Perez v. Philippine National Bank
REITERATIONFacts
The Antecedents: Vicente Perez mortgaged Lot No. 286-E to the Philippine National Bank (PNB) on August 29, 1939, to secure a loan. Vicente Perez died intestate on October 7, 1942, with an outstanding balance on the mortgage. His widow was appointed administratrix of his estate, and notice to creditors was published, but the PNB did not file a claim. The estate proceedings were closed after the project of partition was approved. The widow inquired about the account status in March 1947 and was informed of the outstanding balance. On January 2, 1963, PNB caused the extra-judicial foreclosure of the mortgaged property, which was purchased by the Bank. The certificate of title was cancelled and reissued in the Bank's name. The widow and heirs were not notified. Procedural History: On August 15, 1962, the widow and heirs of Vicente Perez filed a case against PNB seeking to annul the extra-judicial foreclosure sale and the transfer of title, and to recover damages. The trial court annulled the foreclosure and title transfer, ordering PNB to pay damages and attorney's fees, citing the doctrine in Pasno vs. Ravina that the power of sale terminates upon the death of the mortgagor and that foreclosure should be judicial. PNB appealed. The Petition: The Bank appealed the decision of the trial court, arguing that the extra-judicial foreclosure was valid.
Issue(s)
Whether the power to sell in an extrajudicial foreclosure is terminated by the death of the mortgagor. Whether a mortgage creditor may resort to extrajudicial foreclosure under Section 7, Rule 86 of the Rules of Court. Whether the heirs are entitled to redemption if the Bank failed to provide notice of the foreclosure.
Ruling
The Supreme Court modified the decision of the trial court. It declared the extra-judicial foreclosure valid and upheld the cancellation and reissuance of the title. However, it granted the appellees (heirs of Vicente Perez) the right to redeem the property within sixty (60) days after the balance is determined by the court of origin, by paying the capital, stipulated interest to the date of foreclosure, interest thereafter at 12% per annum, and useful expenditures, less any rents and profits derived by the Bank. Neither party was awarded damages or costs.
Ratio Decidendi
On Issue 1: The Court held that the power to foreclose extrajudicially is not an ordinary agency extinguished by the death of the principal under Article 1919 of the Civil Code. Instead, it is a "power coupled with an interest" because it is an authority conferred upon the mortgagee for the latter's protection and is an essential, inseparable part of the mortgage agreement. Such a power survives the death of the mortgagor, as it is supported by the same consideration (causa) as the mortgage itself. This remains true regardless of the fact that the mortgagor's estate has already been settled or distributed among the heirs. On Issue 2: The Court explicitly overruled the majority opinion in Pasno v. Ravina (54 Phil. 382) and adopted the dissenting opinion of Justices Street, Villamor, and Ostrand. Section 7, Rule 86 (formerly Rule 87) provides the mortgage creditor three distinct alternatives: (1) waive the security and share in the general distribution; (2) foreclose judicially and claim any deficiency; or (3) rely on the mortgage alone and foreclose at any time before it is barred by prescription. The Court reasoned that requiring judicial foreclosure under the third option would effectively eliminate it, as the third option specifically allows for foreclosure without a deficiency claim, which includes the extrajudicial method. Extrajudicial foreclosure is often more beneficial to the estate because it entails lower costs (advertising and sale expenses only) compared to judicial foreclosure, which usually includes high attorney's fees. On Issue 3: While the foreclosure was legally valid, the Court found that PNB neglected to notify the widow and heirs of the foreclosure despite being aware of the mortgagor's death since 1947. This failure prevented the heirs from blocking the foreclosure or exercising a seasonable redemption. Consequently, in the interest of justice and equity, the Court granted the heirs the right to redeem the property within sixty (60) days after the balance is determined by the court of origin, subject to the payment of the debt, interest, and reimbursement of useful expenditures, less rents and profits derived by the Bank.
Main Doctrine
The death of a mortgagor does not extinguish the power of sale in a mortgage, and extra-judicial foreclosure is permissible under Section 7, Rule 87 of the original Rules of Court (now Section 7, Rule 86), provided the mortgagee relies solely on the security and waives any claim for deficiency. However, equity may allow redemption if the heirs were not notified of the foreclosure.