Final Exam Transcript

CREDIT TRANSACTIONS Real Mortgage to Concurrence & Preference of Credits

Atty. Jazzie M. Sarona, CPA 2 Manresa Roman 2ND sem, AY 2014-2015

For the use of ALL students under Atty Sarona Bagundang, Ching, Dayhon, Garcia, Harun, Lopez, Montefolca, Rodriguez, Uy, Tan, Villacampa Page 1 of 42

REAL MORTGAGE & FORECLOSURE OF REAL

ESTATE MORTGAGE Just like in pledge, a real estate mortgage is an accessory contract. A contract whereby the debtor securing to the creditor the fulfillment of the principal obligation specially subjecting to such security immovable property or real rights over the immovable property, which the obligation shall be satisfied with the proceeds of the sale of such property or rights, in case such obligation is not complied with at the time stipulated. It is very clear that a real estate mortgage is an accessory contract, and just like a pledge or even a contract of guaranty or suretyship, it can have a separate consideration but if there is no separate consideration, it can have the same consideration as that of the principal obligation. As a real estate mortgage is an accessory contract, without a valid principal contract, there can be no valid real estate mortgage. The obligation may be secured by a third person (refer to the last paragraph of Article 2085), and it will be valid as long as the principal obligation is valid and all the essential requisites are present. And of course, you cannot question the validity of a real estate mortgage for lack of consideration because again, it will have the same consideration as that of the principal obligation. We have here the case of DBP vs CA:

DBP vs CA

Q: From whom did the spouses Mangubat bought the subject land? A: DBP Q: And they also applied for a loan, was it approved by DBP? A: Yes Q: What was the reason why DBP refused to release part of the loan? Q: How did the nature or classification of that land affect the loan? Why was it relevant as to the release of the remaining portion of the loan? Q: What is the relationship of the land to the contract of loan? A: The land served as a security for the loan obtained through the execution of the real estate mortgage, wherein the subject of said REM is the land Q: The refusal of DBP of the loan was premised on what ground? A: That the land was not disposable as private land. Q: What did the spouses contend? A: The spouses filed for annulment of the deed of sale. Q: How did the court rule on the annulment of the deed of sale? A: The court declared the sale as not valid due to the absence of a valid subject matter as the land involved is inalienable. Q: Did the nullity of the sale of the land affect the validity of the loan? A: No because the contract of loan is the principal obligation and it being separate and distinct from the accessory obligation (which is the real estate mortgage), the invalidity of the accessory contract (the REM) does not result to invalidity of the principal contract.

The declaration of nullity of a contract which is void ab initio operates to restore things to the state and condition in which they were found before the execution. The return by DBP (to sps Mangubat) is called for. But that is separate from the issue of the loan wherein it was perfected upon the release (of the money) in favor of the spouses, therefore DBP has the right to demand payment of said loan. The fact that the annulment of the sale will also result in the invalidity of the mortgage does not have an effect on the validity and efficacy of the principal obligation, for even an obligation that is unsupported by any security of the debtor may also be enforced by means of an ordinary action. There is no valid mortgage, but then again, the principal obligation remains valid and not rendered null and void. Under the foregoing circumstances, what is lost is only the right to foreclose the mortgage as a special remedy for satisfying or settling the indebtedness which is the principal obligation. However, the mortgage remains as evidence or proof of a personal obligation of the debtor, and the amount due to the creditor may be enforced in an ordinary personal action. So, a real estate mortgage is an accessory contract. Even if it be declared null and void, its (in)validity will not affect the validity of the principal contract. (recall the principle: Accessory follows the principal!) Characteristics of Mortgage It is a real, accessory, and subsidiary contract. It is also unilateral because it creates only an obligation on the part of the creditor who must free the property from the encumbrance once the obligation is fulfilled. Kinds of Mortgage

(1) Voluntary - Agreed to between the parties or constituted

by the will of the owner of the property on which it is created.

(2) Legal - Required by law to be executed in favor of

certain persons

(3) Equitable - Although lacks proper formalities or other

requisites of a mortgage required by law, nevertheless reveals the intention of the parties to burden real property as security for a debt, and contains nothing impossible or contrary to law.

- Governed by Art 1602 of the Civil Code:

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases: (1) When the price of a sale with right to repurchase is unusually inadequate; (2) When the vendor remains in possession as lessee or otherwise; (3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (4) When the purchaser retains for himself a part of the purchase price; (5) When the vendor binds himself to pay the taxes on the thing sold; (6) In any other case where it may be fairly inferred that the real intention of the parties is




that the transaction shall secure the payment of a debt or the performance of any other obligation. In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws. (n)

What are the valid objects as to real estate mortgage?

Article 2124. Only the following property may be the object of a contract of mortgage: (1) Immovables; (2) Alienable real rights in accordance with the laws, imposed upon immovables. Nevertheless, movables may be the object of a chattel mortgage.

What are immovables? (Article 415, Civil Code)

Article 415. The following are immovable property: (1) Land, buildings, roads and constructions of all kinds adhered to the soil; (2) Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable; (3) Everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object; (4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or on lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements; (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; (6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar nature, in case their owner has placed them or preserves them with the intention to have them permanently attached to the land, and forming a permanent part of it; the animals in these places are included; (7) Fertilizer actually used on a piece of land; (8) Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and waters either running or stagnant; (9) Docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast; (10) Contracts for public works, and servitudes and other real rights over immovable property.

We have here the case of Soriano vs Galit:

Soriano vs Galit Q: What kind of sale took place here? A: Execution sale Q: Was there a REM executed here? Was that the basis of the sale? A: No

Q: What was the defect of the issuance of certificate of sale? Q: Can a building, excluding the land, be a valid subject of REM? A: Yes Q: How about if you have a land with building, can the land be a valid subject of REM excluding the buildings and improvements thereon? A: Yes

Notice in this case, there was no foreclosure sale arising from the foreclosure of the REM, what happened here is an execution sale. Nevertheless, this is an important case as it provides that a notice must have a correct description of the property subject of the REM. Note that an incorrect title number together with a correct technical description of the property to be sold and vice versa is deemed a substantial and fatal error which results in the invalidation of the sale. Subsequently including properties which have not been explicitly mentioned in the notice for registration purposes under suspicious circumstances smacks of fraud. What was included in the (notice of) execution sale was just the storehouse or the bodega. The SC emphasized that the building is separate and distinct from the parcel of land (where it is erected). While it is true that a mortgage of land necessarily includes buildings, in the absence of stipulation of the improvements thereon, a building by itself may be mortgaged apart from the land on which it has been built. Such mortgage would be still a real estate mortgage for the building would still be considered immovable property even if dealt with separately and apart from the land. Considering that what was sold by virtue of the writ of execution issued by the trial court was merely the storehouse and bodega constructed on the parcel of land covered by Transfer Certificate of Title No. T-40785, which by themselves are real properties of respondents spouses, the same should be regarded as separate and distinct from the conveyance of the lot on which they stand. Therefore, a building in itself can be a valid subject of REM. The second object as enumerated under Article 2124 includes alienable real rights or rights over the immovable (such as usufruct), but not the property itself, only the right to use it. A real right over a real property is considered a real property and a valid object in a REM. Take note that the subject matters listed in Article 2124 are the only valid subject matters of a REM. Why? Because of the word only. In other words, the list is exclusive. The third paragraph emphasizes that movables can be valid subject of chattel mortgage, however, if it is delivered it is a contract of pledge. Under Article 2085, it was emphasized that the mortgagor must be the owner of the subject parcel of land. With that: GR: Future property cannot be a valid object of REM because at the time the mortgagor entered in to the contract of mortgage, he still do not own the future property EX:

Mendoza vs CA

Q: What do you mean by after-acquired chattel? A: Properties which were not yet existent at the time of the execution of the REM Q: Is there a chattel mortgage here or REM?




