GARCIA VS VILLAR
stated no cause of action and that the second
FACTS:
- Lourdes V. Galas (Galas) was the original owner
of a piece of property (subject property) located
at Malindang St., Quezon City.
- On July 6, 1993, Galas, with her daughter,
Ophelia G. Pingol (Pingol), as co-maker,
mortgaged the subject property to Yolanda
Valdez Villar (Villar) as security for a loan in the
amount of Two Million Two Hundred Thousand
Pesos (P2,200,000.00).
- On October 10, 1994, Galas, again with Pingol as
her co-maker, mortgaged the same subject
property to Pablo P. Garcia (Garcia) to secure her
loan of One Million Eight Hundred Thousand
Pesos (P1,800,000.00).
- Both mortgages were annotated at the back of
TCT No. RT-67970 (253279).
- On November 21, 1996, Galas sold the subject
property to Villar for One Million Five Hundred
Thousand Pesos (P1,500,000.00), and declared in
the Deed of Sale that such property was free and
clear of all liens and encumbrances of any kind
whatsoever.
- On December 3, 1996, the Deed of Sale was
registered and TCT No. N-168361 was issued in
the name of Villar.
- Both Villars and Garcias mortgages were carried
over and annotated at the back of Villars new
TCT.
- Garcia filed a Petition for Mandamus with
Damages against Villar before the RTC, Branch
92 of Quezon City.
- Garcia subsequently amended his petition to a
Complaint for Foreclosure of Real Estate
Mortgage with Damages.
- Garcia alleged that when Villar purchased the
subject property, she acted in bad faith and with
malice as she knowingly and willfully
disregarded the provisions on laws on judicial
and extrajudicial foreclosure of mortgaged
property.
- Garcia further claimed that when Villar
purchased the subject property, Galas was
relieved of her contractual obligation and the
characters of creditor and debtor were merged in
the person of Villar.
- Therefore, Garcia argued, he, as the second
mortgagee, was subrogated to Villars original
status as first mortgagee, which is the creditor
with the right to foreclose. Garcia further asserted
that he had demanded payment from Villar,
whose refusal compelled him to incur expenses in
filing an action in court.
- Villar, in her Answer, claimed that the complaint
mortgage was done in bad faith as it was without
her consent and knowledge.
- Villar alleged that she only discovered the second
mortgage when she had the Deed of Sale
registered.
- Villar blamed Garcia for the controversy as he
accepted the second mortgage without prior
consent from her. She averred that there could be
no subrogation as the assignment of credit was
done with neither her knowledge nor prior
consent.
- Villar added that Garcia should seek recourse
against Galas and Pingol, with whom he had
privity insofar as the second mortgage of property
is concerned
RTC RULING:
- RTC ruled in favor of Garcia.
- The RTC declared that the direct sale of
the subject property to Villar, the first
mortgagee, could not operate to deprive
Garcia of his right as a second
mortgagee.
- The RTC said that upon Galas’ failure to
pay her obligation, Villar should have
foreclosed the subject property pursuant
to Act No. 3135 as amended, to provide
junior mortgagees like Garcia, the
opportunity to satisfy their claims from
the residue, if any, of the foreclosure sale
proceeds. This, the RTC added, would
have resulted in the extinguishment of
the mortgages.
- The RTC held that the second mortgage
constituted in Garcia’s favor had not
been discharged, and that Villar, as the
new registered owner of the subject
property with a subsisting mortgage, was
liable for it.
CA RULING:
- CA reversed the decision of RTC and ruled in
favor of Villar.
- In dismissing the complaint for judicial
foreclosure of real estate mortgage with damages,
the Court of Appeals held that Garcia had no
cause of action against Villar in the absence of
evidence showing that the second mortgage
executed in his favor by Lourdes V. Galas [had]
been violated and that he [had] made a demand
on the latter for the payment of the obligation
 secured by said mortgage prior to the institution
of his complaint against Villar.
- Motion for Reconsideration denied.
