G.R. No. 20482 - Philippine Industrial Co. vs. El Hogar Filipino

Case Summary (G.R. No. 20482)

Factual Background: the First Mortgage and the Prohibiting Clause

Under the stipulation of facts, Salvador Vallejo executed a mortgage in favor of his codefendant El Hogar Filipino over real property registered under the Torrens system. The mortgage contained a prohibiting stipulation that the mortgagor could not create any legal right upon the mortgaged realty in favor of a third person, and could not make any lease contract registerable under law, or with rentals for more than one month payable in advance, without first obtaining El Hogar Filipino’s previous consent in writing. The mortgage further authorized enforcement: upon the debt becoming due due to breach of specified obligations, the manager of El Hogar Filipino could proceed to an extrajudicial sale at public auction before a notary or an auctioneer designated by the board of directors, subject to prior publication of notice in a newspaper of general circulation in the city once a week for three consecutive weeks. The manager was also authorized, as agent of the borrower, to execute the deed of sale in favor of the highest bidder in accordance with the contractual process.

After the first mortgage was noted as a lien and encumbrance on the certificate of title, Vallejo executed a second mortgage on the same property in favor of The Philippine Industrial Co., the appellee and plaintiff. When that second mortgage was presented for registration, the register of deeds refused on the ground that it did not appear that El Hogar Filipino ever consented to registration, as required by the prohibiting clause in the previously recorded mortgage.

Administrative Action and the Trial Court’s Approach

An administrative proceeding ensued challenging the register of deeds’ refusal to register the second mortgage. The trial court ruled that the question whether the prohibiting clause was valid or void should be litigated in an ordinary action. Accordingly, when the first mortgage fell due per its terms, El Hogar Filipino advertised the mortgaged property for public auction consistent with the extrajudicial enforcement mechanism in the mortgage.

In response, The Philippine Industrial Co. filed the present action, praying (i) that the prohibiting clause be declared void and (ii) for a preliminary injunction against El Hogar Filipino and Salvador Vallejo, including their attorneys, agents, representatives, and all persons acting on their behalf, to restrain them from carrying out the advertised sale.

Based on the stipulation of facts, the trial court held that the prohibition to register the second mortgage executed by Vallejo was of no effect, ordered the register of deeds to register the second mortgage, and declared the preliminary injunction final.

Issues Raised on Appeal by El Hogar Filipino

On appeal, El Hogar Filipino assigned as errors the trial court’s determinations. First, it challenged the holding that the mortgage clause binding the debtor not to create a subsequent real right in favor of a third person was of no effect. Second, it assailed the court’s finding as to the value of the property twice mortgaged, alleging that no evidence on value had been introduced. Third, it objected to the conversion of the preliminary injunction into a final injunction that prevented foreclosure, despite the alleged due status of the first mortgage. Fourth, it contended that the complaint should have been dismissed with costs against The Philippine Industrial Co.

The Court’s Legal Reasoning: Validity of the Prohibiting Stipulation

The Supreme Court’s discussion began with historical doctrine under Spanish law. The Court noted that an earlier Supreme Court of Spain decision dated September 6, 1863 held that if a mortgage specially mortgaged a thing and further stipulated that it should not be mortgaged a second time, and that stipulation was not contrary to law, then a new encumbrance made in contravention of that stipulation would be without effect; thus, any other mortgage on the same property would have no effect.

That doctrine, however, was modified by the Mortgage Law effective in the Philippines beginning December 1, 1889. The decision quoted Article 107, No. 4 of the Mortgage Law, which provided that already mortgaged property may be mortgaged again even if it was agreed not to do so, provided that the preference reserved to prior mortgagees in the collection of their loans is maintained. The Court then cited commentary suggesting doubt existed as to whether provisions authorizing such subsequent mortgaging applied when the first mortgage included a stipulation prohibiting further mortgages.

After the promulgation of the Civil Code, the Court emphasized that Article 1255 recognizes the absolute liberty of contracting parties to stipulate as they may deem fit, provided that the stipulations are not contrary to law, morals, and public order. The Court reasoned that there was no statute prohibiting the stipulation in question. It also noted that Article 1880 of the Civil Code makes the form, operation, and effect of mortgages subject to the Mortgage Law provisions not included in the chapter governing mortgages, and it understood that Article 107, No. 4 restricts contractual liberty by allowing, under its scheme, the registration of a second mortgage on already mortgaged property even if the first mortgage contains a stipulation against subsequent mortgages.

Yet, the Court stated that Article 107, No. 4 of the Mortgage Law did not apply in the case because the property was registered under the Torrens system. The Court invoked Section 124 of Act No. 496, explaining that the system of registration established by laws in force at the time should continue to be applicable to properties not registered under the law, subject to modifications in the Torrens statute. It also held that Article 1880 could not be invoked to displace the Mortgage Law scheme because the case fell outside its reach as described.