A: Both Q: What was the ruling of the Court with respect to the machineries and equipment, can it be valid SM in a REM? Q: Machineries in itself, are they movable or immovable? A: Movable Q: In this case, was it considered to be movable or immovable? A: Immovable Q: Why? A: Immovable by destination, therefore valid subject matter of REM

If there is a movable property and it is made as a subject matter in a REM, the parties would nevertheless be bound to such agreement. In this case, the said promissory notes authorized respondent bank, in case of default, to sell things of value belonging to the mortgagor which may be on its hands for deposit or otherwise belonging to me/us and for this purpose. Besides the petitioner executed not only a chattel mortgage but also a real estate mortgage to secure his loan obligations to respondent bank. A stipulation in the mortgage, extending its scope and effect to after-acquired property is valid and binding where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods. With regard to the subject matter PNB asserts that those movables were in fact "immovables by destination" under Art. 415 (5) of the Civil Code.i It is an established rule that a mortgage constituted on an immovable includes not only the land but also the buildings, machinery and accessories installed at the time the mortgage was constituted as well as the buildings, machinery and accessories belonging to the mortgagor, installed after the constitution thereof. So, immovable by destination with regard to the machinery and accessories. Do take note of the distinction between a REM and a pledge. Although they have similar requisites under Article 2085:

Article 2085. The following requisites are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property.

REM vs Pledge

REM Pledge

Subject matter Real property: immovable

Personal property

Possession Delivery of the subject matter to the mortgagee is not necessary for its validity. GR is that the mortgagor retains

It is a real contract perfected by delivery, possession is required

possession of the property mortgaged. (EX: stipulation by the parties)

Fruits Mortgagee does not have the rights over the fruits of the SM

Pledgee have the right to apply the fruits of the property delivered to him to the principal obligaiton

Foreclosure Extrajudicial and judicial

Extrajudicial in nature

Registration to bind 3rd person

Required: the fact that it is notarized is not sufficient to bind 3rd persons

Not required: what is required is description of the thing pledged, date of pledge, in a public instrument

Article 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties. The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized. (1875a)

Article 2125 emphasizes the requirement for registration of the said mortgage before the registry of property, but this is only to bind third persons. If the instrument is not recorded, the instrument is nevertheless binding between the parties. Absent the annotation, the mortgage cannot be binding as against third persons as provided under the Torrens System, third parties cannot be bound by lien not found in the title. Going back to the characteristics of REMreal, accessory, unilateral, and subsidiary: is REM a real contract wherein delivery is required? No. Thus, there is no basis in saying that a REM is a real contract because again delivery is not required for the validity of the REM. The last paragraph of Article 2125 applies to legal or equitable mortgage under Article 1602. With regard to the validity of the REM whether it be in a private or public document, recall the case of Hechanova vs Adil the mortgagee can demand that the mortgage be executed in a public instrument. The private instrument can be used as evidence wherein the creditor can file an action for the execution of the mortgage and subsequently the registration of said mortgage. He has the right to compel the debtor to execute a contract of mortgage in a public instrument. Again, to bind third persons, a mortgage must be registered. However, you cannot go directly to the register of deeds with a private instrument. Now if a mortgage is not registered, the mortgage however is valid as between the parties as registration operates only as notice to third persons but does not add to its validity nor convert an invalid one to a valid one (ie mortgage is duly notarized and subsequently registered before the ROD, however it was discovered that the mortgagor is not the owner of the property, the mortgage is still not valid).




Tan vs Valdehueza Q: Who was in possession of the property? A: Valdehuezas Q: What was the basis of Tan for filling the case against the Valdehuezas so that Tan would have possession over the said property? A: Pacto de retro sale Q: Was there an auction sale? What was the basis of that auction sale? Q: What was the contract entered into between the Valdehuezas and Tan? A: Equitable mortgage because Valdehuezas remained in possession of the property which is one of the badges under Art 1602

Notice that in this case the contract that they executed is a Deed of Pacto de Retro Sale, which in itself does not show that it is a REM. But the SC held that this was an equitable mortgage since the intention here is to secure the principal obligation moreover badges provided under Art 1602 are present: Valdehuezas remained in possession of the land, and they even paid for the taxes of said land. The Valdehuezas having remained in possession of the land and the realty taxes having been paid by them, the contracts which purported to be pacto de retro transactions are presumed to be equitable mortgages, whether registered or not, there being no third parties involved. Another thing that you have to consider in a REM is the fact that it must sufficiently describe the debt or the obligation sought to be secured.

Sps Viola vs Equitable Q: What are the contracts executed here? A: REM Q: What obligation was secured by that REM? A: Loan premised on the credit line agreement Q: What was included in the credit line agreement? A: Principal obligation with interest Q: What was included in the REM? What was the obligation secured? A: Principal obligation, interests, bank charges Q: Since the penalty is not included in the REM, what is the effect with respect to the foreclosure of the real estate mortgage? A: Still valid, but does not include the penalty

Again, 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. The mortgage contract here did not specifically mention (aside from the principal loan obligation), the payment of the penalty fee of 3% per month, which was provided for in the credit line agreement. Since an action to foreclose must be limited to the amount mentioned in the mortgage 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. Moreover, 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. So the penalty fee was just excluded in the computation. Doctrine of mortgagee in good faith A mortgagee has the right to rely in good faith on the certificate of title of the mortgagor of the property given as security and in the absence of any sign that might arouse suspicion, the mortgagee has no obligation to undertake further investigation. All persons dealing with the property are not required to go beyond what appears on the face of the title. However, this does not apply to a situation where the title is still in the name of the rightful owner and the mortgagor is a different person pretending to be the owner. The principle of mortgage in good faith is not applicable in the following instances:

1) Purchaser or mortgagee has knowledge of the defect of the title

2) The mortgagee does not directly deal with the registered owner of the real property

3) Mortgagee was aware of sufficient facts to induce a reasonably prudent man to inquire to the status of the property in litigation

4) When the mortgagee is a bank of financing institutionit is required to go further than what appears on the face of the Torrens title; it is expected to exercise greater care and prudence and higher standard of diligence - So remember in Cavite Development Bank

vs Lim where Cavite Development Bank was not considered to be mortgagee in good faith.

