Chapter 9. Real Estate Mortgage A. General Concepts Art. 2085. Essential requisites of a mortgage: 1.

That they be constituted to secure the fulfilment of a principal obligation; 2. That the mortgagor be the absolute owner of the thing mortgaged; 3. That the persons constituting the mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. Art. 2087. Also essential that when the principal obligation becomes due, the things mortgaged may be alienated for the payment of the creditor. Real Estate Mortgage (or Real Mortgage) Real security transaction; Constituted to secure the fulfilment of a principal obligation by the absolute owner of immovables or alienable real rights who has free disposal or legally authorized to do so; Subjects the collateral to the condition that when the principal obligation becomes due, the collateral may be alienated for payment to the creditor; B. Form of Real Estate Mortgage Art. 2125. In addition to requisites in 2085, the document in which it appears must be recorded in the Registry of Property. If instrument not recorded, mortgage nevertheless valid between parties; The persons in whose favour the law establishes the mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized. Art. 2131. Governed by Mortgaged Law and Land Registration Law: Form Extent and Consequences of a mortgage, both as to its: o Constitution, modification, and extinguishment, and o As to other matters not included in this Chapter. Unregistered (or unrecorded) mortgage: Binds the parties to the mortgage; But on gives the mortgagee the right to demand the execution and recording of the real estate mortgage; To bind third parties, a real estate mortgage must be recorded in the Registry of Property. C. Obligations Secured General Rule: Real estate mortgage limited to the principal obligations mentioned in the contract of real estate mortgage;

Literal accuracy not required but description must be correct and full enough from its four corners to direct attention to the sources of correct information, and must not mislead or deceive; Terms must be sufficiently clear to put all parties who may have occasion to deal with the collateral upon inquiry; Exception: Contracts for future advancements (or after-incurred obligations or future debts) but for so long as these debts that are yet to be contracted are also accurately described; Most real estate mortgages contain dragnet/blanket mortgage clauses; They are specifically phrased to subsume all debts, whether past or future; Although they are strictly construed, the real estate mortgage where they are contained is a valid and legal contract; The amounts stated as consideration in the real estate mortgage do not limit the amounts for which the real estate mortgage may stand as security if from the four corners of the whole instrument the intent to secure future and other indebtedness can be gathered; Continuing security: real estate mortgage given to secure future debts; not discharged by repayment of the amount named in the real estate mortgage, until the full amount of the principal obligation is paid; Prudential Bank v Alviar and Alviar 2005 Spouses Alviar owned a parcel of land in San Juan. They obtained a loan worth 250k from Prudential Bank and constituted a real estate mortgage on their land. They subsequently execute a promissory note for the loan which provided that it was secured by the real estate mortgage on the land. Later, they executed a 2nd promissory note for 2.64 million which provided that it was secured by a holdout on the mortgagors foreign currency savings account and that the mortgagors passbook is to be surrendered to the bank until the amount secured by the hold-out is settled. They then executed a 3rd promissory note worth 545k for Donalco Trading (which the spouses were officers in) which loan was secured by Clean-Phase out TOD CA 3923 which means that the temporary overdraft incurred by Donald Trading with the bank is to be converted into an ordinary loan in compliance with a Central Bank circular directing the discontinuance of overdrafts. In March 1977, the bank informed Donalco Trading of its approval of a straight loan of 545k, proceeds of which was to liquidate the outstanding loan of 545k TOD. The loan was secured by a deed of assignment on two promissory notes executed by Bancom Realty Corp with Deed of Guarantee in favourof AU Valencia and Co

and the chattel mortgage on various heavy and transportation equipment. In March 1979, the spouses paid the bank 2M to be paid to obligations of Alviar Realty and for the release of two lots. The bank acknowledged and released the mortgaged over the two properties. In 1980, the bank moved to extrajudicially foreclose the mortgage on the land in San Juan. It assessed that the spouses outstanding balance on the 3 promissory notes is 1.6 million. The spouses then filed a complaint for damages with prayer of writ of injunction. They claim that they paid their principal loan secured by the mortgaged property, thus the mortgaged should not be foreclosed. Bank, for its part, said that the 2 million payment in 1979 was payment not by them but by Alviar Realty which had a separate loan secured by a separate mortgage. In 1994, TC dismissed the complaint and ordered the foreclosure but upon MFR, it set aside its earlier decision. CA affirmed. It ruled that while a continuing loan based on only one security or mortgage is a common practice in financial and commercial institutions, such agreement must be clear and unequivocal. At case, the parties agreed on different promissory notes with specific security of each loan. Thus, the foreclosure of the property for the three loans is improper. However, it found that the spouses have not yet paid the 250k loan since the 2M was issued for the obligations of Alviar Realty. Petitioner maintains that the dragnet clause in the real estate mortgage covers not only the 250k but also the other two notes, thus it claims it acted within the terms of the contract. That although the 2nd loan was secured by a foreign savings account, there is no law which prohibits an obligation from being covered by more than one security. As for the third, the security was not exclusive. Respondents say that the loans are covered by separate securities and the blanket mortgage cause applies only to loans obtained jointly by the respondents and not to loans obtained by other parties. Also, contract of adhesion. Issue: 1. 2. 3.

documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera; Dragnet clause construed here: Contrary to CA, the parties intended the mortgage to secure not only the 250k but also future credit facilities and advancements that may be obtained by the respondents; Since its clear and unambiguous, no need nor excuse to construe otherwise; 2. What is covered? 2 schools of thought under American Jurisprudence: a. A dragnet clause broad enough to cover all other debts in addition to the one specifically secured will be construed to cover a different debt, although such is secured by another mortgage; b. A mortgage which such clause will not secure a note that expresses on its face that it is otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting the security specified therein, such deficiency being an indebtedness within the meaning of the mortgage, in the absence of a special contract excluding it from the arrangement; Latter school better: Having agreed to a dragnet clause, it is reasonable to conclude that they also agreed impliedly that subsequent loans need not be secured by other securities, as the subsequent loans will be secured by the first mortgage; But there is no prohibition against requiring other securities for the subsequent loans; Reliance on security test: when the mortgagor takes another loan for which another security was given, it could not be inferred that such loan was made in reliance solely on the original security with the dragnet clause, but rather on the new security given; Ratio: the dragnet clause in the first security constituted a continuing offer by the borrower to secure further loans, and that when the lender accepted a different a security, he did not accept the offer; In another case, a dragnet clause was held to be an offer by the mortgagor to the bank to provide security of the mortgage for advances of and when they are made; 3. Improper for petitioner to foreclose the mortgaged property While the existence of the mortgaged property cannot be denied, there is a need to respect the existence of the other security given for the 2nd promissory note; While the dragnet clause subsists, the security specifically executed for subsequent loans must

Is the dragnet clause valid? Yes. What is covered by the dragnet clause? Propriety of seeking foreclosure of the mortgaged property for the non-payment of the tree loans.

Held and Ratio. 1. Dragnet clause valid Dragnet clause: Avoid expense and inconvenience of executing a new security on each new transaction; Operates as a convenience and accommodation to the borrowers as it makes available funds without their having to execute additional security

first be exhausted before the mortgaged property can be resorted to; Other points: SC recognized the mortgage contract and promissory notes as contracts of adhesion; Blanket mortgage clause should have been indicated in the contract; Ambiguity taken against the party who caused it; The bank is not without recourse because they could still foreclose if theres deficiency still after exhausting the other securities; DENIED. D. Object of Real Estate Mortgage Art. 2124. Only the following may be object of a contract of mortgage: 1. Immovables; 2. Alienable real rights in accordance with the laws, imposed upon immovables Art. 415. The following are immovable property Alienable real rights: Rights, title and interest in a contract of lease of an immovable, such as a building; Title and interest acquired in the land on which the building was constructed; An assignment by way of guaranty of such rights: Real estate mortgage, inasmuch as it is executed to guarantee a principal obligation; Although denominated as an assignment, it is a mortgage since: o Its purpose is to guarantee a principal obligation; and o Is not an absolute conveyance of title that confers ownership on the assignee; Especially if it is stipulated that if the assignor complies with a principal obligation, the assignment would become null and void, otherwise it would remain in full force; A. After acquired properties: Stipulation in a registered real estate mortgage that all property taken in exchange or replacement by the mortgagor (after-acquired property) shall become subject to the mortgage is binding; Result: the real estate mortgage need not be registered second time to bind the after-acquired properties and affect third parties; Peoples Bank & Trust Co and Atlantic Gulf and Pacific CO of Manila v Dahican Lumber Co et al 1948, Atlantic sold and assigned all its rights in the Dahican Lumber concession to Dahican Lumber Company

for $500k of which only $50k was paid. Thereafter, DALCO obtained various loans from the Peoples Bank worth 200k. It also obtained $250k loan from ExportImport Bank of Washinton thru People bank executed by DALCO and Dahican America Lumber Corp (stockholder of DALCO) payable to the bank or its order. 1950, as security for the loans, DALCO executed a deed of mortgage deed in favour of the bank covering 5 parcels of land in Cam Norte together with all the buildings and other improvements and all the personal properties of the mortgagor located in its place of business in municipalities of Mambulao ad Capalonga. On same date, DALCO executed a second mortgage on the same properties in favour of Atlantic to secure the unpaid balance of the lumber concession ($450k). Both deed contained a provision extending the mortgage lien to properties subsequently acquired by the DALCO. Both mortgages were also registered and in addition DALCO and DAMCO pledged shares of stock to secure the same obligations. DALCO and DAMCO failed to pay the 5th promissory note upon maturity so the bank paid it to Export-Import Bank of Washington which assigned the credit and 1st mortgage to the bank. The bank gave DALCO and DAMCO until 1953 to pay the 5th promissory note. Meanwhile, after the execution of the mortgages, DALCO obtained carious machineries and equipment in addition to, or in replacement of, those it already owned The bank then requested it to submit complete lists of the properties pursuant to the after-acquired clause but if failed. In connection with the purchases, there appeared in the books of DALCO as due to Connel Bros (acting as its general purchasing agent) the sum of 452k and to DAMCO, 2M. 1952, DALCO thru a board resolution rescinded the alleged sales of the equipment by Connel and DAMCO to it. The agreements of rescission was thereafter made between DALCO and DAMCO and between DALCO and CONNEL. 1953, the bank (for itself and for Atlantic) demanded that the agreements be cancelled but Connel and DAMCO refused. As a result, the bank and Atlantic commenced foreclosure proceedings in the CFI. The machineries were eventually sold which proceeds was deposited to the court the court pending final determination. Proceeds totalled 175k, half represented sale of after-acquired properties. Issues: 1. Were the so called after-acquired properties covered by the mortgage deeds subject of foreclosure? 2. Assuming they are subject to mortgage deeds, are the mortgages binding on the properties despite non-registration? 3. If the mortgages were valid, what is the effect of the rescission? 4. Action to foreclose premature?

