes respondent bank from claiming the sum of P16,585,286.27 representing the amount covered by the export bills purchased by herein petitioners between June and July 1991.

As to the first question, the Court agrees with petitioners that all their obligations, including their indebtedness arising from their purchase of export bills, are secured by the Real Estate Mortgage contract executed on September 5, 1991. We are not persuaded by respondent bank's contention that the export bills purchases of petitioners from June 13, 1991 to July 11, 1991 were not secured by any real estate mortgage because of the stipulation in the Agreement that the export bill purchase/draft against payment (EBP/DP) line is clean, which means that it is unsecured.

The following provisions appear in the Agreement:

...

WHEREAS, the CLIENT is desirous of obtaining credit accommodations from the BANK and the latter is willing to extend such credit accommodations to the CLIENT upon the terms and conditions hereinafter stipulated.

NOW, THEREFORE, the CLIENT and the BANK, in consideration of the following terms and conditions have agreed and covenanted as follows:

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1. The BANK hereby grants and shall make available to the CLIENT a credit line up to the aggregate principal amount of PESOS: SEVENTEEN MILLION ONLY (P17,000,000.00) PESOS in lawful currency of the Republic of the Philippines, to be availed as follows:

P 7,000,000.00- DISCOUNTING LINE (REM) for one (1)year, interest at prevailing rate, available by way of PNs not more than 360 days, discounted.

10,000,000.00- EBP/DP LINE (CLEAN) for one (1) year,interest at prevailing rate.

2. Drawings on the line shall be secured by:

1. Continuing Suretyship of Spouses Esmeraldo Suico and Elizabeth D. Suico.2. REM for P7.0 MM over TCT Nos. 21663 & 21665 w/ an aggregate area of 10,318 sq. m. and situated at Brgy. Tabok,

Mandaue City, for item 1 only3. Fire Insurance policy(ies) duly endorsed in bank's favor.

...[21] (Emphasis supplied)

It is true that the terms contained in the Agreement provide that the EBP/DP LINE is "clean" and that it is only those drawings made on the DISCOUNTING LINE which are secured by the mortgage constituted by petitioners spouses Suico over the subject properties. However, a perusal of the entire Agreement shows that the credit line extended to petitioners refers only to transactions that the latter may enter into after the execution of the said Agreement. There is nothing in the said document which shows that the credit line covered the export bill purchases incurred prior to the execution of the Agreement. In other words, the provision that the EBP/DP LINE is clear or not covered by real estate mortgage simply refers to credit accommodations which petitioners may avail from respondent bank subsequent to the execution of the Agreement. It does not, in any way, refer to credit accommodations which were already extended by respondent bank to petitioners prior to September 5, 1991, the date the Agreement was constituted. The parties could not have intended that the Agreement shall also pertain to the export bills purchases made by petitioners prior to its execution, that is, between June and July 1991, considering that the maximum amount covered by the EBP/DP LINE under the Agreement is only P10,000,000.00 while the outstanding obligation of petitioners for the export bills purchases as of July 1991 already totaled US$441,279.25 which, at the time of the transactions, had a peso equivalent of P12,218,866.23.

On the other hand, pertinent portions of the Real Estate Mortgage executed on the same date as the Agreement provide as follows:...

That for and in consideration of certain loans and other credit accommodations obtained from the Mortgagee amounting to SIX MILLION TWO HUNDRED FIFTY THOUSAND (P6,250,000.00) PESOS ONLY Philippine Currency, and to secure the payment of the same and those others that the Mortgagee may heretofore have extended or hereafter extend to the Mortgagor and/or SUICO RATTAN & BURI INTERIORS, INC., a domestic corporation with principal office and place of business at Tabok, Mandaue City, Philippines, hereinafter referred to, regardless of number, as the Borrower, including interest at the rate specified in the promissory note(s) or other evidence of indebtedness secured by this mortgage and expenses, and all other obligations of the Mortgagor/Borrower to the Mortgagee of whatever kind or nature, whether direct or indirect, principal or secondary, as appear in the accounts, books and records of the Mortgagee, whether such obligations have been contracted before, during or after the constitution of this mortgage, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted at the back of this document, or in a supplementary list attached hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon and all easements, sugar quotas, agricultural or land indemnities, aids or subsidies, including all other rights or benefits annexed to or inherent therein, now existing or which may hereafter exist, and also other assets acquired with the proceeds of the loan hereby secured, all of which the Mortgagor declares that he is the absolute owner free from all liens and encumbrances.

