G.R. No. L-16217 - De los Reyes vs. De Leon

Case Summary (G.R. No. L-16217)

Key Dates and Events

Mortgages executed: July 4, 1944 (first mortgage) and July 11, 1944 (additional mortgage).
Lawyer’s notice of intended extrajudicial foreclosure: August 5, 1953.
Appellees paid back taxes: September 3, 1953.
Sheriff’s sale: scheduled September 4, 1953, deferred and held September 21, 1953; appellant was sole bidder and purchased property for P30,000, for which a Sheriff’s Certificate of Sale was issued.
Complaint to annul foreclosure filed by appellees: August 21, 1954.
Treaty of Peace signed: September 8, 1951.
Treaty of Peace proclaimed by President Magsaysay: November 5, 1956.

Applicable Law and Constitutional Framework

Constitutional basis applicable to the decision: 1935 Philippine Constitution (decision date 1964 precedes the 1987 Constitution).
Statutory and civil law authorities referenced in the decision: Act No. 3135 (authorizing extrajudicial foreclosure procedures), Article 1169 of the Civil Code (on delay/default and the need for demand), and Article 1198 of the Civil Code (on loss of rights by violation of conditions moving the creditor to grant a term).

Essential Contractual Provisions

First mortgage (July 4, 1944): secured P40,000 Philippine Currency, incorporated key conditions including (1) time being “paramount” — the loan shall not be paid sooner nor later than within three years after the Greater East Asia War, computed from signing of the Treaty of Peace; (3) mortgagor to pay taxes and report such payments; (4) prohibition on leasing, selling or encumbering without mortgagee’s written consent; (6) failure to pay any stipulated obligation makes the entire P40,000 plus accrued interest and other obligations due and payable, and permits judicial or extrajudicial foreclosure under Act No. 3135.
Additional mortgage (July 11, 1944): secured an additional P20,000 and expressly incorporated the terms of the July 4 mortgage except where repugnant; contained a special condition that if the mortgagor did not redeem the original loan prior to the termination of the war, the additional loan (and P10,000 of the original loan plus accrued interest up to cessation of war) would be automatically condoned/annulled — effectively giving the mortgagor the benefit of a reduced indebtedness (to P30,000) if payment was delayed until after the Treaty of Peace.

Facts Material to the Dispute

Appellees mortgaged a property (TCT No. 66955, City of Manila) to secure loans totaling P60,000 (P40,000 + P20,000). Appellant sought foreclosure on the ground that appellees failed to pay property taxes for 1951–1953. Appellant’s counsel gave notice on August 5, 1953 that extrajudicial foreclosure steps were being taken; appellees paid the back taxes on September 3, 1953. The sheriff’s sale ultimately occurred with appellant as sole bidder at P30,000. Appellees then sued to annul the foreclosure on three grounds: misrepresentation of the indebtedness, lack of demand prior to foreclosure, and prematurity of foreclosure given the contractual time stipulation. Appellant counterclaimed for damages, asserting only the mortgagors’ failure to pay real estate taxes for 1951–1953.

Issues Presented

Whether appellees were in default for failure to pay property taxes without prior demand, thereby authorizing immediate foreclosure under the mortgage clause.
Whether appellees’ alleged failure to pay taxes rendered the entire indebtedness due absent prior demand.
Whether the extrajudicial foreclosure and sale were premature in light of the contractual stipulation fixing time for payment relative to the Treaty of Peace, and whether foreclosure for the full P60,000 was consistent with the parties’ contract.

Legal Analysis — Demand and Default (Article 1169)

Article 1169 provides that a debtor delays only after the obligee makes a judicial or extrajudicial demand, except where (a) the obligation or law dispenses with demand, (b) time is of the essence of the obligation, or (c) demand would be useless. The Court found no prior demand had been made by appellant before initiating foreclosure; the only communication was the August 5, 1953 letter advising appellees of appellant’s intent to foreclose. The exceptions (a) and (c) were inapplicable. Although the mortgage contained a clause stating “time is the paramount condition,” the Court construed that clause in context: the time stipulation did not operate to permit acceleration by the mortgagee at that stage because the parties had fixed a very particular temporal condition tied to the Treaty of Peace. Consequently, the absence of a proper demand meant appellees were not in delay or default as to either the tax obligations or the principal obligation.

Legal Analysis — Effect of the Time Stipulation and Treaty of Peace

The mortgages expressly conditioned repayment timing upon events related to the Greater East Asia War and the signing/proclamation of the Treaty of Peace. The additional mortgage provided that if the mortgagor did not redeem before the end of the war, the additional loan and a ten-thousand-peso portion of the original loan would be condoned — yielding an effective indebtedness of P30,000 after the treaty event. The Court took judicial notice of the Treaty’s signing on September 8, 1951 and its later proclamation on November 5, 1956. Under the contractual alternatives embraced by the parties, appellees had until September 1954 (three years after the 1951 signing) or until November 1959 (three years after the proclamation) to pay. The foreclosure on September 4, 1953 therefore preceded the earliest contractual due date and was premature.