Held and Ratio: 1. Clear from 4th paragraph of the deed that whatever machines and equipment the mortgagor may acquire shall immediately be subject to the lien of both mortgages; As the language leaves no room for doubt as to the intention of the parties, no useful purpose in discussing the matter extensively; Where the properties are perishable or subject to inevitable wear and tear or were intended to be sold or to be used but with understanding that they shall be replaced with others to be thereafter acquired by the mortgagor, such is neither unlawful or immoral; Purpose, to maintain the original value of the properties; 2. Valid in spite of non-registration. Respondents also contend: Deeds do not describe the mortgaged chattels specifically; 4th paragraph constitutes mere executory agreements to give a lien over the after acquired properties; Any mortgage stipulation concerning the afteracquired properties should not prejudice creditors and other third persons; SC: Language clear; Although it is in law and jurisprudence that, to affect third persons, a chattel mortgage must be registered and must describe the property sufficiently, such does not apply here; Art. 415 does not define real property but enumerates what are considered as such, among them being machinery, receptacles, instruments or replacements intended by owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and shall tend directly to meet the needs of the said industry or works; Based on that, lower court held that inasmuch the chattels were placed in the real properties mortgaged, they came with operation of Art. 414 and Art 2127; Not dispute that the after-acquired properties were purchased for use in the development of DALCOs lumber concession and that they were purchased in addition to, or in replacement of, those already existing in its premises; In law therefore they must be deemed to have been immobilized; Result: they need not be registered to bind the after-acquired properties and affect third parties; Rescission not valid DALCO and DAMCO maintain they are unpaid sellers and that they acquired superior lien to the mortgage properties:

4.

Contention true only if they were indeed suppliers or vendors of the after-acquired properties; Record shows that petitioners didnt know exact identity of DAMCO and Connel because prior to the filing, DALCO violated its obligation to submit a complete a list of the properties; But later when the books of DALCO were examined, the properties were neither supplied by DAMCO nor Connel; Circumstances together with the fact that DAMCO is a stockholder and Connel was the general agent, their claim to be suppliers of the afteracquired properties would seem preposterous; Rescission appears to be but a desperate attempt to improve their position to that of unpaid sellers and claim a vendors lien over the after-acquired properties; Not only that, they even admitted from the beginning that the after-acquired properties were meant to be included in the 1st and 2nd mortgages under foreclosure; Not premature: DALCO already insolvent when action was filed; -

AFFIRMED. B. Effect and Extent Art. 2126. The mortgage directly and immediately subjects the property (whoever the possessor may be) to the fulfilment of the obligation for whose security it was constituted. Art. 2127. The mortgage extends to the: 1. Natural accessions; 2. Improvements, growing fruits and the rents or income not yet received when the obligation becomes due, and 3. 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. Art. 2129. The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formalities which the law establishes. 2126: a registered real estate mortgage is a right in rem, a lien or legal right or interest that a creditor has in anothers property whoever its owner may be;

3.

It is inseparable from the collateral and until discharged, follows the property; Thus, although the mortgagor retains the right to dispose, its sale or transfer cannot affect or release the mortgage; Purchaser is bound to acknowledge and respect the encumbrance; Personality of owner disregarded so mortgage subsists despite changes in ownership; Mortgage does not go with the estate, whoever may be its owner, does not deserve the name of mortgage; E. Right to Alienate Mortgage Credit Art. 2128. Mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. Art. 1625. An assignment of a credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. Art. 1627. The assignment of a credit includes all the accessory rights, such as a guaranty, mortgage, pledge or preference. Right to alienate real estate mortgage credit Right of the mortgagee to assign its rights under the principal obligation secured by the real estate mortgage; Although the mortgagee does not become the owner of the collateral by virtue of the contract of real estate mortgage, it owns the real estate mortgage credit and may alienate or assign the same to a third person; F. Right to Alienate Collateral Art. 2085(2) Mortgagor must be absolute owner. Art. 2130. A stipulation forbidding the owner alienating the immovable mortgaged shall be void. Mortgagor remains to be owner of collateral and retains the right to dispose; 2130 prohibits pactum de non alienando (or pacto de non alinendo): a. Stipulations forbidding the mortgagor from selling the collateral; and b. Stipulations forbidding the mortgagor from selling the collateral without the consent of the mortgagee; Such as stipulation violates 2130; it achieves the same intent and purpose of a stipulation forbidding the mortgagor from alienating the collateral; The mortgagee is effectively given the sole prerogative to prevent any sale of the collateral to a third person; this unconscionable advantage

