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PABLO P. GARCIA v. YOLANDA VALDEZ VILLAR

FACTS:

The pertinent facts of this case are as follows:

Lourdes V. Galas (Galas) owned a property in Quezon City, covered by Transfer Certificate of Title (TCT) No. RT-67970(253279). On July 6, 1993, Galas mortgaged the property to Yolanda Valdez Villar (Villar) as security for a loan of P2,200,000.00. On October 10, 1994, Galas mortgaged the same property to Pablo P. Garcia (Garcia) to secure her loan of P1,800,000.00. Both mortgages were annotated at the back of TCT No. RT-67970.

On November 21, 1996, Galas sold the property to Villar for P1,500,000.00 and declared in the Deed of Sale that the property was "free and clear of all liens and encumbrances." The Deed of Sale was registered on December 3, 1996, and TCT No. RT-67970(253279) was cancelled and TCT No. N-168361 was issued in Villar's name. Both Villar's and Garcia's mortgages were carried over and annotated at the back of Villar's new TCT.

On October 27, 1999, Garcia filed a Petition for Mandamus with Damages against Villar, which was later amended to a Complaint for Foreclosure of Real Estate Mortgage with Damages. Garcia alleged that Villar acted in bad faith when she purchased the property and disregarded the provisions on foreclosure of mortgaged property. Garcia claimed to be subrogated as the second mortgagee and asserted that he had demanded payment from Villar.

Villar, in her Answer, claimed that the second mortgage was done without her consent and knowledge, and blamed Garcia for accepting the mortgage without her prior consent. Villar argued that there could be no subrogation as the assignment of credit was done without her knowledge or consent, and Garcia should instead seek recourse against Galas and Pingol, who were involved in the second mortgage.

The RTC issued a Pre-Trial Order, where the parties admitted certain facts, including the existence of the second mortgage and the transfer of the title to Villar. The main issue was whether Garcia could foreclose the property at the present time.

Garcia filed a Motion for Summary Judgment, claiming that there was no genuine issue as to the material facts and that he was entitled to a judgment as a matter of law. He argued that his equity of redemption had not yet been claimed since Villar did not foreclose the property.

Yolanda Villar was the first mortgagee of a property previously owned by Lourdes Galas. Galas subsequently mortgaged the same property to Pablo Garcia, making him the second mortgagee. When Galas failed to pay her obligation, Villar directly purchased the property from her, without foreclosing the mortgage. Garcia filed a complaint for judicial foreclosure of the second mortgage against Villar.

The Regional Trial Court (RTC) rendered a decision in favor of Garcia, ordering Villar to pay him the outstanding amount within a specified period. If Villar failed to pay, the property would be sold at public auction to satisfy the judgment. The RTC held that Villar should have foreclosed the property instead of directly purchasing it, so that junior mortgagees like Garcia could have the opportunity to satisfy their claims.

Villar appealed to the Court of Appeals, arguing that Garcia had no valid cause of action against her due to the absence of a violation of the second mortgage. She also claimed that the second mortgage was void and inexistent.

The Court of Appeals reversed the RTC decision, stating that Galas was free to mortgage the property without Villar's consent since there was no restriction in the Deed of Real Estate Mortgage. The Court of Appeals also found no evidence of any violation of the mortgage by Galas. Therefore, Garcia had no cause of action against Villar.

Garcia filed a Motion for Reconsideration, claiming that the main issue of the case was not properly resolved by the Court of Appeals.

ISSUES:

  1. Whether or not the second mortgage to Garcia was valid.

  2. Whether or not the sale of the subject property to Villar was valid.

  3. Whether or not the sale of the subject property to Villar was in violation of the prohibition on pactum commissorium.

  4. Whether or not Garcia's action for foreclosure of mortgage on the subject property can prosper.

  5. Whether Villar's purchase of the subject property violated the prohibition on pactum commissorium.

  6. Whether Galas's decision to sell the subject property to Villar was within her rights as the owner.

  7. Whether Garcia's action for foreclosure of mortgage is proper.

  8. Whether the purchaser of an immovable property encumbered with a mortgage is liable for the payment of the debt guaranteed by the mortgage.

