G.R. No. 228919 - Palo vs. Baquirquir

Case Summary (G.R. No. 228919)

Procedural Posture

Petitioner sought annulment of a notarial extrajudicial foreclosure, the subsequent auction sale, and the new TCT issued to respondent Rey C. Baquirquir. The RTC dismissed petitioner’s complaint on judgment on the pleadings; the CA affirmed the RTC; this Court initially denied review in a November 20, 2017 Resolution. Petitioner filed a Motion for Reconsideration of that denial; the Supreme Court granted the motion, set aside prior resolutions, reversed the CA and RTC decisions, and rendered judgment nullifying the foreclosure notice, certificate of sale, and the TCT in respondent Rey’s name.

Facts Established in the Record

Facts

The spouses Palo obtained a P407,000 loan from Nakamura secured by a real estate mortgage. A Notice of Notarial Foreclosure dated May 12, 2004 was executed by Atty. Casul-Arendain asserting default and initiating extrajudicial foreclosure; the property was publicly auctioned and Rey was the highest bidder. Palo failed to redeem within the applicable period, her original TCT was cancelled, and a new TCT was issued to Rey. Palo later sued to annul the foreclosure and sale, alleging Nakamura lacked authority under the mortgage to extrajudicially foreclose and asserting that Rey was a dummy who did not actually pay for the property.

Trial Court and Court of Appeals Decisions

RTC and CA Disposition

The RTC granted defendants’ counterarguments and dismissed Palo’s complaint on judgment on the pleadings, concluding that the mortgage’s foreclosure provision authorized Nakamura to foreclose and sell the property judicially or extrajudicially. The CA affirmed, holding that issuance of judgment on the pleadings indicates the answer failed to tender an issue or admitted material allegations and that the mortgage’s foreclosure clause supplied the requisite authority to carry out an extrajudicial foreclosure even without a separate special power of attorney (SPA).

Grounds Advanced in This Court and Motion for Reconsideration

Grounds in Supreme Court Filing and Motion

Petitioner’s principal contention in the Motion for Reconsideration before the Supreme Court was that the mortgage’s foreclosure clause did not specifically name the person(s) authorized to effect extrajudicial sale, and that under Act No. 3135 and related law a special power inserted or annexed to the mortgage (or an express authorization) is required to validate an extrajudicial foreclosure sale. Petitioner argued that Nakamura’s lack of an SPA rendered the foreclosure and consequent transfer of title void and that affirming the foreclosure would effect a taking without due process.

Legal and Doctrinal Framework Applied by the Court

Legal Background on Extrajudicial Foreclosure

The Court reviewed the legal history and framework for extrajudicial foreclosure. It recalled El Hogar Filipino v. Paredes, which recognized that a power of sale in a mortgage can be valid, and traced subsequent legislative regulation by Act No. 3135 (1924) that prescribes procedures when a sale is made under a special power inserted in or attached to a real-estate mortgage. The Court emphasized that Act No. 3135 contemplates an express and distinct special power to sell “inserted or attached” to the mortgage. The Civil Code and related jurisprudence were examined to explain that while the power to foreclose is inherent to the mortgagee’s right to realize on the security, the extrajudicial power to sell requires express authorization to protect mortgagors given the special nature of real property and potential for abuse.

Interpretation of the Mortgage Provision at Issue

Construction of the Mortgage Clause

The mortgage’s relevant clause read that if the mortgagor failed to redeem, “then this mortgage shall be foreclosed either judicially or extra-judicially in accordance with law.” The Court found that while the parties clearly intended to empower the mortgagee to seek foreclosure “in accordance with law,” that clause alone does not constitute the specific, express authorization to sell required by Act No. 3135 and controlling jurisprudence. The Court explained that the right to seek foreclosure (i.e., to initiate proceedings) is not equivalent to an express special power to effect an extrajudicial sale and transfer by way of sale under a special power inserted or annexed to the mortgage.

Relevant Precedents and How They Were Applied

Precedential Distinctions and Controls

The Court relied on earlier pronouncements distinguishing mere authorization to foreclose from a special power to sell. It reiterated Tan Chat v. Hodges and The Commoner Lending Corporation v. Villanueva, which require that the terms of a special power must clearly evince the mortgagee’s authority to sell or alienate the property; it also cited Spouses Baysa v. Spouses Plantilla to hold a general provision consenting to extrajudicial foreclosure does not suffice as the special power required. The Court emphasized that Act No. 3135’s language—sale “under a special power inserted in or attached to any real-estate mortgage”—forecloses recognizing any implicit power to sell; the special power must be express and distinct.

Application of Law to the Case Facts and Error Identified

Application and Reversible Error

Applying these principles, the Supreme Court concluded the RTC and CA erred: respondents’ reliance on the general foreclosure clause was insufficient to satisfy Act No. 3135’s requirement of an express special power to sell. Because respondents admitted (or did not successfully dispute) that no SPA was attached or inserted and because the mort

Case Syllabus (G.R. No. 228919)

Procedural Posture

Petition for review on certiorari filed by petitioner Luzviminda Palo (Palo) was originally denied by this Court in an unsigned Resolution dated November 20, 2017 for failure to sufficiently show reversible error in the Court of Appeals (CA) Decision of March 10, 2016 and Resolution of October 19, 2016 in CA-G.R. CV No. 04717.
Palo filed a Motion for Reconsideration of the November 20, 2017 Resolution.
The Motion for Reconsideration was set for resolution and, on August 23, 2023, the Court (Third Division) granted the Motion, set aside the prior Resolution, reversed and set aside the RTC and CA rulings, and rendered judgment nullifying the notarial foreclosure notice, the certificate of sale, and the Transfer Certificate of Title issued to the auction purchaser Rey C. Baquirquir.
The panel opinion: GAERLAN, J.; Caguioa (Chairperson), Dimaampao, and Singh, JJ., concur; Inting, J., on leave.