- Garcia is now before this Court, with the same
arguments he posited before the lower courts. In
his Memorandum, he added that the Deed of Real
Estate Mortgage contained a stipulation, which is
violative of the prohibition on pactum
commissorium.
ISSUES:
1. Whether or not the second mortgage to Garcia was
valid - YES
2. Whether or not the sale of the subject property to
Villar was valid - YES
3. Whether or not the sale of the subject property to
Villar was in violation of the prohibition on pactum
commissorium - NO
4. Whether or not Garcia’s action for foreclosure of
mortgage on the subject property can prosper - NO
RULING:
I. Validity of second mortgage to Garcia
and sale of subject property to Villar
- We agree with the Court of Appeals that both
second mortgage and sale are valid under the
terms and conditions of the Deed of Real Estate
Mortgage executed by Galas and Villar.
- While it is true that the annotation of the first
mortgage to Villar on Galas’ TCT contained a
restriction on further encumbrances without the
mortgagees prior consent, this restriction was
nowhere to be found in the Deed of Real Estate
Mortgage.
- Neither did this Deed proscribe the sale or
alienation of the subject property during the life
of the mortgages. Garcia’s insistence that Villar
should have judicially or extrajudicially
foreclosed the mortgage to satisfy Galas’ debt is
misplaced.
- The Deed of Real Estate Mortgage merely
provided for the options Villar may undertake in
case Galas or Pingol fail to pay their loan.
- Nowhere was it stated in the Deed that Galas
could not opt to sell the subject property to Villar,
or to any other person. Such stipulation would
have been void anyway, as it is not allowed under
Article 2130 of the Civil Code, to wit:
Art. 2130. A stipulation
forbidding the owner from alienating the
immovable mortgaged shall be void.
II. Prohibition on pactum commissorium
- Garcia claims that the stipulation appointing
Villar, the mortgagee, as the mortgagors attorney-
in-fact, to sell the property in case of default in
the payment of the loan, is in violation of the
prohibition on pactum commissorium, as stated
under Article 2088 of the Civil Code, viz:
Art. 2088. The creditor cannot
appropriate the things given by way of
pledge or mortgage, or dispose of
them. Any stipulation to the contrary is
null and void.
The following are the elements of pactum
commissorium:
(1) There should be a property mortgaged by way
of security for the payment of the principal obligation; and
(2) There should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within the
stipulated period.
Villars purchase of the subject property did
not violate the prohibition on pactum commissorium.
- The power of attorney provision above did not
provide that the ownership over the subject
property would automatically pass to Villar upon
Galass failure to pay the loan on time.
- What it granted was the mere appointment of
Villar as attorney-in-fact, with authority to sell or
otherwise dispose of the subject property, and to
apply the proceeds to the payment of the loan.
- This provision is customary in mortgage
contracts, and is in conformity with Article 2087
of the Civil Code, which reads:
Art. 2087. It is also of the essence of
these contracts that when the principal
obligation becomes due, the things in
which the pledge or mortgage consists
may be alienated for the payment to the
creditor.
- Galass decision to eventually sell the subject
property to Villar for an additional P1,500,000.00
was well within the scope of her rights as the
owner of the subject property.
- The subject property was transferred to Villar by
virtue of another and separate contract, which is
the Deed of Sale.
- Garcia never alleged that the transfer of the
subject property to Villar was automatic upon
Galas’ failure to discharge her debt, or that the
 sale was simulated to cover up such automatic against the will of the latter, but not
transfer. without the consent of the
creditor. Payment by the new debtor
III. Propriety of Garcias action gives him the rights mentioned in articles
for foreclosure of mortgage 1236 and 1237.

