Real Mortgage

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.

The last case we discussed is the the case of Agricultural v. Yusay wherein we emphasized that registration of a mortgage is a matter of right and therefore, it is a ministerial act distinguished from a discretionary act where in such registration is by which a deed, contract or instrument is sought to be inscribed in the records of the Register of Deeds and annotated at the back of the certificate of title covering the land subject of the deed of mortgage contract or instrument.

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.

Now we have the case of 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 not 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 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 Ros v. PNB.

Ros 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, its 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 torned 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.

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.

Prudential Bank v. Alviar

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

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, 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. (1159a)

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 vegas.

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 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 sich 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, Vgeas 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 th 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 ebtor. 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 estaffa 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 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.

*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.

Distinctions between Judicial and Extrajudicial foreclosure:

1.) As to right of redemption. (a) Judicial- debtor-mortgagor has a right of redemption (b) Extrajudicial- no right of redemption but only equity of redemption

Spouses Rosales vs 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. 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.

Just an overview of the procedure under a judicial foreclosure.

1.) Essentially, you would file an action with RTC which has jurisdiction over the location of the subject matter.

2.) Thereafter, the court would order the payment of the debt within 90-120 days from the entry of judgment, after which, one can already exercise the equity of redemption.

3.) If the mortgagor does not pay, the court orders the sale of the property to the highest bidder and then the court calls the parties for the confirmation of the sale.

4.) 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.

5.) Afterwhich, there will be execution of the judgment, application of the proceeds and the issuance or execution of the sheriff certificate.

6.) 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? The mortgagor, or one who is in privity of the mortgagor, or the successors in interest of the mortgagor. He can be a person whom the debtor has transferred his right, a person whom the debtor has contained his interest in the subject matter, one who succeeds to the interest of the debtor, 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: 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.

> covered by Act 3135

Act 3135

Procedure:

1.) File an application with the executive judge who jurisdiction over the property.

2.) Requisite posting of notice of the sale if 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.