...[22] (emphasis supplied)

From the language of the contract, it is clear that the mortgaged properties were intended to secure all loans, credit accommodations and all other obligations of herein petitioners to Metrobank, whether such obligations have been contracted before, during or after the constitution of the mortgage.

The Court finds no conflict between the provisions of the Agreement and the Real Estate Mortgage contract both dated September 5, 1991, insofar as the export bills purchases from June 13, 1991 to July 11, 1991 are concerned. The stipulations in the September 5, 1991 Agreement refer only to future export bill purchases, thus excluding those purchases made in June and July, 1991; even as the provisions of the subject Real Estate Mortgage pertain to all obligations of petitioners including those which were constituted even before the execution of the said mortgage. Thus, although the Agreement does not refer to export bill purchases incurred prior to the execution of said Agreement, the Real Estate Mortgage encompasses all obligations incurred by petitioners, including the June and July 1991 export bill purchases but not the purchases made after September 5, 1991 under the Agreement.

Neither is the Court persuaded by respondent bank's contention that petitioners' obligations arising from their purchase of export bills is separate and distinct from their other loan obligations with respondent bank because the export bills purchases were availed by petitioners through the bank's Cebu Downtown Center/Plaridel branch while the other loan obligations of petitioners were obtained from its Mandaue City branch.

The Court quotes, with approval, the trial court's ratiocination on this matter:

...

It matters not that the EBP/DP line was availed of by defendants with the Plaridel branch, because the Credit Line Agreement and the Real Estate

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Mortgages clearly indicate that defendants were indebted to plaintiff bank and not to its Mandaue or Plaridel branch. This is clearly evident in the opening paragraph of the Credit Line Agreement and the Real Estate Mortgages when plaintiff defines itself as a "Commercial Banking Corporation organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal offices and places of business at Metrobank Plaza, Gil. J. Puyat Avenue, Makati, Metro Manila." Clearly therefore, defendants were deemed to be indebted to plaintiff with main office in Makati and not with its Mandaue or Plaridel branch.

...[23]

It bears to note that the complaint for a sum of money was filed in the name of Metrobank alone, without impleading its Plaridel or Mandaue branches. By not impleading either of these branches, it only goes to show that respondent bank, itself, insofar as the present case is concerned, considers the whole Metrobank corporation as the aggrieved party. Hence, it is now estopped from claiming that the mortagaged properties secure only those transactions entered into with its Mandaue branch simply because the mortgage contracts were entered into through the said branch. It does not matter that the export bills purchases of petitioners were entered into through the facility of respondent bank's Plaridel branch and evidenced by separate and distinct documents because in all these transactions there is only one creditor, which is the corporate entity known as Metrobank.

On the other hand, the Court is not persuaded by petitioners' claim that the foreclosed properties command a market price of P50,000,000.00 at the time of the foreclosure sale. No evidence appears on record to prove this allegation. Granting that the mortgaged properties were sold during the auction for an amount which is way below their market price, the same does not place the petitioners at a disadvantage. On the contrary, the low price works to their advantage because it would be easier for them to redeem the property sold. The Court agrees with the CA when it cited the case of Prudential Bank v. Martinez where the Court held as follows:

"Moreover, the fact that the mortgaged property is sold at an amount less than its actual market value should not militate against the right to such recovery. We fail to see any disadvantage going for the mortgagor. On the contrary, a mortgagor stands to gain with a reduced price because he possesses the right of redemption. When there is the right to redeem, inadequacy of price should not be material, because the judgment debtor may reacquire the property or also sell his right to redeem and thus recover the loss he claims to have suffered by the reason of the price obtained at the auction sale. (De Leon v. Salvador, L-30871, December 28, 1970 and Bernabe v. Cruz, et. al., L-31603, December 28, 1970; 36 SCRA 567). Generally, in forced sales, low prices are usually offered and the mere inadequacy of the price obtained at the sheriff's sale unless shocking to the conscience will not be sufficient to set aside a sale if there is no showing that in the event of a regular sale, a better price can be obtained (Ponce de Leon v. Rehabilitation Finance Corporation, L-24571, December 18, 1970, 36 SCRA 289). [24]

