G.R. No. L-14303; March 24, 1960
REHABILITATION FINANCE CORPORATION, plaintiff-appellant, vs. ALTO SURETY and INSURANCE COMPANY, INC., oppositor-appellee.

FACTS

Eustaquio Palma, the registered owner of land covered by Transfer Certificate of Title (TCT) No. 12, executed a first mortgage in favor of the Rehabilitation Finance Corporation (RFC) and, with RFC’s consent, a second mortgage in favor of Alto Surety & Insurance Company, Inc. (Alto). Both mortgages were annotated on the title. Upon Palma’s default, RFC extrajudicially foreclosed the first mortgage and purchased the property at public auction on April 17, 1951. Within the redemption period, Palma assigned his rights to the spouses Anacleto and Rosa Trinidad. On December 29, 1951, the spouses and RFC executed a “Deed of Resale” whereby the property was reconveyed to the redemptioners, with only a partial payment made and the balance payable in installments. Subsequently, on October 2, 1952, RFC executed an affidavit consolidating ownership, stating the redemption period had expired without exercise of the right. Based on this, TCT No. 12 was cancelled and a new title (TCT No. 1155) was issued in RFC’s name, but the annotation of Alto’s second mortgage was carried over to the new title. RFC filed a petition under Section 112 of Act No. 496 (Land Registration Act) in the land registration court to cancel this annotation, claiming its consolidation of ownership extinguished the junior lien. Alto opposed, contending the Deed of Resale constituted a valid redemption that released the property from the first mortgage, thereby elevating Alto’s lien to a first mortgage. The Court of First Instance denied RFC’s petition.

ISSUE

Whether the land registration court, in a summary proceeding under Section 112 of Act No. 496 , may grant RFC’s petition to cancel the annotation of Alto’s second mortgage on TCT No. 1155.

RULING

No. The order denying the petition is affirmed.
1. The relief under Section 112 of the Land Registration Act is summary in nature and may only be allowed if there is unanimity among the parties or no adverse claim or serious objection from any party in interest. It authorizes only alterations that do not impair recorded rights, or alterations consented to by all concerned, or corrections of obvious mistakes. Since Alto, a party in interest, seriously opposed the petition claiming its lien remained valid and was transformed into a first lien, the matter became controversial. Controversial issues relating to the validity or discharge of a mortgage must be litigated in an ordinary civil action, not in a summary land registration proceeding.
2. Furthermore, even assuming the extrajudicial foreclosure was proper, the rights of the junior encumbrancer (Alto) were not terminated because it was not made a party to the foreclosure proceedings. A junior encumbrancer’s interest can only be divested by making it a party to the foreclosure suit. Since Alto was not joined, the foreclosure of the first mortgage did not extinguish its rights over the property. The court affirmed the denial of the petition without prejudice to the proper adjudication of the parties’ respective rights arising from the Deed of Resale in an appropriate ordinary action.