The real nature of a mortgage is described in
Article 2126 of the Civil Code, to wit:
Art. 2126. The mortgage
directly and immediately subjects the
property upon which it is imposed,
whoever the possessor may be, to the
fulfillment of the obligation for whose
security it was constituted.
Simply put, a mortgage is a real right, which
follows the property, even after subsequent transfers by
the mortgagor. A registered mortgage lien is considered
inseparable from the property inasmuch as it is a right
in rem.
- Therefore, the obligation to pay the mortgage
indebtedness remains with the original debtors
Galas and Pingol.
- In view of the foregoing, Garcia has no cause of
action against Villar in the absence of evidence to
show that the second mortgage executed in favor
of Garcia has been violated by his debtors, Galas
and Pingol, i.e., specifically that Garcia has made
a demand on said debtors for the payment of the
obligation secured by the second mortgage and
they have failed to pay.
- WHEREFORE, this Court
hereby AFFIRMS the February 27, 2003
Decision and March 8, 2003 Resolution of the
Court of Appeals in CA-G.R. SP No. 72714.

The sale or transfer of the mortgaged property

cannot affect or release the mortgage; thus the purchaser
or transferee is necessarily bound to acknowledge and
respect the encumbrance. In fact, under Article 2129 of
the Civil Code, the mortgage on the property may still be
foreclosed despite the transfer, viz:

Art. 2129. The creditor may

claim from a third person in possession
of the mortgaged property, the payment
of the part of the credit secured by the
property which said third person
possesses, in terms and with the
formalities which the law establishes.

- While we agree with Garcia that since the second

mortgage, of which he is the mortgagee, has not
yet been discharged, we find that said mortgage
subsists and is still enforceable.
- However, Villar, in buying the subject property
with notice that it was mortgaged, only undertook
to pay such mortgage or allow the subject
property to be sold upon failure of the mortgage
creditor to obtain payment from the principal
debtor once the debt matures.
- Villar did not obligate herself to replace the
debtor in the principal obligation, and could not
do so in law without the creditors consent. Article
1293 of the Civil Code provides:

Art. 1293. Novation which

consists in substituting a new debtor in
the place of the original one, may be
made even without the knowledge or
KOREA EXCHANGE BANK VS FILKOR
BUSINESS INTEGRATED
FACTS:
Respondent Filkor had three transactions with the
petitioner Korea Exchange Bank:
1. Borrowed US$ 140,000.00, of which only
US$ 40,000.00 was paid;
2. Executed nine (9) trust receipt but failed to
turn over the proceeds of the goods or the
goods themselves; and
3. Negotiated the proceeds of seventeen (17)
letters of credit, which were all dishonored
because of discrepancies.
- To secure payment for these obligations
respondent Filkor executed a Real Estate
Mortgage. It mortgaged to the bank the
improvements it constructed on the lot it was
leasing in Cavite Export Processing Zone
Authority.
- Respondents Kim Eung Joe and Lee Han Sang on
their part executed a Continuing Suretyship
binding themselves jointly and severally with
Filkor to pay the obligations to the bank.
- When Filkor breached all its obligations,
petitioner Korea Exchange Bank filed a civil case
with the RTC of Cavite.
- The petitioner sought to be paid for 27 causes of
action and that the mortgaged property be
foreclosed and sold at a public auction in case the
respondent fails to pay within ninety days from
the entry of judgment.
- The trial court rendered a judgment in favor of the
petitioner for all 27 actions but failed to order the
foreclosure and public auction of the mortgaged
property in the event that Filkor fails to pay its
obligation.
- Petitioner filed a motion for partial
reconsideration seeking that the relief of
foreclosure be granted but such motion was
denied saying that the petitioner in opting to file
a civil action for the collection of the defendant’s
obligation, has abandoned its mortgaged lien on
the property subject of the real estate mortgage.
ISSUE: Whether or not petitioner’s complaint before
the trial court was an action for foreclosure of a real
estate mortgage, or an action for collection of a sum of
money.
RULING:
It was an action for foreclosure of a real estate
mortgage. Petitioner’s allegations in its complaint, and
its prayer that the mortgaged property be foreclosed and
sold at public auction, indicate that petitioner’s action
was one for foreclosure of real estate mortgage.
 In petitioner’s complaint before the trial court,
petitioner alleges:
To secure payment of the obligations of
defendant Corporation under the First to
the Twenty-Seventh Cause of Action,
on February 9, 1996, defendant
Corporation executed a Real Estate
Mortgage by virtue of which it
mortgaged to plaintiff the
improvements standing on Block 13,
Lot 1, Cavite Export Processing Zone,
Rosario, Cavite, belonging to defendant
Corporation covered by Tax
Declaration No. 5906-1 and consisting
of a one-story building called
warehouse and spooling area, the
guardhouse, the cutting/sewing area
building and the packing area building.
(A copy of the Real Estate Mortgage is
attached hereto as Annex “SS” and
made an integral part hereof.)
 This allegation satisfies in part the requirements of
Section 1, Rule 68 of the 1997 Rules of Civil
Procedure on foreclosure of real estate mortgage,
which provides:
SECTION 1. Complaint in action for
foreclosure. – In an action for the
foreclosure of a mortgage or other
encumbrance upon real estate, the
complaint shall set forth the date and
due execution of the mortgage; its
assignments, if any; the names and
residences of the mortgagor and the
mortgagee; a description of the
mortgaged property; a statement of the
date of the note or other documentary
evidence of the obligation secured by
the mortgage, the amount claimed to be
unpaid thereon; and the names and
residences of all persons having or
claiming an interest in the property
subordinate in right to that of the holder
 of the mortgage, all of whom shall be
made defendants in the action.