amounts to a virtual prohibition on the owner to alienate the collateral; However, a stipulation prohibiting the mortgagor from entering into second or subsequent mortgages is valid since there is no law forbidding it; Moreover, grant of right of first refusal in favour of mortgagee over the collateral in the event the mortgagor decides to sell the same, that is, the grant of a right to the mortgagee to match the offered purchase price and to buy the collateral at that price is valid; The consideration for the real estate mortgage is the same consideration for the right of first of refusal; The mortgagee may only validly sell the collateral to a third party if the mortgagee fails to exercise the right of first of refusal.

G. Foreclosure of Real Estate Mortgage Foreclosure of real estate mortgage may be judicial or extrajudicial; 1. Judicial Foreclosure

Korea Exchange Bank v Filkor Business Integrated 2002 1997, Filkor borrowed $149k from petitioner Korea Exchange Bank. $40k was only paid. In addition FIlkor executed 9 trust receipts in favour of petitioner. Howver, Filkor failed to turn over the proceeds from the sale of goods or the goods themselves in case FIlkor could not sell them. From June to October of 1997, FIlko negotiated to petitioner the proceeds of 17 LOCs issued by Republic Bank of New York and Banque Leumi France, to pay for goods which FIlkor sold to Segerman International and Davyco. When petitioner tried to collect the proceeds of the LOCs (by presenting bills of exchange), they were dishonoured because of discrepancies. Prior to all the foregoing, in order to secure payment of all its obligations, FIlkor executed a Real Estate Mortgage in 1996. It mortgaged to petitioner the improvements belonging to it constructed on the lot it was leasing at Cavite Processing Zone Authority. Respondents Kim Eung Joe and Lee Han Sang also executed Continuing Suretryships binding themselves jointly and severally with Filkor to pay for the latters obligations. As respondents failed to make good their obligations, petitioner filed a complaint in RTC Cavite. It prayed that it be paid by respondents under its 27 causes of action, the property mortgaged be foreclosed in case respondents failed to pay within 90 days from entry of judgment and other reliefs just and equitable. Petitioner moved for summary judgment. The TC rendered judgment in favour of petitioner granting prayers under all 27 causes of action. It however failed to order that the property mortgaged by Filkor be foreclosed

and sold at public auction in the vent that Filkor fails to pay. Petitioner filed partial reconsideration for it. TC however rendered judgment saying that petitioner in opting to file a civil action for collection, has abandoned its mortgage lien on the property subject of real estate mortgage. Rule: A mortgagor creditor may elect to waive his security and bring, instead, an ordinary action to recover the indebtedness with the right to execute a judgment thereon on all the properties of the debtor including the subject matter of the mortgage: Qualification: if he(creditor) fails in the remedy by him elected, he cannot pursue further the remedy he has waived; Issue: W/N petitioners complaint before the trial court was an action for foreclosure of a real estate mortgage, or an action for collection of a sum of money. Held and Ratio: Paragraph 183 in petitioners complaint satisfies in part the requirements of section 1, Rule 68 of the 1997 ROCP: Date and execution of the mortgage are alleged; Properties mortgaged are stated and described; Names and residence of Filkor, and petitioner as mortgagor and mortgagees respectively; Dates of the obligations secured by the mortgage and amounts unpaid therein are alleged; Very prayer seeks for foreclosure in case Filkor fails to pay within 90 days from entry of judgment; Petitioners allegations and prayer indicate that the action was for foreclosure of real estate mortgage: What determines the nature of an action, as well as which court or body has jurisdiction ver it, are the allegations of the complaint and the character of the relief sought; No indication that petitioner waived its rights under the real estate mortgage executed in its favour; TC erred that the action was for collection; GRANTED. Equity of Redemption 68.2 RoC. Judgment on foreclosure or sale. The court shall: 1. Ascertain amount due to plaintiff upon the mortgage debt or obligation (including interest and other charges as approved by court and costs); 2. (After trial) render judgment for the sum to be found due; Order the same be paid to the court or to the judgment obligee within a grace period (not

less than 90 days nor more than 120 days from entry of judgment); In default of such payment, the property shall be sold at public auction to satisfy the judgment;