Legal Analysis — Nonpayment of Taxes and Substantial Compliance

The mortgage obliged the mortgagor to pay taxes and to report such payments. The Court held that given the primary contractual purpose of the time stipulation — protecting the mortgagor’s right to reduced indebtedness and ensuring payment in Philippine currency — the omission to pay taxes for 1951–part of 1953 was not a material breach that justified acceleration and foreclosure at th

Case Syllabus (G.R. No. L-16217)

Case Citation and Court

Reported at 120 Phil. 29; G.R. No. L-16217; decided May 25, 1964.
Decision authored by Justice Makalintal.
Appeal originally filed with the Court of Appeals and subsequently endorsed to and accepted by the Supreme Court because the issues raised involved only questions of law.
Justices Bengzon, C.J., Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, and Dizon concurred in the decision.

Parties and Roles

Plaintiffs and Appellees: Alfonso de los Reyes et al.
Defendant and Appellant: Luis de Leon.
Appellant acted as mortgagee and eventual successful purchaser at sheriff’s sale; appellees were mortgagors and plaintiffs in the suit to annul the foreclosure sale.

Loan and Security — General Fact Pattern

The parties dealt with an aggregate loan described as P60,000.00, Philippine Currency (composed of a P40,000.00 loan and an additional P20,000.00 loan).
The security for the loan(s) was a real estate parcel described in Transfer Certificate of Title No. 66955 of the Register of Deeds of the City of Manila (property situated at Nebraska, Malate, Manila).
Two separate instruments were executed as security: a "Real Estate Mortgage" dated July 4, 1944, and a "Real Estate Additional Mortgage" dated July 11, 1944.

First Mortgage (Real Estate Mortgage dated July 4, 1944) — Material Terms

Stated consideration: a loan of FORTY THOUSAND PESOS (P40,000.00), Philippine Currency, received by the mortgagor from the mortgagee.
Purpose: to secure payment of the loan, interest thereon, other advances, and "other valuable considerations received or that the latter may acquire, including interest and expenses of any other obligations owing to the Mortgagee whether direct or indirect, principal or secondary."
Property: parcel described in Transfer Certificate of Title No. 66955 (City of Manila).
Express conditions incorporated in the mortgage instrument included:
- (1) Time is the paramount condition: the loan of P40,000.00 "shall not be paid sooner nor later than within the first Three years after the Greater East Asia War, to be computed from the signing of the Treaty of Peace."
- (3) Mortgagor must pay in time the taxes and assessments of the mortgaged property, and report payment to the mortgagee on the dates of payment.
- (4) Mortgagor shall not lease, sell, dispose of, nor encumber the property with a second mortgage without the mortgagee's written consent.
- (6) If mortgagor fails or refuses to pay any of his obligations stipulated when due, or any obligation secured, then the entire loan of Forty Thousand Pesos (P40,000.00), including accumulated interest and other obligations, "shall become due and payable," and the mortgagee may immediately foreclose judicially or extrajudicially under Act No. 3135, as amended; in case of foreclosure, the mortgagee, on filing the corresponding petition, shall be appointed receiver.

Second Instrument (Real Estate Additional Mortgage dated July 11, 1944) — Material Terms

Acknowledges the prior July 4, 1944 mortgage securing P40,000.00 and states the mortgagor sought an additional loan of TWENTY THOUSAND PESOS (P20,000.00).
The additional mortgage transferred and conveyed the same parcel described in TCT No. 66955, subject to conditions.
Incorporated all terms and conditions of the July 4, 1944 Deed of Mortgage, "with the exception only of the terms which may be repugnant and contrary to the additional conditions and supplementary agreements hereinafter stipulated."
Specific additional conditions included:
- (A) The original amount of FORTY THOUSAND PESOS (P40,000.00), including accrued interest referenced in the earlier document, "shall be paid not sooner nor later than Three (3) years after the war, counted from the date of the signing of the Treaty of Peace by the Belligerent Powers."
- (B) Said payment must be made in Philippine Currency.
- A proviso providing that, if prior to the termination of the war and the signing and proclamation of the Treaty of Peace the mortgagor does not redeem and pay the loan obtained under the original mortgage, then the additional loan and all its consideration "shall be automatically condoned, cancelled and annulled, including TEN THOUSAND PESOS (P10,000.00) of the original loan together with the accrued interest up to the cessation of the war born the entire amount of the original loan" (i.e., effecting a reduction of the indebtedness under certain conditions).

Pre-Foreclosure Communications and Tax Payments

On August 5, 1953, appellees received a communication from appellant's lawyer informing them that, due to their alleged failure to pay taxes for the years 1951, 1952, and 1953 on the mortgaged property, their indebtedness of P60,000.00 "together with the accumulated interest thereon has become due and payable," and that the lawyer was taking the necessary extrajudicial steps to foreclose pursuant to the mortgage terms.
Acting on that communication, appellees paid the back taxes on September 3, 1953.
The sheriff scheduled the foreclosure sale for September 4, 1953; the extrajudicial sale was thereafter deferred until September 21, 1953.
Before the sale could proceed, appellee de los Reyes presented receipts evidencing payment of the taxes for 1951 and 1952 to the appellant and his counsel (at that time only the first installment of the tax for 1953 had been due).
Despite presentation of these receipts, appellant and his counsel insisted on foreclosure to collect the indebtedness alleged at P60,000.00.
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