G.R. No. 25235 , December 9, 1926
LIM JULIAN, plaintiff-appellant, vs. TIBURCIO LUTERO, ASUNCION MAGALONA, and RAFAEL LUTERO, defendants-appellees. “EL HOSPITAL DE SAN PABLO DE ILOILO,” intervenor-appellee.

FACTS

1. On April 15, 1920, defendants Tiburcio Lutero and Asuncion Magalona executed a mortgage in favor of plaintiff Lim Julian to secure future advancements of up to P12,000 for the cultivation and harvesting of their sugar crop for 1920-1921. The mortgage covered their hacienda, livestock, sugar mill, buildings, and the expected sugar cane crop. It was registered on June 16, 1920.
2. On June 17, 1920, the same mortgagors executed another mortgage over the same property in favor of “El Hospital de San Pablo de Iloilo” (St. Paul’s Hospital) to secure a loan of P22,400. This mortgage was not registered.
3. Lim Julian filed an action to foreclose his mortgage, claiming an unpaid balance of P22,807.09 plus interest and penalty. The defendants later claimed the mortgage debt had been paid and any remaining balance was an ordinary debt.
4. St. Paul’s Hospital intervened, claiming its mortgage, though unregistered, was valid and had priority.
5. The trial court dismissed Lim Julian’s complaint, ordered the cancellation of his mortgage, and directed the registration of St. Paul’s Hospital’s mortgage as a first lien, giving it preference.

ISSUES:
1. Whether Lim Julian’s mortgage debt had been fully paid.
2. Whether the unregistered mortgage of St. Paul’s Hospital is valid and can be given preference over Lim Julian’s registered mortgage.

RULING

The Supreme Court REVERSED the trial court’s decision.

1. On the Payment of the Mortgage Debt: The Court held that Lim Julian’s mortgage was not fully paid. The evidence showed that the defendants received total advancements exceeding P12,000. A subsequent payment of P14,157.18 made by the defendants was not specifically applied to any debt. Applying Article 1174 of the Civil Code, when a debtor has several debts and does not apply a payment to a specific one, the payment is applied to the most burdensome debthere, the mortgage debt bearing 12% interest. However, this payment only extinguished the secured mortgage principal of P12,000 and part of its interest. A balance remained as an ordinary unsecured debt. The trial court erred in ordering the cancellation of the mortgage and dismissing the complaint. The mortgage should be foreclosed for the unpaid balance of the secured amount.

2. On the Priority of St. Paul’s Hospital’s Mortgage: The Court held that the unregistered mortgage of St. Paul’s Hospital is void and cannot prejudice third parties, including Lim Julian. Under Article 1875 of the Civil Code, registration in the Registry of Property is an indispensable requisite for the validity of a mortgage. An unregistered mortgage is null and void as to third parties, even if they have knowledge of it. Since Lim Julian’s mortgage was registered first, it has priority. The trial court erred in ordering the registration of St. Paul’s Hospital’s mortgage as a first lien and in giving it preference.

DISPOSITIVE:
The Supreme Court reversed the judgment of the lower court. It rendered judgment in favor of Lim Julian, ordering:
a) The defendants to pay the plaintiff the amount found due upon the mortgage.
b) In default of payment, the mortgaged property be sold at public auction.
c) The proceeds of the sale be applied first to the costs, then to the payment of Lim Julian’s mortgage credit, and the remainder, if any, to be paid to the person or persons legally entitled thereto.
d) The intervenor, St. Paul’s Hospital, take nothing by its intervention.
e) The defendants and the intervenor to pay the costs.