FORECLOSURE

What is foreclosure?

It is the remedy available to the mortgagee by which he subjects the mortgaged

property to the satisfaction of the obligation secured by the mortgage.
Demand is essential for default

■ Demand, however, is necessary for default to exist and which gives the right to
collect debt and foreclose the mortgage. It is the refusal to pay after demand
that gives the creditor a cause of action against the debtor (DBP v. Licuanan,
GR No. 150097, 26 February 2007).

Demand Default Foreclose

Judicial Foreclosure- Definition

A mortgage may be foreclosed judicially by bringing an action for that purpose, in

the proper court which has jurisdiction over the area wherein the real property
involved or a portion thereof, is situated.
Judicial Foreclosure- Procedure

Complaint: Order: Mortgagor to Order: Upon

Foreclosure of pay Mortgage Debt: failure, property to
Mortgage (Rule 68 ROC) 90-120 days be sold (Rule 39 ROC)

Motion, Order, Execution Sale:

Application of
Registration: Highest Bidder,
Proceeds of Sale
Confirmation of Sale Certificate of Sale

Sheriff’s Certificate
Judicial Foreclosure- Nature

■ Action Quasi in Rem- It is based on a personal claim against a specific

property of the defendant.

■ Result or incident of failure to pay indebtedness- The principal obligation is

the money indebtedness, and the subjection of the property is only resorted to
upon failure to pay the debt.

■ Survives the death of mortgagor- “..the claim is not a pure money claim but
an action to enforce a mortgage lien. Being so, the judgment rendered therein
may be enforced by a writ of execution. (Testamentaria de Don Amadeo
Matute Olave vs. Canlas, 4 SCRA 463 [1962])
Extrajudicial Foreclosure- Definition

A mortgage may be foreclosed extrajudicially where there is inserted in the contract,

a clause giving the mortgagee the power, upon default of the debtor, to foreclose
the mortgage by an extrajudicial sale of the mortgaged property.
Extrajudicial Foreclosure- Essential
Requirements [Act 3135, as amended]

Sale
within Publicatio
Special Public
province n of Notice
Power of
Attorney
where of Auction Auction
property is Sale (Sec4)
(Sec1)
located (Sec3)
(Sec2)
Additional requisites [A.M. No. 99-
10-05-0. August 7, 2001]
■ All applications for extra-judicial foreclosure of mortgage whether under the
direction of the sheriff or a notary public shall be filed with the Executive Judge,
through the Clerk of court who is also the Ex-Officio Sheriff.
■ Notices of auction sale in extrajudicial foreclosure for publication by the sheriff or
by a notary public shall be published in a newspaper of general circulation.
■ The name/s of the bidder/s shall be reported by the sheriff or the notary public
who conducted the sale to the Clerk of Court before the issuance of the
certificate of sale.
■ Republication in the manner prescribed by Act No. 3135 is necessary for the validity
of a postponed extrajudicial foreclosure sale.
Extrajudicial Foreclosure- Nature

■ Conferred for mortgagee’s protection

■ An ancilliary stipulation- The extrajudicial foreclosure is proper only when so

provided under a special power inserted in or attached to the mortgage contract.

■ A prerogative of the mortgagee. — The power to decide to foreclose or not is

the prerogative of the mortgagee.
Remedy of party aggrieved by
foreclosure.(Sec. 8, Act 3135)
The debtor may, in the proceedings in which possession was requested, petition that the sale be
set aside and the writ of possession cancelled, because the mortgage was not violated or the sale
was not made in accordance with the provisions thereof. He may ask for the annulment of the
foreclosure sale on
the ground that:
(a) There was fraud, collusion, accident, mutual mistake,
breach of trust or misconduct by the purchaser;
(b) The sale had not been fairly and regularly conducted;
or
(c) The price was inadequate and the inadequacy was so great as to shock the conscience of the
court. (United Coconut Planters Bank vs. Spouses Beluso, 530 SCRA 567 [2007].)
Right of Mortgagee to recover
deficiency
■ If the deficiency is embodied in a judgment, it is referred to as deficiency
judgment. (Sec. 6, Rule 68). It is the settled rule that a mortgagee may recover
any deficiency in the mortgage account which is not realized in a foreclosure
sale and that an independent civil action for the recovery of deficiency may be
filed even during the period of redemption. (Tarnate vs. Court of Appeals,
241 SCRA 254 [1995].)

