NOTES ON FORECLOSURE OF REM FORECLOSURE - meaning - It is a remedy available to mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation secured for which the mortgage was given. It refers to the proceedings to terminate the rights of a mortgagor on the property and includes the sale itself. Foreclosure is an act or a legal proceeding that bars or extinguishes a mortgagor's right of redeeming a mortgaged estate. “Foreclose” - to end or terminate a right in property; to shut out or to bar. The power to foreclose the real estate mortgage pertains to the creditor-mortgagee. Validity and effects of foreclosure- 1, Foreclosure is valid if debtor is (a) in default in the payment of the Principal obligation or has (b) violated the terms and conditions of the mortgage contract. 2, Foreclosure consists in the sale or alienation of the mortgaged Property and the proceeds of the sale applied to the payment of the debt. 3. Effects of sale - (a)IF proceeds cover the entire obligation then the principal obligation is extinguished. (b)IF proceeds are insufficient, there is a deficiency claim against the principal debtor. 4. Foreclosure retroacts to the date of the registration of the mortgage ~ 2" mortgage, attachment liens are subordinate to the first mortgage cannot affect rights of the first mortgagee. (PVB vs. Monillas, 550 SCRA 251). 5. As a general rule demand to pay is required before foreclosure. a) Acceleration clause - a stipulation accelerating the maturity of the entire obligation. It may be (a) optional - acceleration clause where notice of acceleration by creditor is required to cause entire obligation to become due and demandable OR (b) automatic acceleration debt becomes due upon default in payment of some installments as expressly provided in the document, i.e., promissory note. Kinds of foreclosure of REM a) Judicial and, 2) extrajudicial. I, JUDICIAL FORECLOSURE is a judicial or ordinary action in court governed by Rule 68 of the Rules of Court. The petition for foreclosure should be filed with the proper court. ‘A. Nature of the proceedings - It is quasi in rem, i.e., it is an action against a specific person but the purpose of the action is to subject the property to a burden, that is, the mortgage lien. B. Venue of action - The petition or complaint is filed with the court having territorial jurisdiction over the mortgaged property.Parties ~ Creditor is the plaintiff/petitioner. The principal debtor and all persons having interest in the mortgaged property, i.e., creditors with subordinate liens in the property or the junior encumbrancers. Those with subordinate liens should be made party defendant because if they are not included or impleaded in the case, these encumbrancers will not lose their equity of redemption. Pre-trial, Trial and judgment - After presentation of evidence, if the court finds for the creditor/mortgagee, then the judgment will order the principal debtor/mortgagor to pay the debt within period of not less than 90 days and not more than 120 days from entry of judgment. The period within which to pay is known as the equity of redemption. After the expiration of this period, the property will be sold at public auction as in an execution sale. Equity of redemption is the right of the defendant ina judicial foreclosure of real estate mortgage to extinguish the mortgage and retain ownership of the property by paying the secured debt within the prescribed period after judgment has become final and executory, or even after the sale but prior to its confirmation. (Rosales vs. Suba, 408 SCRA 664; Robles vs. Yupunco, 739 SCRA 75) It is the right of the mortgagor in case of judicial foreclosure to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the confirmation of the sale of the mortgaged property. (Top-Rate International Services inc. vs. CA, 142 SCRA 467) Auction Sale - Publication and posting of notices required - Any person may bid including the debtor, mortgagor and mortgagee- if mortgagee is the highest bidder, he need NOT pay the purchase price as the amount of his credit would be considered as the consideration which will be stated in the certificate of sale. As a rule the amount of the bid by the creditor/mortgagee should be either the total debt or the market value of the mortgaged property whichever is lower. Application of the proceeds of the sale - 1. cost of sale, 2. Mortgage debt; 3. claims of junior encumbrancers in the order of priority of the liens, 4. the excess, if any, shall go to the mortgagor. The Sheriff conducting the auction sale shall execute the Sheriff's Certificate of Sale which should then be registered with the Registry of Deeds. Order Confirming the Sale - cuts off or divests the mortgagor of title over the property and vests absolute ownership upon the buyer. 