State Investment vs CA

Q: Which is superior between a contract to sell and mortgage? A: Registered CTS Q: Why? A: Because State Investment was not considered as mortgagee in good faith because it being a financing institution, it cannot rely upon the face of the title Q: What are the other reasons why State Investment was not considered to be mortgagee in good faith? A: It had knowledge of the defect Q: Is there already transfer of ownership? A: There was no transfer of ownership as there was no delivery

In this case you have here a registered mortgage and unregistered right under the CTS. STATEs registered mortgage right over the property is inferior to that of respondents-spouses unregistered right. As a general rule, where there is nothing in the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title upon its face indicates in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto. This rule, however, admits of an exception as where the purchaser or mortgagee, has knowledge of a defect or lack of title in his vendor, or that he was aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the title of the property in litigation. In this case, petitioner (State) was well aware that it was dealing with SOLID, a business entity engaged in the business of selling subdivision lots. In fact, the OAALA found that at the time the lot was mortgaged, State Investment House, Inc., had been aware of the lots




location and that said lot formed part of Capital Park/Homes Subdivision. As petitioner is a financing institution, it is to investigate, examine and assess the real property offered as security for any loan application. It is a settled rule that a purchaser or mortgagee cannot close its eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor. Petitioner was not a purchaser or mortgagee in good faith; hence petitioner cannot solely rely on what merely appears on the face of the Torrens Title.

PNB vs Corpuz Q: Who was the registered owner? Was there a title issued to Bondoc? A: Yes Q: How about the subsequent sale issued to Palaganas? A: Yes Q: Why would it be important to determine whether the bank is a mortgagee in GF? Q: Was the mortgage entered into by the Songcuans here valid? A: No Q: Nevertheless, does this mean that PNB is a mortgagee in GF? A: No, aside from the period, the price for which it was sold was too small as to be considered as realistic sale

Take note here that even if the mortgage was considered as void for not having complied with the requirements under the law, mortgagee in good faith is protected. As emphasized, an exception to this mortgagee in good faith are banks and financing institutions. Banks are expected to be more cautious than ordinary individuals in dealing with lands, even registered ones, since the business of banks is imbued with public interest. It is of judicial notice that the standard practice for banks before approving a loan is to send a staff to the property offered as collateral and verify the genuineness of the title to determine the real owner or owners of the property. Petitioner PNB was informed of the previous TCTs covering the subject property. And the PNB has not categorically contested this finding. It is evident from the faces of those titles that the ownership of the land changed from Corpuz to Bondoc, from Bondoc to the Palaganases, and from the Palaganases to the Songcuans in less than three months and mortgaged to PNB within four months of the last transfer. This should have driven the PNB to look at the deeds of sale involved. It would have then discovered that the property was sold for ridiculously low prices: Corpuz supposedly sold it to Bondoc for just P50,000.00; Bondoc to the Palaganases for just P15,000.00; and the Palaganases to the Songcuans also for just P50,000.00. Yet the PNB gave the property an appraised value of P781,760.00. Anyone who deliberately ignores a significant fact that would create suspicion in an otherwise reasonable person cannot be considered as an innocent mortgagee for value.

Canlas vs CA Q: Wasnt it that a SPA was executed to authorize Manosca to mortgage the property? A: There was intervention of impostor, and it was not through the SPA that the land was mortgaged Q: Can the bank here be considered as mortgagee in good faith? What was the negligence on the part of the

bank? How was it discovered that they were impostors?

It is already settled that the banks and financial institutions are required to exert more diligence as compared to other mortgagees. Respondent bank did not observe the requisite diligence in ascertaining or verifying the real identity of the couple who introduced themselves as the spouses Osmundo Canlas and Angelina Canlas. It is worthy to note that not even a single identification card was exhibited by the said impostors to show their true identity; and yet, the bank acted on their representations simply on the basis of the residence certificates bearing signatures which tended to match the signatures affixed on a previous deed of mortgage to a certain Atty. Magno, covering the same parcels of land in question. The efforts exerted by the bank to verify the identity of the couple posing as Osmundo Canlas and Angelina Canlas fell short of the responsibility of the bank to observe more than the diligence of a good father of a family. The negligence of respondent bank was magnified by the fact that the previous deed of mortgage (which was used as the basis for checking the genuineness of the signatures of the suppose Canlas spouses) did not bear the tax account number of the spouses, as well as the Community Tax Certificate of Angelina Canlas. But such fact notwithstanding, the bank did not require the impostors to submit additional proof of their true identity. The SC also applied here the doctrine of last clear chance in Torts and Damages, the Court finds that it cannot be denied that the bank had the last clear chance to prevent the fraud, by the simple expedient of faithfully complying with the requirements for banks to ascertain the identity of the persons transacting with them. Under the attendant facts and circumstances, Osmundo Canlas was undoubtedly negligent, which negligence made them (petitioners) undeserving of an award of Attorneys fees. However, it cannot be denied that the bank is not considered to be mortgagee in GF. The mortgage here is considered void as it was constituted by an impostor and for failing to exercise the negligence required of banks, the bank cannot be considered mortgagee in GF.

Agricultural vs Yusay Q: Registration is a ministerial act, what do you mean by that? A: The ROD does not exercise discretion in registering mortgages, as it is a ministerial act Atty Sarona: As long as the requirements are duly complied with, the ROD must register the mortgage without exercise of its discretion. Q: In case you have a void mortgage, does the registration thereof cure the invalidity of the mortgge? A: No

Registration is a mere ministerial act, the ROD has no discretion and can refuse as long as the requirements are complied with. Registration is a mere ministerial act by which a deed, contract or instrument is sought to be inscribed in the records of the Office of the Register of Deeds and annotated at the back of the certificate of title covering the land subject of the deed, contract or instrument. The registration of a lease or mortgage, or the entry of a memorial of a lease or mortgage on the register, is not a declaration by the state that such an instrument is a valid




and subsisting interest in land; it is merely a declaration that the record of the title appears to be burdened with the lease or mortgage described, according to the priority set forth in the certificate. The mere fact that a lease or mortgage was registered does not stop any party to it from setting up that it now has no force or effect. In registration and annotation of the mortgage it does not pass on its invalidity or effect. As the mortgage is admittedly an act of the registered owner, all that the judge below did and could do, as a registration court, is to order its registration and annotation on the certificate of title covering the land mortgaged. By said order the court did not pass upon the effect or validity of the mortgage these can only be determined in an ordinary case before the courts, not before a court acting merely as a registration court, which did not have the jurisdiction to pass upon the alleged effect or validity. Even if it is registered, one can still go to court to have it declared as void through annulment of REM, and then pray for the cancellation of the REM. Do remember that with regard to real estate mortgage the provisions that we have discussed before that were common to pledge and mortgage are also applicable to contracts of mortgage, so don't forget Art. 2085 and 2088 among others. Last time we have already identified what a real mortgage is, what are its objects or subject matter and also under Art. 2125, even if it is not recorded the mortgage is nevertheless binding between the parties. And also last time, we discussed the doctrine of a mortgage lien. Aside from Yusay, we also discussed the case of State Investment wherein you remember in that case you have there a registered mortgage and also, a registered right of a buyer. If you remember it, the one who has a preferred right over the subject matter was the buyer even if his deed of sale was not registered. Atlhough, in that case, if you remember, by the perfection of the sale, there is transfer of ownership again distinguish it, it is NOT the perfection of the contract that transfers ownership but the delivery whether actual or constructive. So if there was delivery then there is a subsequent mortgage executed at the time this said mortgage was executed, the mortgagor could not be the owner of the property and therefore, failure to conform with the requirements of 2085, there is no valid contract of mortgage. Now, also relate contract of mortgage with Persons, remember mortgage is an encumbrance so this means that the property relations between the spouses is an absolute community or conjugal partnership of gains, if you remember you have to get the written consent of the other spouse, this applies not only to contracts of sale but even in a contract of mortgage. I think you have Art. 124 governing conjugal partnership of gains and the other one is Art. 96, Absolute Community. Nevertheless, that provision states that sole power to administration do not include disposition referring to sale or encumbrance meaning mortgage without authority of the court or the written consent of the other spouse. In the absence of such authority or consent the disposition or encumbrance shall be void but shall be construed as a continuing offer. So dont forget what you have learned in Persons and Family Relations and relate it to the execution of a real estate mortgage.