Grace period (equity of redemption) Right of mortgagor to extinguish the mortgage and retain ownership of the collateral, after default in the performance of the condition of the mortgage but before the foreclosure sale of the collateral, by paying the mortgage obligation; Conferred by law on mortgagors successors-ininterest, or on third person acquiring rights over the collateral from the mortgagor subsequent, and therefore subordinate to the mortgagees lien; 68.1 Complaint in action for foreclosure All persons having or claiming an interest in the property subordinate in right to that of the holder of the mortgage shall be made defendants in the action; Although these subsequent or junior lien holders acquire the equity of redemption, this right is strictly subordinate to the superior lien of the first mortgagee; And although the second mortgagee is a proper and, in a sense, a necessary party to a foreclosure proceeding brought by the first mortgagee, the second mortgagee is not an indispensible party to the proceeding; The court may grant appropriate relief to the first mortgagee, in the original foreclosure proceeding, without affecting the rights of the second mortgagee; A decree of foreclosure, in a proceeding to which the junior lien-holders are not parties, leaves the equity of redemption in favour of such lien holders unforeclosed and unaffected; Unforeclosed equity of redemption If these junior lien holders are not joined, the judgment is ineffective against them; Since they retain the unforeclosed equity of redemption, a separate foreclosure proveeding should be brought to require them to redeem from the first mortgagee, or the party acquiring title to the collateral at the foreclosure sale, under penalty of losing the prerogative to redeem;

Section 3. Sale of mortgaged property; effect. When the defendant (after being directed to do so as provided in the next preceding section) fails to pay the amount of the judgment within the period specified therein, the court (upon motion) shall:

Order the property to be sold in the manner and under the provisions of Rule 39 and other regulations governing sales of real estate under execution.

Such sale: 1. Shall not affect the rights of persons holding prior encumbrances upon the property or a part thereof, and 2. When confirmed by an order of the court, also upon motion, it shall operate to divest the rights in the property of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law. Upon the finality of the order of confirmation or upon the expiration of the period of redemption when allowed by law: The purchaser at the auction sale or last redemptioner, if any, shall be entitled to the possession of the property unless a third party is actually holding the same adversely to the judgment obligor. The said purchaser or last redemptioner may secure a writ of possession, upon motion, from the court which ordered the foreclosure. (3a) Section 4. Disposition of proceeds of sale. The amount realized from the foreclosure sale of the mortgaged property shall, after deducting the costs of the sale: Be paid to the person foreclosing the mortgage, and When there shall be any balance or residue, after paying off the mortgage debt due, the same shall be paid: To junior encumbrancers in the order of their priority, to be ascertained by the court, or If there be no such encumbrancers or there be a balance or residue after payment to them, then: To the mortgagor or his duly authorized agent, or to the person entitled to it. (4a) Section 5. How sale to proceed in case the debt is not all due. If the debt for which the mortgage or encumbrance was held is not all due as provided in the judgment as soon as a sufficient portion of the property has been sold to pay the total amount and the costs due: The sale shall terminate; and Afterwards as often as more becomes due for principal or interest and other valid charges, the court may, on motion, order more to be sold. But if the property cannot be sold in portions without prejudice to the parties, the whole shall be ordered to be sold in the first instance, and the entire debt and costs shall be paid, if the proceeds of the sale be sufficient therefor, there being a rebate of interest where such rebate is proper. (5a) Section 6. Deficiency judgment. If upon the sale of any real property as provided in the next preceding section there be a balance due to the plaintiff after applying the proceeds of the sale, the court, upon motion, shall: Render judgment against the defendant for any such balance for which, by the record of the

case, he may be personally liable to the plaintiff, upon which execution may issue immediately if the balance is all due at the time of the rendition of the judgment; otherwise; The plaintiff shall be entitled to execution at such time as the balance remaining becomes due under the terms of the original contract, which time shall be stated in the judgment. (6a)

Section 7. Registration. A certified copy of the final order of the court confirming the sale shall be registered in the registry of deeds. If no right of redemption exists: The certificate of title in the name of the mortgagor shall be cancelled, and a new one issued in the name of the purchaser. Where a right of redemption exists: The certificate of title in the name of the mortgagor shall not be cancelled, But the certificate of sale and the order confirming the sale shall be registered and a brief memorandum thereof made by the registrar of deeds upon the certificate of title. In the event the property is redeemed, the deed of redemption shall be registered with the registry of deeds, and a brief memorandum thereof shall be made by the registrar of deeds on said certificate of title. If the property is not redeemed: The final deed of sale executed by the sheriff in favour of the purchaser at the foreclosure sale shall be registered with the registry of deeds; whereupon the certificate of title in the name of the mortgagor shall be cancelled and a new one issued in the name of the purchaser. (n) Section 8. Applicability of other provisions. The provisions of sections 31, 32 and 34 of Rule 39 shall be applicable to the judicial foreclosure of real estate mortgages under this Rule insofar as the former are not inconsistent with or may serve to supplement the provisions of the latter. (8a) Rule 39 Section 31. Manner of using premises pending redemption; waste restrained. Until the expiration of the time allowed for redemption, the court may, as in other proper cases, restrain the commission of waste on the property by injunction, on the application of the purchaser or the judgment obligee, with or without notice; but it is not waste for a person in possession of the property at the time of the sale, or entitled to possession afterwards, during the period allowed for redemption, to continue to use it in the same manner in which it was previously used, or to use it in the ordinary course of husbandry; or to make the necessary repairs to buildings thereon while he occupies the property. (33a) Section 32. Rents, earnings and income of property pending redemption. The purchaser or a redemptioner shall not be entitled to receive the rents, earnings and