Therefore, the Court concluded that Article 1255 remained governing, and it held that the stipulation that the mortgagor would not make any other mortgage without the mortgagee’s consent was valid and binding between the parties. The Court reasoned that while a mortgagor may obtain subsequent loans through subsequent mortgages, there is no reason why a debtor who voluntarily binds himself to refrain from making a second mortgage without the creditor’s consent should not be held to comply.

The Court also clarified the legal effect of the Mortgage Law provision it discussed. It noted that the Mortgage Law did not declare the prohibiting stipulation void. Instead, it merely limited itself to permitting registration of a second mortgage under particular conditions and circumstances. In the present case, because the Court held that the Mortgage Law provision permitting registration did not apply to Torrens-registered property as explained, the contract’s prohibiting clause was to be enforced.

Ruling of the Supreme Court: Reversal and Dissolution of Injunction

Applying these conclusions, the Supreme Court reversed the trial court’s judgment. It held that the complaint should be dismissed and that

Case Syllabus (G.R. No. 20482)

Parties and Procedural Posture

THE PHILIPPINE INDUSTRIAL CO. appeared as plaintiff and appellee, and Salvador Vallejo acted as a defendant in the trial court.
El Hogar Filipino appeared as defendant in the trial court and became the appellant before the Court.
The parties submitted the case to the trial court for decision upon a stipulation of facts.
The trial court ruled for the plaintiff, prompting El Hogar Filipino to appeal.
The appeal assigned four alleged errors, which the Court resolved by reversing the trial court’s judgment.

Key Factual Allegations

Salvador Vallejo executed a mortgage in favor of El Hogar Filipino over registered real property under the Torrens system.
The mortgage included a prohibiting clause preventing the mortgagor from creating any legal right on the property in favor of a third person and from making lease arrangements registerable under law, or paying rentals for more than one month in advance, without the mortgagee’s prior written consent.
The same mortgage authorized extrajudicial sale if the debtor breached specified obligations, upon publication of notice once a week for three consecutive weeks in a newspaper of general circulation, and authorized the manager to execute the deed of sale as agent of the borrower in favor of the highest bidder.
After the mortgage was noted as a lien and encumbrance on the certificate of title, a second mortgage was presented to the register of deeds.
The register of deeds refused to register the second mortgage because it did not show that the first mortgagee El Hogar Filipino ever consented as required by the prohibiting clause.
An administrative proceeding followed the register of deeds’ refusal, and the trial court held that the validity or nullity of the prohibiting clause had to be litigated in an ordinary action.
When the first mortgage fell due under its terms, El Hogar Filipino advertised the mortgaged property for public auction.
THE PHILIPPINE INDUSTRIAL CO. filed an action seeking (a) a declaration that the prohibiting clause was void and (b) a preliminary injunction to stop the advertised sale.
The trial court held that the prohibiting clause had no effect, ordered the register of deeds to register the second mortgage, and declared the preliminary injunction final.

Contract Clauses at Issue

The prohibiting clause bound the borrower not to create any real right on the mortgaged property in favor of a third party and not to enter registerable lease arrangements, and it required the mortgagee’s written consent for such acts.
The prohibiting clause treated a breach as a trigger for the debt to become due at once and for the partnership to proceed under the contract’s collection provisions.
The tenth clause granted the manager sufficient and irrevocable authority to sell extrajudicially and at public auction upon board resolution after publication of notice.
The manager was also empowered to execute the deed of sale as agent of the borrower, and the clause imposed conditions relating to timing and the possibility of nullification of the sale upon payment within a stated period.
The dissent emphasized that these clauses represented an arrangement where the senior mortgagee secured privileges restricting the debtor’s further encumbrances.

Issues Presented on Appeal

The Court faced the question whether the mortgage clause prohibiting a mortgagor from creating subsequent real rights on the property in favor of a third person had no effect as the trial court held.
The appellant also challenged the trial court’s treatment of alleged value of the property “twice mortgaged” because no evidence on valuation had been introduced.
The appellant contested the trial court’s declaration that the preliminary injunction was final, thereby preventing foreclosure despite the first mortgage being due.
The appellant raised the trial court’s alleged failure to dismiss the complaint with costs.
Substantively, the dispute centered on the legal effect of a contractual stipulation against subsequent mortgages in light of then-applicable mortgage and civil law rules and the Torrens registration system.

Statutory and Doctrinal Framework

The dissent invoked general principles that contracts contrary to law, morals, or public policy are void, and that contracts taking property without due process of law are void.
The dissent cited Civil Code references including arts. 4, 1115, and 1255.
The majority discussion addressed the historical tension between an old Spanish Supreme Court doctrine and later mortgage statutes that regulated the effect of agreements restricting furthe