Hence, it is wrong for petitioners to conclude that when respondent bank supposedly bought the foreclosed properties at a very low price, the latter effectively prevented the former from satisfying their whole obligation. Petitioners still had the option of either redeeming the properties and, thereafter, selling the same for a price which corresponds to what they claim as the properties' actual market value or by simply selling their right to redeem for a price which is equivalent to the difference between the supposed market value of the said properties and the price obtained during the foreclosure sale. In either case, petitioners will be able to recoup the loss they claim to have suffered by reason of the inadequate price obtained at the auction sale and, thus, enable them to settle their obligation with respondent bank. Moreover, petitioners are not justified in concluding that they should be considered as having paid their obligations in full since respondent bank was the one who acquired the mortgaged properties and that the price it paid was very inadequate. The fact that it is respondent bank, as the mortgagee, which eventually acquired the mortgaged properties and that the bid price was low is not a valid reason for petitioners to refuse to pay the remaining balance of their obligation. Settled is the rule that a mortgage is simply a security and not a satisfaction of indebtedness. [25]

As to petitioners' contention that they are not liable to pay since there is no showing that the principal debtor cannot pay, the time-honored rule is that the surety obligates himself to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation.[26] Thus, a creditor can go directly against the surety although the principal debtor is solvent and is able to pay or no prior demand is made on the principal debtor.[27] Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a regular party to the undertaking.[28] A surety is considered in law to be on the same footing as the principal debtor in relation to whatever is adjudged against the latter.[29]

Equally settled is the principle that contracts have the force of law between the parties and are to be complied with in good faith. [30] From the moment the contract is perfected, the parties are bound to comply with what is expressly stipulated as well as with what is required by the nature of the obligation in keeping with good faith, usage and the law. [31] In the present case, it is clear from the Continuing Surety Agreement [32] executed by the Suico spouses that they hold themselves solidarily liable with SRBII in the payment of the latter's obligations to respondent bank to the extent of P17,500,000.00, plus interests and other incidental charges such as penalties, costs and expenses in collecting their obligation. The same principle applies with respect to the payment of interest. It is clear from the various letters executed by SRBII in favor of respondent bank that it agreed to pay interest in favor of respondent bank at the rate of 26% per annum based on the value of the draft, the same to be reckoned after twelve days from the date of purchase or from the date of dishonor, whichever is earlier, up to the date of final payment. [33] Since the Suico spouses obligated themselves to be solidarily bound with SRBII, it follows that they are also liable to pay interest as stipulated in the above-cited letters.

Having settled that the mortgaged properties served as security for all the petitioners' obligations to Metrobank and that the former's liability is solidary, the next question to be resolved is whether, under the facts and circumstances obtaining in the present case, the respondent bank is precluded from recovering the amount representing the value of the export bills purchased by petitioners from it in June and July, 1991.

The rule is settled that a mortgage creditor may, in the recovery of a debt secured by a real estate mortgage, institute against the mortgage debtor either a personal action for debt or a real action to foreclose the mortgage. [34] These remedies available to the mortgage creditor are deemed alternative and not cumulative. An election of one remedy operates as a waiver of the other.[35] In sustaining the rule that prohibits mortgage creditors from pursuing both the remedies of a personal action for debt or a real action to foreclose the mortgage, the Court held in the case of Bachrach Motor Co., Inc. v. Esteban Icarangal, et al. that a rule which would authorize the plaintiff to bring a personal action against the debtor and simultaneously or successively another action against the mortgaged property, would result not only in multiplicity of suits so offensive to justice and

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obnoxious to law and equity, but also in subjecting the defendant to the vexation of being sued in the place of his residence or of the residence of the plaintiff, and then again in the place where the property lies.[36] Hence, 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 provisions of Rule 68 of the Rules of Court. [37] 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. [38]

Records show that the complaint for a sum of money was filed with the RTC on November 5, 1992. On the other hand, there is no direct evidence to show when respondent bank filed a petition with the provincial sheriff of Cebu for the extrajudicial foreclosure of the mortgaged properties. The petition for extrajudicial foreclosure of the mortgaged properties was not presented in evidence. What appears on record is that the auction sale of the foreclosed properties was conducted on November 17, 1992. However, as mentioned earlier, the remedy of extrajudicial foreclosure is deemed chosen not on the date of foreclosure sale but upon the filing of the petition for foreclosure with the office of the sheriff of the province where the sale is to be made. Hence, for purposes of determining which remedy was first elected - the personal action for debt or the real action for foreclosure - there is a need to determine when the respondent bank filed a petition for extrajudicial foreclosure.