 Prayer of the complaint before the trial court

reads as follows:

WHEREFORE, it is respectfully prayed

that judgment be rendered:
x xx
2. Ordering that the property
mortgaged be foreclosed and sold at
public auction in case defendants fail to
pay plaintiff within ninety (90) days
from entry of judgment.

 Petitioner’s action being one for foreclosure of real

estate mortgage the trial should have ordered the
foreclosure and public auction of the mortgaged
property in the event that respondent Filkor fails to
pay its outstanding obligations. This is pursuant to
Section 2 of Rule 68 of the 1997 Rules of Civil
Procedure, which provides:

SEC. 2. Judgment on foreclosure for

payment or sale.- If upon the trial in
such action the court shall find the facts
set forth in the complaint to be true, it
shall ascertain the amount due to the
plaintiff upon the mortgage debt or
obligation, including interest and other
charges as approved by the court, and
costs, and shall render judgment for the
sum so found due and order that the same
be paid to the court or to the judgment
obligee within a period of not less than
ninety (90) days nor more than one
hundred twenty (120) days from entry of
judgment, and that in default of such
payment the property shall be sold at
public auction to satisfy the judgment.

- WHEREFORE, the petition is

GRANTED The Order dated March 12,
1999, of the Regional Trial Court of
Cavite City, Branch 88, in Civil Case No.
N-6689 is hereby MODIFIED, to state
that the mortgaged property of
respondent Filkor be ordered foreclosed
and sold at public auction in the event
said respondent fails to pay its
obligations to petitioner within ninety
(90) days from entry of judgment.
HUERTA ALBA RESORT, INC. VS. CA AND
SYNDICATED MANAGEMENT GROUP, INC.
FACTS:
- Private respondent sought the foreclosure of four
(4) parcels of land mortgaged by petitioner to
Intercon Fund Resource, Inc. (Intercon).
- Private respondent SMGI instituted as
mortgagee-assignee of a loan amounting to P8.5
million obtained by petitioner from Intercon, in
whose favor petitioner mortgaged the aforesaid
parcels of land as security for the said loan.
- In its answer, petitioner questioned the
assignment by Intercon of its mortgage right
thereover to the private respondent, on the ground
that the same was ultra vires.
- On April 30, 1992, the trial court came out with
its decision granting herein private respondent
SMGI’s complaint for judicial foreclosure of
mortgage.
- Payment must be given within a period of not less
than 150 days from receipt hereof by the
defendant. In default of such payment, the four
parcels of land subject matter of the suit including
its improvements shall be sold to realize the
mortgage debt and costs, in the manner and under
the regulations that govern sales of real estate
under execution.
- Petitioner appealed the decision to the Court of
Appeals which dismissed the case on June 29,
1993 on the ground of late payment of docket
fees.
- petitioner came to SC via a petition for certiorari
which this court resolved to dismiss on December
13, 1993, on the finding that the Court of Appeals
erred not in dismissing the appeal of petitioner.
- Motion for reconsideration denied.
- Private respondent filed with the trial court of
origin a motion for execution of the Decision and
said motion was granted on July 13, 1994.
- Accordingly, a writ of execution issued and, on
July 20, 1994, a Notice of Levy and Execution
was issued by the Sheriff concerned, who issued
a Notice of Sheriffs Sale for the auction of subject
properties.
- Petitioner filed with the same trial court an
Urgent Motion to Quash and Set Aside Writ of
Execution ascribing to it grave abuse of
discretion in issuing the questioned Writ of
Execution.
- The lower court denied petitioners urgent motion
to quash the writ of execution, opining that
subject judgment had become final and executory
and consequently, execution thereof was a matter
of right and the issuance of the corresponding
writ of execution became its ministerial duty.
- Petitioner filed once more with the Court of
Appeals another petition for certiorari and
prohibition with preliminary injunction.
- On September 6, 1994, the scheduled auction sale
of subject pieces of properties proceeded and the
private respondent was declared the highest
bidder.
- Thus, private respondent was awarded subject
bidded pieces of property. The covering
Certificate of Sale issued in its favor was
registered with the Registry of Deeds on October
21, 1994.
- On September 7, 1994, petitioner presented an
Ex-Parte Motion for Clarification asking the trial
court to clarify whether or not the twelve (12)
month period of redemption for ordinary
execution applied in the case.
- On September 26, 1994, the trial court ruled that
the period of redemption of subject property
should be governed by the rule on the sale of
judicially foreclosed property under Rule 68 of
the Rules of Court.
- Thereafter, petitioner then filed an Exception to
the Order dated September 26, 1994 and Motion
to Set Aside Said Order, contending that the said
Order materially altered the Decision dated April
30, 1992 which declared that the satisfaction of
the judgment shall be in the manner and under the
regulation that govern sale of real estate under
