G.R. No. 171206 - Heirs of the Late Spouses Magsalang vs. Manila Banking Corporation

Case Summary (G.R. No. 171206)

Facts of the Loan and Mortgage

On June 16, 1975 spouses Flaviano and Salud Maglasang obtained a P350,000 credit line from the respondent, secured by a real estate mortgage over seven properties in Leyte. They drew two loans against the line—P209,790.50 (October 24, 1975) and P139,805.83 (March 15, 1976)—both due within a year. The parties agreed on 12% per annum interest and an additional 4% penalty upon default.

Probate Proceedings and Notice to Creditors

After Flaviano’s death (intestate) on February 14, 1977, the heirs appointed Edgar as attorney-in-fact and subsequently petitioned for letters of administration; Edgar was appointed administrator on August 9, 1977. A notice to creditors was issued August 30, 1977. Respondent notified the probate court of a claim against Flaviano’s estate in the amount of P382,753.19 (exclusive of interests and charges) as of October 11, 1978.

Extra-judicial Foreclosure and Deficiency Claim

While probate proceedings were pending, Edgar and Oscar obtained several loans from respondent secured by promissory notes. The probate court later closed the proceedings by order of December 14, 1978, after heirs executed an extrajudicial partition; the court nonetheless recognized respondent’s rights under the mortgage and promissory notes. Respondent proceeded to extrajudicial foreclosure under Act No. 3135, emerged as highest bidder at P350,000, and a deficiency remained. On June 24, 1981 respondent filed suit to recover the deficiency (P250,601.05 as of May 31, 1981) against the estate, Salud, and the heirs (Civil Case No. 1998-0).

RTC Decision

After trial, the Regional Trial Court (formerly probate court) rendered judgment on April 6, 1987 directing petitioners to pay respondent jointly and severally P434,742.36, with 12% interest and 4% penalty from September 5, 1984 until fully paid, plus attorney’s fees (10% of the outstanding obligation). The RTC found petitioners still owed the stated obligation after extrajudicial foreclosure.

Arguments on Appeal (petitioners)

Petitioners argued that Section 7, Rule 86 of the Rules of Court governs secured claims against a decedent’s estate, providing three alternative and exclusive remedies; having filed a claim in the probate proceedings, respondent effectively elected the remedy of proving its claim in the estate settlement and thereby waived foreclosure and any right to recover a deficiency. They also contended that, even if foreclosure were available, the extrajudicial foreclosure was void because the sale was not held in the provincial capital as stipulated in the mortgage, and they denied personal liability for their parents’ loans.

Court of Appeals Ruling

The Court of Appeals affirmed the RTC. It held the probate court erred in terminating the probate proceedings without satisfying creditors, which left respondent with the option to foreclose the mortgage. The CA concluded Section 7, Rule 86 did not apply in the manner petitioners claimed (interpreting it narrowly to concerns over administrator-made mortgages) and instead applied Act No. 3135 to validate the extrajudicial foreclosure and respondent’s entitlement to pursue the deficiency.

Supreme Court Issue Presented

The central issue before the Supreme Court was whether the CA erred in affirming the RTC’s award of the deficiency amount. Petitioners insisted Section 7, Rule 86 applied and that respondent’s notice to the probate court constituted election of the remedy against the estate, thereby barring foreclosure and recovery of any deficiency. They also repeated their challenge to the venue of the sale and their asserted lack of personal liability.

Supreme Court Analysis — Scope and Effect of Section 7, Rule 86

The Court examined Section 7, Rule 86, concluding it broadly governs secured claims against a deceased debtor’s estate; its language encompasses all secured creditors and is not limited to mortgages executed by an administrator. Jurisprudence interprets Section 7 to provide three distinct, independent, and mutually exclusive remedies for the secured creditor: (a) abandon the security and prove the claim against the estate as an ordinary creditor; (b) judicially foreclose and prove any deficiency as an ordinary claim; or (c) rely exclusively on the security and foreclose (including extrajudicial foreclosure) without right to claim any deficiency. The election of one remedy bars the others.

Supreme Court Analysis — Relationship Between Section 7, Rule 86 and Act No. 3135

The Court explained that Section 7, Rule 86 and Act No. 3135 are complementary. Section 7 defines the creditor’s options and the legal effect of choosing them; Act No. 3135 prescribes the procedure for extrajudicial foreclosure under the third option. Thus, electing extrajudicial foreclosure under Section 7 triggers the procedural requirements of Act No. 3135, but the legal consequence remains that choosing this third remedy waives any claim for deficiency against the estate.

Supreme Court Finding on Respondent’s Election and Sufficiency of Its Probate Notice

Applying these principles, the Court found respondent had elected the third option—extrajudicial foreclosure—because it

Case Syllabus (G.R. No. 171206)

Procedural Posture and Panel

Final adjudication is by the Supreme Court (Second Division) in G.R. No. 171206, decided September 23, 2013.
Petitioners are the heirs of the late spouses Flaviano Maglasang and Salud Adaza-Maglasang (named individually: Oscar A. Maglasang, Edgar A. Maglasang, Concepcion Chona A. Maglasang, Glenda A. Maglasang-Arnaiz, Lerma A. Maglasang, Felma A. Maglasang, Fe Doris A. Maglasang, Leolino A. Maglasang, Margie Leila A. Maglasang, Ma. Milalie A. Maglasang, Salud Maglasang, and Ma. Flasalie A. Maglasang), representing the estates of their deceased parents.
Respondent is Manila Banking Corporation, later substituted by First Sovereign Asset Management (SPV-AMC), Inc. (FSAMI).
The petition assails the Court of Appeals (CA) Decision dated July 20, 2005 and Resolution dated January 4, 2006 in CA-G.R. CV No. 50410 which affirmed the Regional Trial Court (RTC), Branch 12, Ormoc City Decision dated April 6, 1987.
The RTC had directed petitioners to pay Manila Banking Corporation the amount of P434,742.36 with applicable interest and penalties, representing a deficiency after extrajudicial foreclosure, including attorney’s fees and costs of suit; this award was affirmed by the CA and later reviewed before the Supreme Court.

