Equity of Redemption: A Vital Right for Junior Lien Holders in Property Foreclosures

Luz V. Fallarme v. Romeo Pagedped, G.R. No. 247229, September 03, 2020

Imagine you’ve invested in a piece of property, only to find out later that it’s been foreclosed without your knowledge. This scenario, though distressing, highlights the importance of understanding your rights as a junior lien holder in the Philippines. In the case of Luz V. Fallarme versus Romeo Pagedped, the Supreme Court addressed a critical issue: the equity of redemption for subsequent lien holders in judicial foreclosure proceedings. This case underscores the necessity of knowing your legal standing when dealing with real estate encumbrances.

The dispute centered on a 1,862-square meter land in Baguio City, originally owned by the Avilas. Pagedped, having a mortgage on the property, foreclosed it when the Avilas defaulted. However, Fallarme, who had a subsequent lien on half of the property, was not made a party to the foreclosure. The central question was whether Fallarme’s right to redeem her interest in the property remained valid despite not being involved in the foreclosure process.

Legal Context: Understanding Equity of Redemption and Judicial Foreclosure

In Philippine law, equity of redemption refers to the right of the mortgagor or any person with an interest in the mortgaged property to reclaim it after a foreclosure sale but before the sale’s confirmation. This right is crucial for junior lien holders, like Fallarme, who have interests in the property that are subordinate to the primary mortgage.

The relevant legal framework is found in Rule 68 of the Rules of Court, which governs judicial foreclosure. Section 1 of Rule 68 mandates that all persons with interests subordinate to the mortgage should be made defendants in the foreclosure action. However, the Supreme Court has clarified that this requirement is directory, not mandatory. Thus, failure to join a junior lien holder does not invalidate the foreclosure but preserves their equity of redemption.

For example, if a homeowner defaults on their mortgage and the bank forecloses, any subsequent creditor with a lien on the property (like a second mortgagee or a judgment creditor) retains the right to redeem their interest within 90 days from the final judgment if they were not included in the foreclosure suit.

Case Breakdown: The Journey of Fallarme’s Equity of Redemption

The story began when the Avilas mortgaged their Baguio City property to Pagedped in 1999. When they failed to pay, Pagedped foreclosed the mortgage in 2005, acquiring the property at a public auction. Meanwhile, Fallarme had obtained a judgment against the Avilas and attached half of the property in 2003, which was not known to Pagedped until after he received the title.

Fallarme, unaware of Pagedped’s foreclosure, attempted to redeem her half of the property in 2013, leading to a series of legal battles. The Regional Trial Court initially allowed her redemption, but the Court of Appeals reversed this, citing estoppel due to Fallarme’s withdrawal of her opposition to Pagedped’s petition to cancel the annotations on his title.

The Supreme Court, however, found merit in Fallarme’s petition. The Court emphasized that:

“If these subsequent or junior lien-holders be not joined in the foreclosure action, the judgment in the mortgagor’s favor is ineffective as to them…they retain what is known as the ‘unforeclosed equity of redemption,’ and a separate foreclosure proceeding should be brought to require them to redeem.”

The Court also noted:

“The equity of redemption also does not constitute as a bar to the registration of the property in the name of the mortgagee. Registration may be granted in the name of the mortgagee but subject to the subordinate lien holders’ equity of redemption.”

The procedural steps included:

• Pagedped’s foreclosure of the property in 2005 without joining Fallarme as a party.
• Fallarme’s attempt to redeem her interest in 2013, leading to a case for redemption and consignation.
• The Regional Trial Court’s initial ruling in favor of Fallarme, followed by the Court of Appeals’ reversal.
• The Supreme Court’s final decision reinstating the Regional Trial Court’s ruling, affirming Fallarme’s right to redeem her interest.

Practical Implications: Safeguarding Your Rights in Property Transactions

This ruling reinforces the importance of equity of redemption for junior lien holders in the Philippines. It ensures that their rights are not extinguished by foreclosure proceedings they were not part of. For property owners and investors, this case highlights the need to be vigilant about all liens on a property and to understand the procedural requirements for foreclosure and redemption.

Key Lessons:

• Always check for existing liens before purchasing or investing in property.
• If you have a junior lien, ensure you are involved in any foreclosure proceedings to protect your equity of redemption.
• Act promptly to exercise your equity of redemption within the legal timeframe to avoid losing your rights.

Frequently Asked Questions

What is equity of redemption?

Equity of redemption is the right of the mortgagor or any person with an interest in the mortgaged property to reclaim it after a foreclosure sale but before the sale’s confirmation.

Can a junior lien holder redeem their interest if they were not part of the foreclosure proceedings?

Yes, as upheld in the Fallarme case, a junior lien holder retains the ‘unforeclosed equity of redemption’ if they were not joined in the foreclosure action.

How long does a junior lien holder have to exercise their equity of redemption?

Typically, a junior lien holder must exercise their equity of redemption within 90 days from the date the decision in the foreclosure case becomes final.

What happens if a junior lien holder does not redeem their interest within the specified period?

If the junior lien holder fails to redeem within the 90-day period, they may lose their right to redeem, and the property may be registered in the name of the foreclosure purchaser without their interest.

What should I do if I discover a foreclosure on a property I have a lien on?

Seek legal advice immediately to understand your rights and the steps you need to take to protect your interest in the property.

ASG Law specializes in property law and foreclosure proceedings. Contact us or email hello@asglawpartners.com to schedule a consultation.