The Supreme Court ruled that interest and penalty charges on a mortgaged property continue to accrue until the full obligation is settled, even after foreclosure proceedings have begun, especially when a third party assumes the mortgage. This decision emphasizes the importance of fulfilling contractual obligations and clarifies the application of jurisprudence regarding interest calculation in foreclosure cases. It confirms that obligations remain until satisfied, reinforcing the principle of immutability of judgments.

Foreclosure Frustration: When Does Interest Stop Ticking?

This case revolves around a property in Mandaue City originally owned by Victor T. Bollozos, who mortgaged it to Banco de Oro Unibank, Inc. (BDO) to secure a loan for World’s Arts & Crafts, Inc. Bollozos later sold the property to VTL Realty Corporation (VTL), with a Deed of Definite Sale with Assumption of Mortgage. BDO, however, refused to recognize VTL as the new owner and rejected their payments, insisting that Bollozos’ loan obligation be settled first. Consequently, VTL filed a specific performance action against BDO, but the bank proceeded with foreclosure due to the unpaid debt, eventually consolidating ownership after the redemption period expired. This legal battle highlights the complexities of assumed mortgages, foreclosure rights, and the critical question of when interest accrual ceases on a foreclosed property.

The Regional Trial Court (RTC) initially directed BDO to provide VTL with an updated statement of account, based on the original August 12, 1994 statement, including accrued interests and penalties, which VTL was then to assume and pay. The Court of Appeals (CA) affirmed this decision. Disagreements arose during the execution phase, particularly regarding the period for calculating interests and penalties. VTL argued, citing Development Bank of the Philippines vs. Zaragoza (DBP vs. Zaragoza), that these should be computed only up to April 28, 1995, the date of the Certificate of Sale’s registration. However, the RTC initially sided with VTL based on their interpretation of DBP vs. Zaragoza, limiting VTL’s liability to P6,631,840.95.

Upon BDO’s motion for reconsideration, the RTC reversed its position and directed BDO to clarify its computation. Consequently, the RTC ultimately sided with BDO, decreeing that VTL owed P41,769,596.94 as of March 16, 2007. The CA, however, reversed the RTC’s order, agreeing with VTL that interest should only be calculated up to the registration date of the Certificate of Sale, relying on both DBP vs. Zaragoza and PNB vs. CA. The CA reasoned that after the foreclosure proceedings are completed, the counting of interest should cease. BDO then elevated the case to the Supreme Court, arguing that the CA’s decision violated the principle of immutability of judgments, given the finality of the earlier CA decision.

The Supreme Court sided with BDO, clarifying the misapplication of DBP vs. Zaragoza. In that case, the issue was whether a mortgagor was liable for interests during the period between the foreclosure and the actual sale of the property, a period of four years. The Supreme Court emphasized that the delay was attributable to the Zaragozas, thus justifying the imposition of interests. The High Court emphasized that the key question in DBP vs. Zaragoza was about the liability for interest *from the date of the foreclosure to the date of sale of the property* and not regarding the extinguishment of the debt.

The Supreme Court pointed out that the core ruling in DBP vs. Zaragoza provides clarity:

x x x it must be noted that a foreclosure of mortgage means the termination of all rights of the mortgagor in the property covered by the mortgage. It denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself In judicial foreclosures, the “foreclosure” is not complete until the Sheriffs Certificate is executed, acknowledged and recorded. In the absence of a Certificate of Sale, no title passes by the foreclosure proceedings to the vendee. It is only when the foreclosure proceedings are completed and the mortgaged property sold to the purchaser that all interests of the mortgagor are cut off from the property. This principle is applicable to extrajudicial foreclosures. Consequently, in the case at bar, prior to the completion of the foreclosure, the mortgagor is, therefore, liable for the interest on the mortgage.

