El Hogar Filipino v. Philippine National Bank
REITERATIONFacts
The Antecedents: Serafin Novella, Mercedes Novella, Cecilia Magalona, and Robustiano Magalona constituted a first mortgage on several lots in favor of El Hogar Filipino, Mutual Building and Loan Association, to secure a P28,000 debt. The mortgage deed contained a clause granting the eventual manager of El Hogar Filipino irrevocable power to proceed with an extrajudicial sale upon default, with specific notice and sale procedures, and a proviso for cancellation of the sale if the borrower paid the full indebtedness plus accrued interest and expenses, minus the withdrawal value of shares, within thirty days after the auction sale. Subsequently, Serafin Novella constituted a second mortgage on his share of the lots in favor of the Philippine National Bank (PNB), with El Hogar Filipino's consent, provided it was subordinate to the first mortgage. Procedural History: The Novellas and Magalonas violated the contract, leading El Hogar Filipino to declare the debt due and proceed with an extrajudicial sale. El Hogar Filipino was the highest bidder, with the lots adjudicated to it for P39,063.71. PNB was notified of the sale and its right of repurchase but did not exercise it. Thirty days after the auction, a deed of sale was issued to El Hogar Filipino. When presented for cancellation of titles and issuance of new ones, PNB opposed, asserting its right to redeem within one year. The deed was registered with a notation of PNB's mortgage, which El Hogar Filipino agreed to, provided it was clear that it was merely taken from the original certificates. El Hogar Filipino filed actions to have the PNB mortgage lien extinguished and the annotation cancelled. The Court of First Instance denied El Hogar Filipino's petition, and it appealed. The Petition: El Hogar Filipino appealed the denial of its petition to have the mortgage lien in favor of the Philippine National Bank declared extinguished and to order the register of deeds to cancel the annotation of said mortgage on the transfer certificates of title issued in favor of El Hogar Filipino.
Issue(s)
Whether the second mortgage in favor of the Philippine National Bank subsists despite the extrajudicial sale conducted by the first mortgagee. Whether the Philippine National Bank has the right to redeem the lots after the extrajudicial sale conducted by El Hogar Filipino.
Ruling
The appealed judgment is reversed. The second mortgage constituted on the lots in question in favor of the Philippine National Bank is ordered cancelled. No special pronouncement as to costs.
Ratio Decidendi
On the subsistence of the second mortgage: The Court held that the second mortgage in favor of the Philippine National Bank was extinguished by the extrajudicial sale conducted by El Hogar Filipino. By virtue of the first mortgage and the credit becoming demandable, El Hogar Filipino had the legal right to cause the sale of the mortgaged lots to apply the proceeds to its credit. The Philippine National Bank, by accepting a second mortgage subordinate to the first, could not oppose this legal effect. The tenth clause of the mortgage deed, which allowed for extrajudicial sale, was deemed valid. The sale, having been conducted strictly in accordance with this clause, could not be questioned. Consequently, the lots were considered extinguished in so far as they secured the payment of the credit of the Philippine National Bank. The security in favor of PNB, as the second creditor, was thus extinguished. On the right of repurchase: The Court clarified that aside from the right of repurchase, the Philippine National Bank's only remaining right under its mortgage would be to apply any excess proceeds from the sale after the payment of El Hogar Filipino's credit. However, since El Hogar Filipino's credit absorbed the entire proceeds of the sale, the mortgage in favor of PNB was effectively extinguished. The lots passed to the repurchaser (El Hogar Filipino) free from the mortgage in favor of PNB. The bank's claim that its second mortgage stands to the prejudice of the purchaser was deemed untenable, as it would effectively convert the second mortgage into a first mortgage and vice versa. El Hogar Filipino's tolerance of the annotation of PNB's mortgage was merely a compromise regarding PNB's claim of timely redemption and not an admission of the mortgage's continued validity post-sale, especially since it was conditioned on the annotation being taken from the debtors' original certificates.
Main Doctrine
A second mortgage, accepted as subordinate to a first mortgage, is extinguished when the proceeds of an extrajudicial sale conducted by the first mortgagee, strictly in accordance with the mortgage deed, are fully absorbed by the first mortgage credit, leaving no excess for the second mortgagee. The lots pass to the highest bidder free from the second mortgage.