Title
Perez vs. Philippine National Bank
Case
G.R. No. L-21813
Decision Date
Jul 30, 1966
Heirs of Vicente Perez challenged PNB's extrajudicial foreclosure of mortgaged property after his death. SC upheld foreclosure validity but granted heirs redemption rights due to lack of notice.
extrajudicial foreclosure
mortgage
bank
A

Case Summary (G.R. No. 209463)

Key Dates and Procedural Milestones

Aug. 29, 1939 — Vicente Perez executed mortgage to secure P2,500 loan.
Oct. 7, 1942 — Vicente Perez died intestate, survived by widow and children. Outstanding mortgage balance then ≈ P1,917 plus interest.
Oct. 18, 1946 — Widow instituted Special Proceedings No. 512 for settlement of estate; she was appointed Administratrix; notice to creditors published; the Bank did not file a claim.
Mar–Apr, 1947 — Widow inquired about account; Bank informed her of outstanding balance (P2,758.84) and furnished mortgage copy and tax declaration.
July 18, 1956 — Project of partition approved; Special Proceeding No. 512 closed.
May 11, 1962 — Certificate of Title T‑32066 (in Bank’s name) shown in the record.
Jan. 2, 1963 — Bank caused extrajudicial foreclosure; property sold at sheriff’s auction and purchased by the Bank; after lapse of redemption, original title cancelled and new title issued in Bank’s name.
Aug. 25, 1962 — (As stated in record) Appellees instituted suit in trial court seeking annulment and damages.
Dec. 15, 1962 — Trial court rendered judgment annulling foreclosure, cancelling Bank’s title, awarding damages (P3,000) and attorneys’ fees (P2,000).
Appeal to the Supreme Court followed.

Applicable Law and Rules Referenced

  • Section 7, Rule 87 of the original Rules of Court (1941), later Section 7, Rule 86 of the 1964 Revised Rules — reproduction of section 708 of the Code of Civil Procedure (Act 190). The Rule provides three alternatives for a creditor holding a mortgaged claim against a deceased: (1) abandon the security and prove the claim as an ordinary creditor; (2) foreclose by action in court, making executor/administrator a defendant and, if necessary, prove deficiency in administration; or (3) rely upon the mortgage alone and foreclose the same at any time within the statute of limitations, in which event the creditor is not admitted as a creditor in the estate and receives no share in distribution. The Rule also permits executor/administrator to redeem under court direction if in the interest of the estate.
  • Section 708 of the Code of Civil Procedure (text reproduced in the record).
  • References to Act No. 3135 and to Civil Code provisions concerning agency (Article 1732 of the Civil Code of 1889 and Article 1919 of the Civil Code of the Philippines) appear in the trial and appellate analysis as background to arguments about the effect of a mortgagor’s death on the power of sale.

Trial Court Holding and Basis

The trial court annulled the extrajudicial foreclosure and the Bank’s title transfer, awarding damages and attorneys’ fees to the heirs. The court relied principally on the Supreme Court’s majority view in Pasno v. Ravina (54 Phil. 378), which held that, given the silence of Act No. 3135 and the contents of section 708 (old numbering), the mortgagee should foreclose by judicial action after the mortgagor’s death to safeguard the estate and put it on notice. The trial court concluded the power to sell in the mortgage had terminated upon the mortgagor’s death and that extrajudicial foreclosure was therefore improper.

Precedent Considered: Pasno v. Ravina — Majority and Dissent

The Pasno majority reasoned that although a power of sale may survive the mortgagor’s death in theory, the settlement procedures for estates and the silence of Act No. 3135 made it preferable to require judicial foreclosure after death to protect the estate’s interests. The Pasno dissent (Justices Street, Villamor and Ostrand) argued that section 708 expressly provides three alternatives and that the third alternative — to foreclose without action (i.e., by power of sale) within the prescription period — remains available after death. The dissent emphasized practical advantages to estates from extrajudicial foreclosure (limited expenses, a one‑year redemption period) versus judicial foreclosure (potentially higher attorney’s fees, no fixed redemption period) and that requiring judicial foreclosure would prejudice estates.

Supreme Court’s Re‑examination and Legal Conclusion

Upon careful reexamination, the Supreme Court in the present appeal concluded that the dissenting reasoning in Pasno v. Ravina better accords with the text of the Rules and with reason. The Court held that section 7, Rule 87 (old numbering) plainly offers three alternatives to the mortgage creditor, and the third alternative — to foreclose extrajudicially and rely upon the mortgage alone within the prescription period — cannot be read out of the Rule. Therefore, the majority of Pasno, which effectively abolished the third alternative by requiring judicial foreclosure after the mortgagor’s death, was overruled. The Court recognized that the power to foreclose extrajudicially survives the mortgagor’s death and is not extinguished by operation of ordinary agency rules, because the power of sale is ancillary to and an inseparable part of the mortgage contract and is exercised primarily for the mortgagee’s protection.

Findings on Bank’s Conduct and Equitable Relief

Although the Court validated the Bank’s right to extrajudicial foreclosure, it expressly found that the Bank had been apprised of the mortgagor’s death as early as 1947 (the widow’s inquiries and the Bank’s responses) yet failed to give notice of the foreclosure to the widow and heirs. The Supreme Court held that this failure effectively prevented the heirs from timely preventing the foreclosure by payment and from exercising a seasonable redemption. In equity, and to avoid prejudice to the heirs arising from the Bank’s failure to notify, the Court fashioned a remedy permitting the heirs to redeem the property within a reasonable time.

Modified Judgment and Relief Ordered by the Supreme Court

The Supreme Court modified the trial court’s judgment as follows:

  1. Declared the extrajudicial foreclosure of Lot 286‑E valid and effective.
  2. Confirmed the cancellation of Transfer Certificate of Title No. 29530 and its replacement by Certificate of Title T‑32066 in the Bank’s name.
  3. Held that the widow and heirs are entitled to redeem the foreclosed property by paying or tendering to the Bank: (a) the capital of Vicente Perez’s debt, with the stipulated interest to the date

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