GR 43459; (August, 1937) (Digest)
G.R. No. 43459 and 43460; August 11, 1937
EL HOGAR FILIPINO, Mutual Building and Loan Association, petitioner-appellant, vs. THE PHILIPPINE NATIONAL BANK, oppositor-appellee.
FACTS
El Hogar Filipino held a first mortgage over certain lots to secure a loan. The mortgage deed contained a clause authorizing extrajudicial foreclosure and sale at public auction by El Hogar upon default, with a 30-day post-sale redemption period for the borrower. The Philippine National Bank (PNB) later acquired a second mortgage over a portion of the lots, subordinate to El Hogar’s mortgage. Upon the borrowers’ default, El Hogar extrajudicially foreclosed the mortgage, purchased the properties at the auction, and, after the 30-day redemption period, obtained a deed of sale. When El Hogar sought to register the deed and cancel all liens, PNB opposed, claiming a one-year legal redemption period. The register of deeds registered the deed but annotated PNB’s mortgage on the new title, with El Hogar’s consent provided the annotation was noted as taken from the old title. El Hogar filed an action to have PNB’s mortgage lien declared extinguished and its annotation cancelled.
ISSUE
Whether the extrajudicial foreclosure and sale under the mortgage deed’s pacto comisorio clause extinguished the subordinate second mortgage of PNB, thereby entitling El Hogar to the cancellation of its annotation on the title.
RULING
Yes. The Supreme Court reversed the lower court’s judgment. The extrajudicial foreclosure and sale, conducted in strict accordance with the valid tenth clause of the mortgage deed (a pacto comisorio), had the legal effect of applying the proceeds of the sale to El Hogar’s credit. As the first mortgagee, El Hogar’s credit absorbed the entire proceeds (the purchase price being equivalent to its credit). Consequently, PNB’s second mortgage, being subordinate, was extinguished because there was no excess proceeds to which its lien could attach. The lots passed to El Hogar free from PNB’s encumbrance. The Court held that allowing PNB’s mortgage to subsist would improperly convert its second mortgage into a first lien. El Hogar’s conditional consent to the annotation on the new title was not an admission of the mortgage’s continued validity but a compromise pending resolution of the redemption issue. The annotation of PNB’s mortgage was ordered cancelled.
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