The Supreme Court clarified that when a creditor opts to extrajudicially foreclose a mortgage on a deceased debtor’s property, they waive the right to claim any deficiency from the estate. This decision emphasizes the importance of creditors carefully considering their options under Section 7, Rule 86 of the Rules of Court. By choosing extrajudicial foreclosure, the creditor accepts the proceeds of the sale as full satisfaction of the debt, forgoing any further claims against the estate’s assets.

From Probate Court to Foreclosure Sale: Can the Bank Still Claim What’s Owed?

Spouses Flaviano and Salud Maglasang obtained a credit line from Manila Banking Corporation, secured by a real estate mortgage on several properties. After Flaviano’s death, the bank filed a claim against his estate in probate court. The proceedings were terminated, and the bank later foreclosed on the mortgage due to unpaid debts. This case revolves around whether the bank, after foreclosing, could still sue the heirs for the remaining debt deficiency. The heirs argued that the bank’s initial claim in probate court limited their options, preventing them from pursuing a deficiency claim after foreclosure.

The central legal issue hinged on interpreting Section 7, Rule 86 of the Rules of Court, which governs secured claims against a deceased’s estate. This rule outlines three alternative remedies for a creditor holding a mortgage against the deceased’s property. The creditor can: (a) waive the mortgage and claim the entire debt as an ordinary claim against the estate; (b) judicially foreclose the mortgage and claim any deficiency as an ordinary claim; or (c) rely solely on the mortgage and foreclose it before it prescribes, without the right to claim any deficiency. These remedies are distinct and mutually exclusive. Choosing one option means abandoning the others.

The Supreme Court emphasized the importance of understanding the consequences of each choice. The Court stated:

SEC. 7. Mortgage debt due from estate. – A creditor holding a claim against the deceased secured by a mortgage or other collateral security, may abandon the security and prosecute his claim in the manner provided in this rule, and share in the general distribution of the assets of the estate; or he may foreclose his mortgage or realize upon his security, by action in court, making the executor or administrator a party defendant, and if there is a judgment for a deficiency, after the sale of the mortgaged premises, or the property pledged, in the foreclosure or other proceeding to realize upon the security, he may claim his deficiency judgment in the manner provided in the preceding section; or he may rely upon his mortgage or other security alone, and foreclose the same at any time within the period of the statute of limitations, and in that event he shall not be admitted as a creditor, and shall receive no share in the distribution of the other assets of the estate; but nothing herein contained shall prohibit the executor or administrator from redeeming the property mortgaged or pledged, by paying the debt for which it is held as security, under the direction of the court, if the court shall adjudged it to be for the best interest of the estate that such redemption shall be made.

The Court clarified that this section applies broadly to all secured claims against the estate, regardless of whether the mortgage was created by the deceased or by the estate administrator. The Court explicitly stated that the remedies provided are alternative and not cumulative. The election of one remedy operates as a waiver of the others, as highlighted in Bank of America v. American Realty Corporation:

In our jurisdiction, the remedies available to the mortgage creditor are deemed alternative and not cumulative. Notably, an election of one remedy operates as a waiver of the other. For this purpose, a remedy is deemed chosen upon the filing of the suit for collection or upon the filing of the complaint in an action for foreclosure of mortgage, pursuant to the provision of Rule 68 of the 1997 Rules of Civil Procedure. As to extrajudicial foreclosure, such remedy is deemed elected by the mortgage creditor upon filing of the petition not with any court of justice but with the Office of the Sheriff of the province where the sale is to be made, in accordance with the provisions of Act No. 3135, as amended by Act No. 4118.

The Court further elucidated that extrajudicial foreclosure, governed by Act No. 3135, falls under the third option. By choosing this path, the creditor implicitly waives the right to pursue a deficiency claim against the estate. In this case, Manila Banking Corporation opted for extrajudicial foreclosure. Even though they had notified the probate court of their claim, this notification did not constitute an election of the first remedy (filing a claim against the estate). Consequently, the bank was barred from seeking the deficiency amount from the heirs.

The Court also addressed the heirs’ argument that the foreclosure sale was invalid because it was not conducted in the capital of the province, as stipulated in the mortgage contract. The Court found that the stipulation lacked explicit language restricting the venue solely to the capital. Therefore, the sale in Ormoc City, which is within the province where the property was located, was deemed compliant with both the contract and Section 2 of Act No. 3135. Section 2 of Act No. 3135 states:

SEC. 2. Said sale cannot be made legally outside of the province which the property sold is situated; and in case the place within said province in which the sale is to be made is subject to stipulation, such sale shall be made in said place or in the municipal building of the municipality in which the property or part thereof is situated.

In essence, while the foreclosure was valid, the bank’s choice to proceed extrajudicially meant they could not pursue the deficiency claim. The Supreme Court, therefore, partly granted the petition, dismissing the bank’s claim for the deficiency amount but upholding the validity of the extrajudicial foreclosure.

FAQs

What was the key issue in this case?	The key issue was whether a creditor who extrajudicially forecloses a mortgage on a deceased debtor’s property can still claim the deficiency from the estate. The Supreme Court ruled that they cannot.
What are the three options available to a secured creditor under Section 7, Rule 86 of the Rules of Court?	The creditor can waive the mortgage and claim the entire debt as an ordinary claim, judicially foreclose and claim any deficiency, or rely solely on the mortgage and foreclose without claiming any deficiency. These are alternative and exclusive remedies.
What happens if a creditor chooses to extrajudicially foreclose the mortgage?	If a creditor chooses to extrajudicially foreclose, they are considered to have waived their right to claim any deficiency from the estate. This is because extrajudicial foreclosure is considered the third option under Section 7, Rule 86.
Did the bank’s notification to the probate court constitute an election of remedy?	No, the bank’s notification to the probate court about its claim and the ongoing restructuring did not constitute an election of remedy. It was merely an informational notice.
Was the extrajudicial foreclosure valid in this case?	Yes, the extrajudicial foreclosure was deemed valid because it complied with Act No. 3135. The sale was conducted within the province where the property was located.
What was the effect of the stipulation in the mortgage contract regarding the venue of the foreclosure sale?	The stipulation, lacking explicit restrictive language, was interpreted as an additional venue. This allowed the sale to be conducted in Ormoc City, within the province, satisfying both the contract and Act No. 3135.
What is Act No. 3135?	Act No. 3135 is a law that governs the extrajudicial foreclosure of real estate mortgages. It outlines the procedures for conducting foreclosure sales outside of court.
Does Section 7, Rule 86 apply to mortgages made by the estate administrator?	Yes, the Supreme Court clarified that Section 7, Rule 86 applies to all secured claims, whether the mortgage was made by the deceased or the estate administrator. The court emphasized that mortgages of estate property executed by the administrator are also governed by Rule 89 of the Rules.

This case serves as a critical reminder for creditors dealing with deceased debtors’ estates. A clear understanding of Section 7, Rule 86, and its implications is essential to avoid unintended waivers of rights. Choosing the appropriate remedy requires careful consideration of the specific circumstances and potential financial outcomes.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Heirs of Maglasang vs. Manila Banking Corporation, G.R. No. 171206, September 23, 2013