El Hogar Filipino vs. Paredes

Factual Background

Dona Aniceta Ardosa executed a mortgage over the rural estate known as the Hacienda de Bayabas y Agtongtong, municipality of Manapla, Province of Occidental Negros, to secure a loan from El Hogar Filipino. The mortgage contained, among other provisions, a tenth clause authorizing the manager of the association, upon maturity of the debt and default, to make an extrajudicial sale before a notary public or auctioneer after publication once a week for three successive weeks, and an irrevocable power in the manager as agent of the debtor to execute a deed to the highest bidder at the end of thirty days, during which period the debtor had a right of redemption. The fifteenth clause authorized the association to bid at any such sale and, if the association became the highest bidder, authorized the manager, as the debtor’s apoderado, to make the deed to the association. The debtor defaulted and the manager effected a nonjudicial foreclosure in accordance with the mortgage clauses. The association purchased the property as highest bidder and, after the thirty-day period without redemption, the manager executed a deed of transfer in favor of the association.

Registration Refusal and Petition

The hacienda was not registered under the Torrens system of Act No. 496 but was inscribed in the property register of Iloilo Province. To complete transfer, El Hogar Filipino presented the deed and sale documents to the Register of Deeds of Occidental Negros for registration under Administrative Code, sec. 194, as amended. Geronimo Paredes, the register of deeds, refused to register the instrument on the ground that clause ten, conferring a power of sale, was void.

Procedural History

The mortgagee filed a petition in the Supreme Court seeking a writ of mandamus to compel the register to register the instruments. The court cited Geronimo Paredes, who answered admitting the material facts but contending that the mortgage clause was void. The court permitted the association to make Dona Aniceta Ardosa a party defendant. Dona Aniceta demurred generally on the ground that the petition failed to state a cause of action. The court treated the register’s answer as a demurrer, and considered the issues on the admitted facts.

Issues Presented

The court framed a single issue of law: whether a stipulation in a mortgage of real property conferring upon the mortgagee a power to sell the mortgaged property by extrajudicial public auction, and to have the mortgagee purchase and take title by virtue of that power, is valid and enforceable.

Position of the Petitioner and Majority Rationale

El Hogar Filipino urged that the power of sale was valid. The majority surveyed Spanish jurisprudence and decisions of the English and American courts and found a broad consensus that a power of sale in a mortgage is not contrary to law, morals, or public order. The court observed that Spanish resolutions and the Supreme Court of Spain had recognized that article 1859 of the Spanish Civil Code, which prohibits appropriation by the creditor, does not forbid a stipulation authorizing the creditor to sell at public auction or to adjudicate the property upon failure of sale. The court noted that English and American authority had evolved to accept powers of sale as a recognized and generally valid mode of foreclosure in the absence of statutes requiring judicial foreclosure. The court cited local precedent sustaining a power of sale in a pledge of personal property (Peterson vs. Azada, 8 Phil., 432) and reasoned that if such a provision is valid for pledges of movables, it must a fortiori be valid in mortgages of realty, since the contracts are analogous in purpose.

Statutory and Policy Considerations Addressed by the Majority

The majority considered the contention that the Code of Civil Procedure’s provisions for judicial foreclosure (secs. 254–261) were intended to make judicial foreclosure exclusive. The court rejected exclusivity, treating judicial and extrajudicial foreclosure pursuant to a valid power as alternative remedies. The court further relied on Act No. 496, sec. 66, which recognizes a special power of sale in mortgages affecting Torrens-registered land, as reflecting the accepted validity of such a clause and as support for the clause’s validity when applied to non-Torrens land. The majority also considered Corporation Law, sec. 185, which authorizes the board to proceed by action, and held that the statutory grant of a remedy by action is not exclusive of an express contractual power of extrajudicial sale.

Disposition by the Majority

The majority overruled the demurrer of Dona Aniceta Ardosa and the register’s answer. The court ordered issuance of the writ of mandamus as prayed, directing Geronimo Paredes to register Exhibit B in the manner prescribed by law unless a sufficient answer were filed within five days of notification. The majority made no special pronouncement as to costs.

Dissent of Justice Johns

Justice Johns dissented in a lengthy opinion. He emphasized the legal distinction between a mortgage and a trust deed. He explained that in a trust deed the record title vests in a trustee who is expected to act impartially, whereas in a mortgage the record title remains with the mortgagor and may be divested only by formal sale. He criticized the particular provisions of the contract: the board’s unilateral power to declare indebtedness due without notice to the mortgagor; publication of notice only in a Manila newspaper as sufficient notice to mortgagors residing in distant islands; a redemption period limited to thirty days as compared to the statutory twelve months for judicial sale under Code sec. 465; and the liberty of the mortgagee to bid and take the property to itself. He argued that these provisions, in the Philippine geographical, social, and linguistic context, were unconscionable and summary in effect, and that they exposed illiterate and remote mortgagors to loss of property without meaningful notice or opportunity to redeem. Justice Johns urged that, even if powers of sale may be valid under proper safeguards, the specific power and its exercise in this case violated public policy and equity and should be void.

Dissent of Justice Malcolm

Justice Malcolm concurred with the view that Philippine law, as he read it, does not sanction powers of sale in mortgages. He cited Code of Civil Procedure, sec. 254, Civil Code, art. 1872, Corporation Law, sec. 185, and local decisions as indicating disfavor. He concluded th