Ross v. PNB Q: What would be the effect of such defense absence of the consent of the spouse?

A: Without the consent of the spouse, and since it is the Civil Code which was the applicable law at the time the mortgage was executed, since the spouses property relations is governed by Art. 173 of the Civil Code states that any disposition or encumbrance of a conjugal real property by the husband without the express or implied consent of the other spouse is voidable. The wife can question the encumbrance on the ground that she did not consent to the same. In contrast, if the transaction is governed by the Family Code, the absence of consent by the wife would be void and not merely voidable. Q: Why can you say that in this case the law applicable is the Civil Code? How can you determine that? A: It depends on when the transaction took place, if it is before Aug. 3, 1988 the old Civil Code will be applicable. In this case the mortgage was executed in 1974 as such, the old Civil Code is applicable.

Now, take note with regard to this case what was applied was the Civil Code provisions since the marriage took place during the effectivity of the Civil Code and not during the Family Code and if you remember in Persons and Family Relations, the presumption there is that in the absence of any agreement between the spouses or what we call pre-nuptial agreement shall be considered as a conjugal partnership of gainsaid that any property acquired during the marriage belongs to the conjugal property of the spouses. In this case, a real mortgage executed the wife alleged that her signature therein was forged. However, bare allegations are not sufficient especially when you are alleging fraud or forgery. You should show sufficient proof to support your allegation of fraud or forgery. Moreover, there is a presumption here that the mortgage was regularly executed since the acknowledgment is a prima facie evidence of the execution of the instrument of the document involved since it was duly notarized and is considered as a public document. Now, even if the property was to be considered as an absolute community property wherein the property was acquired, the marriage took place within the effectivity of the Family Code. Again the consent would be required to be in writing which is present in this case. No contrary thereto was shown and therefore the mortgage would still be considered as valid. That is the case of Ross v. PNB. Ross v. PNB: absence of consent of the other spouse in a contract of mortgage executed under the Civil Code (before Aug. 3, 1988), the contract of mortgage is voidable. Now, of course if the written consent was not acquired, it is only the husband who executed the real estate mortgage and the marriage took place under the family code, so absolute community property, remember that was a mortgage which is considered void, the principal obligation will be considered as valid. Where a mortgage is not valid, the principal obligation which is guaranteed by it will not be null and void. What is lost is only the right to foreclose the mortgage and the mortgage can even be used while it cannot be used to foreclose the property it can be used as an evidence of the personal obligation.

Article 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. (1876)

Remember that the registered mortgage is a real right, a right in rem and therefore it is inseparable from the property and therefore enforceable against the whole world. The mortgage attaches not to the owner of the property but to the property itself and therefore the




mortgage follows the property wherever it goes and subsists notwithstanding the change of ownership. It disregards the personality of the owner. Whoever subsequently acquires the property carries with it the obligation to observe the mortgage but take note, it must be registered in order to bond third persons. So it just means even if there is already a mortgage the mortgagor can still sell the property to third persons but again to bind third persons with regard to the mortgage, the mortgage must be registered. And all subsequent purchasers must respect the registered mortgage or that the buyer must know of its existence. So again, there could be a valid contract of sale even if the property has already been previously mortgaged. A mortgage is a real right attached to the property. EXAMPLE: Let us say that you have a real estate mortgage with Giovanni as the debtor-mortgagor and then Ron i the creditor-mortgagee, there is already a mortgage executed by Giovanni over his subject parcel of land. Now, even with that mortgage, even if that obligation still remains unpaid. Giovanni can sell the property to Jordan. That is a valid contract of sale. A mortgage is a real right therefore if the obligation becomes due and demandable Giovanni fails to pay, notwithstanding that the mortgaged property has already been bought by Jordan, Ron can still foreclose the property and Jordan cannot raise as a defense that the he does not owe Ron and that it was Giovanni who owed him and therefore, he cannot foreclose the property he already bought. This defense will only be available to a third person if the mortgage is not registered. But if the mortgage was registered, that defense cannot apply. As we go along, you would notice however that with regard to the obligation itself the third person has no personal obligation which just sans that the mortgagee can foreclose the property but if there is a deficiency, the proceeds of the sale is not sufficient to cover the amount of the principal obligation, Ron, the creditor-mortgagee, can no longer collect from Jordan because it is the personal obligation of Giovanni, the debtor-mortgagor to pay for the deficiency. So that is the nature of a contract of mortgage being a real right. The right attaches to the property and not to the owner thereof. The only instance however, that the buyer can be held liable to pay, is when there is a novation. For instance in our example, if Jordan becomes the debtor of the obligation of Giovanni. So if you remember in novation there are three instances one of which is the substitution of the person of the debtor, if that would be the instance, then that would be the only time that Ron as credtitor-mortgagee can collect from Jordan for the deficiency.

Article 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. (1877)

So this is another instance that would show that the mortgage is indeed inseparable from the property. Article 2127 discusses the extent of the mortgage. Remember that upon the time the obligation becomes due and demandable the creditor can demand the payment from the debtor. Now, the mortgage extends to all its natural accessions, improvements, growing fruits, rents or income, even proceeds of insurance if the property should be destroyed, and in case the property is expropriated,

the mortgage extends to the just compensation that will received by the mortgagor. Now, with regard to the fruits. If the fruits were already harvested before the obligation becomes due and demandable, of course that would not be part of the mortgage. However, if the fruits are attached to the property when the obligation becomes due, then they will form part of the mortgage. To exclude these fruits, improvements, an accessions there must be an express stipulation in the real estate mortgage. Otherwise, the following are deemed included in the absence of an express stipulation excluding the following they will be deemed included:

1. New paintings 2. Fruits except for those collected before the

obligation falls due or those removed and stored when it falls due.

3. Accrued and unpaid rents, by accrued, we mean those already earned but not yet received.

4. Buildings and machineries belonging to the debtor-mortgagor installed on a mortgaged issuance central. This should be familiar to you, one of the cases in property law. All objects or materials permanently attached to the mortgaged building although they have been placed after the execution of the mortgage.