■ The action to recover a deficiency after foreclosure prescribes after ten (10)
years from the time the right of action accrues
Other important matters

■ Stipulation of upset price is null and void

Upset price is the minimum price at which the property shall be sold, to become
operative in the event of a foreclosure sale at public auction, is null and void for
the property must be sold to the highest bidder. (Banco Español-Filipino vs.
Donaldson, Sim & Co., 5 Phil. 418 [1906])

■ Waiver of security by mortgagee allowed

Mortgagee may waive the right to foreclose the mortgage and claim and maintain
a personal action for recovery of the indebtedness. (BPI Family Savings
Bank, Inc. vs. Vda. De Cosculluela, 493 SCRA 472 [2006].)
■ Remedies in case of death of debtor
1. To waive the mortgage and claim the entire debt from the estate of the mortgagor
as an ordinary claim
2. To foreclose the mortgage judicially and prove any deficiency as an ordinary
claim; and
3. To rely on the mortgage exclusively, foreclosing the same at any time before it is
barred by prescription without right to file a claim for any deficiency
Exercise

X, at Y’s request, executed a Real Estate Mortgage (REM) on his (X’s) land to secure Y’s
loan from Z. Z successfully foreclosed the REM when Y defaulted on the loan but half of
Y’s obligation remained unpaid. May Z sue X to enforce his right to the deficiency?
(2011 Bar Question)
a. Yes, but solidarily with Y.
b. Yes, since X’s is deemed to warrant that his land would cover the whole obligation.
c. No, since it is the buyer at the auction sale who should answer for the deficiency.
d. No, because X is not Z’s debtor.
What is the effect if the proceeds in an extra-judicial foreclosure sale is not sufficient to
pay for the obligation? (2012 Bar Question)
a. The mortgagee can claim for deficiency judgment from the debtor;
b. The mortgagee can claim for deficiency judgment from the mortgagor even though it
is a third party mortgage;
c. The mortgagee has no more recourse or claim against the debtor;
d. The mortgagee cannot claim for deficiency judgment from the debtor because it’s an
extrajudicial foreclosure.
On X’s failure to pay his loan to ABC Bank, the latter foreclosed the Real Estate
Mortgage he executed in its favor. The auction sale was set for Dec. 1, 2010 with the
notices of sale published as the law required. The sale was, however, cancelled when
Dec. 1, 2010 was declared a holiday and rescheduled to Jan. 10, 2011 without
republication of notice. The auction sale then proceeded on the new date. Under the
circumstance, the auction sale is (2011 Bar Question)
a. Rescissible.
b. Unenforceable.
c. Void.
d. Voidable.
Eduardo was granted a loan by XYZ Bank for the purpose of improving a building which
XYZ leased from him. Eduardo, executed the promissory note (“PN”) in favor of the bank,
with his friend Recardo as cosignatory. In the PN, they both acknowledged that they are
“individually and collectively” liable and waived the need for prior demand. To secure
the PN, Recardo executed a real estate mortgage on his own property. When Eduardo
defaulted on the PN, XYZ stopped payment of rentals on the building on the ground that
legal compensation had set in. Since there was still a balance due on the PN after
applying the rentals, XYZ foreclosed the real estate mortgage over Recardo’s property.
Recardo opposed the foreclosure on the ground that he is only a co-signatory; that no
demand was made upon him for payment, and assuming he is liable, his liability should
not go beyond half the balance of the loan. Further, Recardo said that when the bank
invoked compensation between the rentals and the amount of the loan, it amounted to
a new contract or novation, and had the effect of extinguishing the security since he did
not give his consent (as owner of the property under the real estate mortgage) thereto.
x x x Can Recardo’s property be foreclosed to pay the full balance of the loan? (2%)
(2008 Bar Question)
Answer: No, because there was no prior demand on Ricardo, depriving him of the right
to reasonably block the foreclosure by payment. The waiver of prior demand in the PN is
against public policy and violates the right to due process. Without demand, there is no
default and the foreclosure is null and void. Since the mortgage, insofar as Ricardo is
concerned is not violated, a requirement under Act 3135 for a valid foreclosure of real
estate mortgage is absent.