income of the property sold on execution, or the value of the use and occupation thereof when such property is in the possession of a tenant. All rents, earnings and income derived from the property pending redemption shall belong to the judgment obligor until the expiration of his period of redemption. (34a) Section 34. Recovery of price if sale not effective; revival of judgment. If the purchaser of real property sold on execution, or his successor in interest, fails to recover the possession thereof, or is evicted therefrom, in consequence of irregularities in the proceedings concerning the sale, or because the judgment has been reversed or set aside, or because the property sold was exempt from execution, or because a third person has vindicated his claim to the property, he may on motion in the same action or in a separate action recover from the judgment obligee the price paid, with interest, or so much thereof as has not been delivered to the judgment obligor, or he may, on motion, have the original judgment revived in his name for the whole price with interest, or so much thereof as has been delivered to the judgment obligor. The judgment so revived shall have the same force and effect as an original judgment would have as of the date of the revival and no more. (36a)

confirmation, not only to enable the interested parties to resist the motion but also to inform them of the time when the equity of redemption is cut off; The mortgagor may still exercise the equity of redemption over the collateral after rendition of a void order confirming the sale, for lack of hearing and notice to the mortgagor;

Under 68.3, the acceptance of a bid at the foreclosure sale confers no title on the purchaser: He is nothing more than a preferred bidder, until the court has validly confirmed the foreclosure sale; Title vests only when court has validly confirmed the foreclosure sale; It is the confirmation by the court of the foreclosure sale that divests the mortgagor of his rights to the collateral, and vests such rights in the purchaser at the foreclosure sale; A foreclosure sale is not complete until it is confirmed: The court retains control of the proceedings, either granting or withholding confirmation as the rights and interests of the parties and the ends of justice may require; Thus, after the foreclosure sale but before its confirmation, the court may the judgment debtor or mortgagor the equity of redemption, that is, an opportunity to pay an amount equal to the proceeds of the sale, and thus refrain from confirming the sale; In order that the court may validly confirm a foreclosure sale, it is necessary that a hearing be given the interested parties, to show cause why the sale should not be confirmed. Mortgagor should be notified of the hearing and lack of notice vitiates the confirmation of the sale; Notice and hearing of a motion for confirmation of sale are essential to the validity of the order of

Right of Redemption When a foreclosure sale is confirmed by an order of the court, it divests the mortgagor of his rights to the collateral, and vests such rights in the purchase at the foreclosure sale, subject to the right of redemption allowed by law. But references in Rule 68 and 39 to the right of redemption are not grants of this statutory prerogative; To claim a right of redemption in judicial foreclosure, there must be a specific law that exceptionally allows it; For example, RA 8791 (General Banking Law of 2000) provides that in a judicial foreclosure by a bank, quasi-bank or trust entity, the mortgagor shall have the right within 1 year after the sale of the collateral to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. Right to Surplus Mortgagor is entitled to surplus, if there be any, after payment of the proceeds of the sale in accordance with Section 4. Mortgagee is entitled to deficiency judgment in the same proceeding for judicial foreclosure in accordance with Section 6. Right to deficiency extends to judicial foreclosure of mortgage arising out of settlement of estate; Here, Rule 86 grants mortgagee three distinct, independent and mutually exclusive remedies that can be alternatively pursued by the mortgagee for the satisfaction of the principal obligation: o Waive mortgage and claim principal obligation; o Foreclose mortgage judicially and prove any deficiency as an ordinary claim; and o Rely on the mortgage exclusively, extrajudicially foreclosing the same at any time before it is barred by prescription without right to file a claim for any deficiency;

2.

Extrajudicial Foreclosure A. Special Powers Act 3135.1 Law recognizes the right of mortgagee to foreclose a real estate mortgage upon mortgagors failure to pay his obligation, but it is imperative that it be exercised according to its clear mandate; Real estate mortgage may be extrajudicially foreclosed only if there is a special power inserted or attached to the document in which the real estate mortgage appears and only in accordance with 3135; B. Foreclosure Sale 3135.2: sale cannot be made outside the province where property is situated; in case place within the province 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 party thereof is situated; 3135.2 There should be notice thru posting notices of the sale: o Not less than 20 days; o In at least 3 public places of the municipality or city where property is situated; If property is worth more than 400 pesos: o Notice shall also be published once a week and at least 3 consecutive weeks in a newspaper of general circulation in the municipality or city; AM 99-10-05-0: Section 1: applications for extra-judicial foreclosure (whether under direction of sheriff or a notary public) shall be filed with the Executive Judge, thru the clerk of court, who is also the ex-officio sheriff); Section 2: (read book); a. Requirement of Notice Object of Notice: To inform public of the nature and condition of the collateral to be sold, and of the time, place and terms of the sale; Also, to secure bidders and to prevent a sacrifice of the collateral; General Rule: Statutory provisions governing posting of notice of real estate mortgage foreclosure sales must be strictly complied with: Even slight deviations will invalidate the notice and render the sale at least voidable;

If sheriff sells without required notice prescribed by law (specifically if induced by mortgagee), and purchaser is the mortgagee, sale is absolutely void and not title passes; If mistakes or omissions occur in the notice (calculated to deter or mislead bidders, to depreciate propertys value, or to prevent it from bringing a fair price), such will be fatal to the validity of the notice and the consequent foreclosure sale;