5. Another instance, if a more costly building is constructed in place of a torn down building.

Also, we have mentioned last time the concept of an after acquired property. In an after acquired property, this is an exception to the rule that with regard to a mortgage, the mortgagor must be the owner of the property. Such stipulation should include as after acquired property subject to mortgage is valid. Usually this refers to perishable, wear and tear or subject matters that can be replaced with others. Such stipulation is valid. EXAMPLE: If mortgagor Giovanni would subject his properties for instance his groceries, where he owns the grocery store, the inventory or stock that he subjected to the mortgage, but of course that would be chattel mortgage, nevertheless a mortgage, there will be a replenishment that will take place. So what happens is that at the time of the execution of the mortgage, what the mortgagor owns is the present inventory now later on when the obligation becomes due and demandable those stocks that were present in the inventory at the time of the execution of the mortgage has already been sold but these stocks were replenished with new ones. So just the same, those stocks which were used to replenish are subject to the mortgage, which is known as after acquired properties. Also last time, we emphasized that the general rule that with regard to foreclosing a mortgage it must be limited to the amount mentioned in the mortgage however, as an exception, the amount given as consideration of the contract is not really the amount of which the mortgage may stand as security for as long as there is an intention on the part of the partied to secure future loans or advancements and other indebtedness wherein we have the concept of a blanket mortgage or a dragnet clause.

Producers Bank v. Excelsa Q: What is the basis for the action to annul? A: According to Excelsa, the real estate mortgage only covered the loan and not the drafts. Q: So what if it covers only the loan? A: This means that whatever the liabilities from the drafts of the respondent, the real estate mortgage should not answer for such or stand as a security to the same.




Q: Was the loan already paid? A: No. Q: However, what was the basis for the foreclosure of the mortgage? The drafts? A: Yes. Q: What was the ruling of the curt? was the foreclosure valid? A: The SC held in this case that the foreclosure is valid in saying that the real state mortgage here also secures the drafts since the real state mortgage contains a blanket mortgage clause or a dragnet mortgage clause. Q: What do you mean by dragnet clause? A: A dragnet clause is one which is specifically phrased as to subsume all debts of past and future origins. It is strictly construed and operates as a convenience and accommodation to the borrower as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. Q: How was the Supreme Court able to conclude that the real estate mortgage here includes a dragnet clause? A: It was the clause which states For and in consideration of those certain loans, overdraft and/or other credit accommodations on this date obtained from the MORTGAGEE, and to secure the payment of the same, the principal of all of which is hereby fixed at FIVE HUNDRED THOUSAND PESOS ONLY (P500,000.00) Pesos, Philippine Currency, as well as those that the MORTGAGEE may hereafter extend to the MORTGAGOR, including interest and expenses or any other obligation owing to the MORTGAGEE, the MORTGAGOR does hereby transfer and convey by way of mortgage unto the MORTGAGEE, its successors or assigns, the parcel(s) of land which is/are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the MORTGAGOR declares that he/it is the absolute owner, free from all liens and encumbrances. Q: With that, is the foreclosure valid or not? A: The SC held that the Respondent executed a real estate mortgage containing a "blanket mortgage clause," also known as a "dragnet clause." It has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. Q: With regard to the 250,000 was it already paid? A: No. Q: Do you have here a dragnet clause? A: Yes. Q: Why can you say that we have a dragnet clause here? A: This case the agreement between the parties which states that to secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the

Mortgagee, whether direct or indirect, principal or secondary.

So we have here the concept of a blanket mortgage clause also known as a dragnet clause. Mortgages which includes this dragnet clause is given to secure future advancements are valid and legal contracts, and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. If you look at the provision in the real estate mortgage while it says there the principal of all of which is hereby fixed at 500,000, you would see that the intention of the parties here that the mortgage is to secure other obligations, the 500,000 pesos as well as those which the mortgagee hereafter may extend to the mortgagor including interests and expenses or any other obligation owing to the mortgagee. So if you compare it to contracts of guaranty or suretyship, its akin to that of a continuing guaranty or suretyship. Again, the same purpose, it enables the parties to provide continuous dealings when the extent of which may not be known or unliquidated at that time, and therefore, they avoid the expense or inconvenience of executing a new security of each transaction. It operates as a convenience and accommodation to the borrower as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. Also it is stated here that petitioner was not precluded from seeking the foreclosure of the real estate mortgage based on the unpaid drafts drawn by respondent. And with regard to notice in their agreement, petitioner was merely required to furnish respondent a notice but no obligation to ensure that respondent actually receive the same. in other words, the petitioner, producers bank here complied with all the requirements both under the law as well as their agreement. Just take note of this case, the Court again, emphasizes the concept of a dragnet mortgage clause is valid. Again, it is specifically phrased to subsume all debts of past and future origins. In this case, again, there was an amount stated or fixed to 250,000 but it also includes all hose that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary. However, take note that such clauses are carefully scrutinized and strictly construed. Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. The real estate mortgage secures or covers not only the 250,000 but also future credit facilities. However, while the dragnet clause is valid, we have here other loans which were covered by another security other than this real estate mortgage with a dragnet clause. In other words, with regard to preference the specific property mortgaged to cover the other two obligations would have been first applied or foreclosed before availing of what is present in the blanket mortgage clause. Again, take note of how these clauses should be carefully interpreted and construed strictly and carefully scrutinized. More often than not, these real estate mortgage is a contract of adhesion, banks or financial institutions already have a pro forma mortgage contract and you would just fill in the blanks as in the case of Prudential vs




Alviar. While contracts of adhesion are also considered as strictly construed and carefully scrutinized, again, just because it is a contract of adhesion it does not mean that there is vitiated consent on the part of the mortgagor.

Article 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. (1878)

Mortgaged credit, this refers to the right of the mortgagee. The right of the mortgagee over the property mortgaged may be alienated or assigned to a third person in whole or in part. EXAMPLE: Ron here assigned his rights creditor-mortgagee in favor of Julian. So what do we have here? If Giovanni fails to pay the obligation then Julian being the assignee of the rights of Ron can foreclose the property even if he is not the original creditor. That right is provided under Article 2128 wherein the assignee can foreclose the property subject to the mortgage since the right of the mortgagee has already been assigned to him. The alienation or assignment is valid even if it is not registered. The assignment between Ron and Julian. Registration again, is only necessary to affect third persons. Now on the part of the mortgaged property again, on the part of Giovanni as mortgagor, he can sell it to third person. He can alienate the property because again in a mortgage there is no transfer of ownership. A stipulation saying that upon non-payment of the obligation that the property shall automatically be appropriated or forfeited in favor of the creditor- mortgagee is not valid, it is void being contrary to public policy and law. And, we have discussed that under Art. 2128 the concept of pactum commisorium. If the debar cannot pay and there was a mortgage executed, follow the procedures outlined by law with respect to the foreclosure of the mortgage.

Vega v. SSS Q: What is Article 1237? A: Article 1237 provides: Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. Q: Can we apply that article to the facts of this case? A: No. Article 1237 cannot apply in this case since Reyes consented to the transfer of ownership of the mortgaged property to the Vegas. Reyes also agreed for the Vegas to assume the mortgage and pay the balance of her obligation to SSS. Even if paragraph 4 of the mortgage contract covering the property required Reyes to secure SSS consent before selling the property is a stipulation that is valid and binding, in the sense that the SSS cannot be compelled while the loan was unpaid to recognize the sale, it cannot however, be interpreted as absolutely forbidding her, as owner of the mortgaged property, from selling the same while her loan remained unpaid. Such stipulation contravenes public policy, being an undue impediment or interference on the transmission of property. Q: What was the nature or basis of that public auction? Why was the property sold by the sheriff? A: RTC issued a writ of execution against Reyes and its Sheriff levied on the property in Pilar Village.