The Certificate of Sale executed by the Ex-Officio Provincial Sheriff indicates that the extrajudicial foreclosure sale was conducted on November 17, 1992.[39] In the absence of evidence to the contrary, the Court presumes that the sheriff regularly performed his duties and that the ordinary course of business had been followed in the conduct of the auction sale.[40] Section 3 of Act No. 3135, as amended by Act No. 4118 provides:

Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city. (Emphasis supplied)

Hence, it is reasonable to assume that the requirements regarding notice and publication prior to the conduct of the sale have been complied with. Going back 20 days from November 17, 1992, which was the date the auction sale was conducted, the petition for extrajudicial foreclosure could have been filed by respondent bank not later than October 27, 1992. Considering that the complaint for a sum of money was only filed on November 5, 1992, the only conclusion that can be arrived at is that respondent bank first elected to avail of the remedy of extrajudicial foreclosure. Thus, by availing of such remedy it is deemed to have waived its right to file an ordinary case for collection.

The question that remains then is: may the complaint for a sum of money filed by respondent bank be considered as a suit for the recovery of deficiency in petitioners' obligation?

The Court rules in the negative.

It is undisputed that the suit filed by respondent bank with the trial court was a personal action for the collection of a sum of money. The complaint was premised on the refusal of herein petitioners' buyers to pay and accept the value of the drafts or bills of exchange and the subsequent failure of petitioners to answer for the value of the said drafts plus interest upon notice and demand sent by respondent bank. There was no mention, either in the body of the complaint or in the prayer, for the recovery of the balance of petitioners' obligations which were not covered by the foreclosure sale. In fact, the foreclosure sale was not even mentioned. In other words, in filing the complaint with the RTC, respondent bank was not suing for any deficiency. Understandably, the respondent bank could not have claimed such deficiency because, as correctly observed by petitioners, at the time of the filing of the complaint on November 5, 1992, the foreclosure sale is yet to be conducted. Hence, the complaint cannot, in any way, be construed as an action for the recovery of deficiency in petitioners' obligation. It is actually an ordinary action for collection which is barred by reason of respondent's prior election of the remedy of foreclosure. Thus, the Court is left with no recourse but to sustain the dismissal of the complaint by the RTC subject to the right of Metrobank to recover the alleged deficiency, as will be discussed forthwith. It must be emphasized that as aptly observed by petitioners, Metrobank did not amend its complaint accordingly.

Given the fact that the proceeds of the auction sale were not sufficient to answer for the entire obligation of petitioners to respondent bank, the latter still has the right to recover the balance due it after applying the proceeds of the sale. We agree with the CA that where the mortgage creditor chooses the remedy of foreclosure and the proceeds of the foreclosure sale are insufficient to cover the debt, the mortgagee is entitled to claim the deficiency from the debtor.[41] The law gives the mortgagee the right to claim for the deficiency resulting from the price obtained in the sale of the property at public auction and the outstanding obligation at the time of the foreclosure proceedings. [42] This rule is based on the principle earlier mentioned that the mortgage is only a security and not a satisfaction of the mortgagor's entire obligation. Moreover, unlike in pledge[43] and chattel mortgage on a thing sold on installment,[44] where the Civil Code expressly forecloses the right of creditors to sue for any deficiency resulting from the sale of the property given as a security for the obligation, there is nothing in Act. No. 3135, [45] the law governing extrajudicial foreclosures, which expressly or impliedly prohibits the recovery of such deficiency. If the legislature had intended to deny the creditor the right to sue for any deficiency resulting from the foreclosure of a security given to guarantee an obligation, the law would expressly so provide. [46] Absent such a provision in Act. No. 3135, as amended, the creditor is not precluded from taking action to recover any unpaid balance on the principal obligation simply because he chose to extrajudicially foreclose the real estate mortgage. [47] Hence, in the present case, the Court's dismissal of the complaint should be without prejudice to the filing of another action for the recovery of the balance left in petitioners' obligation after the foreclosure sale of the mortgaged properties.

The CA or this Court has no jurisdiction to rule on the amount of deficiency that is yet to be claimed and proved in the proper forum by Metrobank.

WHEREFORE, the petition is partially GRANTED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 48320 are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Cebu, Branch 8 in Civil Case No. CEB-13156 is REINSTATED with MODIFICATION to the effect that the portion of the RTC Decision, declaring that "all obligations of defendants to plaintiffs incurred by the former either as principal, surety or guarantor, which matured and had become due and demandable on the date of the foreclosure of the Real Estate Mortgage are considered fully paid by the mortgage security", is DELETED subject to the right of Metropolitan Bank and Trust Co., Inc. to recover the amount of deficiency in a proper action in the proper court.

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No pronouncement as to cost.

SO ORDERED.

Panganiban, C.J., (Chairperson), Ynares-Santiago, Callejo, Sr., and Chico-Nazario, JJ., concur.