Statement of Facts

On June 16, 1975, spouses Flaviano and Salud Maglasang obtained a credit line from respondent in the amount of P350,000.00, secured by a real estate mortgage executed over seven of their properties located in Ormoc City and the Municipality of Kananga, Province of Leyte.
The spouses availed themselves of the credit line by taking loans of P209,790.50 (on October 24, 1975) and P139,805.83 (on March 15, 1976). Both loans became due and demandable within one year.
The parties agreed the loans would bear interest at 12% per annum and an additional 4% penalty would be charged upon default.
Flaviano died intestate on February 14, 1977.
After Flaviano’s death, Salud and their surviving children (the petitioners), with Edgar appointed attorney-in-fact for some heirs, proceeded with probate steps: on March 30, 1977 Edgar filed a verified petition for letters of administration; on August 9, 1977 the probate court issued an order granting letters of administration and appointed Edgar as administrator.
The probate court issued a Notice to Creditors on August 30, 1977 for the filing of money claims against Flaviano’s estate.
Respondent notified the probate court of its claim in the amount of P382,753.19 as of October 11, 1978, exclusive of interests and charges.
During the intestate proceedings, Edgar and Oscar obtained several loans from respondent, secured by promissory notes they signed.
On December 14, 1978 the probate court terminated the intestate proceedings after the surviving heirs executed an extrajudicial partition of Flaviano’s properties; the probate court expressly recognized respondent’s rights under the mortgage and promissory notes, specifically its right to foreclose within the statutory period.
Respondent proceeded to extrajudicially foreclose the mortgage on the spouses’ properties and became the highest bidder at public auction for P350,000.00.
A deficiency remained on the spouses’ obligation; on June 24, 1981 respondent filed suit to recover a deficiency amount of P250,601.05 as of May 31, 1981 against Flaviano’s estate, his widow Salud, and the petitioners (Civil Case No. 1998-0).

RTC Decision and Relief Awarded

After trial on the merits, the RTC rendered a Decision dated April 6, 1987 directing petitioners to pay respondent, jointly and severally, the amount of P434,742.36 with interest at 12% per annum plus a 4% penalty charge, reckoned from September 5, 1984 until fully paid.
The RTC found by a preponderance of evidence that, following extrajudicial foreclosure of the mortgaged properties, petitioners still had an outstanding obligation equal to the amount awarded as of the date specified.
The RTC allowed interest and penalty charges and awarded attorney’s fees equivalent to 10% of the outstanding obligation.

Appeal to the Court of Appeals and Contentions

Petitioners appealed to the CA, contending among other things that Section 7, Rule 86 of the Rules of Court provides alternative and exclusive remedies for satisfaction of respondent’s claim against the estate; election of one remedy operates as waiver of the others.
Petitioners argued that because respondent filed its claim against the estate during the intestate proceedings, it effectively abandoned its right to foreclose on the mortgage and is barred from filing any claim for deficiency amount.
Petitioners further contended the extrajudicial foreclosure was null and void because it was not conducted in the capital of the Province of Leyte as stipulated in the mortgage contract, and they denied any personal liability for loans taken by their deceased parents.

Court of Appeals Ruling

In a Decision dated July 20, 2005, the CA denied petitioners’ appeal and affirmed the RTC Decision.
The CA observed that the probate court erred in closing and terminating the intestate proceedings by the December 14, 1978 order without first satisfying claims of creditors in violation of Section 1, Rule 90 of the Rules of Court; as a result respondent was not able to collect from the petitioners and resorted to foreclosing the mortgage.
The CA held Section 7, Rule 86 did not apply because the case did not involve a mortgage made by an administrator over estate property; instead, the CA applied Act No. 3135 (the Act to regulate sale of property under special powers inserted in or annexed to real-estate mortgages) to entitle respondent to claim the deficiency after extrajudicial foreclosure.
Petitioners’ motion for reconsideration was denied by the CA in a Resolution dated January 4, 2006.

Issues Before the Supreme Court

The central issue presented to the Supreme Court was whether the Court of Appeals erred in affirming the RTC’s award of the deficiency amount to respondent.
Petitioners asserted that Section 7, Rule 86, not Act No. 3135, governs and that the remedies under Section 7, Rule 86 are alternative and exclusive; having filed its claim against the estate, respondent waived its right to foreclose and is precluded from recovering any deficiency.
Petitioners also maintained the extrajudicial foreclosure was void for being conducted outside the capital of Leyte (contrary to the mortgage stipulation) and denied personal liability for their parents’ loans.

Governing Rules and Statutory Provisions Discussed

Rules of Court — special proceedings rules (Rules 73 to 90) govern