Boston Equity Resources, Inc. and Hernandez vs. Del Rosario

A real estate mortgage executed over conjugal properties without the written consent of the other spouse, as required by Article 124 of the Family Code, is void ab initio and renders the foreclosure proceedings null and void, even though the principal loan obligation remains valid and enforceable through ordinary judicial action.

The case involves a dispute over the validity of a real estate mortgage and its foreclosure where the mortgagor, Edgardo Del Rosario, represented himself as single despite being married to Rosie Gonzales Del Rosario. The mortgage covered six parcels of land in Quezon City that formed part of the conjugal partnership of gains. After defaulting on the loan obligations, the mortgagee, Boston Equity Resources, Inc., foreclosed the mortgage extrajudicially and emerged as the sole bidder. The spouse and children of the mortgagor subsequently intervened to challenge the validity of the mortgage and foreclosure on the ground that the properties were conjugal and the mortgage lacked the wife's written consent.

• Edgardo Del Rosario was married to Rosie Gonzales Del Rosario on March 9, 1968, and they had three children: Christina, Peter, and Paul.
• On April 12, 1999, Edgardo Del Rosario, representing himself as single, executed a Real Estate Mortgage in favor of Boston Equity Resources, Inc. covering six parcels of land located at 300 Kanlaon St., Sta. Mesa Heights, Quezon City, with a total area of 4,533.60 square meters and a fair market value of P113,345,000.00, to secure a loan of P17,000,000.00 at 4% monthly interest for six months.
• On September 8, 1999, the Real Estate Mortgage was amended to include an additional loan obligation of P15,000,000.00, adopting all terms and conditions of the original mortgage.
• Edgardo Del Rosario made partial payments totaling P28,178,667.00, and on December 9, 1999, Boston Equity issued a cash voucher representing an excess payment of P7,257,200.00 on the P32,000,000.00 loan.
• In 2000, Edgardo obtained additional loans totaling P34,400,000.00, but after deduction of advance interest amounting to P11,660,347.00, he received only P22,739,653.00.
• On February 21, 2001, Boston Equity sent a demand letter for P52,900,000.00, followed by another demand letter on March 13, 2001 for P51,400,000.00. Edgardo requested an accurate statement of account and additional time to settle his obligation.
• Boston Equity published the Notice of Foreclosure in Maharlika Pilipinas on May 31, June 7, and June 14, 2001, and the Ex-Officio Sheriff scheduled a public auction on June 27, 2001 to satisfy the alleged P52.9 million debt.
• At the public auction held on June 27, 2001, Boston Equity was declared the sole bidder for the properties with a bid of P75,000,000.00.

• The mortgage executed by Edgardo was not void despite the alleged lack of consent by his wife Rosie, arguing that she had actually consented by affixing her signature as a witness to the mortgage contract and its amendment, and that the loan proceeds redounded to the benefit of the family.
• The two-bidder rule under A.M. No. 99-10-05-0 should not invalidate the extrajudicial foreclosure sale, contending that this requirement is not found in Act No. 3135 and is impractical for private foreclosure sales.
• The publication of the notice of foreclosure sale in Maharlika Pilipinas was valid and effective as it was a newspaper of general circulation in Quezon City where the auction was held.
• There was no need for a detailed accounting of Edgardo's obligation before he could be declared in default, as the obligation was liquidated and demandable based on the terms of the promissory notes and mortgage documents.

• The Real Estate Mortgage and its amendment were null and void because they involved conjugal properties and lacked the written consent of Rosie, the mortgagor's spouse, as required by Article 124 of the Family Code.
• The extrajudicial foreclosure sale was null and void for failure to comply with the two-bidder rule mandated by A.M. No. 99-10-05-0, which requires at least two participating bidders in the auction sale.
• The publication of the notice of foreclosure in Maharlika Pilipinas was ineffectual because it was not a newspaper of general circulation, citing Metropolitan Bank and Trust Company, Inc. v. Peñafiel.
• Edgardo was entitled to a proper accounting of his outstanding obligation before being declared in default, as the amounts demanded by Boston Equity were inconsistent and inaccurate.

• Procedural: Whether the petitioners can raise for the first time on appeal the defense that the spouse had consented to the mortgage by signing as a witness, and whether they can change their legal theory on appeal without requiring additional evidence.
• Substantive Issues:
  • Whether the Real Estate Mortgage and its amendment are void for lack of the written consent of the mortgagor's spouse over conjugal properties.
  • Whether the extrajudicial foreclosure sale is void for non-compliance with the two-bidder rule under A.M. No. 99-10-05-0.
  • Whether the publication of the notice of foreclosure in Maharlika Pilipinas complied with the requirements of Act No. 3135.
  • Whether the creditor must provide a detailed accounting before the debtor can be declared in default.

