G.R. No. 158891 - Garcia vs. Villar

Case Summary (G.R. No. 158891)

Key Dates and Procedural Posture

Second mortgage executed: October 10, 1994 (Garcia as mortgagee). First mortgage executed: July 6, 1993 (Villar as mortgagee). Sale from Galas to Villar: November 21, 1996; registration and issuance of new title: December 3, 1996. Garcia filed suit (originally mandamus, later foreclosure) on October 27, 1999. RTC decision in favor of Garcia: May 27, 2002. Court of Appeals reversed: February 27, 2003 (resolution denying reconsideration: July 2, 2003). Supreme Court decision under review: June 27, 2012 (applying the 1987 Constitution).

Applicable Law and Authorities

Governing constitutional framework: 1987 Constitution. Relevant statutory and civil provisions cited: Civil Code Articles 2087, 2088 (pactum commissorium), 2126, 2129 (nature and remedies of mortgage), 1293 (novation/substitution of debtor), and 2130 (prohibition on stipulation forbidding alienation of mortgaged immovable). Procedural law: Rule 45 (petition for review on certiorari) of the 1997 Rules of Civil Procedure. Controlling jurisprudence cited in the decision: E.C. McCullough & Co. v. Veloso and Serna, Rodriguez v. Reyes, Philippine National Bank v. RBL Enterprises, Ganzon v. Inserto, and Development Bank of the Philippines v. Court of Appeals.

Chronology of Transactions and Encumbrances

Galas executed a first real estate mortgage in favor of Villar (P2,200,000) in 1993 and later executed a second real estate mortgage in favor of Garcia (P1,800,000) in 1994. Both mortgages were annotated on the back of the original TCT. In 1996 Galas sold the property to Villar and declared the property free and clear of liens in the Deed of Sale; the sale was registered and the title was reissued to Villar with both mortgage annotations carried forward on the new title.

Plaintiff’s (Garcia’s) Claims and Prayer for Relief

Garcia alleged Villar acted in bad faith by purchasing the mortgaged property rather than foreclosing in accordance with mortgage foreclosure rules, thereby depriving Garcia (a junior mortgagee) of his rights. He argued that the debtor-creditor relationship merged when the first mortgagee acquired title, that he was subrogated to the status of first mortgagee, and that Villar was liable to pay the second mortgage or be subject to judicial foreclosure. Garcia sought foreclosure of his second mortgage and damages.

Defendant’s (Villar’s) Defense

Villar contended the complaint failed to state a cause of action, denied wrongdoing, and asserted that Garcia’s second mortgage was executed without Villar’s consent and in bad faith. She argued Garcia’s remedy was against his mortgagors (Galas and Pingol), not against her, because the sale to her did not extinguish the mortgage nor automatically place upon her the personal obligation to pay the mortgage debt absent an agreement to assume the debt.

Trial Court Findings and Ruling

The RTC found for Garcia, ruling that Villar’s direct purchase of the property did not deprive Garcia of his rights as a second mortgagee, and that Villar should have foreclosed under applicable foreclosure rules (including provisions from Act No. 3135 as amended) to give junior mortgagees the opportunity to satisfy their claims from foreclosure proceeds. The RTC ordered Villar to pay P1,800,000 plus interest or, upon failure, to have the property sold at public auction to satisfy the judgment.

Court of Appeals Ruling

The Court of Appeals reversed the RTC, holding the second mortgage to Garcia was valid and that Galas was free to execute the second mortgage absent a contractual prohibition found in the first mortgage deed. The appellate court also found the sale to Villar valid, and it dismissed Garcia’s foreclosure complaint for lack of evidence that Galas violated terms of the first mortgage or that Garcia had demanded payment from the debtors prior to suing Villar.

Issues Framed by the Supreme Court

The Supreme Court analyzed, in sequence: (1) the validity of the second mortgage to Garcia; (2) the validity of the sale of the property to Villar; (3) whether the sale violated the prohibition on pactum commissorium; and (4) whether Garcia’s foreclosure action against Villar could prosper.

