For a person to validly constitute a mortgage on real estate, he must be the absolute owner thereof (Article 285 [2] Civil Code). This is the law applied in this case of the spouses Kiko and Lisa.
Kiko and Lisa were the owners of a property with an area of 6,368 square meters covered by Transfer Certificate of Title (TCT) No 35084. On July 26, 1963, the spouses sold a portion of said lot with an area of 822 square meters to Cely, a widow. Cely succeeded in obtaining a new TCT covering not just the 822 square meters portion sold to her, but the entire 6,368 square meters. Another new TCT (No. 70813) was also issued in the names of the spouses and Cely covering the entire area.
Subsequently Cely mortgaged the whole 6,368 square meter lot and not just the 822 square meters portion thereof in favor of a bank (PCIB) to secure a loan she obtained from it. When Cely failed to pay her obligation, the bank foreclosed the mortgage extra-judicially at a public auction sale where it emerged as the highest bidder. The bank thereafter assigned its rights over the aforesaid land to a government owned and controlled corporation (NIDC). So the Certificate of Sale and the Assignment was annotated at the back of TCT No. 70813.
Meanwhile, Cely failed to complete payment of the lots she purchased from the spouses. So the spouses filed an action for the rescission of the Contract of Sale and the cancellation of the mortgage constituted thereon in favor of the bank before the then Court of First Instance (CFI). After trial the CFI rendered a decision in favor of the spouses and ordered the rescission of the Contract of Sale without prejudice however to the rights of PCIB as mortgagee of the same. This decision became final when the appeal thereon was filed out of time.
But when the CFI ordered the execution of said decision by cancelling TCT No. 70813 and replacing it with TCT No. 139925 in the name solely of the spouses, NIDC questioned the said order before the Supreme Court.
While the said case was pending, the spouses mortgaged TCT No. 139925 with another bank (BF) to secure their loan of P400,000. When the spouses defaulted on their loan, BF foreclosed TCT No. 139925 and a Certificate of Sale was issued in BF’s name as highest bidder.
Meantime the SC case filed by NIDC was decided in favor of the latter. The SC found that PCIB was a mortgagee in good faith and its subsequent assignment to NIDC of its rights as such and as the highest bidder in the foreclosure sale of said land under TCT No. 70813 was valid. So the SC declared the order of the CFI replacing TCT 70813 with TCT 139925 null and void. When this decision also became final, NIDC informed BF that pursuant to said SC decision, it is declared the rightful owner of the land covered by TCT No. 13995. But instead of litigating with BF, NIDC just proposed to exercise its right of redemption. To which BF agreed. So, NIDC was able to secure TCT 186147 cancelling TCT 139925 covering the entire 6, 368 sq. meter lot.
When the spouses learned about this, they sued both NIDC and BF for recovery of 5,546 sq. meters of the land in question plus damages. The spouses contended that NIDC had no right to said 5,546 sq.meter because the same was neither sold to Cely nor mortgaged to PCIB from whom NIDC acquired its rights. Were the spouses correct?
Yes. While the spouses are already barred from questioning the validity of the real estate mortgage between Cely and PCIB and the assignment of rights between PCIB and NIDC under the principle of res judicata, they are only barred in so far as they pertain to the real property actually sold by the spouses to Cely. The issue of whether Cely could have mortgaged to PCIB the 5,546 sq. meter portion of the 6, 638 sq. meter lot which was never sold by the spouses to her can still be raised and resolved.
In this case only 882 sq. meters of the land was the subject of the contract of sale between the spouses and Cely. So the 5,546 sq. meters of said land was still owned by said spouses. Not being the owner of the 5,546 sq. meter lot, Cely could not have constituted a mortgage of the same in favor of PCIB as security for her loan. There being no valid mortgage of the said portion to PCIB, it could not be subjected to foreclosure; it could not be sold at public auction; it could not be bought by PCIB as the highest bidder at the public auction; and it could not be assigned by PCIB to NIDC. The 5, 546 sq. meter portion remained the property of the spouses.
But considering that: the spouses subsequently mortgaged the same land to BF under TCT No. 13995 including the 5,546 sq.meter portion; that BF already foreclosed the property and acquired it as highest bidder, that NIDC subsequently purchased it from BF supposedly in the exercise of its right of redemption although it was actually an ordinary purchase, then NIDC also became the owner of the 6, 368 sq. meter of land. Essentially NIDC twice became the owner of the 882 portion of said land having acquired them by assignment from PCIB and having purchased the same from BF (NIDC vs. Spouses Bautista, G.R. 150388, March 11, 2009).
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