• Procedural: The Court held that petitioners cannot raise the issue of the spouse's consent to the mortgage for the first time on appeal. Issues not raised before the trial court cannot be raised for the first time on appeal as this contravenes the basic rule of fair play and justice and violates the adverse party's constitutional right to due process. The exception allowing a change of theory on appeal does not apply because it would require the adverse party to present additional evidence to meet the new theory, and would involve the Court in ascertaining factual issues beyond the purview of a petition for review limited to questions of law.
• Substantive:
  • The Real Estate Mortgage and its amendment are void for lack of written consent by the spouse. Under Article 124 of the Family Code, the disposition or encumbrance of conjugal property without the written consent of the other spouse or authority of the court is void. The mortgage was an encumbrance on conjugal properties, and Edgardo's representation that he was single did not cure this defect.
  • The two-bidder rule under A.M. No. 99-10-05-0 does not apply to extrajudicial foreclosure of mortgages under Act No. 3135. This rule was intended for government infrastructure projects under P.D. No. 1594 where public interest is predominant, whereas private foreclosure sales involve predominantly private interests. The foreclosure sale was valid despite Boston Equity being the sole bidder.
  • The publication in Maharlika Pilipinas was presumed valid as the respondents failed to prove it was not a newspaper of general circulation in Quezon City, the place where the auction was held. The burden of proving non-compliance with publication requirements lies with the party alleging it.
  • No accounting was required before declaring default. The obligation was liquidated and demandable based on the terms of the mortgage documents, and the discrepancy in the demand letters did not render the obligation unliquidated or hinder the legitimate effort to recover the debt.
  • While the mortgage is void, the principal loan obligation remains valid and enforceable through ordinary action, as the nullity of the accessory contract does not extinguish the principal obligation.

• Two-Bidder Rule Inapplicability — The requirement of at least two bidders under A.M. No. 99-10-05-0 applies only to government infrastructure projects under P.D. No. 1594 and not to extrajudicial foreclosure of real estate mortgages under Act No. 3135, as the latter involves predominantly private rather than public interest.
• Written Consent Requirement for Conjugal Property — Under Article 124 of the Family Code, the encumbrance of conjugal property requires the written consent of both spouses or authority of the court; otherwise, the disposition or encumbrance is void, even as to the share of the consenting spouse.
• Nullity of Mortgage vs. Principal Obligation — The nullity of a real estate mortgage, being an accessory contract, does not extinguish the principal obligation of loan, which remains enforceable through ordinary judicial action.
• Presumption of Validity of Publication — Publication of notice of foreclosure in a newspaper is presumed compliant with Section 3 of Act No. 3135 unless the party challenging it proves otherwise by showing the newspaper is not of general circulation in the place where the auction is held.
• Prohibition on Raising New Issues on Appeal — Issues, theories, and arguments not raised before the trial court are barred by estoppel and cannot be considered by a reviewing court, as allowing them would violate due process and fair play.

• "The two-bidder rule is not applicable during the public auction of the mortgaged assets foreclosed pursuant to Act No. 3135."
• "Questions raised on appeal must be within the issues the parties framed at the start; hence, issues not raised before the trial court cannot be raised for the first time on appeal."
• "The mortgage was but an accessory agreement, and was distinct from the principal contract of loan... Where the mortgage was not valid, the principal obligation that the mortgage guaranteed was not thereby rendered null and void."
• "In the absence of such authority or consent, the disposition or encumbrance shall be void."

• Metropolitan Bank and Trust Company, Inc. v. Peñafiel — Cited by respondents to argue that Maharlika Pilipinas was not a newspaper of general circulation; distinguished by the Court as that case involved Mandaluyong City, whereas the present case involved Quezon City, and respondents failed to prove lack of general circulation in Quezon City.
• Homeowners Savings & Loan Bank v. Dailo — Cited by petitioners to support their argument that they could change legal theory on appeal; distinguished by the Court as the exception applies only when the adverse party would not need to present additional evidence to meet the new theory.
• Philippine Geothermal, Inc. Employees Union v. Unocal Philippines, Inc. — Cited for the proposition that the exception to the rule against changing legal theory on appeal requires that the adverse party should not have to present further evidence to contest the new claim.
• Selegna Management and Development Corp. v. United Coconut Planters Bank — Cited for the definition of mora solvendi (debtor's default) and the requisites necessary to support a finding of default.
• Bank of the Philippine Islands v. Puzon — Cited for the principle that the burden of proving non-compliance with the requisite publication in extrajudicial foreclosure lies with the party alleging such non-compliance.
• Guiang v. Court of Appeals — Cited for the rule that the invalidity of a mortgage over conjugal property for lack of the other spouse's consent applies to the entire mortgage, even to the portion corresponding to the share of the consenting spouse.
• Philippine National Bank v. Reyes, Jr. and Philippine National Bank v. Banatao — Cited for the principle that the nullity of the mortgage does not extinguish the principal obligation, which may still be enforced through ordinary action.

• Article 124 of the Family Code — Mandates that encumbrance of conjugal property requires written consent of both spouses or court authority; otherwise void. This was the primary basis for nullifying the mortgage.
• Act No. 3135, Sections 3, 4, 5, and 6 — Governs extrajudicial foreclosure of real estate mortgages; Section 3 requires publication in a newspaper of general circulation, while Section 4 requires the sale to be at public auction, but neither requires two bidders.
• A.M. No. 99-10-05-0 (Procedure in Extra-Judicial Foreclosure of Mortgage), Paragraph 5 — Contains the two-bidder rule which the Court held inapplicable to Act No. 3135 foreclosures.
• P.D. No. 1594 — The law governing government infrastructure projects where the two-bidder rule originated, cited to distinguish why that rule does not apply to private foreclosure sales.