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RULE 68FORECLOSURE OF REAL ESTATE MORTGAGE

MORTGAGE DEFINEDIn a contract of mortgage, a property has been identified or set apart from the mass of the property of the mortgagor as security for the payment of money or the fulfillment of an obligation to answer the amount of indebtedness, in case of default of payment (Agcaoili, 2006).

OBJECT (Article 2124)Real Estate Mortgage: Immovable property and real rights

Chattel Mortgage: Movable property ESSENCESecurity for the payment of money or the fulfillment of an obligation

Dragnet Clause or Mortgage Blanket Clause

REMEDIES AVAILABLE TO THE MORTGAGEESimple action for collection of money; or,

Action for the foreclosure of mortgage

Remedies are alternative (Danao v. CA)

FORECLOSURE DEFINED Foreclosure is one of the remedies available to a mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure that for which the mortgage was given (Herrera, 2006). Right to foreclose belongs only to the mortgagee or his assigns.

Necessity of Foreclosure: Prohibition against pactum commissarium (Art. 2088)

MODES OF FORECLOSUREJudicial Foreclosure under Rule 68

Extrajudicial Foreclosure under Act No. 3135

Extrajudicial foreclosure must be expressly provided in the contract of mortgage (sec. 1, Act 3135).

Prior demand is necessary.

PROCEDURE FOR JUDICIAL FORECLOSUREFiling of a petition for judicial foreclosure (section 1, Rule 68)TrialJudgment (section 2, Rule 68).Redemption (sec 2, Rule 68)Public auction (sec 2-3, Rule 68)Judicial confirmation (sec 3, Rule 68)Registration (sec 7, Rule 68)

SECTION 1Complaint in action for foreclosure. In an action for the foreclosure of a mortgage or other encumbrance upon real estate, the complaint shall set forth the date and due execution of the mortgage; its assignments, if any; the names and residences of the mortgagor and the mortgagee; a description of the mortgaged property; a statement of the date of the note or other documentary evidence of the obligation secured by the mortgage, the amount claimed to be unpaid thereon; and the names and residences of all persons having or claiming an interest in the property subordinate in right to that of the holder of the mortgage, all of whom shall be made defendants in the action. (1a)

PARTIESPlaintiff/Complainant: Mortgagee-Creditor or his assigns

Defendants: names and residences of all persons having or claiming an interest in the property subordinate in right to that of the holder of the mortgage, all of whom shall be made defendants in the action

EFFECT OF FAILURE TO IMPLEAD DEFENDANTIndispensible Party: Ground for Dismissal (Sec. 11, Rule 3)Mortgage debtorMortgagor or owner of the mortgaged property, if he is not the debtor

Necessary Party: Action will proceed without prejudice to the right of those not impleaded thereinSubsequent attaching creditorPurchaser of the mortgaged property

CONTENTS OF THE COMPLAINT Date and due execution of the mortgage;Assignments of the mortgage, if any; Names and residences of the mortgagor and the mortgagee; Description of the mortgaged property; Statement of the date of the note or other documentary evidence of the obligation secured by the mortgage;Amount claimed to be unpaid thereon; and, Names and residences of all persons having or claiming an interest in the property subordinate in right to that of the holder of the mortgage.

JURISDICTION AND VENUEAs to Jurisdiction

MTC, if Assessed value of the real property is not more than =P=20,000.00, or in Metro Manila, not more than =P=50,000.00; and,

Amount of the mortgage debt is not more than =P=300,000.00, or in Metro Manila, not more than =P=400,00.00.

Otherwise, RTC

JURISDICTION AND VENUEAs to Venue

In the proper court which has jurisdiction over the area wherein the real property involved or a portion thereof is situated (Sec. 1, Rule 4)

If the property is located in two or more provinces, in any of the provinces where any of the parcels of land is located.

SECTION 2Judgment on foreclosure for payment or sale. If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment. (2a)

JUDGMENT ON FORECLOSURE FOR PAYMENT to the court or to the judgment oblige

not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment (Equity of Redemption)

Payment extinguishes real estate mortgage

Nonpayment gives rise to sale at public auction

JUDGMENT ON FORECLOSURE FOR SALE After the lapse of the 90-120 day equity of redemption period

Payment allowed until before confirmation of sale

SECTION 3Sale of mortgaged property; effect. When the defendant, after being directed to do so as provided in the next preceding section, fails to pay the amount of the judgment within the period specified therein, the court, upon motion, shall order the property to be sold in the manner and under the provisions of Rule 39 and other regulations governing sales of real estate under execution. Such sale shall not affect the rights of persons holding prior encumbrances upon the property or a part thereof, and when confirmed by an order of the court, also upon motion, it shall operate to divest the rights in the property of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.

