G.R. No. 142896 - Caneland Sugar Corp. vs. Alon

Case Summary (G.R. No. 142896)

Facts and Chronology of Transactions

On January 30, 1975, the spouses Tad-y obtained a loan of ₱109,000 from PNB secured by a Real Estate Mortgage (REM) over six parcels of land. Subsequently, on August 14, 1975, the mortgage was extended to cover an additional loan of ₱63,000. The mortgage was duly annotated on the titles of these properties. On August 9, 1988, Lots 778 and 788 were sold at a tax delinquency auction by the Provincial Treasurer of Negros Occidental due to failure by the Tad-ys to pay real property taxes. PNB participated as the sole bidder and acquired titles to both lots through final bills of sale issued on August 23, 1989. The spouses Tad-y restructured their loans under Republic Act No. 7202 in November 1995 and fully paid off the loans by 1996. Accordingly, PNB executed a deed of release for the mortgage but excluded Lots 778 and 788, citing their ownership through the auction purchase.

Trial Court Decision and Key Rulings

The Regional Trial Court (RTC) of Himamaylan City ruled in favor of the Tad-ys, ordering PNB to reconvey Lots 778 and 788 to them upon payment of the auction price, expenses, and interest. The RTC reasoned that under paragraph (c) of the REM, the mortgagee (PNB) was obligated to pay real property taxes if the mortgagors failed to do so. PNB’s failure to pay taxes on the disputed lots allowed the accumulation of tax delinquencies and enabled PNB to acquire the properties at a significantly undervalued price during the auction. Although PNB’s participation in the auction was not illegal, it constituted an abuse of right under Article 19 of the Civil Code and caused prejudice to the Tad-ys. Moreover, paragraph (d) of the REM granted PNB automatic appointment as attorney-in-fact of the mortgagors in case of breach, implicating that PNB’s acquisition should benefit the Tad-ys. The RTC also dismissed PNB’s argument that the Province of Negros Occidental was an indispensable party.

Court of Appeals Affirmation

The Court of Appeals (CA) affirmed the RTC’s decision, emphasizing that the REM duty to pay real property taxes is a joint obligation which, upon mortgagor’s default, the mortgagee must assume to protect the property. PNB’s failure to do so and its subsequent acquisition of the properties at auction constituted abuse of rights and breach of fiduciary duty. The CA rejected PNB’s prescription defense, noting the failure to raise it timely in pleadings barred its consideration on appeal. The CA further found that PNB’s acquisition of the disputed lots created a constructive trust for the benefit of the Tad-ys, as PNB held the legal title adverse to equity and good conscience.

Prescription and Laches: Procedural and Substantive Issues

PNB contended that the action filed by the Tad-ys was barred by the statute of limitations, entitling it to dismissal under Rule 9, Section 1 of the Rules of Court, which allows dismissal if prescription is evident on the face of the complaint. The Supreme Court applied the 1987 Philippine Constitution and relevant procedural rules, affirming that while prescription may be raised via motion to dismiss or as an affirmative defense, its invocation requires that the complaint clearly show the action is barred. Where factual issues about prescription or laches require evidence, dismissal without trial is improper. Given that PNB raised prescription for the first time on appeal and that the complaint's allegations and reliefs created ambiguity as to the applicable prescriptive period, the Court upheld the CA’s refusal to dismiss the action based on prescription. The Court also recognized laches as a factual matter needing trial-level evidence, which was absent in this case.

Interpretation of the Real Estate Mortgage’s Tax Payment Obligation

The Court analyzed paragraphs (b) and (c) of the REM, which specify that the mortgagor shall pay all taxes and assessments and that failure to pay constitutes default enabling foreclosure. Paragraph (c) further provides that the mortgagee shall advance taxes and insurance premiums if the mortgagor defaults, but the Court held that PNB’s obligation to pay such taxes arises only if judicial foreclosure is initiated. Since no judicial foreclosure took place, the Court ruled PNB was not obligated to pay the taxes and that the mortgagors’ nonpayment amounted to default under the REM.