4. Motion for confirmation is filed, 2. Notice and hearing of motion required. If the order is granted, such order of confirmation retroacts to the date of the date of sale. Redemption Price - Purchase price plus interest, cost and expenses, taxes payable within the equity of redemption. Redemption is liberally construed and courts will allow the exercise of redemption before confirmation of sale. For Banks there is a right of redemption even after confirmation of sale - 1 year for natural persons, or three months from sale or registration of sale to a juridical person. Deficiency claim - basis - mortgage is a contract of security NOT satisfaction of the debt -I Procedure- file motion to execute judgment as to the deficiency claim - NO need to file another action. Deficiency claim directed against principal debtor ONLY and NOT 3” party mortgagor except if he bound himself principally with debtor. EXTRAJUDICIAL FORECLOSURE ~ governed by ACT NO. 3135, as amended, A. Basis of the right is the power to sell (Sec. 1, ACT 3135) that is granted to the mortgagee in the mortgage contract or in another document such as Special Power of Attorney (SPA) or authority. If there is NO authority to foreclose extrajudicially, the remedy should be judicial foreclosure. The power to sell, i.e., extrajudicial foreclosure of REM, is NOT extinguished by the death of either the mortgagor or mortgagee. Nature of proceedings is NOT adversarial. The Executive Judge with whom the petition for foreclosure is filed merely performs administrative function, i.e., to ensure compliance with the conditions and requirements of the law on extrajudicial foreclosure. Venue ~ Petition for foreclosure filed with the Executive Judge of the court having territorial jurisdiction over the mortgaged property - through the Clerk of Court. It is then assigned to a Deputy Sheriff thru raffle. The foreclosure may also be conducted by a NOTARY PUBLIC. Parties are the Creditor/Mortgagee and Debtor/Mortgagor. Notice of Sale prepared by Sheriff or Notary Public - Notice of sale determines date, time and place of auction sale. Publication requirement is jurisdictional. The purpose of publication in a newspaper of general circulation is to achieve a reasonably wide publication of the auction sale. The publication of the notice of sale is made in order to secure bidders and to prevent a sacrifice of the property. (Olizon vs. CA, 236 SCRA 148; Metrobank vs. Penafiel, 380 SCRA 352; BPI vs. Castro, 746 SCRA 129) Publication, Posting, Personal Notice to debtor/mortgagor 1. NO waiver of right of publication - postponement of sale requires republication of notice of sale with a new date (PNB vs. Nepomuceno Productions, G.R. No. 139479, Dec. 27, 2002 - If the notice of sale is not published anew, sale would be VOID even if parties agreed on the postponement. The requirement of publication is is mandated not for the mortgagor's benefit but for the public or third persons. As such, it is imbued with public policy considerations and the waiver thereof would be violative of the law. Non-compliance with the publication requirement constitutes. jurisdictional defect that invalidates the sale. It is also a substantial error or omission in a notice of sale that would render it insufficient and vitiates the sale. (San Jose vs. CA, 225 SCRA 450) 2. Newspaper of general circulation - published for the dissemination of local news and general information, that it has a bona fide subscription list of paying subscribers and published at regular intervals. ~ P.D.No. 1079 - Publication in the city or province where publication is required. 3. Date of auction sale declared a holiday ~ the rule on | pretermission of holiday does not apply. Sec. 31 of the Revised Administrative Code, “Pretermission of holiday” - where the day or the last day, for doing any act required or permitted by law falls on a holiday, the act may be done on the next succeeding business day, pretermission applies only when the last day of a given Period for doing an act falls on a holiday, e.g., payment of taxes April 15, 2009; and the period for filing of pleadings such as within fifteen (15) days from receipt of an order. If the last day is a holiday, the succeeding business day is considered the last day (See Rural Bank of Caloocan vs. CA, 104 SCRA 151 [1981]) Pretermission of holiday” does not apply to a day fixed by an office or public officer for an act to be done, e.g. date of hearing of a case, and date of auction sale of property. 4. Object or purpose of the notice of sale is to inform public of the sale to secure as many bidders as possible to get the best price for the property. 5. If there is NO proof of posting and personal notice, the same does NOT affect the validity of the sale provided that the notice of sale is published in a newspaper of general circulation (Three consecutive weeks in a Newspaper of general circulation in the municipality or city where the property lies). Evidence of publication of the notice of sale is the AFFIDAVIT of PUBLICATION executed by the publisher or his authorized representative. 6. General rule is that personal notice to mortgagor of the sale is NOT required. However, personal notice is required if expressly provided or stipulated in the deed of REM, The parties are contractually bound by the stipulation. If no personal notice, the foreclosure sale may be invalidated because the failure to notify the mortgagor personally constitutes breach of contract on the part of the mortgagee. 7. Levy of the mortgaged property is NOT required for purposes of the sale. G. Auction sale - ONLY one (1) sale is required and the mortgagee may bid. 1. Where ~ The sale should be held in the municipal or city hall of the municipality or city where the land lies between 9:00 in the morning to 4:00 in the afternoon. 