Title
Spouses Publico vs. Bautista
Case
G.R. No. 174096
Decision Date
Jul 20, 2010
Spouses Publico failed to repay loans secured by a mortgage; respondent Bautista paid their bank debt, sought foreclosure, and won. SC upheld rulings, preserving redemption rights.
loan obligation
mortgage cancellation
valid subrogation
A

Case Summary (G.R. No. L-53998)

Factual Background

On April 12, 1996, petitioners obtained a loan of P200,000 from respondent secured by a real estate mortgage covering the land under TCT No. T-244828. The Kasulatan specified interest and penalties and provided that, if not paid within one-and-a-half years, the mortgaged property could be sold pursuant to Act 3135. Petitioners surrendered the owners' copy of the title to respondent. In September 1996 petitioners borrowed back the owners' copy to remortgage the property in order to secure another loan the proceeds of which would be used to pay respondent.

The Pagpapatunay and Subsequent Bank Loan

Petitioner Divinia executed a written Pagpapatunay acknowledging a conditional promise to pay and stating that she would apply P100,000 toward the P200,000 debt and would leave a vehicle as pledge for the remaining P100,000. Petitioners thereafter obtained a P200,000 loan from Hiyas Savings and Loan Bank, Inc. (Hiyas Bank). Petitioners failed to satisfy their obligation to respondent. Fearing foreclosure by Hiyas Bank, respondent offered to pay the bank, and Hiyas Bank agreed provided respondent also pay obligations secured by mortgages on two other titled properties. In the presence of petitioner Jose, respondent settled petitioners' obligations with Hiyas Bank in the amount of P697,714.58. The official receipts were in Jose's name but bore dorsal annotations acknowledging that respondent advanced the payment; Jose and respondent signed those annotations.

Trial Court Proceedings and Judgment

Respondent filed on February 1, 1999 a complaint for foreclosure of mortgage, sum of money and damages before the RTC of Bulacan. Petitioners answered with a counterclaim alleging payment of the indebtedness. By Decision dated May 16, 2002, Branch 19, Bulacan RTC found that petitioners did not present competent evidence to support their bare assertions and rendered judgment for respondent. The trial court ordered petitioners to pay respondent the principal sum of P200,000 with interest and penalties, authorized foreclosure in default of payment, ordered payment of P697,714.58 plus interest, awarded attorney's fees of P20,000 and costs, and directed respondent to return two other titles. On motion of respondent the trial court amended its decision to state interest at twelve percent per annum on petitioners' unpaid loans.

Court of Appeals Ruling

The Court of Appeals affirmed the trial court by decision dated November 29, 2005. The appellate court held that the Pagpapatunay did not effect novation of the original obligation embodied in the Kasulatan because it created, at best, a conditional obligation whose condition was not fulfilled. The court emphasized that the real estate mortgage was merely a security and not the principal obligation. As to respondent's payment of Hiyas Bank, the CA relied on the official receipts and the dorsal annotations signed by Jose and respondent to conclude that respondent advanced the payment and that petitioners became liable to repay that advance. The CA rejected petitioners' reliance on Article 1236 for the reason that the payment was expressly allowed by Jose, was beneficial to petitioners, and Divinia failed to repudiate it within a reasonable time. The CA modified the dispositive portion to include a redemption period of "ninety (90) days from finality of judgment" as required by Rule 68, Sec. 2.

Issues Presented to the Supreme Court

Petitioners raised the following issues: whether respondent could still file an action for judicial foreclosure on the basis of the Kasulatan despite the subsequent execution of the Pagpapatunay and the delivery of the owners' copy of TCT No. 244828 to Divinia; whether petitioners were deprived of the equity of redemption; whether there was valid subrogation under Article 1294 of the Civil Code when respondent paid Hiyas Bank; and whether the award of attorney's fees was proper.

Parties' Contentions Before the Court

Petitioners contended that the mortgage had been cancelled and discharged by the Pagpapatunay and by respondent's payment to Hiyas Bank, which allegedly made respondent subrogee of the bank; they argued respondent's remedy should be an action for collection, not a foreclosure. Respondent argued that the Pagpapatunay did not replace the Kasulatan because she merely permitted the remortgage; that petitioners failed to present evidence of payment or compliance with the Pagpapatunay; and that she was justified in seeking judicial relief and thus entitled to attorney's fees.

Supreme Court Ruling and Disposition

The Supreme Court denied the petition. The Court sustained the findings of the trial court and the Court of Appeals that the Pagpapatunay did not extinguish the original obligation because its condition of payment was never fulfilled and because petitioners offered no competent proof of payment. The Court affirmed the CA's conclusion that the payment made by respondent to Hiyas Bank constituted an advance for which petitioners remained liable, and rejected petitioners' reliance on Article 1236 because the payment benefited them and Divinia did not repudiate it when she learned of it. The Court approved the appellate modification that the redemption period be "ninety (90) days from finality of judgment" consistent with Rule 68, Sec. 2, and noted that, under Rule 36, Sec. 2, the date of finality is the date of entry. The Court held that the theory of subrogation under Article 1294 was misplaced because the law does not confer upon a third person who pays the creditor the securities and rights of the creditor in the absence of an express stipulation; such third person has only an action for reimbursement. The Court further held that the trial court properly did not implead Hiyas Bank as an indispensable party. Finally, the Court upheld the award of attorney's fees under Article 2208 because petitioners' failure to satisfy their obligations compelled respondent to litigate since 1999; the petition was denied and costs were charged against petitioners.

Legal Basis and Reasoning

The Court reasoned that novation requires substitution of a new obligation in place of the old and the extinction of the prior obligation; a conditional promise such as the Pagpapatunay does not operate as novation unless the condition is fulfilled. The mortgage remained as security for the principal indebtedness and therefore foreclosure remained an available remedy. With respect to payment by a third person, the Court applied Article 1236 to hold that recovery is limited

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