Title
Spouses Villaluz vs. Land Bank of the Philippines
Case
G.R. No. 192602
Decision Date
Jan 18, 2017
The Spouses Villaluz authorized Agbisit via SPA to mortgage their land; she delegated authority to Milflores Cooperative, which secured a loan from Land Bank. Default led to foreclosure. SC upheld the mortgage, ruling delegation valid, future loans as consideration, and additional collateral non-extinguishing.
mortgage contract
foreclosure sale
loan

Case Summary (G.R. No. 192602)

Factual Background

In 1996 Paula Agbisit, mother of petitioner May S. Villaluz, sought collateral to secure a loan for the expansion of her business and, with May's assent, proposed to use the Spouses Villaluz's land in Calinan, Davao City covered by TCT No. T-202276. On March 25, 1996 the Spouses Villaluz executed a one-page Special Power of Attorney authorizing Agbisit to negotiate for the sale, mortgage, or other disposition of the subject land and to sign documents on their behalf; the power of attorney contained no express limitations as to the amount or conditions for disposition. On June 19, 1996 Agbisit executed a Special Power of Attorney appointing Milflores Cooperative as her attorney-in-fact to obtain a loan and execute a real mortgage in favor of Land Bank of the Philippines. On June 21, 1996 Milflores Cooperative, in a representative capacity, executed a Real Estate Mortgage in favor of Land Bank for a principal amount of P3,000,000; on June 24, 1996 the cooperative executed a Deed of Assignment of produce and inventory as additional collateral. Land Bank released a first tranche of the loan amounting to P995,500 on June 25, 1996 and the remainder on October 4, 1996. Milflores Cooperative failed to meet its obligations and Land Bank initiated extrajudicial foreclosure, won the October 2, 2003 auction as the sole bidder, and sought to register its title.

Trial Court Proceedings

The Spouses Villaluz filed a complaint in the Regional Trial Court, Davao City, seeking annulment of the foreclosure sale. The trial court framed the dispositive issue narrowly as whether Agbisit validly delegated her authority as attorney-in-fact to Milflores Cooperative. Applying Art. 1892, the RTC found no prohibition in the Special Power of Attorney against appointment of a substitute, held the delegation valid, and dismissed the complaint.

Court of Appeals Decision

The Court of Appeals affirmed the RTC in its Decision dated September 22, 2009, reiterating the rule that an agent may appoint a sub-agent absent an express prohibition and that the Special Power of Attorney of March 25, 1996 contained no such prohibition; accordingly, the CA held that Agbisit validly appointed Milflores Cooperative as her sub-agent. The CA denied reconsideration, as reflected in its May 26, 2010 Resolution.

Issues Presented to the Supreme Court

The Supreme Court considered whether the mortgage executed by the substitute was valid and binding upon the principal. The Spouses Villaluz advanced two principal theories on appeal: first, that the Real Estate Mortgage was void for want of consideration because the loan proceeds were disbursed after the mortgage was executed; and second, that the Special Power of Attorney was extinguished by the Deed of Assignment of produce and inventory, which they characterized as payment of the cooperative's loan and thus operated to nullify the agency and the mortgage.

Parties' Contentions

The Spouses Villaluz argued that, under Art. 1409(3), obligations whose cause or object did not exist at the time of the transaction are void, hence the mortgage executed June 21, 1996 was void ab initio because the loan funds were released only on June 25, 1996. They also contended that the Deed of Assignment effectively paid the cooperative's obligation and thereby extinguished the agency. Land Bank responded that the CA and RTC correctly applied Arts. 1892 and 1893, that a security instrument is not extinguished until the underlying loan obligation is paid, and that the Deed of Assignment was additional security designed to cover any deficiency, not a payment that extinguished the loan.

Legal Rules on Agency and Substitution

The Court reviewed Arts. 1892 and 1893 of the Civil Code, which presume that an agent may appoint a substitute unless the principal has forbidden it, while allocating responsibility to the agent for the acts of the substitute in specified circumstances and granting the principal remedies against both agent and substitute. The law creates a presumption in favor of an agent's power to appoint a sub-agent, which, when exercised validly, gives rise ipso jure to an agency relationship between the principal and the substitute, thereby binding the principal by the substitute's acts performed within authority.

Court's Analysis on Validity of the Sub-Agent Appointment

The Court found that the March 25, 1996 Special Power of Attorney contained no restrictive language or express prohibition against Agbisit appointing a substitute; hence, under Art. 1892 the appointment of Milflores Cooperative was valid and the cooperative became the agent of the Spouses Villaluz for purposes within the delegated authority. The Court noted the concomitant obligations of a substitute to act within the scope of authority and in accordance with the principal's instructions and observed that the remedy for any prejudice to the principal remained an action against the agent and the substitute pursuant to Arts. 1892 and 1893.

Analysis on Consideration and the Meaning of "Did Not Exist" in Art. 1409(3)

Addressing the Spouses Villaluz's contention that the mortgage was void because the loan did not exist at the time of the mortgage's execution, the Court reconciled Art. 1409(3) with Art. 1347 and Arts. 1461 and 1462, which permit future things to be the object of contracts. Adopting the interpretive approach that the phrase "did not exist" in Art. 1409(3) means "could not come into existence," the Court limited Art. 1409(3) to cases of impossibility. The Court characterized the loan, which the mortgage expressly stated it secured, as a contemplated and possible obligation; the initial tranche of the loan was disbursed on June 25, 1996, and the security instrument was conditioned upon release of the loan. Relying on the principle that a loan is a real contract perfected upon delivery of the object of the contract, the Court held that the Real Estate Mortgage became operative when the suspensive condition — release of loan proceeds — was satisfied.

Analysis of the Deed of Assignment and the Nature of the Collateral

The Court rejected the contention that the Deed of Assignment constituted payment sufficient to extinguish the loan or the agency. The Deed of Assignment was expressly intended to secure payment of the loan and related charges and contained a clause preserving the assignor's liability except to the extent of any amount actually collected and paid to the assignee. The Court held that the assignment was accessory security, not dation in payment under Art. 1245, and did not operate as a cession in payment under Art. 1255, which presupposes multiple creditors and different circumstances. Because no cas

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