Q: So what is a foreclosure sale by virtue of a real estate mortgage? Was the sale considered as an extrajudicial foreclosure of property? Did Reyes execute a real estate mortgage in favor of PDC? A: No, Reyes did execute a real estate mortgage in favor PDC. She acquired the property through the loan she obtained from SSS and to secure said loan, it was the property acquired from PDC which was mortgaged in favor of SSS. Q: So with that, there was a sale in favor of PDC in a public auction by virtue of an execution sale not extrajudicial foreclosure sale? And then on the other hand, we have here Vega occupying the property in the concept of an owner. Now, between PDC and Vega, who has a better right to the property? A: The spouses Vegas has a better right to the property over PDC because they already became owners of the property when the said property was sold to them by the Reyes. Q: Is it possible for PDC to considered as a purchaser in good faith? A: No since at that time that PDC filed an action for a sum of money against the Reyes they already had a notice of the adverse claim of the Spouses Vega.

So what do you have here? We have here Reyes who borrowed money from SSS and mortgaged their property subsequently sold to Spouses Vegas but apparently the Reyes still has a debt to PDC or Pilar Development Corporation. And thereafter, PDC filed an action for sum of money. Since Reyes cannot pay, her properties were sold at a public auction. Remember here that the mortgage in favor of SSS, the mortgagor was Reyes. And even if it was annotated remember that it was subsequently released by SSS by virtue of the payment made by Vegas. Now, in other words, when PDC looked at the title, the right of spouses Vegas was not annotated therein. Nevertheless, PDC cannot be considered as purchaser in good faith or cannot take comfort in the fact that the property remained in the spouses Reyes name when PDC bought the same in the sheriff sale. PDC cannot assert that it is a buyer in good faith since it had notice of the Vegas claim on the property prior to such sale. Therefore, even if the deed between Reyes and Vega was not registered, Vega would nevertheless have a better right over PDC. This is one thing you have to consider in the execution of a real estate mortgage, a deed of assignment with an assumption of mortgage, deed of sale with assumption of real estate mortgage. You purchase a real estate property but you still have a debt to financial institutions, PAGIBIG, SSS etc. Now, any transaction, or such deed of assignment with assumption of real estate mortgage is valid between the parties who executed the same. On other words, the owner sells the property to the buyer and if there is still a remaining balance the buyer will pay for the same. However, one thing you should take note of here is, ask the mortgagee, in this case it was SSS. Remember what was the rule here of SSS? They will not recognize assignment of mortgage. What do you mean by that? The assignment is valid between the parties but in the record of SSS they will not recognize it, in the sense that when the mortgaged property is already released they have then have the obligation to release the property to the buyer who bought it from the original debtor-mortgagor. For their part they are concerned that the loan be paid by the owner-mortgagor. There may be other financial institutions or real estate developers which would acknowledge such documents. For instance, in some cases, if the buyer still has not paid for the property and is till paying, and the one who pays for the property is the




one who assumes the debt so that there would only be one transfer, which is directly to the buyer. So you have to ask, for practicality reasons, ask the mortgagee, what are the terms or requirement with regard to such arrangement. Now regardless of the procedure or arrangement on the part of the mortgagee, it is better on the part of the subsequent buyers to have that deed of assignment or deed of sale with assumption of mortgage registered in the title. In this case, Vegas was just lucky that when PDC purchased the property it already had knowledge prior to the sale. What if PDC had no knowledge of the same? And let us say that Vega was not in possession of the property, then you could have PDC as an innocent purchaser for value. It would be Vega who would be financially disadvantaged because they were the ones who paid the debt of Reyes to SSS. So as the third person being the innocent purchaser for value would have a better right. The only remedy available here to the subsequent buyer is to go after the original owner. The problem here Reyes is no longer in the Philippines. How can you recover from Reyes? The subsequent buyer would have no recourse against Reyes unless Reyes has other properties. So you should consider this, there are a lot of assumption of mortgage that happens, so you have to make sure to ask the if it will be acknowledged by the mortgagee or the financial institution and then aside from that, make sure that you register it. As in this case, the assignment or the deed of sale with assumption of mortgage was not registered then third persons can be considered as innocent purchaser for value consequently, they would be considered to have a better right.

Article 2129. The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formalities which the law establishes. (1879)

Remember for a valid contract of mortgage there is no requirement for the delivery of the possession to the creditor-mortgagee. However, there is nothing that would prohibit the parties from turning over the possession. General Rule: It is not required that the possession be transferred to the creditor-mortgagee. Exception: Stipulation by the parties that possession be transferred to the creditor-mortgagee. Now, with that this also means in our example: Giovanni could sell the property to Jordan, deliver the property to Jordan and Jordan will be in possession of the subject property. Under Art. 2129, the creditor may claim the payment of the credit to secure the property even if it is already in possession of a third person it may be proceeded against by the creditor as payment of the obligation. So what does this mean? The illustration there in your book, the obligation of the debtor there is 600,000. The value of the property is 500,000 the creditor can try to collect from the third person the value of the property which is 500,000. However, prior demand is required of the debtor. The creditor has to first demand debtor-mortgagor before proceeding against the third person who purchased the mortgaged property. Now, if you demanded payment from the third person and the third person pays, this third person can seek reimbursement from the principal debtor. If there was a foreclosure proceeding, debtor did not pay, Jordan tells the third person that he will also not pay, the property is foreclosed and the deficiency will not be the obligation of the third person but rather the creditor can demand the deficiency to the principal debtor. The third person cannot be held for the deficiency unless again, there is a novation in the contract wherein there is a substitution in the person of the debtor.

Article 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void. (n)

Remember the ownership remains with the debtor-mortgagor and 2130 is clear that any stipulation prohibiting the mortgagor from alienating the immovable mortgaged is void. Do recall the case of Vega v. SSS. There was a stipulation there in the mortgage, requiring Reyes to secure SSS consent before selling the property. What was the ruling of the court? Although such stipulation is valid and binding, in the sense that SSS cannot be compelled while the loan is unpaid to recognize the sale, it cannot be interpreted as absolutey forbidding her otherwise, it would be in contravention to Article 2130. As owner of mortgaged property requiring the consent of SSS to the sale while her loan was remain unpaid, such stipulation contradicts public policy and is deemed as an undue impediment or interference on the transmission of the property. In other words, if such consent would be required before the mortgagor could sell it to third persons while it may be valid, it must not be used in contravention of Art. 2130 wherein what would happen the mortgagee can always withhold its consent and in effect, it would be forbidding the owner from alienating the immovable mortgages. Therefore, that would be considered as void. In addition, if the mortgagor wishes to sell the property and it is required the he secures the consent of the mortgagee, otherwise he can be liable for estafa which is why the mortgagor cannot be prevented from having the right to sell the property mortgaged. How about executing a second or subsequent mortgage? It is also valid to secure a second mortgage over a property already mortgaged. For example, Giovanni already mortgaged his property in favor of Ron, what if Giovanni also mortgaged the same property after this mortgage to Ron, in favor of Nikki? Is it valid? Yes. But what we have here, we have the first mortgagee Ron and the second mortgagee, Nikki and therefore the rights of the second mortgagee will be subordinate to the rights of the first mortgagee. If the debtor cannot pay his debts and in the order of payment the first mortgagee is preferred. The proceeds of the property would be used to pay whatever is due to the first mortgagee any excess can be paid to the second mortgagee and so on and so forth. Usually what would happen here? It is possible that the second mortgagee here, Nikki, the property will be foreclosed by Ron as the first mortgagee. It is possible that Nikki will redeem the property or pay the obligation of Giovanni because he has an interest in the obligation. And that would be included in the obligation of Giovanni which can be part of the security of the second mortgage. Under the law on obligations and contracts that the creditor is not bound to accept payment from a third person but if Nikki offers to pay the obligation of Giovanni just so that the property will not be foreclosed in favor of Ron, then that would be one of the instances wherein Ron would be compelled to accept payment from Nikki because Nikki here has an interest in the obligation. The first mortgagee cannot refuse payment by a second mortgagee because the second mortgagee is interested in the extinguishment of the obligation. Is it really possible to have two mortgages over one property? Yes, but on your part, as the second mortgagee, you already have notice of the first mortgage. And what happens? If the principal obligation of the first mortgage becomes due and demandable and there would be foreclosure proceedings, if the proceeds of the foreclosure sale is merely enough or insufficient to cover the obligation, the second mortgagee no longer has a security. That is the disadvantage on the part of the second mortgagee. Probably what would happen here, the property subject to