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587 Phil. 289

THIRD DIVISION

[ G.R. No. 171827, September 17, 2008 ]

TERESITA MONZON, PETITIONER, VS. SPS. JAMES & MARIA ROSA NIEVES RELOVA AND SPS. BIENVENIDO & EUFRACIA PEREZ, RESPONDENTS. VS. ADDIO PROPERTIES, INC., INTERVENOR.

D E C I S I O N

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari assailing the Decision[1] of the Court of Appeals dated 27 September 2005 and its Resolution dated 7 March 2006 in CA-G.R. CV No. 83507 affirming the Decision of the Regional Trial Court (RTC) of Tagaytay City, Branch 18.

The factual and procedural antecedents of this case are as follows:

On 18 October 2000, the spouses James and Maria Rosa Nieves Relova and the spouses Bienvenido and Eufracia Perez, respondents before this Court, filed against Atty. Ana Liza Luna, Clerk of Court of Branch 18 of the RTC of Tagaytay City, and herein petitioner Teresita Monzon an initiatory pleading captioned as a Petition for Injunction. The case, which was filed before the same Branch 18 of the RTC of Tagaytay City, was docketed as Civil Case No. TG-2069.

In their Petition for Injunction, respondents alleged that on 28 December 1998, Monzon executed a promissory note in favor of the spouses Perez for the amount of P600,000.00, with interest of five percent per month, payable on or before 28 December 1999. This was secured by a 300-square meter lot in Barangay Kaybagal, Tagaytay City. Denominated as Lot No. 2A, this lot is a portion of Psu-232001, covered by Tax Declaration No. 98-008-1793. On 31 December 1998, Monzon executed a Deed of Absolute Sale over the said parcel of land in favor of the spouses Perez.

Respondents also claim in their Petition for Injunction that on 29 March 1999, Monzon executed another promissory note, this time in favor of the spouses Relova for the amount of P200,000.00 with interest of five percent per month payable on or before 31 December 1999. This loan was secured by a 200 square meter lot, denominated as Lot No. 2B, another portion of the aforementioned Psu-232001 covered by Tax Declaration No. 98-008-1793. On 27 December 1999, Monzon executed a Deed of Conditional Sale over said parcel of land in favor of the spouses Relova.

On 23 October 1999, the Coastal Lending Corporation extrajudicially foreclosed the entire 9,967-square meter property covered by Psu-232001, including the portions mortgaged and subsequently sold to respondents. According to the Petition for Injunction, Monzon was indebted to the Coastal Lending Corporation in the total amount of P3,398,832.35. The winning bidder in the extrajudicial foreclosure, Addio Properties Inc., paid the amount of P5,001,127.00, thus leaving a P1,602,393.65 residue. According to respondents, this residue amount, which is in the custody of Atty. Luna as Branch Clerk of Court, should be turned over to them pursuant to Section 4, Rule 68 of the Revised Rules of Civil Procedure. Thus, respondents pray in their Petition for Injunction for a judgment (1) finding Monzon liable to the spouses Perez in the amount of P1,215,000.00 and to the spouses Relova in the amount of P385,000.00; (2) ordering Atty. Luna to deliver said amounts to respondents; and (3) restraining Atty. Luna from delivering any amount to Monzon pending such delivery in number (2).

Monzon, in her Answer, claimed that the Petition for Injunction should be dismissed for failure to state a cause of action.

Monzon likewise claimed that respondents could no longer ask for the enforcement of the two promissory notes because she had already performed her obligation to them by dacion en pago as evidenced by the Deed of Conditional Sale and the Deed of Absolute Sale. She claimed that petitioners could still claim the portions sold to them if they would only file the proper civil cases. As regards the fund in the custody of Atty. Luna, respondents cannot acquire the same without a writ of preliminary attachment or a writ of garnishment in accordance with the provisions of Rule 57 and Section 9(c), Rule 39 of the Revised Rules of Civil Procedure.

On 5 December 2001, the RTC, citing the absence of petitioner and her counsel on said hearing date despite due notice, granted an oral Motion by the respondents by issuing an Order allowing the ex parte presentation of evidence by respondents.[2]

On 1 April 2002, the RTC rendered a Decision in favor of respondents. The pertinent portions of the Decision are as follows:That [petitioner] Teresita Monzon owes [herein respondents] certain sums of money is indisputable. Even [Monzon] have admitted to this in her Answer. [Respondents] therefore are given every right to get back and collect whatever amount they gave [Monzon] together with the stipulated rate of interest.

Likewise, it has been established that [petitioner] Teresita Monzon has the amount of P1,602,393.65 in the possession of the Clerk of Court, Atty. Ana Liza M. Luna. This amount, as is heretofore stated, represented the balance of the foreclosure sale of [Monzon's] properties.

