G.R. No. L-27365 January 30, 1970
FELIX L. LAZO, MERCEDES CASTRO DE LAZO, and JOSE ROBLES, plaintiffs-appellees, vs. REPUBLIC SURETY & INSURANCE CO., INC. represented by ANTONIO M. KOH, General Manager and as Attorney-in-Fact of plaintiffs, FELIX and MERCEDES LAZO defendants-appellants.

FACTS

The spouses Felix L. Lazo and Mercedes Castro de Lazo, as guarantors for Jose Robles, executed a real estate mortgage on August 18, 1953, in favor of Republic Surety & Insurance Co., Inc. to secure a P12,000.00 loan Robles obtained from the Philippine Bank of Commerce, for which the defendant company acted as principal co-debtor. The loan was later transferred to Republic Investment Co., Inc. The mortgage was extrajudicially foreclosed on July 1, 1958, and the property was sold to the mortgagee. A deed of absolute sale was executed and registered on March 20 and 28, 1963, respectively, leading to the cancellation of the Lazos’ certificate of title and the issuance of a new one in the defendant company’s name. The plaintiffs filed a complaint on December 12, 1963, alleging that the foreclosure was invalid because Robles had made payments on the loan totaling P13,466.36 from August 20, 1953, to May 24, 1958, and further payments aggregating P17,250.00 from July 8, 1958, to August 23, 1963. They prayed for an accounting of these payments to determine if the loan had been fully paid, and if not, to be allowed to exercise legal redemption for any remaining balance, plus damages and attorney’s fees. The defendants moved to dismiss, arguing the complaint stated no cause of action and the claim had prescribed, contending that the right to an accounting under Rule 39, Section 34 of the Rules of Court applies only to execution sales and not to extrajudicial foreclosure, and that the redemption period had expired. The trial court, without resolving the motion, set the case for trial to first receive evidence on prescription. After an amended complaint was filed, the defendants answered, asserting that post-foreclosure payments were made as rents, not loan payments, and thus no accounting was due. The trial court, however, decided the case on an issue not raised by the pleadings, ruling that the transfer of the loan to Republic Investment Co., Inc. constituted a novation that extinguished the defendant company’s liability and the mortgage, thereby nullifying the foreclosure.

ISSUE

1. Whether the trial court erred in deciding the case on the issue of novation and the validity of the mortgage, which was not raised in the pleadings or litigated by the parties.
2. Whether the plaintiffs, as redemptioners, are entitled to demand an accounting and liquidation of accounts from the defendant company under Rule 39, Section 34 of the Rules of Court.
3. Whether the plaintiffs’ right of redemption was still subsisting at the time the action was commenced.

RULING

1. Yes, the trial court erred. The Supreme Court held that judgments must conform to the pleadings and the theory of the case upon which the parties framed their claims and defenses. The parties litigated the case on the admitted premise that the mortgage was valid and subsisting, focusing on the issues of accounting and the right of redemption. The trial court’s decision on the validity of the mortgage based on novation was extrajudicial and invalid, as it adjudicated a matter not in issue and upon which the parties were not heard. The Court noted that evidence, including promissory notes and an indemnity agreement (Exhibit N), demonstrated the defendant company’s continued liability and the mortgage’s validity, but these were not properly at issue given the pleadings.
2. No, the plaintiffs are not entitled to the accounting demanded under Rule 39, Section 34. The Court ruled that this provision applies specifically to sales on execution pursuant to a final judgment, not to sales resulting from extrajudicial foreclosure of a mortgage. The right to an accounting for rents and profits under this rule is a incident of the right of redemption. Since the plaintiffs’ right of redemption had expired, as discussed below, the ancillary right to an accounting could not be invoked.
3. No, the plaintiffs’ right of redemption was no longer subsisting. The Court held that the one-year period for redemption under Act No. 3135 commenced from the date of registration of the sheriff’s certificate of sale. The certificate of sale was registered on August 2, 1958. Therefore, the redemption period expired on August 2, 1959. The plaintiffs’ action, filed on December 12, 1963, was filed well beyond this period. The Court rejected the plaintiffs’ argument that the redemption period was extended by their demand for an accounting, as such extension under Rule 39, Section 34 applies only to execution sales, not extrajudicial foreclosure sales. Consequently, the defendant company had become the absolute owner of the property, and the plaintiffs’ right of redemption had been extinguished.