Validity of the Second Mortgage and the Sale to Villar

The Court agreed with the Court of Appeals that both the second mortgage and the sale were valid. The recorded restriction on the title (that mortgagee’s consent was necessary for subsequent encumbrance) did not control because that restriction did not appear in the operative Deed of Real Estate Mortgage executed between Galas and Villar; the Deed’s terms govern the annotation. The Deed also did not prohibit sale or alienation during the mortgage’s life. Even if a prohibition had been intended, Article 2130 of the Civil Code renders stipulations forbidding alienation of a mortgaged immovable void. Thus the second mortgage was not invalidated by the first mortgagee’s annotation on the title.

Pactum Commissorium and the Power of Attorney Provision

Garcia argued that a power-of-attorney clause appointing Villar as attorney-in-fact to take possession and sell the mortgaged property upon default violated the prohibition on pactum commissorium (Article 2088). The Court concluded the provision did not effect an automatic appropriation of the mortgaged property to Villar upon default. Instead, the clause merely conferred authority to sell and apply proceeds to the indebtedness—an arrangement consistent with Article 2087, which contemplates alienation of mortgaged properties to satisfy the obligation. Consequently, the power-of-attorney clause did not constitute an impermissible pactum commissorium.

Nature of Mortgage Rights and Effect of Transfer on Remedies

The Court reiterated the real-right character of mortgage: a mortgage follows the property (Article 2126), and the mortgage survives transfer of the property such that th

Case Syllabus (G.R. No. 158891)

Case Details

Citation: 689 Phil. 363, FIRST DIVISION, G.R. No. 158891, June 27, 2012.
Nature of case: Petition for review on certiorari under Rule 45 of the 1997 Rules of Court, from the Decision (February 27, 2003) and Resolution (July 2, 2003) of the Court of Appeals in CA-G.R. SP No. 72714, which reversed the May 27, 2002 Decision of the Regional Trial Court (RTC), Branch 92 of Quezon City in Civil Case No. Q-99-39139.
Ponente: Justice Leonardo-De Castro, J. (Acting Chairperson).
Concurring Justices at final resolution: Bersamin, Del Castillo, Villarama, Jr., and Perlas-Bernabe, JJ.

Procedural History

July 6, 1993: Lourdes V. Galas (Galas), with daughter Ophelia G. Pingol (Pingol) as co-maker, executed a real estate mortgage of the subject property in favor of Yolanda Valdez Villar (Villar) to secure a loan of P2,200,000.00; mortgage annotated on TCT No. RT-67970(253279) (Entry No. 6537/T-RT-67970(253279)); instrument dated 7-6-93; inscribed 7-7-93.
October 10, 1994: Galas, again with Pingol as co-maker, executed a second real estate mortgage of the same property in favor of Pablo P. Garcia (Garcia) to secure a loan of P1,800,000.00; annotated on TCT (Entry No. 821/T-RT-67970(253279)); instrument dated 10/10/94; inscribed 10/11/94.
November 21, 1996: Galas sold the subject property to Villar for P1,500,000.00 via Deed of Sale declaring the property “free and clear of all liens and encumbrances of any kind whatsoever.”
December 3, 1996: Deed of Sale registered; TCT No. RT-67970(253279) cancelled; new TCT No. N-168361 issued in name of Villar; both Villar’s and Garcia’s mortgages were carried over and annotated on the new TCT.
October 27, 1999: Garcia filed a Petition for Mandamus with Damages in the RTC; later amended to a Complaint for Foreclosure of Real Estate Mortgage with Damages.
May 23, 2000: RTC issued Pre-Trial Order in which parties stipulated certain facts and framed the principal issue.
June 26, 2000: Garcia filed Motion for Summary Judgment with Affidavit of Merit; submitted memorandum on June 28, 2000.
May 27, 2002: RTC rendered decision in favor of Garcia ordering Villar to pay P1,800,000.00 with legal interest from October 27, 1999; upon failure, property to be sold at public auction to satisfy judgment.
Villar appealed to the Court of Appeals.
February 27, 2003: Court of Appeals reversed the RTC and dismissed the complaint for judicial foreclosure of real estate mortgage with damages.
March 20, 2003: Garcia filed Motion for Reconsideration in the Court of Appeals.
July 2, 2003: Court of Appeals denied the motion for lack of merit (Resolution).
Petition for review on certiorari filed with the Supreme Court; Supreme Court rendered decision on June 27, 2012 affirming the Court of Appeals.