By way of this petition, [respondents] would want to get said amount so that the same can be applied as full payment of [petitioner's] obligation. That the amount should be divided between the [respondents] in the amount they have agreed between themselves; [respondent] spouses Relova to receive the amount of P400.00.00, while the spouses Perez shall get the rest.

WHEREFORE, judgment is hereby rendered ordering the x x x Clerk of Court, Atty. Ana Liza M. Luna, to deliver unto [herein respondents] the amount of P1,602,393.65 plus whatever interest she may received if and when the said amount has been deposited in any banking institution. [3]

The Decision also mentioned that the Order allowing the ex parte presentation of evidence by respondents was due to the continuous and incessant absences of petitioner and counsel.[4]

On 25 April 2002, Monzon filed a Notice of Appeal, which was approved by the trial court. Monzon claims that the RTC gravely erred in rendering its Decision immediately after respondents presented their evidence ex parte without giving her a chance to present her evidence, thereby violating her right to due process of law.

On 14 June 2002, Addio Properties, Inc. filed before the trial court a Motion for Intervention, which was granted by the same court on 12 July 2002.

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On 27 September 2005, the Court of Appeals rendered the assailed Decision dismissing the appeal. According to the Court of Appeals, Monzon showed tepid interest in having the case resolved with dispatch. She, thus, cannot now complain that she was denied due process when she was given ample opportunity to defend and assert her interests in the case. The Court of Appeals reminded Monzon that the essence of due process is reasonable opportunity to be heard and submit evidence in support of one's defense. What the law proscribes is lack of opportunity to be heard. Monzon's Motion for Reconsideration was denied in a Resolution dated 7 March 2006.

On 27 March 2006, Monzon filed the instant Petition for Review on Certiorari under Rule 45 of the Rules of Court.

Monzon claims anew that it was a violation of her right to due process of law for the RTC to render its Decision immediately after respondents presented their evidence ex parte without giving her a chance to present her evidence. Monzon stresses that she was never declared in default by the trial court. The trial court should have, thus, set the case for hearing for the reception of the evidence of the defense. She claims that she never waived her right to present evidence.

Monzon argues that had she been given the opportunity to present her evidence, she would have proven that (1) respondents' Exhibit A (mortgage of land to the spouses Relova) had been novated by respondent's Exhibit B (sale of the mortgage land to the spouses Relova); (2) respondents' Exhibit C (mortgage of land to the spouses Perez) had been novated by respondent's Exhibit B (sale of the mortgage land to the spouses Perez); and (3) having executed Exhibits "B" and "D," Monzon no longer had any obligation towards respondents.

The Order by the trial court which allowed respondents to present their evidence ex parte states:In view of the absence of [Monzon] as well as her counsel despite due notice, as prayed for by counsel for by [respondents herein], let the reception of [respondent's] evidence in this case be held ex-parte before a commissioner who is the clerk of court of this Court, with orders upon her to submit her report immediately upon completion thereof.[5]

It can be seen that despite the fact that Monzon was not declared in default by the RTC, the RTC nevertheless applied the effects of a default order upon petitioner under Section 3, Rule 9 of the Rules of Court:SEC. 3. Default; declaration of.-- If the defending party fails to answer within the time allowed therefor, the court shall, upon motion of the claiming party with notice to the defending party, and proof of such failure, declare the defending party in default. Thereupon, the court shall proceed to render judgment granting the claimant such relief as his pleading may warrant, unless the court in its discretion requires the claimant to submit evidence. Such reception of evidence may be delegated to the clerk of court.

(a) Effect of order of default.-- Aparty in default shall be entitled to notice of subsequent proceedings but not to take part in the trial.In his book on remedial law, former Justice Florenz D. Regalado writes that failure to appear in hearings is not a ground for the declaration of a defendant in default:Failure to file a responsive pleading within the reglementary period, and not failure to appear at the hearing, is the sole ground for an order of default (Rosario, et al. vs. Alonzo, et al., L-17320, June 29, 1963), except the failure to appear at a pre-trial conference wherein the effects of a default on the part of the defendant are followed, that is, the plaintiff shall be allowed to present evidence ex parte and a judgment based thereon may be rendered against the defendant (Section 5, Rule 18).[6] Also, a default judgment may be rendered, even if the defendant had filed his answer, under the circumstance in Sec. 3(c), Rule 29.[7]

Hence, according to Justice Regalado, the effects of default are followed only in three instances: (1) when there is an actual default for failure to file a responsive pleading; (2) failure to appear in the pre-trial conference; and (3) refusal to comply with modes of discovery under the circumstance in Sec. 3(c), Rule 29.

