In loan transactions, lenders usually require a security to guarantee its payment. If the security is realty, it is called a real estate mortgage. A mortgage does not transfer ownership to the lender [creditor] if the borrower [debtor] fails to pay the loan. This is because a mortgage only creates an encumbrance, not a sale. Any contract empowering the creditor to appropriate the property given as a security without foreclosure in case of non-payment of loan is prohibited under Article 2088 of the Civil Code, which states: “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.” This is legally known as pactum commissorium. In real estate mortgage, the remedy of the creditor in case of non-payment is foreclosure of the mortgage, either judicially under Rule 68 of the Revised Rules of Court or extrajudicially under Act 3135, as amended. The last law requires a special power given by the mortgagor to the mortgagee [creditor] to sell in public auction, which must be inserted in the real estate mortgage.
Is a provision giving the mortgagee [creditor] the power to foreclose in case of non-payment sufficient to carry out an extrajudicial sale? This issue was raised in Palo v. Sps. Baquirquir, et. al., G.R. No. 228919, 23 August 2023. In this case, Palo obtained a loan from Nakamura at P407,000.00 secured by real estate mortgage. In 2004, Atty. Arendain executed a Notice of Notarial Foreclosure since Palo failed to pay the loan. Baquirquir won as the highest bidder. As Palo tailed to redeem a new title was issued to Baquirquir. In 2009, Palo sued them to annul the foreclosure for being void because Nakamura has no authority to extrajudicially foreclose. In their answer, they argued that a Special Power of Attorney is not necessary to effect the foreclosure since the mortgage contract contained a provision authorizing the mortgagee to extrajudicially foreclose if he fails to redeem. Palo filed a motion for judgment on the pleadings since the answer failed to tender an issue when Nakamura admitted that no SPA is needed, when Act 3135 requires an SPA in real estate mortgage to validate the extrajudicial foreclosure. In 2012, the Regional Trial Court rendered judgment on the pleadings, but dismissed the case as Nakamura was authorized to sell if the loan is not paid. Palo appealed when the RTC denied her motion for reconsideration. The Court of Appeals ruled Nakamura’s lack of SPA does not preclude him from extrajudicially foreclosing the mortgage since the foreclosure provision of the mortgage contract gave him the requisite authority to do so. What matters is that the terms of the contract evince an intention that the sale may be made upon default. Palo elevated the matter to the Supreme Court when the CA denied her motion for reconsideration. The SC ruled the RTC and CA did not err. It upheld the extrajudicial foreclosure. Palo moved for reconsideration on the ground that the foreclosure provision of the real estate mortgage does not name the person who is authorized to foreclose the mortgage, which is contrary to Section 1 of Act No. 3135 as amended and upholding the extrajudicial foreclosure amounts to taking of property without due process of law.
It is stated in the contract that if the mortgagor fails to redeem within the period, then this mortgage shall be foreclosed either judicially or extrajudicially in accordance with law. Is this stipulation complies with Act 3135? Under our prevailing law on extrajudicial foreclosure, the mortgagee must be given an express authority to sell the mortgaged property. As such, a stipulation giving the mortgagee the power to extrajudicially foreclose or a general provision regarding extrajudicial foreclosure, does not constitute a special power to effect extrajudicial sale. In Sps. Baysa v. Plantilla, we held that a provision in a mortgage contract stating that “[i]n the event of non-payment of the principal and accrued interest, the mortgagors expressly and specifically agree to extra-judicial foreclosure of the mortgaged property” does not give the mortgagor sufficient authority to proceed with the extrajudicial foreclosure sale since it merely expresses the mortgagors’ amenability to an extrajudicial foreclosure. In this case, respondent’s argument that the “SPA was no longer necessary when the real estate mortgage explicitly authorized to foreclose judicially or extra-judicially when the law [Act 3135 and the Civil Code] ordain otherwise, entitled Palo to a judgment on the pleading in his favor. As such, both the RTC and CA committed reversible error and thus our Honorable Supreme Court granted the motion for reconsideration.
