G.R. No. L-5508, August 14, 1911
CONGREGACION DE LA MISION DE SAN VICENTE DE PAUL, plaintiff-appellant, vs. FRANCISCO REYES Y MIJARES and EL BANCO ESPAÑOL-FILIPINO, defendants-appellees.

FACTS

On March 4, 1905, Francisco Reyes y Mijares executed a first mortgage (Exhibit A) in favor of El Banco Español-Filipino over specified real and personal property to secure a debt of P226,117.38. On May 12, 1905, Reyes executed a second mortgage (Exhibit C) over the same properties in favor of the plaintiff, Congregacion de la Mision de San Vicente de Paul. The bank later made additional advances to Reyes, some secured by separate pledges. The bank took custody of the mortgaged and pledged properties, sold portions, and credited the proceeds to Reyes’s account. The plaintiff contended that the first mortgage debt had been fully paid through: (a) proceeds from the mortgaged properties (P145,646.15); (b) excess from other pledged properties (P12,112.50); and (c) payments made by Reyes from other sources (P96,781.75), totaling P254,540.40. The plaintiff filed an action to have the first mortgage declared satisfied and to foreclose its second mortgage. The bank argued that the debt remained unpaid and that the P96,781.75 was a deposit, not a payment, and should be applied to later unsecured advances.

ISSUE

Whether the sum of P96,781.75 paid by Reyes to the bank from sources other than the mortgaged properties should be applied to extinguish the first mortgage debt, thereby releasing the properties from the first lien and elevating the plaintiff’s second mortgage to first priority.

RULING

No. The Supreme Court affirmed the trial court’s judgment, holding that the P96,781.75 was intended by the parties (Reyes and the bank) to be a deposit, not a payment toward the first mortgage debt. The Court found no evidence of prejudice to the plaintiff from this arrangement. Consequently, the first mortgage debt was not fully satisfied, and the plaintiff’s second mortgage remained subject to the bank’s prior lien. The foreclosure of the plaintiff’s mortgage was thus ordered subject to the bank’s first mortgage, with a remaining balance due of P75,427.88.