Furthermore, the Supreme Court distinguished the case from PNB vs. CA, which pertained to the redemption price and the cessation of stipulated interest upon the foreclosure sale. The Court noted that in this case, VTL did not exercise its right of redemption, making the principles in PNB vs. CA inapplicable. The Court then cited Section 30 of Rule 39 of the Rules of Court regarding the redemptioner’s obligations:

Pursuant to Section 30 of Rule 39, the redemptioner, who is the private respondent herein, “may redeem the property from the purchaser at any time within twelve (12) months after the sale, on paying the purchaser the amount of his purchase, with one per centum per month interest thereon in addition, up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid therein after purchase and interest on such last named amount at the same interest rate; …”

In essence, both cited cases were misapplied by the Court of Appeals. The Supreme Court underscored that VTL neither tendered payment nor deposited any amount to stop the accrual of interest and penalty charges. As such, VTL’s attempt to purchase the property after the redemption period had lapsed was distinct from exercising a right to redeem.

Building on this, the Supreme Court highlighted that VTL did not appeal the CA’s earlier decision, which affirmed that the amount to be paid by VTL should include interests and penalty charges accruing after August 12, 1994. This previous ruling had become final and executory. The Supreme Court emphasized the importance of the principle of immutability of judgments. A final and executory judgment can no longer be attacked or modified, even by the highest court. This principle aims to bring finality to disputes and maintain stability in the justice system.

Therefore, the Supreme Court reversed the CA’s decision and reinstated the RTC’s orders, affirming that VTL was liable for the amount computed by BDO as of March 16, 2007. This decision reinforces the sanctity of contracts and the binding nature of final judgments. The case serves as a reminder that obligations, particularly those assumed in real estate transactions, must be fulfilled according to the terms agreed upon.

The decision underscores the significance of understanding the nuances of mortgage assumptions and the implications of foreclosure proceedings. It clarifies that interest and penalties continue to accrue until the debt is fully settled, unless a valid redemption is made. This ruling provides guidance to both lenders and borrowers involved in real estate transactions, ensuring that contractual obligations are upheld and that final judgments are respected.

FAQs

What was the key issue in this case?	The central issue was whether interest and penalty charges on a mortgaged property should continue to accrue after foreclosure proceedings, especially when a third party assumes the mortgage.
What did the Supreme Court decide?	The Supreme Court ruled that interest and penalty charges continue to accrue until the obligation is fully settled, even after foreclosure, unless there is a valid redemption.
Why did the Supreme Court reverse the Court of Appeals’ decision?	The Supreme Court found that the Court of Appeals had misapplied previous jurisprudence, specifically DBP vs. Zaragoza and PNB vs. CA, which dealt with different factual scenarios.
What is the principle of immutability of judgments?	The principle of immutability of judgments states that final and executory judgments can no longer be attacked or modified, directly or indirectly, even by the highest court of the land.
What was VTL Realty’s argument in this case?	VTL Realty argued that interest and penalties should only be computed up to the date of registration of the Certificate of Sale, citing DBP vs. Zaragoza.
Why was DBP vs. Zaragoza not applicable in this case?	DBP vs. Zaragoza was not applicable because it concerned the period between foreclosure and the actual sale of the property, whereas this case involved a completed foreclosure and an attempt to purchase the property after the redemption period.
What should VTL Realty have done to stop the accrual of interest?	VTL Realty should have tendered payment or deposited the amount due to stop the running of interest and imposition of penalty charges.
What is the significance of the redemption period in foreclosure cases?	The redemption period allows the mortgagor or their successor in interest to redeem the property by paying the purchase price, interest, and other charges within a specified time after the foreclosure sale.

This case underscores the critical importance of understanding contractual obligations and the implications of mortgage assumptions in real estate transactions. It clarifies the application of jurisprudence regarding interest calculation in foreclosure cases, providing valuable guidance for lenders and borrowers alike.

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: BANCO DE ORO UNIBANK, INC. VS. VTL REALTY, INC., G.R. No. 193499, April 23, 2018