2. Sale at different places - The principle of indivisibility of mortgage is not violated by conducting two separate foreclosure proceedings on mortgage properties located in different cities or provinces as long as each land is answerable for the entire debt. (Yu vs. PCIB, 485 SCRA 56; LBC Bank vs. Marquez, 478 SCRA 160) 3. Who may bid - any person may submit his bid in a public bidding that is exposed to general or public view.4. How bid or price paid- Payment of the purchase price must be in cash except if the purchaser is’ the mortgagee, 5. Winning or highest the auction sale, executed by the she sale. bidder is declared the purchaser at A certificate of sale would then be 'eriff or notary public conducting the 7. Mortgagee - as winning bidder - He need not pay the bid price as the amount of his debt is the consideration of the sale which must be stated in the certificate of sale. Effect of inadequacy of price - general rule - NOT sufficient ground to set aside sale because of the Mortgagor’s right of redemption -exception- unless the Price is so inadequate as to shock the conscience of the court taking into consideration the peculiar circumstance attendant thereto. 9. May be sold for less than the fair market value because it is easier for mortgagor to effect redemption. 10. Deficiency claim after foreclosure is recognized, The mortgage is merely a security and not a satisfaction of an obligation (DBP vs. Mirang, 66 SCRA 141; DBP vs. Lcuanan, 516 SCRA, 644; BPI Family vs. Avenido, 661 SCRA 758). Prescription of action to recover deficiency after extrajudicial foreclosure is ten years from the time the cause of action accrues under Art. 1141 (1) of the Civil Code. (DBP vs. Toneldan, 101 SCRA 171; Quirino Gonzales Logging vs. CA, 402 SCRA 181) - Exception to deficiency claim after foreclosure of REM is the Maceda Law. H,. RIGHT OF REDEMPTION 1. Concept ~ a transaction by which the mortgagor reacquires or buys back the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have created. There is no new title created in favor of the purchaser at the auction sale as it is still subject to the mortgagor's right of redemption. It eliminates the lien created by the mortgage. 2. Kinds of redemption ~ 1) equity of redemption; and 2) right of redemption 3. Only tender of payment of full amount of redemption price Is required as it has the effect of “freezing the one year redemption period”. The right of redemption may be enforced beyond the redemption period (Heirs of W.J. Quisumbing vs. PNB, 576 SCRA 762) 4. Period to exercise right of redemption - One year from registration of the certificate of sale with Reg. of Deeds. Exception: the case of Ibaan Rural Bank vs. CA, G. R. No. 123817, Dec. 17, 1999 - Sheriff placed 2 years redemption period in certificate of sale - bank did not question saidL provision in certificate of sale - enforced by SC silence of bank meant consent to the 2 yr. period and redemption liberally interpreted in favor of the owner of the property. General Banking Law (R.A. No. 8791, effective June 13, 2000) Sec. 47 par. 2 - Mortgagor is juridical person - “Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the Property in accordance with this provision until, but not after, the registration of the certificate of foreciosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever Is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration.” Right of redemption is a property right that may be assigned or alienated. 6. Who may exercise right of redemption - mortgagor; successor-in-interest; assignee or transferee of right to redeem; one who succeeds to right of debtor by operation of law; joint debtors or joint owners; 7. How exercised -there should be notice of redemption: payment of the purchase price; within one year and the mode or medium of payment may be cash or check (Co vs. PNB, 114 SCRA 842; Tolentino vs. CA, 517 SCRA 732) 8. Payment of redemption price - to the purchaser or redemptioner or to officer who made the sale ~ If property is sold by purchaser at auction to a third person, redemption may be effected by redeeming property from third party buyer by paying only the amount of redemption price, i.e., the amount of the obligation, costs of sale and interest - NOT the purchase price of the subsequent sale. 9. What to pay ~ purchase price; interest (1% p.a), expenses of preservation or, if bank is mortgagee (rate provided in the REM) Exception DBP because of its law or charter, redemptioner must pay all the amounts owed by debtor to DBP; 10. Effect of redemption — restores the property to its original condition prior to the creation of the lien as if no sale was conducted. 