Upon the finality of the order of confirmation or upon the expiration of the period of redemption when allowed by law, the purchaser at the auction sale or last redemptioner, if any, shall be entitled to the possession of the property unless a third party is actually holding the same adversely to the judgment obligor. The said purchaser or last redemptioner may secure a writ of possession, upon motion, from the court which ordered the foreclosure. (3a)

FAILURE TO PAY WITHIN 90 DAYS OR 120 DAYS FROM ENTRY OF JUDGMENTUpon motion

The court shall order the property to be sold in a manner and under the provisions of Rule 39 on Execution.EFFECT OF SALEIt will not affect the rights of third persons with prior encumberances or rights

CONFIRMATION OF SALEUpon motion

By courts order

EFFECT OF CONFIRMATION: It operate to divest the rights in the property of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.

Note: Equity of redemption ceases from the time the sale is confirmed by the court.

GENERAL RULE: No Right of Redemption

EXCEPTION: When the law provides for such right xxx Subject to such rights of redemption as may be provided by law

REPUBLIC ACT 337 GENERAL BANKING ACTRIGHT OF REDEMPTION IS AVAILABLE WHEN:

Mortgagors or debtors owns property which has been sold at public auction, judicially or extrajudicially;

Such mortgagors or debtors are indebted to any:BankBanking institutionCredit instiution

WHAT DOES THE RIGHT OF REDEMPTION CONSIST OF?

The mortgagor has one (1) year from the sale of the property to redeem the same by paying the judgment debt and other costs.

WHEN THERE IS NO RIGHT OF REDEMPTION

Upon the finality of the order of confirmation

the purchaser at the auction sale or last redemptioner, if any, shall be entitled to the possession of the property unless a third party is actually holding the same adversely to the judgment obligor. The said purchaser or last redemptioner may secure a writ of possession, upon motion, from the court which ordered the foreclosure. (3a)

WHEN THERE IS RIGHT OF REDEMPTION

Upon the expiration of the period for redemption (1 year from the date of confirmation)

the purchaser at the auction sale or last redemptioner, if any, shall be entitled to the possession of the property unless a third party is actually holding the same adversely to the judgment obligor. The said purchaser or last redemptioner may secure a writ of possession, upon motion, from the court which ordered the foreclosure. (3a)

RIGHT OF REDEMPTION VS. EQUITY OF REDEMPTIONGenerally exists in extrajudicial foreclosure casesOnly available in cases of judicial foreclosure

To be exercised within 1 year from the registration of sale in the ROD

may be exercised during the period of not less than 90 nor more than 120 days from entry of judgment of foreclosure or even after the foreclosure sale but before the judicial confirmation of the sale;

Right of redemption is governed by other laws or special laws such as Republic Act 337 or the General Banking Act

equity of redemption is governed by Rule 68 Sections 2 and 3

VALID CONFIRMATION IS A FINAL ORDERThe Supreme Court has ruled that an order of confirmation of sale in foreclosure proceedings is a final order, not merely interlocutory. it is the final order from which appeal may be taken in judicial foreclosure proceedings. Where no appeal was taken, it follows that said order is final and binding. (Ocampo vs. Damalanta)

SECTION 4Disposition of proceeds of sale. The amount realized from the foreclosure sale of the mortgaged property shall, after deducting the costs of the sale, be paid to the person foreclosing the mortgage, and when there shall be any balance or residue, after paying off the mortgage debt due, the same shall be paid to junior encumbrancers in the order of their priority, to be ascertained by the court, or if there be no such encumbrancers or there be a balance or residue after payment to them, then to the mortgagor or his duly authorized agent, or to the person entitled to it. (4a)

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PRIORITY IN THE DISPOSITION OF THE PROCEEDSCost of the sale

Person foreclosing the mortgage

If there is a residue, the junior encumberancers

If no such encumbrancers, to the mortgagor or his duly authorized agent or person entitled to it.

FAILURE TO RETURN THE EXCESSMortgagor simply acquires a cause of action to recover such surplus

It does not invalidate the sale. The provision does not provide so.