Exception: If objectives of the notice are attained, immaterial errors and mistakes may not affect the sufficiency of the notice; If what is lacking is the posting of the notice in 3 public places, and not the publication in a newspaper of general circulation, and considering judicial notice that newspapers have more far-reaching effects; Reason: far greater probability that notice in a newspaper distributed nationwide shall be read by more people than a notice posted in a public bulletin, no matter how strategic its location may be; In addition, when there is no showing that the collateral was sold for a price far below as to insinuate any bad faith, nor was there collusion between the sheriff and the mortgagee; [Grand Farms v CA] b. Conduct of Sale

3135.4 Sale shall be made at public auction; Between 9am and 4pm; Under direction of: o Sheriff of the province, the justice or auxiliary justice of the peace of the municipality in which the sale is to be made, or o A notary public of said municipality, who shall be entitled to collect a fee of 5 pesos each day of actual work performed, in addition to his expenses; 3135.5: At any sale: Creditor, trustee, or other persons authorized to act for the creditor, may participate in the bidding and purchase under the same conditions as any other bidder; Unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made; AM 99-10-05-0.5 Conduct of extrajudicial foreclosure sale:

Bidding thru sealed bids which must be submitted to the Sheriff who must conduct the sale within 9am and 4pm; Property mortgaged shall be awarded to highest bidder; In case of a tie, an open bidding shall be conducted between the highest bidders; Payments shall be made either in cash or in managers check, in PH currency, within 5 days from notice; Sale must be in province in which the real property is situated and, in case the place within the province is subject to stipulation, such sale shall be made in said place in the municipal building of the municipality in which the property or part thereof is situated;

Juridical persons whose property is sold thru extrajudicial foreclosure, shall have the right to redeem the property: o Until, but not later than, the registration of the certificate of foreclosure sale o Which in no case shall be more than 3 months after foreclosure, whichever is earlier; In case of redemption, clerk of court shall assess the redemptioners fee as provided in Section 7(k), Rule 141, as amended; If not redeemed, clerk of court, as a requirsit for the issuance of the final deed of ale, assess the highest bidder of 300 pesos as provided in Section 20(d), Rule 141, as amended.

AM 99-10-05-0.6: After the sale, the clerk of courts shall collect the appropriate fees: Amount paid shall not be subject to a refund even if the foreclosed property is subsequently redeemed; AM 99-10-05-0.8 Sheriff or notary who conducted the sale shall report the names of the bidders to the clerk of court; AM 99-10-05-0.9 Upon presentation of the appropriate receipts, the clerk of court shall issue and sign the certificate of sale, subject to the approval of the Executive Judge or, in the latters absence, the Vice-Executive Judge; Right of Redemption 3135.6 In all cases of extrajudicial foreclosure made under SPA: a. Debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or b. Any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold; May redeem the same at any time within 1 year from date of sale; Such redemption shall be governed by Sections 464 to 466 of Code of Civil Procedure; now R39.27 to 33; in so far as they are not inconsistent with this act; AM 99-10-05-0.10 After certificate of sale has been issued, clerk of court shall keep the complete records for 1year from date of registration of the certificate of sale with RoD, after which the records shall be archived;

C.

Notes: Right acquired by purchaser of collateral at an extrajudicial foreclosure is merely inchoate; Ownership remains with mortgagor until expiration of the period of right of redemption granted by law; only after expiration of this period that ownership is consolidated in the purchaser; However, for a party to claim a right of redemption, there must be a specific law that exceptionally allows it; General rule: when real estate mortgage is foreclosed extrajudicially, 3135 grants the mortgagor the right of redemption within 1year from date of registration of the certificate of foreclosure sale; Exception: Under 8791 or General Banking Law of 2000, when extrajudicial foreclosure is by a bank, quasi-bank or trust entity, juridical mortgagors are granted the right to redeem until, but not later than, the registration of the certificate of foreclosure sale, which in no case shall be more than 3 months after foreclosure; Unless the amount is shocking to the conscience, it is immaterial if the collateral is old at an amount less than its actual market value; When there is right to redeem, mortgagor has the option: o To exercise the right and sell the property; or o To sell the right to redeem, to a third party; Either option allows the mortgagor to recover any alleged loss suffered by the reason of the low price obtained at the foreclosure sale; Mere inadequacy of the price at foreclosure will not be sufficient to set it aside if there is

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no showing that in even of a regular sale, a better price can be obtained; c. Who may Redeem

d.