Construction of Attorney-in-Fact Authority under Paragraph (d) of the REM

Paragraph (d) automatically appoints PNB as attorney-in-fact upon breach of any mortgage condition, granting broad powers to manage, lease, or sell the mortgaged property, including recovery and administration of rents and expenses. While the REM does not expressly mention the power to buy the property at auction, the Court interpreted “any other act … convenient for the proper administration of the mortgaged property” to include such authority as necessary to preserve PNB’s security interest. The power to repurchase properties at auction was viewed as ancillary to PNB’s obligation to safeguard its mortgage rights, especially since it was acquired to prevent loss to third parties. However, once the Tad-ys fully paid the indebtedness in 1996, the REM became functus officio, and PNB’s interest terminated. The Court di

Case Syllabus (G.R. No. 142896)

Facts of the Case

On January 30, 1975, spouses Jose Tad-y and Patricia Toledanes Tad-y obtained an agricultural sugar crop loan amounting to ₱109,000.00 from the Philippine National Bank (PNB), secured by a Real Estate Mortgage (REM) covering six parcels of land in Himamaylan City and Hinigaran, Negros Occidental.
The REM was annotated on the respective certificates of title as Entry No. 201793.
On August 14, 1975, the spouses availed themselves of a second loan of ₱63,000.00, which was incorporated under the same mortgage and annotated as Entry No. 210254.
On August 9, 1988, two parcels (Lots 778 and 788) under the REM were sold at a tax delinquency public auction by the provincial treasurer of Negros Occidental due to unpaid real estate taxes.
PNB was the sole bidder, acquiring the lots for ₱10,609.63 and received Final Bills of Sale on August 23, 1989.
The Certificates of Sale were annotated on the titles as Entry Nos. 329629 and 329628.
In November 1995, the spouses restructured their loans under Republic Act No. 7202, and by 1996, fully paid off both loans.
PNB executed a Deed of Release of the REM on March 6, 1996, but notably excluded Lots 778 and 788 claiming ownership via the tax auction sale.
Patricia Tad-y made formal requests for reconveyance and expressed willingness to reimburse PNB for the auction price in 2001 and 2003.
PNB maintained ownership but expressed willingness to negotiate repurchase.
On March 23, 2004, Patricia and her children, represented by Antonio Tad-y, filed a complaint for breach of contract and reconveyance before the Regional Trial Court (RTC) of Himamaylan City.

Issues Presented

Whether PNB breached the Real Estate Mortgage contract by failing to pay real property taxes on Lots 778 and 788, allowing their tax delinquent sale.
Whether PNB acted as attorney-in-fact of the spouses Tad-y in acquiring the tax-delinqent lots at auction by virtue of paragraph (d) of the REM.
Whether the action filed by the spouses Tad-y is barred by prescription.
Whether the acquisition of the disputed lots by PNB created a constructive trust in favor of the spouses Tad-y.
The nature and extent of PNB’s obligation to pay real property taxes under the REM.
The scope and application of the attorney-in-fact power granted to PNB under the REM.

Ruling of the Regional Trial Court (RTC)

The RTC held in favor of the Tad-ys, ordering PNB to reconvey Lots 778 and 788.
It ruled PNB should have paid the real property taxes in the event of default under the REM (per paragraph (c)).
PNB’s failure to pay and subsequent participation in the tax auction was deemed an actionable abuse of rights under Article 19 of the Civil Code.
Paragraph (d) of the REM constitutes PNB as attorney-in-fact of the spouses Tad-y upon breach, thus PNB’s purchase at auction inured to the benefit of the Tad-ys.
The RTC rejected PNB’s claim that the Province of Negros Occidental was an indispensable party.
Plaintiffs were ordered to reimburse PNB the auction price plus interest at 12% per annum.

Court of Appeals (CA) Decision and Resolution

The CA affirmed the RTC ruling.
It held that while the mortgagor is primarily responsible for taxes under paragraph (b), the mortgagee must advance unpaid taxes if the mortgagor fails to pay per the last sentence of paragraph (c).
PNB’s allowance of tax delinquency and purchase of the lots at auction for a below-market price constituted a breach and abuse of rights.
The CA refused to consider prescription as it was not raised in PNB’s pleadings.
The CA sustained the creation of an agency relation under paragraph (d), authorizing PNB’s acts in purchasing the lots for the mortgagors.
It ruled that a constructive trust was imposed on PNB over the parcels, acknowledging its fiduciary duty.
PNB’s motion for reconsideration was denied.

Supreme Court’s Analysis on Prescription

The Court noted that prescription is an affirmative defense and may be raised by motion to dismiss or in the answer but must be apparent from the pleadings or evidence to warrant dismissal without trial.
Since PNB raised prescription for the first time on appeal, the issue was deemed waived.
The Court explained that prescription involves factual disputes that re