~Sulit vs. CA

SECTION 5How sale to proceed in case the debt is not all due. If the debt for which the mortgage or encumbrance was held is not all due as provided in the judgment as soon as a sufficient portion of the property has been sold to pay the total amount and the costs due, the sale shall terminate; and afterwards as often as more becomes due for principal or interest and other valid charges, the court may, on motion, order more to be sold. But if the property cannot be sold in portions without prejudice to the parties, the whole shall be ordered to be sold in the first instance, and the entire debt and costs shall be paid, if the proceeds of the sale be sufficient therefor, there being a rebate of interest where such rebate is proper. (5a)

ApplicabilityWhen the judgment debt is to mature on different datesE.g. Debt payable in installments

Illustrative ExampleRyan is indebted to Kurt for the sum of P1 million. It is to be paid in five equal annual installments

This is secured by a mortgage consisting of 5 hectares of land

After the 1st year, Ryan failed to pay the P200, 000 installment due.

QUESTION:

Should Kurt wait for the entire P1 million debt to be due before he could file a foreclosure sale? ANS. No. What should Kurt do after Ryans default in payment? File a motion asking the court to order the property to be sold.

(Based on the case of SAGA vs. ZABALLERO)

WHERE PROPERTY CANNOT BE SOLD IN PORTIONSEntire property be sold and entire debt and costs be settled if the proceeds be sufficient, with a rebate of interest, if proper. (Provisional Remedies and Special Civil Actions 2007 Edition, Feria and Noche, Pg. 261)

SECTION 6Deficiency judgment. If upon the sale of any real property as provided in the next preceding section there be a balance due to the plaintiff after applying the proceeds of the sale, the court, upon motion, shall render judgment against the defendant for any such balance for which, by the record of the case, he may be personally liable to the plaintiff, upon which execution may issue immediately if the balance is all due at the time of the rendition of the judgment; otherwise; the plaintiff shall be entitled to execution at such time as the balance remaining becomes due under the terms of the original contract, which time shall be stated in the judgment. (6a)

SITUATIONSituation: If upon the sale of any real property, there be a balance due to the plaintiff after the applying the proceeds of the sale.

PREREQUISITE FOR A DEFICIENCY JUDGMENTThere should be a sale.

A deficiency exists. (Government of the Philippine Islands v. Torralba Viuda de Santos, 61 Phil. 689 [1935])

NON-APPLICABILITY OF SEC. 6When one mortgages his property to secure the debt of another without expressly assuming personal liability fir such debt, he cannot be compelled to pay the deficiency remaining due after the mortgage is foreclose. (Philippine Trust C. v. Echaus Tan Siua, 52 Phil. 852 [1929])

In an action to foreclose a mortgage against a non-resident defendant not found in the Philippines who fails to submit himself to the jurisdiction to the jurisdiction of the court, no personal judgment for the deficiency can be rendered. (El Banco Espanol-Filipino v. Palanca, 37 Phil. 921 [1918])

SECTION 7Registration. A certified copy of the final order of the court confirming the sale shall be registered in the registry of deeds. If no right of redemption exists, the certificate of title in the name of the mortgagor shall be cancelled, and a new one issued in the name of the purchaser.

Where a right of redemption exists, the certificate of title in the name of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale shall be registered and a brief memorandum thereof made by the registrar of deeds upon the certificate of title. In the event the property is redeemed, the deed of redemption shall be registered with the registry of deeds, and a brief memorandum thereof shall be made by the registrar of deeds on said certificate of title.

If the property is not redeemed, the final deed of sale executed by the sheriff in favor of the purchaser at the foreclosure sale shall be registered with the registry of deeds; whereupon the certificate of title in the name of the mortgagor shall be cancelled and a new one issued in the name of the purchaser. (n)

SITUATION1. If no right to redemption exists.2. If a right to redemption exists.3. If the property is redeemed.4. If the property is not redeemed.

SECTION 8Applicability of other provisions. The provisions of sections 31, 32 and 34 of Rule 39 shall be applicable to the judicial foreclosure of real estate mortgages under this Rule insofar as the former are not inconsistent with or may serve to supplement the provisions of the latter. (8a)

RULE 39Section 31 Manner of using premises pending redemption

Section 32 Rents,earnings and income of property pending redemption

Section 34 Recovery of price if sale not effective;revival of judgment

JUDICIAL VS. EXTRA JUDICIAL FORECLOSUREJUDICIAL FORECLOSUREEXTRAJUDICIAL FORECLOSURE

Governed by Rules of Court

Governed by ACT 3135

Involves the filing of an independent action

It does not require the filing of an action

With equity of redemption and no right of redemption except when mortgagee is a banking institution

There is right of redemption in extrajudicial foreclosureThere could be a deficiency judgment rendered by the court in the same proceeding There can be no judgment for a deficiency because there is no judicial proceeding, although recovery of deficiency is allowed

Recovery of the deficiency can be done by mere motion for a deficiency judgment

The recovery of the deficiency is through an independent action, and although nothing about the recovery of the deficiency is provided in Act 3135, there is no prohibition either.