execution.
- Meanwhile, in its Decision of September 30,
1994, the Court of Appeals resolved the issues
raised by the petitioner, holding that the 150 day
period within which petitioner may redeem
subject properties should be computed from the
date petitioner was notified of the Entry of
Judgment and that the 150-day period within
which petitioner may exercise its equity of
redemption expired on September 11, 1994.
- On March 31, 1995, the private respondent filed
a Motion for Issuance of Writ of Possession with
the trial court.
- On May 2, 1995, in opposition to private
respondents Motion for Issuance of writ of
Possession, petitioner filed a Motion to Compel
Private Respondent to Accept Redemption. It was
the first time petitioner ever asserted the right to
 redeem subject properties under Section 78 of
R.A. No. 337, the General Banking Act;
theorizing that the original mortgagee, being a
credit institution, its assignment of the mortgage
credit to petitioner did not remove petitioner from
the coverage of Section 78 of R.A. No. 337.
- In its Order of July 21, 1995, the trial court denied
private respondents motion for a writ of
possession, opining that Section 78 of the General
Banking Act was applicable and therefore, the
petitioner had until October 21, 1995 to redeem
the said parcels of land.
- Private respondent interposed a Motion for
Reconsideration seeking the reversal of the Order
but to no avail. In its Order dated September 4,
1995, the trial court denied the same.
- To attack and challenge the aforesaid order of the
trial court, the private respondent filed with this
court a Petition for Certiorari, Prohibition and
Mandamus but absent any special and cogent
reason shown for entertaining the same, the Court
referred the petition to the Court of Appeals, for
proper determination.
- Court of Appeals gave due course to the petition
and set aside the trial courts Order dated July 21,
1995 and Order dated September 4, 1995.
- In its Resolution of March 11, 1997, the Court of
Appeals denied petitioners Motion for
Reconsideration of the Decision.
- Undaunted, petitioner has come to this Court via
the present petition.
ISSUE: Whether or not Huerta Alba Resort has the one
year right of redemption under Sec. 78 of RA No. 337 –
NO.
RULING:
- Various decisions show that Huerta has been adjudged
to have only the Equity of Redemption, not the Right of
Redemption (Court cited Limpin v. IAC)
- The right of redemption in relation to a mortgage -
understood in the sense of a prerogative to re-acquire
mortgaged property after registration of the foreclosure
sale – exists only in extrajudicial mortgage.
- No right recognized in judicial foreclosure unless
mortgagee is PNB or a banking institution
- Where a mortgage is foreclosed extrajudicially, Act
3135 grants to the mortgagor the right of redemption
within one (1) year from the registration of the sheriff’s
certificate of foreclosure sale.
- Where the foreclosure is judicially effected, however, no
equivalent right of redemption exists.
- No such right of redemption exists in case of judicial
foreclosure of a mortgage if the mortgagee is not the PNB
or a bank or banking institution.
- In such a case, the foreclosure sale, when confirmed by
an order of the court. x x shall operate to divest the rights
of all the parties to the action and to vest their rights in the
purchaser. There then exists only what is known as
the equity of redemption.
- This is simply the right of the defendant mortgagor to
extinguish the mortgage and retain ownership of the
property by paying the secured debt within the 90-day
period after the judgment becomes final, in accordance
with Rule 68, or even after the foreclosure sale but prior
to its confirmation.
 What exists only now is the Equity of Redemption –
right of the mortgagor to extinguish the mortgage and
retain ownership by paying the debt within the 90 day
period after judgment becomes final.
 Section 2, Rule 68 provides that – x x If upon the trial
x x the court shall find the facts set forth in the
complaint to be true, it shall ascertain the amount due
to the plaintiff upon the mortgage debt or obligation,
including interest and costs, and shall render
judgment for the sum so found due and order the same
to be paid into court within a period of not less
than ninety (90) days from the date of the service of
such order, and that in default of such payment the
property be sold to realize the mortgage debt and
costs.
 This is the equity of redemption – it may even be
exercised beyond the 90 day period from date of
service of the order, as long as its before the order of
confirmation of the sale. (After such order of
confirmation, there is no more redemption possible)
- Petitioner did not seasonably invoke its purported right
under Sec 78 of RA 337.
- Earliest opportunity – when it submitted its answer to
the complaint for foreclosure (essentially, they should
have filed a counterclaim).
- Huerta should have asserted their right under Sec 78 of
RA 337 as a counterclaim in its answer.
- Counterclaims allow the whole controversy between
parties to be disposed of in one action.
- The applicability of Sec 78 RA 337 hinged on a factual
question
- The question whether Intercon is a credit institution was
never squarely brought before the court.