How to Redeem

3135.6 (supra) 39.27: who may redeem real property sold: a. Judgment obligor, or his successor in interest in the whole or any party of the property; b. A creditor having a lien by virtue of an attachment, judgment or mortgage on the property sold, or on some party thereof, subsequent to the lien under which the property was sold; such redeeming creditor is termed a redemptioner; Notes: It is the mortgagor that generally has the right to redeem the collateral sold at an extrajudicial foreclosure sale; But parties who acquire a right to the collateral under certain conditions are also granted the right to redeem; Successor in interest includes, but not limited to: o One to whom mortgagor transferred the statutory right of redemption; o One to whom the mortgagor has conveyed its interest in the collateral for the purpose of redemption; o One who succeeds to the interest of the mortgagor by operation of law; and o One or more joint debtor-mortgagors who were joint owners of the collateral sold; A surety cannot redeem the collateral because the surety, by paying the debt of the debtor-mortgagor, stands in the place of the creditor, not of the debtor-mortgagor, and consequently is not a successor in interest in the collateral; Redemptioner, on the other hand, is a creditor of the mortgagor with a lien on the collateral subsequent to the lien (a junior encumbrancer) that was the basis of the foreclosure sale (for example, a second mortgagee); If the lien is prior to the lien under which the collateral was sold (a senior encumbrancer), it is not a redemptioner and, therefore, cannot redeem; but its lien is fully protected, since any purchaser at the foreclosure sale of the collateral takes the same subject to such prior lien, which must first be satisfied; Unlike the mortgagor, a redemptioner must prove its right to redeem by producing the documents required by Rule 39;

ROC 39.28 Notes: For a valid redemption: 1. Redemption must be made within 12 months from date of registration of the sale in Officer of the Register of Deeds; 2. Payment of the purchase price of the collateral involved, plus 1% per month thereon, together with the amount of any assessments or taxes if any, paid by the purchaser after the sale with the same rate of interest; 3. Written notice of the redemption must be served on the officer who made the sale and a duplicate filed with the Register of Deeds of the province; General Rule: it is not sufficient that a person offering to redeem manifests its desire to do so; Actual and simultaneous tender of payment must accompany the statement of intention; Bona fide redemption implies a reasonable and valid tender of the entire redemption price; otherwise the rule on redemption may be easily circumvented; Filing of judicial action, made simultaneously with deposit of redemption price within redemption period may be necessary to preserve the right of redemption for future enforcement even beyond such period; The filing of a complaint to enforce redemption within the redemption period is equivalent to an offer to redeem and has the effect of preserving the right of redemption; But nothing in the law prohibits piecemeal redemption of collateral sold at a foreclosure; D. Right to Deficiency RoC 86.7 Notes: 3135 does not contain any provision on the mortgagees right to recover the deficiency; but neither does the law prohibit such recovery; Underlying principle that allows recovery of deficiency is that a real estate mortgage is a security transaction and not a satisfaction of indebtedness of the debtor; A real estate mortgage does not in any way limit or minimize the amount of the principal obligation as its only purpose is to ensure its fulfilment;

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So, if after foreclosure, there is a deficiency, the mortgagee may proceed in a proper action against the debtor for the deficiency;

As in any claim for payment of money, a mortgagee must prove the basis for the deficiency judgment it seeks; The right of the mortgagee to pursue the debtor only arises when the proceeds of the foreclosure sale are ascertained to be insufficient to cover the obligation and the other costs of sale; Thus, the amount of the obligation prior to foreclosure and the proceeds of the foreclosure are material in a claim for deficiency; But the mortgagees right to recover the deficiency does not extend to the extrajudicial foreclosure of mortgage arising out a settlement of estate; in such case, Rule 86 grants three distinct, independent and mutually exclusive remedies that can be alternatively pursued by the mortgagee for the satisfaction of the principal obligation: a. Waive the mortgage and claim the principal obligation from the estate of the mortgagor as an ordinary claim; b. Foreclose mortgage judicially and prove any deficiency as an ordinary claim; and c. Rely on the mortgage exclusively, extrajudicially foreclosing the same at any time before it is barred by prescription without right to file a claim for any deficiency E. Right to Surplus In case of surplus, the mortgagee must account for the proceeds; The application of the proceeds from the sale is an act of payment, not payment by dacion, hence, it is the mortgagees duty to return any surplus in the selling price to the mortgagor; By the accessory nature of a real estate mortgage, the mortgagee has the right to foreclose the mortgaged property only to the extent of the loan secured by it; Any contrary decision means unjust enrichment; By its nature, the surplus stands in place of the collateral itself with respect to liens thereon or vested rights therein: The surplus is constructively, at least, real property and belongs to the mortgagor; Right of mortgagor to the surplus is a substantial right that prevails over any technicality;

Surplus gains significance when there are junior encumbrancers: When there are several liens upon the collateral, the surplus must be applied to their discharge in the order of their priority; Aside from the right of redemption, a second mortgagees only other right would be to apply, to the payment of its credit, the surplus of the proceeds of the foreclosure sale after the payment of the first mortgagee, such being the effect of the subordination of its lien; Thus, a junior mortgagees lien on the collateral is transferred to the surplus, and a senior mortgagee, realizing more than the amount of the debt on a foreclosure sale, is regarded as a trustee for the benefit of the junior encumbrancers; But even if the mortgagee retains more of the proceeds of the sale than it is entitled to, this fact alone will not affect the validity of the sale but gives the mortgagor a cause of action to recover the surplus. [Suico v PNB]

F.

Right to Possession a. During Redemption Period b. After Consolidation of Ownership c. When Held by a Third Party

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