the first mortgage secures a principal obligation lesser than that of the value of the property. So if the second mortgagee looks at the 1st mortgage, it would be okay on his part because again if the property would be foreclosed only a portion thereof can cover the payment of the principal obligation. What about the right of first refusal? Before Giovanni can sell it to Jordan, Ron will have a right of first refusal in which Giovanni must first offer the sale to Ron under the same terms and conditions. Such stipulation is valid and will not affect the contract of mortgage. It is also not in contravention of Article 2130. Mortgagor has every right to sell the mortgaged property even without securing the consent of the mortgagee and therefore, if there is a right of first refusal, that right of first refusal will also be valid. A sale made in violation of the mortgagees right of first refusal is considered as a rescissible contract. Do take note that for mortgage to be valid as against third persons as provided in the Civil Code the said mortgage must be registered and such registration serves as a constructive notice to the whole world that the has a lien or has been encumbered and a person dealing with a property has the obligation to look at the title and see for himself whether or not the property is encumbered. Some people would no longer opt to have it annotated on the title because there are subsequent expenses to have it annotated. Nevertheless, although it is not required for validity, it should be done because it is also for your protection as your right can bind third persons. However, do take note that even if the mortgage lien was not annotated on the title but the buyer has knowledge of the existence of such lien, that actual knowledge is deemed a constructive notice and binds the third person, the buyer can no longer be considered as a buyer in good faith. Another situation, Giovanni sold the property to Jordan and the sale was duly notarized but not yet registered. So in the title, the property still belongs to Giovanni. Thereafter, Giovanni mortgages the property to Ron, since in the title Giovanni appears to be the owner of the property, Ron accepted the offer of the said mortgage. But in this instance a sale duly notarized over the mortgaged property already took place. If Giovanni fails to pay his obligation to Ron and Ron proceeds to foreclose the property. What is the effect here? Can Jordan oppose the foreclosure of the property? Remember, as what I have emphasized earlier, sale itself does not transfer ownership, since ownership is not required for the perfection thereof we have to take not here that there was already a deed of sale duly notarized, execution of a public document which constitutes constructive delivery so therefore at the time Giovanni mortgaged the property in favor of Ron, Giovanni was no longer the owner of the subject property as a result, there is no valid mortgage in favor of Ron to speak of. But, the principal obligation subsists. Take note that in this case, the deed of sale in favor Jordan was not even registered. Even if the mortgage in favor of Ron was registered, there is still no valid contract of mortgage because at the time the mortgage was executed, the mortgagor is no longer the owner of the property. Take note again, the concept of after acquired properties. As a general rule, after acquired properties cannot be the subject of a contract of mortgage because at the time of the mortgage you have to be the owner of the property, in this case the mortgagor acquires the property after the mortgage was executed. But, as mentioned earlier, if you are talking of inventories which are to be replenished as in the ordinary course of business then that would be allowed as a valid object in a contract of chattel mortgage.

Article 2131. The form, extent and consequences of a mortgage, both as to its constitution,

modification and extinguishment, and as to other matters not included in this Chapter, shall be governed by the provisions of the Mortgage Law and of the Land Registration Law. (1880a)

In fact we have the Chattel Mortgage Law and the Land Registration Law. Governing laws:

a. Act 3135 for Real Estate Mortgage b. Act 1508 for Chattel Mortgage c. PD 1529 for Land Registration d. General Banking Law of 2000

- where some provisions therein involves the foreclosure of mortgages

e. Rule 68 of the Rules of Court- Extrajudicial foreclosure of property

Take note of those rules in relation to the foreclosure of properties. What are the remedies available to a creditor if the debtor cannot pay him?

1. File an action for collection of a sum of money. - In this case he abandons the mortgage.

Remember the debtor who executed a real estate mortgage, he cannot compel the creditor to foreclose the property as the creditor can opt for a collection of sum of money therefore he abandons the mortgage. Here however, while the creditor files an action for collection of sum of money, the creditor can pray for the issuance for a writ of attachment mortgaged.

2. He can institute foreclosure proceedings on the

mortgaged property. NOTA BENE: But the remedies available to the creditor are alternative and not cumulative nature therefore, he can only opt to exercise either of the remedies but at no instance can he exercise both.

FORECLOSURE PROCEEDINGS

Foreclosure is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure which the mortgagee was given where the mortgagor is in default in the payment of said obligation. Foreclosure proceedings has in their favor the presumption of regularity and therefore, the burden of evidence to rebut the same is on the party that seeks to challenge the proceedings. Two kinds of foreclosure proceedings: (1) Extrajudicial- foreclosure done without the aid of the

court; governed by Act 3135

(2) Judicial- is a foreclosure filed before the court and governed by Rule 68 of the Rules of Court.

Judicial vs Extrajudicial foreclosure:

Extrajudicial

Judicial

As to right of redemption of debtor-mortgagor

has a right of redemption no right of redemption but only equity of redemption ion

no right of redemption but only equity of redemption




As to the law applicable

Act 3135 Rule 68 of the Rules of Court

As to period of redemption

1 yr. period from date of registration Debtor mortgagor is a juridical entity: 3 months from the

90-120 days from date of entry of judgment ; even after the 90-120 period but before the confirmation of sale Mortgagee is is a banking institution 1 yr. from the date of entry judgment

Spouses Rosales v. Spouses Suba Q: Why was the property here considered to be subject to a judicial foreclosure? Was there a mortgage? A: There was an equitable mortgage. Q: Why was it considered as an equitable mortgage? What was the contract executed between the parties? A: The parties executed a deed of sale but the court considered said deed to be an equitable mortgage. The Court defined an equitable mortgage as one which although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law. An equitable mortgage is not different from a real estate mortgage, and the lien created thereby ought not to be defeated by requiring compliance with the formalities necessary to the validity of a voluntary real estate mortgage.[6] Since the parties transaction is an equitable mortgage and that the trial court ordered its foreclosure, execution of judgment is governed by Sections 2 and 3, Rule 68 of the 1997 Rules of Civil Procedure, as amended and not under Act 3135 on extrajudicial foreclosure. Q: Why do we have to determine whether what we have here is a judicial foreclosure or an extrajudicial foreclosure? A: It is important to determine because the right of the redemption of the debtor-mortgagor would depend on whether or not what exists is a judicial foreclosure or extrajudicial foreclosure over the property. Q: What do you mean by equity of redemption under judicial foreclosure? A: As provided under Rule 68 of the Rules of Court, the mortgagor is provided not less than 90 days and no more than 120 days from the entry of judgment to retain ownership over the property and extinguish the obligation and as long as there is no confirmation of sale by the court. However, in this case, there was already confirmation of the judicial foreclosure sale in favor of Spouses Suba therefore, the Spouses Rosales can no longer redeem the property.

