In Spouses Benedict and Maricel Dy Tecklo vs. Rural Bank of Pamplona, Inc., the Supreme Court clarified the scope of redemption rights in mortgage foreclosures, particularly concerning blanket mortgage clauses and subsequent loans. The Court ruled that a bank’s failure to include a subsequent loan in its application for extrajudicial foreclosure constitutes a waiver of its lien on the mortgaged property concerning that loan. While a blanket mortgage clause covers future loans, the bank’s actions dictate the extent of its claim during foreclosure and redemption, safeguarding the rights of successors-in-interest.

When Foreclosure Forgets: Can a Bank Exclude a Loan and Still Demand It at Redemption?

This case revolves around a loan secured by a real estate mortgage containing a ‘blanket mortgage clause,’ which stipulates that the mortgage also secures future loans. Spouses Roberto and Maria Antonette Co obtained a P100,000 loan from Rural Bank of Pamplona, Inc., secured by a mortgage on their property. The mortgage included a clause stating it would cover future loans as well. Subsequently, they acquired a second loan of P150,000.

Meanwhile, Spouses Benedict and Maricel Dy Tecklo (petitioners) filed a collection suit against Spouses Co and obtained a writ of attachment on the mortgaged property. When Spouses Co defaulted on both loans, the bank initiated extrajudicial foreclosure proceedings but only sought satisfaction for the first loan. The bank won the auction, and petitioners, as successors-in-interest, attempted to redeem the property by paying the amount corresponding to the first loan. The bank refused, insisting that the redemption amount should also include the second loan, leading to a legal dispute.

The core legal question before the Supreme Court was whether the redemption amount should include the second loan, considering it was not included in the bank’s application for extrajudicial foreclosure. Petitioners argued that since the second loan was not annotated on the Transfer Certificate of Title (TCT) and the bank only foreclosed on the first loan, they should only be required to pay the amount of the first loan to redeem the property. The bank, however, contended that the blanket mortgage clause covered the second loan, and as redemptioners, petitioners should assume all debts secured by the mortgage.

The Supreme Court began by acknowledging the validity of blanket mortgage clauses, explaining that such clauses are recognized to secure future advancements or loans, eliminating the necessity of executing additional security documents for each loan. The court also cited Presidential Decree No. 1529, the Property Registration Decree, which emphasizes that registration serves as constructive notice to the world, binding third parties. However, the Court highlighted the importance of the mortgagee’s actions during foreclosure in determining the extent of the lien on the foreclosed property.

Referring to Tad-Y v. Philippine National Bank, the Court reiterated that if a mortgage contract containing a blanket mortgage clause is annotated on the TCT, subsequent loans need not be separately annotated to bind third parties. In this case, the mortgage contract containing the blanket mortgage clause was indeed annotated on the TCT, providing sufficient notice that the mortgage secured both current and future loans. However, the Court found a critical flaw in the bank’s actions.

Despite the existence of the blanket mortgage clause, the bank’s petition for extrajudicial foreclosure pertained solely to the first loan, even though the second loan was already due. The bank even admitted that the second loan was not included in its bid at the public auction sale. This admission proved crucial. The Supreme Court concluded that by failing to include the second loan in its application for extrajudicial foreclosure and its bid at the public auction sale, the bank effectively waived its lien on the mortgaged property concerning the second loan.

For its failure to include the second loan in its application for extrajudicial foreclosure as well as in its bid at the public auction sale, respondent bank is deemed to have waived its lien on the mortgaged property with respect to the second loan.

The Court clarified that the bank was not barred from collecting the unpaid second loan through an ordinary collection suit, provided the right to collect had not prescribed. However, it could not enforce the lien on the foreclosed property for that particular loan. After foreclosure, the mortgage is extinguished, and the purchaser acquires the property free from such mortgage. Any deficiency cannot constitute a continuing lien on the foreclosed property but must be collected in a separate action. In this case, the second loan was treated as a deficiency amount after foreclosure.

The Supreme Court underscored the principle that to effect redemption, the debtor needs only to pay the price the purchaser paid at the auction sale, plus any assessments or taxes paid by the purchaser, along with applicable interest. The bank’s demand to include the second loan in the redemption amount lacked legal basis. Finally, the Court turned to the computation of the redemption amount. Section 78 of Republic Act No. 337, the General Banking Act, specifies that the interest rate stipulated in the mortgage should be applied.

Sec. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution, within the purview of this Act shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, or the amount due under the mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property. x x x x

Applying this provision, the Court used the 24% per annum interest rate specified in the mortgage. Ultimately, the Supreme Court granted the petition, setting aside the Court of Appeals’ decision. The petitioners were ordered to pay the respondent bank a deficiency of P11,307.18 on the redemption amount, with 24% interest from May 22, 1998, until fully paid. Upon receiving the full amount, the bank was ordered to surrender the owner’s duplicate of TCT No. 24196 to the petitioners.

FAQs

What was the key issue in this case?	The main issue was whether the redemption amount for a foreclosed property should include a second loan, even if the bank only sought to satisfy the first loan during the foreclosure proceedings.
What is a blanket mortgage clause?	A blanket mortgage clause is a provision in a mortgage contract that secures not only the initial loan but also any future loans or advancements made to the mortgagor. This eliminates the need for new security documents for each subsequent loan.
Did the existence of a blanket mortgage clause automatically mean the second loan had to be included in the redemption amount?	No, the Supreme Court ruled that despite the blanket mortgage clause, the bank’s decision to exclude the second loan from the foreclosure proceedings constituted a waiver of its lien on the property for that loan.
Why was the bank’s decision to exclude the second loan from foreclosure so important?	The Court deemed that by not including the second loan in its foreclosure application and bid, the bank signaled its intent not to enforce its lien on the property for that particular debt, thus waiving its right to claim it during redemption.
What interest rate was used to calculate the redemption amount?	The Supreme Court applied the interest rate specified in the original mortgage contract, which was 24% per annum, as mandated by Section 78 of the General Banking Act.
What happens to the second loan now that it wasn’t included in the foreclosure?	The bank can still pursue the collection of the second loan through an ordinary collection lawsuit, provided that the statute of limitations has not expired. However, it cannot enforce the lien on the foreclosed property for that debt.
What is the significance of registering the mortgage contract on the TCT?	Registration serves as constructive notice to the entire world, meaning that anyone dealing with the property is presumed to know about the mortgage and its terms. This protects the mortgagee’s rights against third parties.
What is the effect of foreclosure on the mortgage?	Foreclosure extinguishes the mortgage, and the purchaser at the auction sale acquires the property free from the mortgage. Any deficiency amount cannot be claimed as a continuing lien on the property.

In conclusion, this case clarifies the responsibilities and limitations of banks in mortgage foreclosures, particularly when dealing with blanket mortgage clauses. While such clauses provide security for future loans, the bank’s actions during foreclosure proceedings determine the extent of its lien on the property. This ruling safeguards the rights of redemptioners, ensuring they are not unfairly burdened with debts that the bank chose not to enforce during foreclosure.

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: Spouses Benedict and Maricel Dy Tecklo vs. Rural Bank of Pamplona, Inc., G.R. No. 171201, June 18, 2010