RULING:

  1. The second mortgage to Garcia was valid under the terms and conditions of the Deed of Real Estate Mortgage executed by Galas and Villar.

  2. The sale of the subject property to Villar was valid under the terms and conditions of the Deed of Real Estate Mortgage executed by Galas and Villar.

  3. The sale of the subject property to Villar was not in violation of the prohibition on pactum commissorium as there was no restriction on the sale or alienation of the property during the life of the mortgages.

  4. Garcia's action for foreclosure of the mortgage on the subject property cannot prosper as there was no violation of the second mortgage executed in his favor and he failed to make a demand for payment of the obligation secured by said mortgage prior to his complaint against Villar.

  5. Villar's purchase of the subject property did not violate the prohibition on pactum commissorium. The power of attorney provision in the mortgage contract granted Villar the authority to sell or dispose of the subject property and apply the proceeds to the payment of the loan, but it did not provide for the automatic transfer of ownership to Villar upon Galas's failure to pay the loan. This provision is customary in mortgage contracts and is in conformity with Article 2087 of the Civil Code.

  6. Galas's decision to sell the subject property to Villar for an additional amount was within her rights as the owner of the property. The transfer of the property was made through a separate contract, namely the Deed of Sale, and there was no allegation that the sale was simulated to cover up an automatic transfer of ownership.

  7. While the second mortgage in favor of Garcia is still enforceable, Villar, as the buyer of the mortgaged property with notice of the mortgage, is only obligated to pay the mortgage or allow the property to be sold upon the creditor's failure to obtain payment from the original debtors. The obligation to pay the mortgage remains with the original debtors, Galas and Pingol.

  8. The Supreme Court ruled that the mere fact that the purchaser of an immovable property has notice of its encumbrance does not render him liable for the payment of the debt guaranteed by the mortgage, unless there is a stipulation or condition that he is to assume payment of the mortgage debt. The mortgage is merely an encumbrance on the property and the mortgagee, if he chooses, can waive the mortgage security and proceed to collect the principal debt by personal action against the original mortgagor. In this case, the petitioner has no cause of action against the respondent in the absence of evidence to show that the second mortgage executed in favor of the petitioner has been violated by the debtors and that a demand for payment has been made but failed.

PRINCIPLES:

  • Stipulations forbidding owners from alienating mortgaged properties are void.

  • The power of attorney provision in a mortgage allowing the mortgagee to sell the property in case of default in payment is not a violation of the prohibition on pactum commissorium if it is based on a valid agreement between the parties.

  • The mortgage directly and immediately subjects the property to the fulfillment of the obligation for which it was constituted. The mortgage lien is considered inseparable from the property and follows it even after subsequent transfers by the mortgagor.

  • The sale or transfer of a mortgaged property does not affect or release the mortgage. The purchaser or transferee is bound to acknowledge and respect the encumbrance.

  • The buyer of a mortgaged property is not obligated to replace the debtor in the principal obligation without the consent of the creditor. Novation, which consists of substituting a new debtor in place of the original one, may be made even without the knowledge or against the will of the original debtor, but not without the consent of the creditor.

  • "Caveat emptor" applies only to execution sales and does not apply in cases where the purchaser has notice of an encumbrance such as a mortgage on the property.

  • The mere existence of a mortgage on an immovable property does not automatically make the purchaser liable for the payment of the mortgage debt unless there is a stipulation or condition to that effect.

  • A mortgage is merely an encumbrance on the property and the mortgagee can choose to waive the mortgage security and pursue the principal debt by personal action against the original mortgagor.

  • In order to have a cause of action against the purchaser of an encumbered property, there must be evidence showing that the mortgage has been violated by the debtor and that a demand for payment has been made but failed.