Facts (as established in the record)

Subject property: parcel located at Malindang St., Quezon City, initially covered by TCT No. RT-67970(253279).
First mortgage: executed July 6, 1993 in favor of Yolanda Valdez Villar to guarantee a principal obligation of P2,200,000.00; annotation on TCT (Entry No. 6537) included a standard phrase indicating “mortgagee’s consent necessary in case of subsequent encumbrance or alienation of the property,” with reference to Doc. No. 97, Book No. VI, Page No. 20 of the notarial registry; dates of instrument and inscription as above.
Second mortgage: executed October 10, 1994 in favor of Pablo Garcia to guarantee principal obligation of P1,800,000.00; annotation on TCT (Entry No. 821) likewise included the stamped phrase “mortgagee’s consent necessary in case of subsequent encumbrance or alienation of the property,” with reference to Doc. No. 08, Book No. VII, Page No. 03 of the notarial registry; dates of instrument and inscription as above.
November 21, 1996 Deed of Sale from Galas to Villar declared the property “free and clear of all liens and encumbrances of any kind whatsoever,” yet both mortgages were carried over and annotated on the newly issued TCT No. N-168361 after registration on December 3, 1996.
Garcia’s factual allegations: Villar purchased the property in bad faith and malice, knowingly and willfully disregarding foreclosure provisions; upon purchase the debtor-creditor relationship merged in Villar and Garcia, as second mortgagee, was subrogated to first mortgagee status and entitled to foreclose; Garcia alleged he demanded payment from Villar and sued when she refused.
Villar’s factual assertions/defenses: Complaint stated no cause of action; second mortgage was done in bad faith without her consent and knowledge; she discovered the second mortgage only upon registration of the Deed of Sale; Garcia accepted the second mortgage without her prior consent; no subrogation and Garcia should seek recourse against Galas and Pingol.

Pre-Trial Stipulations / Admissions (RTC Pre-Trial Order, May 23, 2000)

Defendant (Villar) admitted the second mortgage annotated at the back of TCT No. RT-67970 of Lourdes V. Galas, qualifying that she discovered said mortgage only in 1996 after the sale.
Defendant admitted the existence of the annotation of the second mortgage at the back of the title despite transfer of the title in her name.
Plaintiff (Garcia) admitted that defendant Villar is the first mortgagee and that the first mortgage was annotated at the back of the title of mortgagor Lourdes V. Galas.
Plaintiff admitted that by virtue of the Deed of Sale the title of the property was transferred from the previous owner in favor of defendant Villar.
Issue framed: Whether or not the plaintiff, at this point in time, could judicially foreclose the property in question.

Issues Presented to the Supreme Court

Whether or not the second mortgage to Garcia was valid.
Whether or not the sale of the subject property to Villar was valid.
Whether or not the sale of the subject property to Villar was in violation of the prohibition on pactum commissorium.
Whether or not Garcia’s action for foreclosure of mortgage on the subject property can prosper (i.e., whether Garcia had a cause of action against Villar to demand payment or to foreclose).

RTC Decision (May 27, 2002) — Disposition and Reasoning

Dispositive order: Judgment in favor of plaintiff Pablo P. Garcia against defendant Yolanda V. Villar ordering Villar to pay P1,800,000.00 plus legal interest from October 27, 1999 within 90 to 120 days from entry of judgment; upon failure, property subject to the 2nd Real Estate Mortgage to be sold at public auction under Rules 39 and 68 of the 1997 Rules of Civil Procedure; defendant ordered to pay costs.
RTC rationale:
- The direct sale of the subject property to Villar (first mortgagee) could not operate to deprive Garcia (second mortgagee) of his rights.
- Upon Galas’ failure to pay, Villar should have foreclosed the subject property pursuant to Act No. 3135 as amended, thereby providing junior mortgagees opportunity to satisfy claims from the residue of the foreclosure sale proceeds; foreclosure would result in extinguishment of mortgages.
- The second mortgage in Garcia’s favor had not been discharged and Villar, as registered owner with a subsisting mortgage, was liable.

Court of Appeals Decision (February 27, 2003) — Disposition and Reasoning

Disposition: Reversed the RTC decision and entered judgment dismissing the complaint for judicial foreclosure of real estate mortgage with damages.
Court of Appeals rationale:
- Found that Galas was free to mortgage the subject proper
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