In Philippine National Bank v. De Leon,[8] we held:We have in the past admonished trial judges against issuing precipitate orders of default as these have the effect of denying a litigant the chance to be heard, and increase the burden of needless litigations in the appellate courts where time is needed for more important or complicated cases. While there are instances when a party may be properly defaulted, these should be the exception rather than the rule, and should be allowed only in clear cases of obstinate refusal or inordinate neglect to comply with the orders of the court (Leyte vs. Cusi, Jr., 152 SCRA 496; Tropical Homes, Inc. vs. Hon. Villaluz, et al., G.R. No. L-40628, February 24, 1989).

It is even worse when the court issues an order not denominated as an order of default, but provides for the application of effects of default. Such amounts to the circumvention of the rigid requirements of a default order, to wit: (1) the court must have validly acquired jurisdiction over the person of the defendant either by service of summons or voluntary appearance; (2) the defendant failed to file his answer within the time allowed therefor; and (3) there must be a motion to declare the defendant in default with notice to the latter. [9] In the case at bar, petitioner had not failed to file her answer. Neither was notice sent to petitioner that she would be defaulted, or that the effects of default shall be imposed upon her. "Mere non-appearance of defendants at an ordinary hearing and to adduce evidence does not constitute default, when they have already filed their answer to the complaint within the reglementary period. It is error to default a defendant after the answer had already been filed. It should be borne in mind that the policy of the law is to have every litigant's case tried on the merits as much as possible; it is for this reason that judgments by default are frowned upon."[10]

Does this mean that defendants can get away with failing to attend hearings despite due notice? No, it will not. We agree with petitioner that such failure to attend, when committed during hearing dates for the presentation of the complainant's evidence, would amount to the waiver of such defendant's right to object to the evidence presented during such hearing, and to cross-examine the witnesses presented therein. However, it would not amount to a waiver of the defendant's right to present evidence during the trial dates scheduled for the reception of evidence for the defense. It would be an entirely different issue if the failure to attend of the defendant was on a hearing date set for the presentation of the evidence of the defense, but such did not occur in the case at bar.

In view of the foregoing, we are, therefore, inclined to remand the case to the trial court for reception of evidence for the defense. Before we do so, however, we need to point out that the trial court had committed another error which we should address to put the remand in its proper perspective. We refer to Monzon's argument as early as the Answer stage that respondents' Petition for Injunction had failed to state a cause of action.

Section 4, Rule 68 of the Rules of Court, which is the basis of respondent's alleged cause of action entitling them to the residue of the amount paid in the foreclosure sale, provides as follows: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.

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However, Rule 68 governs the judicial foreclosure of mortgages. Extra-judicial foreclosure of mortgages, which was what transpired in the case at bar, is governed by Act No. 3135,[11] as amended by Act No. 4118,[12] Section 6 of Republic Act No. 7353, Section 18 of Republic Act No. 7906, and Section 47 of Republic Act No. 8791. A.M. No. 99-10-05-0, issued on 14 December 1999, provides for the procedure to be observed in the conduct of an extrajudicial foreclosure sale. Thus, we clarified the different types of sales in Supena v. Dela Rosa, [13] to wit:Any judge, worthy of the robe he dons, or any lawyer, for that matter, worth his salt, ought to know that different laws apply to different kinds of sales under our jurisdiction. We have three different types of sales, namely: an ordinary execution sale, a judicial foreclosure sale, and an extrajudicial foreclosure sale. An ordinary execution sale is governed by the pertinent provisions of Rule 39 of the Rules of Court on Execution, Satisfaction and Effect of Judgments. Rule 68 of the Rules, captioned Foreclosure of Mortgage, governs judicial foreclosure sales. On the other hand, Act No. 3135, as amended by Act No. 4118, otherwise known as "An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages," applies in cases of extrajudicial foreclosure sales of real estate mortgages.

Unlike Rule 68, which governs judicial foreclosure sales, neither Act No. 3135 as amended, nor A.M. No. 99-10-05-0 grants to junior encumbrancers the right to receive the balance of the purchase price. The only right given to second mortgagees in said issuances is the right to redeem the foreclosed property pursuant to Section 6 of Act No. 3135, as amended by Act No. 4118, which provides:Sec. 6. Redemption. 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, [14] inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with this Act.