Facts

Palo and her husband Marcelo obtained a loan of P407,000.00 from respondent Takeshi Nakamura, a Japanese national.
The loan was secured by a real estate mortgage over a parcel in Barrio Gabi, Cordova, Cebu, designated Lot No. 4, Block 13, Pcs-072220-002578 and registered in Palo’s name under TCT No. T-103943.
On May 12, 2004, respondent Atty. Orpha T. Casul-Arendain executed a document titled "Notice of Notarial Foreclosure," stating that Palo failed to comply with the mortgage conditions and that Nakamura opted to foreclose.
Pursuant to the notarial foreclosure, the property was sold at public auction and Rey C. Baquirquir became the highest bidder. Palo failed to timely redeem; her original TCT was cancelled and a new TCT (T-152541) was issued to Rey.
Sometime in February 2009, Palo sued Nakamura, Rey, Atty. Casul-Arendain and others in the Regional Trial Court (RTC), Lapu-Lapu City, to annul the foreclosure, sale and issuance of the new TCT on the ground that Nakamura had no authority under the mortgage to extrajudicially foreclose; Palo also alleged Rey was a dummy and the auction sale was simulated because Rey never paid the alleged price.

Mortgage Provision at Issue

The mortgage instrument recited indebtedness of P407,000.00 payable on or before 24 November 2001 and constituted a first mortgage in favor of the mortgagee (Nakamura), his heirs and assigns, covering the described parcel and improvements.
The clauses included a prohibition on mortgagor from selling or contracting a second mortgage and a provision: "Should the MORTGAGOR fail to redeem the above-described properties within the period, then this mortgage shall be foreclosed either judicially or extra-judicially in accordance with law."
Emphasis in the Court’s opinion: the contract identified spouses Palo as MORTGAGOR and Nakamura as MORTGAGEE; the quoted foreclosure sentence was central to the dispute over authority to sell extrajudicially.

Trial Court (RTC) Proceedings and Ruling

Palo moved for judgment on the pleadings (Sept. 30, 2009), asserting respondents admitted Nakamura lacked a special power of attorney (SPA) necessary for extrajudicial foreclosure under Act No. 3135, as amended, and related authorities; she argued respondents’ answer failed to tender an issue.
Respondents opposed, contending no particular formality is required to authorize a mortgagee to effect sale upon foreclosure and relying on precedent (Tan Chat v. Hodges).
On August 7, 2012, the RTC rendered judgment dismissing Palo’s complaint "for lack of merit and evidence" and likewise dismissed defendants’ counterclaims for lack of evidence.
The RTC concluded the mortgage’s foreclosure provision gave Nakamura sufficient authority to foreclose and sell, finding the provision "clear as well as specific enough" to show the parties agreed for Nakamura to foreclose judicially or extra-judicially if mortgagor fails to redeem.

Court of Appeals Proceedings and Ruling

Palo appealed, arguing the RTC erred in dismissing her claim on the pleadings without expressly declaring whether respondents’ answer failed to tender an issue or admitted material allegations; she insisted extrajudicial foreclosure was void because no SPA was executed and the mortgage deed did not authorize extrajudicial sale.
The CA denied Palo’s appeal (Decision dated March 10, 2016) and later denied reconsideration (Resolution dated Oct. 19, 2016).
The CA held judgment on the pleadings indicated respondents’ answer failed to tender an issue or admitted the material allegations, hence the trial court correctly decided on pleadings alone.
On substance, the CA ruled Nakamura’s lack of an SPA did not preclude extrajudicial foreclosure because the mortgage’s foreclosure clause provided the requisite authority; it held no particular formality is required to empower the mortgagee to sell, so long as terms evince an intention that the sale may be made upon default.

Supreme Court Initial Resolution (Nov. 20, 2017)

Palo elevated the matter to the Supreme Court by petition for review on certiorari.
This Court initially denied the petition (unsigned Resolution dated Nov. 20, 2017), concluding the RTC and the CA did not err in finding the foreclosure provision of the mortgage contract gave Nakamura the authority to foreclose and sell the property.
The denial affirmed the CA Decision dated March 10, 2016, which had affirmed the RTC Decision and Order upholding the extrajudicial foreclosure sale’s validity.

Motion for Reconsideration to the Supreme Court — Grounds Raised

Palo’s Motion for Reconsideration to the Supreme Court argued:
- The foreclosure provision does not name the person(s) authorized to foreclose, in violation of Section 1 of Act No. 3135 as amended.
- Because Nakamura was not specifically named, the notarial foreclosure by Atty. Casul-Arendain on his behalf is void.
- Upholding the foreclosure and auction sale effectuated in favor of Rey constitutes a taking of property without due process.

Supreme Court Analysis on Reconsideration — Legal Framework and Precedent

The Court identified the core issue as construction of the mortgage’s relevant provision and the legal requirement for extrajudicial foreclosure