G.R. No. 140398 . September 11, 2001
COL. FRANCISCO DELA MERCED (substituted by his heirs, Blanquita E. dela Merced, Luis Cesar dela Merced, Blanquita E. dela Merced (nee Macatangay), and Maria Olivia M. Paredes), petitioners, vs. GOVERNMENT SERVICE INSURANCE SYSTEM (GSIS) and SPOUSES VICTOR and MILAGROS MANLONGAT, respondents.

FACTS

Governor Jose C. Zulueta and his wife Soledad Ramos owned parcels of land known as the Antonio Village Subdivision in Pasig City, registered under TCT Nos. 26105, 37177, and 50256. On September 25, 1956, they obtained a loan from GSIS, mortgaging the land under TCT No. 26105. The mortgage deed expressly stipulated that certain lots, including “Lots Nos. 1 to 11, Block No. 2,” were excluded from the mortgage as they had been previously sold or donated. On September 3, 1957, the Zuluetas executed a contract to sell Lots 6, 7, 8, and 10, Block 2 (formerly Block 4) of the subdivision to Francisco dela Merced and Evarista Mendoza. After full payment, a Deed of Absolute Sale was executed in favor of Col. dela Merced on October 26, 1972.
Subsequently, the Zuluetas obtained additional loans from GSIS on March 6, 1957 (P190,000.00), April 4, 1957 (P1,000,000.00), and October 15, 1957 (P1,398,000.00), secured by mortgages on properties under the mentioned TCTs. The Zuluetas defaulted, leading GSIS to extrajudicially foreclose the mortgages on August 16, 1974. After the redemption period lapsed, title was consolidated in GSIS. Later, on March 25, 1982, GSIS sold Lot 6, Block 2 at a public auction to the children of spouses Victor and Milagros Manlongat.
Col. dela Merced filed a complaint (Civil Case No. 51470) against GSIS and the Zuluetas, seeking to nullify the foreclosure sale concerning his lots. He also intervened in a related case (Civil Case No. 51410) filed by other lot occupants against the Manlongats and others. The trial court consolidated the cases and initially ruled in favor of dela Merced, declaring him the owner of the lots and nullifying the foreclosure and subsequent titles. The Court of Appeals remanded the case for reception of the defendants’ evidence. After trial, the Regional Trial Court again ruled for dela Merced, declaring the foreclosure sale and titles of GSIS and the Manlongats null and void, and recognizing dela Merced (substituted by his heirs) as the lawful owner. The Court of Appeals reversed this decision, prompting this petition.

ISSUE

Whether the Court of Appeals erred in reversing the trial court’s decision which declared the foreclosure sale by GSIS null and void with respect to Lots 6, 7, 8, and 10, Block 2, and recognized Col. dela Merced (petitioners) as their true owner.

RULING

The Supreme Court REVERSED the decision of the Court of Appeals and REINSTATED the decision of the Regional Trial Court with modification regarding attorney’s fees.
The Court held that the lots in question (Lots 6, 7, 8, and 10, Block 2) were expressly excluded from the mortgage contract between the Zuluetas and GSIS dated September 25, 1956. The mortgage deed contained a clear annotation that “Lots Nos. 1 to 11, Block No. 2” were not covered by the mortgage due to prior sale to third parties. This exclusion was confirmed by a GSIS letter dated October 1, 1956. Since these lots were not included in the mortgage, they could not be validly foreclosed upon by GSIS. The subsequent mortgages and the foreclosure sale, insofar as they affected these excluded lots, were null and void. The sale by GSIS to the Manlongats, deriving from a void foreclosure, conveyed no valid title.
The Court emphasized that a mortgage cannot cover properties not included in the mortgage contract. The petitioners, as successors-in-interest to Col. dela Merced who fully paid for the lots under a prior contract to sell and subsequent deed of absolute sale, have a superior right. The Court modified the award of attorney’s fees, increasing it to P50,000.00 to be paid jointly and severally by respondents GSIS and the Manlongat spouses.