11. Offer to redeem property constitutes waiver of the defects in the foreclosure. Execution of a dacion en pago is also considered waiver by mortgagor of the right of redemption. (First Global Realty vs. San Agustin, 377 SCRA 341) Waiver of Mortgage - Mortgagee may waive mortgage right and the right to foreclose- by filing ordinary suit based on the principal obligation. (BPI Family Savings vs. Vda. De Cosculuella, 493 SCRA 472) Other creditors may now attach or cause the property to be levied. Priority right of attaching or judgment creditors created by date of registration. Consolidation of Title - if NO redemption is effected within the period of redemption or upon the expiration of the redemption period, purchaser may consolidate title over the property by executing and registering affidavit of consolidation. Vendee's right of possession of mortgaged property sold - WRIT OF POSSESSION 1. Sec. 7. while right of redemption still effective - (ex- parte) petition for issuance of a writ of possession is filed with land registration court with an offer to postbond in amount corresponding to the value of the use of the property. ‘After consolidation of title by purchaser at auction, an ex parte petition (without bond) may be filed with the land registration court. The right to the issuance of the writ of possession is absolute and court has ministerial duty to issue writ of possession; The ministerial duty of courts in issuing writs of possession has been settled in a long line of cases decided by the Supreme Court. Thus, in the case of Banco Filipino Savings and Mortgage Bank vs. L.A.C. 142 SCRA 44, 47, the Supreme Court ruled that “considering the present case, that the period of redemption had already lapsed with no redemption having been made, there is no justifiable ground why the writ of possession would not be issued. See also the case of Teresita V. Idolor vs. Court of Appeals, GR 161028, January 31, 2005. WRIT OF POSSESSION NOT applicable to or may be enforced against a third person with an interest adverse to the mortgagor or judgment debtor (Clapano vs. Gapultos, 132 SCRA 429) Other instances when writ of possession would not be granted ~ a) where property is in possession of lessee - Although the purchaser at foreclosure sale can be granted a writ of possession even if the property is in the possession of a lessee whose lease has NOT terminated, nevertheless, if the lease had been previously (i) registered in the Registry of Deeds (such lease is binding upon mortgagee); or, (ii) the mortgagee had prior knowledge of the existence and duration of the lease (actual knowledge of the lease is equivalent to registration) [Ibasco vs. Caguioa, 143 SCRA 538], the writ of possession cannot be enforced against said lessee. b) Where possessor of property claims adverse right or title as against mortgagor- Art. 433 of the C Code requires that a person claiming ownership of property possessed by another should file appropriate action to recover possession. The phrase “judicial process” could mean an ejectment suit or reinvidicatory action in which the issue of ‘ownership may be properly heard and adjudicated. The proceedings under Sec. 7 of Act No. 3135, as amended, is NOT the “judicial process ‘contemplated in Art. 433. It is not an ordinary suit filed in court by which one party sues another for the enforcement or protection of a right or the prevention or rederess of a wrong (PNB vs. CA, 374 SCRA 22; Idolor vs. CA, GR 161028, January 31, 2005). Accordingly, the writ of possession shouldEE EEESE:’”S:~= OMEN AN AAR tt Gabi rr he a Not be issued (PINB vs. CA, 374 SCRA 22; DBP vs. Prime Neighborhood Association., 587 SCRA 582). The petition is an ex Parte proceeding and is a non-litigious proceeding and summary in nature. (Arquiza vs. CA, 459 SCRA 753) Since the foreclosure is extrajudicial, the person claiming a right adverse to the mortgagor will have no opportunity to be heard on his claim. ‘It stands to reason, therefore, that such third person may not be dispossessed on the strength of a mere ex parte possessory writ, since to do so would be tantamount to his summary ejectment in violation of the basic tenets of due Process. (ITC Service and Leasing Corp, etc. vs. Nera, 19 SCRA 181; Barican vs. IAC, 162 SCRA 358; Joven vs. CA, 212 SCRA 700; (PNB vs. CA, 374 SCRA 22; Idolor vs. CA, GR 161028, January 31, 2005) c) Where purchaser of property failed to deliver surplus or excess to the mortgagor- Considerations of equity demand the deferment of the issuance of the writ as it would be unfair and iniquitous for the mortgagor, who as a redemptioner might still choose to redeem the foreclosed property to pay the equivalent amount of the bid. (Sulit vs. CA, 268 SCRA 441; Nagtalon vs. UCPB, 702 SCRA 615) L. REMEDIES of mortgagor after foreclosure of REM - 1. File independent civil action to set aside or nullify foreclosure sale - the grounds may include failure to comply with requirements of the auction sale e.g., lack of publication; there was NO violation of the terms and Conditions of the mortgage; or, 2. File a petition under Sec. 8 of Act. No. 3135 with the court which issued the writ of possession (LRC Case) to set aside the sale and to cancel the writ of possession. The grounds in support of said petition are that (i) mortgage was not violated, or (ii) sale was not made in accordance with the law. The petition should be filed not later than thirty days after the purchaser was given possession of the property. 3. Preliminary Step to the foregoing remedies is to file a terceria (third party claim) or an affidavit of claim with the Sheriff implementing the writ. By térceria, the sheriff would not be bound to keep the property and may be held liable for damages.