Premature

Foreclosure of mortgage is valid only when the debtor is in default in the payment of the obligation. This means that demand has been made upon the debtor to settle the obligation and the debtor fails to do so. This is the rule applied in this case of the spouses Lito and Rosa.

Lito and Rosa entered into a Growers Contract with an agricultural company (GMC) wherein the latter was to supply broiler chickens for the spouses to raise in their land. To guarantee full compliance of the contract and in consideration of a credit line amounting to P215,000 payable within an indefinite period with interest at 12 percent per annum, the couple executed a Real Estate Mortgage over a piece of real property upon which their conjugal home was built.

The spouses were eventually unable to settle their account with GMC. So GMC sent letters to the couple requesting them to go to its office to discuss settlement of their obligation. Then on March 31, 1997, GMC’s counsel notified Lito and Rosa that GMC would institute foreclosure proceedings. So on May, 7, 1997, GMC extra-judicially foreclosed the property of the spouses for the amount of P935,882,075 representing the losses on chicks and feeds exclusive of 12 percent interest and attorney’s fees.

On March 3, 2000, the spouses filed a complaint with the Regional Trial Court (RTC) for Annulment and Declaration of Nullity of the Extrajudicial Foreclosure. They claimed that the foreclosure was premature and was done without complying with the requirements of Act 3135.

In its answer GMC insisted that it repeatedly reminded the couple of their liabilities under the Growers Contract and was compelled to foreclose the mortgage only because of their failure to pay their obligation. GMC also alleged that it had observed all the requirements under Act 3135.

After trial, the RTC ruled that GMC’s foreclosure of the properties was premature because the latter’s obligation under the contract was not yet due. The RTC said that since the credit line secured by the REM was for an indefinite period, the obligation is not yet due and payable until an action is commenced for the purpose of having the court fix the date of maturity of the obligation.

On appeal, the Court of Appeals (CA) sustained the RTC decision but anchored its ruling on the ground that GMC’s foreclosure was premature as the couple were not in default when the said foreclosure was instituted. It found that no demand was made by GMC as its letters only requested the spouses to go to GMC’s office to discuss the settlement of their account. Was the CA correct?

Yes. For a finding of default, the following requisites are necessary: first, the obligation must already be demandable and liquidated; second, the debtor delays performance; and third, the creditor judicially or extra-judicially demands the debtor’s performance of the obligation. However no demand is necessary when the law or the contract so declares.

As the contract in the instant case carries no provision that demand is not necessary, the CA is correct in ruling that GMC should have first made a demand on the spouses before proceeding with the foreclosure. In this case the CA found that GMC did not make a demand on the spouses Lito and Rosa but merely requested them to go to GMC’s office to discuss the settlement of the account. These are factual findings that as a general rule the Supreme Court cannot review except when there are circumstances requiring it. GMC has not shown any circumstance making the case an exception to the rule. So the extrajudicial foreclosure in this case should be declared null and void because the debtors are not yet in default in the payment of their obligation (General Milling Corporation vs. Spouses Ramos, G.R. 193723, July 20, 2011).

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