Even if, for the sake of argument, Rule 68 is to be applied to extrajudicial foreclosure of mortgages, such right can only be given to second mortgagees who are made parties to the (judicial) foreclosure. While a second mortgagee is a proper and in a sense even a necessary party to a proceeding to foreclose a first mortgage on real property, he is not an indispensable party, because a valid decree may be made, as between the mortgagor and the first mortgagee, without regard to the second mortgage; but the consequence of a failure to make the second mortgagee a party to the proceeding is that the lien of the second mortgagee on the equity of redemption is not affected by the decree of foreclosure.[15]

A cause of action is the act or omission by which a party violates the right of another. [16] A cause of action exists if the following elements are present: (1) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of the right of plaintiff or constituting a breach of the obligation of defendant to the plaintiff for which the latter may maintain an action for recovery of damages. [17] In view of the foregoing discussions, we find that respondents do not have a cause of action against Atty. Ana Liza Luna for the delivery of the subject amounts on the basis of Section 4, Rule 68 of the Rules of Court, for the reason that the foregoing Rule does not apply to extrajudicial foreclosure of mortgages.

In Katon v. Palanca, Jr.,[18] we held that where prescription, lack of jurisdiction or failure to state a cause of action clearly appears from the complaint filed with the trial court, the action may be dismissed motu proprio, even if the case has been elevated for review on different grounds. However, while the case should indeed be dismissed insofar as Atty. Luna is concerned, the same is not necessarily true with respect to Monzon. Other than respondents' prayer that the amount due to respondents be delivered by Atty. Luna to them, they also pray for a judgment declaring Monzon liable for such amounts. Said prayer, as argued by Monzon herself, may constitute a cause of action for collection of sum of money against Monzon.

The rule is now settled that a mortgage creditor may elect to waive his security and bring, instead, an ordinary action to recover the indebtedness with the right to execute a judgment thereon on all the properties of the debtor including the subject matter of the mortgage, subject to the qualification that if he fails in the remedy elected by him, he cannot pursue further the remedy he has waived. [19]

However, due to the fact that construing respondents' Petition for Injunction to be one for a collection of sum of money would entail a waiver by the respondents of the mortgage executed over the subject properties, we should proceed with caution before making such construction. We, therefore, resolve that upon the remand of this case to the trial court, respondents should be ordered to manifest whether the Petition for Injunction should be treated as a complaint for the collection of a sum of money.

If respondents answer in the affirmative, then the case shall proceed with the presentation of the evidence for the defense. If Monzon would be successful in proving her defense of dacion en pago, there would, in effect, be a double sale of the mortgaged properties: the same properties were sold to both respondents and to herein intervenor Addio Properties, Inc. If, pursuant to the rules on double sales, respondents are entitled to the properties, their remedy is to file the proper action to recover possession. If, pursuant to said rules, Addio Properties, Inc. is entitled to the properties, respondents' remedy is to file an action for damages against Monzon.

If respondents answer in the negative, the case shall be dismissed, without prejudice to the exercise of respondents' rights as mortgage creditors. If respondents' mortgage contract was executed before the execution of the mortgage contract with Addio Properties, Inc., respondents would be the first mortgagors. Pursuant to Article 2126[20] of the Civil Code, they would be entitled to foreclose the property as against any subsequent possessor thereof. If respondents' mortgage contract was executed after the execution of the mortgage contract with Addio Properties, Inc., respondents would be the second mortgagors. As such, they are entitled to a right of redemption pursuant to Section 6 of Act No. 3135, as amended by Act No. 4118.

WHEREFORE, the Decision of the Court of Appeals dated 27 September 2005 and its Resolution dated 7 March 2006 are REVERSED and SET ASIDE. The Petition for Injunction in Civil Case No. TG-2069 is hereby ordered DISMISSED insofar as Atty. Ana Liza Luna is concerned. The Petition for Injunction in Civil Case No. TG-2069, insofar as petitioner Teresita Monzon is concerned, is ordered REMANDED to the Regional Trial Court of Tagaytay City for further proceedings. Upon such remand, the Regional Trial Court of Tagaytay City shall issue an Order to respondents, the spouses James and Maria Rosa Nieves Relova and the spouses Bienvenido and Eufracia Perez, to manifest whether the Petition for Injunction should be treated as a complaint for the collection of a sum of money.

If respondents answer in the affirmative, the Regional Trial Court shall set the case for hearing for the presentation of the evidence for the defense. If respondents answer in the negative, the case shall be dismissed, without prejudice to the exercise of respondents' rights as mortgage creditors. No costs.

SO ORDERED.

Ynares-Santiago, (Chairperson), Austria-Martinez, Nachura, and Reyes, JJ., concur.

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