Bicol Savings and Loan Association vs. Court of Appeals

A special power to mortgage includes the authority to stipulate on extrajudicial foreclosure, as such a stipulation is an ancillary and essential part of the mortgage contract, not the voluntary "power to sell" proscribed by Article 1879 of the Civil Code.

Juan de Jesus was the owner of a parcel of land in Naga City. On March 31, 1976, he executed a Special Power of Attorney in favor of his son, Jose de Jesus, authorizing him to negotiate and mortgage the property with any bank, preferably Bicol Savings Bank. Juan de Jesus died in the meantime on a date that does not appear of record.

Juan de Jesus owned a parcel of land in Naga City. On March 31, 1976, he executed a Special Power of Attorney in favor of his son, Jose de Jesus, authorizing him to negotiate and mortgage the property with any bank, preferably Bicol Savings Bank. By virtue of this authority, Jose obtained a P20,000 loan from petitioner Bicol Savings and Loan Association on April 13, 1976. To secure payment, Jose executed a deed of mortgage over the property, which included a stipulation allowing the bank to extrajudicially foreclose the mortgage in case of default and appointing the bank as attorney-in-fact to sell the property for that purpose.

Juan de Jesus died in the meantime. Because Jose failed to pay the loan obligation even during Juan's lifetime, the bank caused the extrajudicial foreclosure of the mortgage on November 16, 1978. The property was sold at public auction to the bank as the highest bidder, and a Provisional Certificate of Sale was issued. The heirs of Juan de Jesus, including Jose, failed to redeem the property within one year from the registration of the Provisional Certificate of Sale on November 21, 1980. Consequently, a Definite Certificate of Sale was issued in favor of the bank on September 7, 1982.

Despite the expiration of the redemption period, the heirs negotiated with the bank for the repurchase of the property. Offers and counter-offers were made, but no agreement was reached, and the bank eventually sold the property to third parties in installments. Conditional deeds of sale were executed, and a Writ of Possession was granted to the bank by the Regional Trial Court.

On January 31, 1983, the heirs filed a complaint for the annulment of the foreclosure sale or for repurchase. The trial court dismissed the complaint, holding that the bank's title had become absolute and that the heirs were guilty of laches. The Court of Appeals reversed this decision, applying Article 1879 of the Civil Code and ruling that the special power to mortgage did not include the power to sell, rendering the extrajudicial foreclosure and auction sale null and void. The appellate court opined that the bank should have resorted to judicial foreclosure.

• Validity of Extrajudicial Foreclosure: Petitioner argued that the stipulation in the mortgage deed allowing extrajudicial foreclosure was valid and not proscribed by Article 1879 of the Civil Code, as the power to extrajudicially foreclose is an ancillary stipulation to the mortgage contract and not a voluntary power to sell.
• Statutory Right: Petitioner maintained that the right to extrajudicially foreclose exists independently of the stipulation in the mortgage deed, as recognized by Section 7, Rule 86 of the Rules of Court.

• Scope of Authority: Respondents argued that Jose de Jesus, as attorney-in-fact, only had the special power to mortgage the property and not the power to sell, pursuant to Article 1879 of the Civil Code.
• Nullity of Foreclosure: Respondents contended that because the power to sell was not granted, the extrajudicial foreclosure and subsequent auction sale were null and void, and the bank should have resorted to judicial foreclosure.

• Validity of Extrajudicial Foreclosure: Whether the extrajudicial foreclosure of the mortgaged property was valid, considering that the attorney-in-fact was only authorized to mortgage and not to sell under a special power of attorney.

• Validity of Extrajudicial Foreclosure: Yes. The extrajudicial foreclosure was valid because the stipulation allowing it is an ancillary and essential part of the mortgage contract, not the "power to sell" proscribed by Article 1879 of the Civil Code.

• Validity of Extrajudicial Foreclosure: Article 1879 of the Civil Code, which states that a special power to mortgage does not include the power to sell, was deemed inapplicable. The sale proscribed by this provision refers to a voluntary and independent contract, not an auction sale resulting from extrajudicial foreclosure precipitated by a mortgagor's default. The stipulation granting authority to extrajudicially foreclose is an ancillary stipulation supported by the same consideration as the mortgage and forms an inseparable part of that bilateral agreement. Furthermore, the power to foreclose is an authority conferred upon the mortgagee for its own protection and survives the death of the mortgagor. This right exists independently of the stipulation in the mortgage deed, as recognized by Section 7, Rule 86 of the Rules of Court, which grants a mortgagee the alternative remedy to foreclose the mortgage extrajudicially. The fact that the authority to extrajudicially foreclose was granted by an attorney-in-fact rather than the mortgagor personally does not invalidate it, as the stipulation is essential to the mortgage contract and no creditor will agree to a mortgage without it.

• Ancillary Stipulation in Mortgage Contracts — A stipulation in a mortgage deed allowing extrajudicial foreclosure is an ancillary and essential part of the mortgage contract, not a voluntary "power to sell" under Article 1879 of the Civil Code. It is supported by the same consideration as the mortgage and is inseparable from it.
• Power to Foreclose as Mortgagee's Protection — The power to extrajudicially foreclose is primarily an authority conferred upon the mortgagee for its own protection, not an ordinary agency for the representation of the principal. This power survives the death of the mortgagor and exists independently of any stipulation, as recognized by Section 7, Rule 86 of the Rules of Court.

• "The sale proscribed by a special power to mortgage under Article 1879 is a voluntary and independent contract, and not an auction sale resulting from extrajudicial foreclosure, which is precipitated by the default of a mortgagor." — This passage distinguishes the voluntary sale proscribed by Article 1879 from the involuntary auction sale in an extrajudicial foreclosure, forming the core of the ratio decidendi.
• "The power to foreclose is not an ordinary agency that contemplates exclusively the representation of the principal by the agent but is primarily an authority conferred upon the mortgagee for the latter's own protection." — This defines the nature of the power to foreclose, explaining why it is not limited by the scope of the agent's authority under the Special Power of Attorney.

• Perez vs. Philippine National Bank, 17 SCRA 833 (1966) — Followed. The Court relied on this case to hold that the stipulation granting authority to extrajudicially foreclose is an ancillary and essential part of the mortgage contract, and that the power to foreclose survives the death of the mortgagor. This case explicitly reversed the ruling in Pasno vs. Ravina.
• Pasno vs. Ravina, 54 Phil. 382 — Overturned/Distinguished. This case required judicial foreclosure in the same factual situation, but was reversed by Perez vs. PNB because it virtually wiped out the third alternative under Section 7, Rule 86 of the Rules of Court, which includes extrajudicial foreclosure.

• Article 1879, Civil Code — Provides that a special power to sell excludes the power to mortgage, and a special power to mortgage does not include the power to sell. The Court held this provision inapplicable because the sale in extrajudicial foreclosure is not a voluntary sale but a consequence of default.
• Section 7, Rule 86, Rules of Court — Grants a mortgagee three alternative remedies upon the death of the mortgagor: (1) waive the mortgage and claim the debt from the estate; (2) foreclose judicially and claim any deficiency; or (3) rely on the mortgage exclusively and foreclose it at any time before prescription, without the right to claim any deficiency. The Court used this to show that the right to extrajudicially foreclose exists independently of the mortgage stipulation.

Paras, Padilla, Sarmiento, and Regalado, JJ., concur.