 The claim of benefits under Sec 78 RA 337 is in

the nature of a compulsory counterclaim that
should have been in the answer to the complaint.
- Failure of Huerta to assert this alleged right precludes it
from doing so at the late stage of litigation
- Estoppel may successfully be invoked.
- A party who failed to invoke his claim in the main case,
while having opportunity to do so, will be precluded from
invoking this claim subsequently.
- Huerta should have alleged at the very start that Intercon
was a credit institution, in order for Sec 78 RA 335 to
apply.
- Hence, in conformity with the ruling in Limpin, the sale
of the subject properties, as confirmed by the Order dated
February 10, 1995 of the trial court operated to divest the
rights of all the parties to the action and to vest their rights
in private respondent.
- There then existed only what is known as the equity of
redemption, which is simply the right of the petitioner to
extinguish the mortgage and retain ownership of the
property by paying the secured debt within the 90-day
period after the judgment became final.
- There being an explicit finding on the part of the Court
of Appeals in its Decision of September 30, 1994 in CA-
G.R. No. 35086 - that the herein petitioner failed to
exercise its equity of redemption within the prescribed
period, redemption can no longer be effected.
- The confirmation of the sale and the issuance of the
transfer certificates of title covering the subject properties
to private respondent was then, in order. The trial court
therefore, has the ministerial duty to place private
respondent in the possession of subject properties.
- WHEREFORE, the petition is DENIED, and the
assailed decision of the Court of Appeals, declaring null
and void the Order dated 21 July 1995 and Order dated 4
September 1997 of the Regional Trial Court of Makati
City in Civil Case No. 89-5424, AFFIRMED. No
pronouncement as to costs.