Here we have an equitable mortgage under Article 1602, provisions regarding sale. And an equitable mortgage is not any different from a real estate mortgage because the intention of the parties is to secure a principal obligation. Since the transaction between the parties is an equitable mortgage the trial court ordered its foreclosure and execution of judgment as provided under Rule 68. Right of redemption is not recognized under a judicial foreclosure. In a right of redemption, the mortgagor has a

one year period from the date of the registration of sale to redeem the property. Here, since it was a judicial foreclosure, you only have equity of redemption. Right to redemption is not recognized in a judicial foreclosure except when the mortgagee is a banking institution. Where the foreclosure is judicially effected no equivalent right of redemption exists, what we have here is only an equity of redemption wherein it gives the mortgagor 90 from the date of entry of judgment or even after the foreclosure sale but prior to its confirmation, to extinguish the obligation and retain the property.

Section 2, Rule 68. Judgment on foreclosure for payment or sale. If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment. (2a)

General Rule: No right of redemption in judicial foreclosure after the confirmation of the sale mortgagor can no longer redeem the property. Exception: Mortgagee is a banking institution as provided under the banking laws, even if it is a judicial foreclosure as long as the mortgagee is a bank the mortgagor has the right to redeem the property within one year reckoned from the date of registration of the foreclosure sale. Judicial Foreclosure under Rule 68

1.) The mortgagee would file a a petition for judicial foreclosure in the court which has jurisdiction over the area where the property is situated.

2.) The court will conduct a trial. If, after trial, the court finds merit in the petition, it will render judgment ordering the mortgagor/debtor to pay the obligation within a period not less than 90 nor more than 120 days from the finality of judgment.

3.) Within this 90 to 120 day period, the

mortgagor has the chance to pay the obligation to prevent his property from being sold. This is called the EQUITY OF REDEMPTION PERIOD.

4.) If mortgagor fails to pay within the 90-120 days

given to him by the court, the property shall be sold to the highest bidder at public auction to satisfy the judgment.

5.) There will be a judicial confirmation of the sale.

After the confirmation of the sale, the purchaser shall be entitled to the possession of the property, and all the rights of the mortgagor with respect to the property are severed or terminated. The equity of redemption period actually extends until the sale is confirmed. Even after the lapse of the 90 to 120 day period, the mortgagor can still redeem the property, so long as there has been no confirmation of the sale yet. Therefore, the equity of redemption can be considered as the right of the mortgagor to redeem the property BEFORE the confirmation of the sale.

6.) The confirmation of the sale is a hearing where the parities will appear and the mortgagor can




assail the validity of the option or question the legality thereof.

7.) There will be execution of the judgment, application of the proceeds and the issuance or execution of the sheriff certificate.

8.) Thereafter, a registration of the certified true copy of the final order of the court confirming the sale.

* Remember the equity of redemption in a judicial foreclosure will not stop on the 120th day, even if it is not within the 90-120 day period for as long as there is no confirmation of the sale, the mortgagor can redeem the property by paying the amount of the debt and not the purchase price of the sale. Who can redeem the property?

1.) The mortgagor 2.) One who is in privity of the mortgagor 3.) The successors in interest of the mortgagor. 4.) A person whom the debtor has transferred his

right 5.) A person whom the debtor has contained his

interest in the subject matter 6.) One who succeeds to the interest of the debtor 7.) One who is a joint debtor or joint owner of the

subject matter. In case of deficiency in a judicial foreclosure, the creditor-mortgagee can recover within ten years from the time the right of action accrues. In fact you can also recover within the 90-120 period. The deficiency must be incorporated in the deficiency judgment in a judicial foreclosure. In other words, you have to look at the judgment of the court with respect to the deficiency judgment, the proceeds there is still a balance which shall be paid by the debtor-mortgagor. In summary: Judicial foreclosure General Rule: equity of redemption; 90-120 from date of entry of judgment AND as long as the there is no confirmation sale. Exception: right of redemption if the mortgagee is a bank (1 year from registration of sale) Extrajudicial foreclosure General Rule: Right of redemption (1 year period from registration of sale) Exception: equity of redemption applicable if the mortgagor is a juridical entity; 1 year period of redemption will not apply, the juridical entity can pay the obligation within but not after registration until registration but not more than 3 months after foreclosure. Act 3135 Extrajudicial Foreclosure Procedure: 1.) File an application with the executive judge who has the jurisdiction over the property. 2.) Requisite posting of notice of the sale; if the property is valued at 400 pesos; if more than 400 pesos publication of the notice of sale once a week for at least three consecutive weeks in a newspaper of general circulation. 3.) Clerk of court issues a certificate of payment and the application is raffled among the sheriff. 4.) 1st sale, there must be at least two bidders. If there is only one bidder or no one bids, the sale will be postponed. 5.) In the 2nd sale, one who emerges as the highest bidder the certificate of sale will be approved by the

executive judge or the vice executive judge in his absence and is issued to the winning bidder. 6.) Registration of the sale and from this date will the 1 year redemption period will run; or if a mortgagor is a juridical entity three months. 7.) If the redemption period expires, the clerk will archive the records. *this is why I mentioned before, in an extrajudicial foreclosure, it does not technically mean that there is no court intervention since you still you have to file a petition with the judge. It is only that there is no longer a hearing but mainly summary procedures to be followed. Judicial foreclosure is under special civil action. Extra judicial foreclosure is under Act 3135. Act 3135 is an act to regulate the sale of property under special powers inserted in or annexed to real estate mortgages. We have here an extrajudicial foreclosure.

SECTION 1. When a sale is made under a special power inserted in or attached to any real-estate mortgage hereafter made as security for the payment of money or the fulfillment of any other obligation, the provisions of the following election shall govern as to the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power.

For you to be able to promptly advance an execution foreclosure of real estate mortgage, make sure that in the same contract of real estate mortgage or attached thereto there is a special power or authority given by the mortgagor to the mortgagee to foreclose or sell the subject property in case the debtor fails to pay. In the absence of that authority you cannot apply for extrajudicial foreclosure. The only remedy would be by judicial foreclose or an action for sum of money.

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

Section 3 provides for the notice and publication requirement. This must be strictly complied otherwise, failure to comply with this provision would result to the nullity of the foreclosure proceeding.

SECTION 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.

Evidence there will be Affidavit of publication as well issues with regard to this notice. Section 4 with regard to the time of the public auction under the direction of the sheriff, justice or auxiliary justice but usually sheriff.

SECTION 4. The sale shall be made at public auction, between the hours or nine in the morning and four in the afternoon; and shall be under the direction of the sheriff of the province, the justice

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