Mortgage: Real Estate Mortgage

GR 158891 (June 27, 2012)

Garcia v Villar
Leonardo-de Castro

Galas and Pingol mortgaged property to Villar and again to Garcia. Galas and Pingol then sold
the property to Villar, thus Garcia filed this action for foreclosure with damages against Villar
raising violation of Pactum Commisorium and that Villar subrogated the role of the principal
debtor. RTC ruled IFO Garcia, CA reversed it, and SC affirmed CA ruling that the sale did not
violated the prohibition against pactum commisorium, and that foreclosure against Villar is
improper since under the law, the original mortgage still persists, therefore he has no cause of
action against Villar yet for foreclosure since the action should still be against the principal
debtors Galas and Pingol.

DOCTRINE
● Elements of pactum commissorium:
(1) There should be a property mortgaged by way of security for the payment of the
principal obligation
(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.
● 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."
a. 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.
● The mere fact that the purchaser has notice that the property is encumbered does NOT
RENDER HIM LIABLE for payment of mortgage debt. IT is because the mortgage is
merely an ENCUMBRANCE ON THE PROPERTY, entitling him to have property
foreclosed if the principal obligor does not pay the debt. It is accessory to the
undertaking and exists independently of the obligation to pay secured by it.

IMPORTANT PEOPLE
[Petitioner] Pablo Garcia
[Respondent] Yolanda Villar
FACTS
1. Lourdes Galas (original owner of property in Quezon City), together with her daughter,
Ophelia G. Pingol, mortgaged said property to Yolanda Villar (RESPONDENT) as
security for a loan of 2.2 Million pesos.
2. Galas, again with Pingol, mortgaged the same subject property to Pablo P. Garcia
(PETITIONER) to secure her loan of 1.8 Million pesos.
3. Both mortgages were annotated at the back of TCT
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 4. Galas then sold the property to Villar (Resp) for 1.5 Million, declaring in Deed of
Sale that such property was "free and clear of all liens and encumbrances of any kind
whatsoever." Deed of sale registered, TCT cancelled and a new one was issued
carrying the name of Villar, but with both Villar’s and Garcia’s mortgages still annotated
at the back of new TCT.
5. Garcia (Pet) filed Mandamus with damages against Villar before the RTC. He
subsequently amended to Complaint for Foreclosure of Real Estate Mortgage with
Damages alleging
a. That when Villar purchased the subject property, she acted in bad faith and with
malice as she knowingly and willfully disregarded laws on judicial and
extrajudicial foreclosure of mortgaged property
b. 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 as second mortgagee, he was subrogated to
Villar’s original status as first mortgagee, which is the creditor with the right to
foreclose.
c. That he had demanded payment from Villar who refused, thus this action.
6. Villar (Resp) answered, that complaint has no COA and that 2 nd mortgage in bad faith
as it was without her consent and knowledge. She alleged that she discovered about it
when she registered the DOS. Also there is no subrogation as the assignment of credit
was done with neither her knowledge nor prior consent.
7. RTC rendered decision in favor of Garcia ordering Villar to pay 1.8 Million plus legal
interest (subject matter of 2nd mortgage) within 90-120 days and upon failure and upon
motion, property be sold at a public auction under Rules 39 and 68 of ROC.
a. Court declared that the direct sale of property to Villar could not deprive the right
of Garcia as 2nd mortgagee, and upon failure of Galas to pay the obligation, VIllar
should have foreclosed the property instead (pursuant to Act 3135).
b. Since here 2nd mortgage was not discharge, and thus subsisted, Villar in turn is
LIABLE FOR IT.
8. Villar appealed to CA which in turn reversed the decision of RTC declaring that Galas
was free to mortgage said property WITHOUT consent of VIllar and that the sale was
valid since nothing in records show that Galas violated the Deed of Real Estate
Mortgage prior to sale.
a. Garcia filed MR raising that CA failed to resolve the main issue on whether or not
Garcia as 2nd mortgagee could still foreclose the mortgage after said property
had been sold to Villar the 1st mortgagee. MR denied.
9. Thus this action to SC with same arguments and added in a memorandum that the
Deed of REM contained a stipulation violating prohibition on Pactum Commisorium.

RELATED ISSUE with HOLDING

1. W/N sale of the subject property to Villar violated prohibition on Pactum

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 Commissorium? NO it did not since the transfer was due to another contract
● Garcia: that the stipulation appointing Villar, the mortgagee, as the mortgagor’s
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 (Article 2088 of the Civil Code)
● SC DISAGREES: Galas’s decision to eventually sell the subject property to Villar 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.
o Garcia never alleged that the transfer of the subject property to Villar was
automatic upon Galas’s failure to discharge her debt, or that the sale was
simulated to cover up such automatic transfer.
● Elements of pactum commissorium:
(3) There should be a property mortgaged by way of security for the payment of the
principal obligation
(4) 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.
● Villar’s purchase of the subject property did not violate the prohibition on pactum
commissorium. The power of attorney provision did not provide that the ownership
over the subject property would automatically pass to Villar upon Galas’s failure to pay
the loan on time.
o 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.

“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.”

2. ON propriety of Garcia’s action for foreclosure of Mortgage – IMPROPER – since the

COA is still with the original debtors
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.
● SC: 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."
o 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.
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 o In Article 2129 of the Civil Code, the mortgage on the property may still be
foreclosed despite the transfer:
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.
● Therefore the 2nd mortgage subsists and is still enforceable. However, Villar in buying
said property with notice that it was mortgaged, only undertook to pay such mortgage or
allow property to be sold upon failure of the mortgage creditor to obtain payment from
the principal debtor. Villar DID NOT OBLIGATE HERSELF to replace the debtor in the
principal obligation, and could not do so without the creditor’s consent (Art. 1293 on
novation)
o Meaning – obligation to pay the indebtedness still remains with the original
debtors Galas and Pingol.
● Finally court reiterated the ruling in Rodriguez v Reyes in that: the mere fact that the
purchaser has notice that the property is encumbered does NOT RENDER HIM LIABLE
for payment of mortgage debt. IT is because the mortgage is merely an
ENCUMBRANCE ON THE PROPERTY, entitling him to have property foreclosed if the
principal obligor does not pay the debt. It is accessory to the undertaking and exists
independently of the obligation to pay secured by it.
o THEREFORE: Garcia has no cause of action against Villar absent the evidence
showing that the 2nd mortgage executed in favor of Garcia has been violated by
his debtors (Galas and Pingol) – specifically that Garcia has made demand on
said debtors for payment of obligation secured by the 2 nd mortgage and failed to
pay.

DISPOSITIVE PORTION
Affirmed

Digester: Dino De Guzman