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

A real estate mortgage encumbering conjugal property is void for lacking the written consent of the non-mortgagor spouse, and such nullity extends to the entire mortgage; however, the two-bidder rule does not apply to extrajudicial foreclosures under Act No. 3135, and a debtor cannot avoid default by demanding an accounting when the obligation is already liquidated.

A husband obtained multiple loans from a private corporation and secured them with a real estate mortgage over conjugal properties, misrepresenting himself as single. After making partial payments and obtaining further loans, a dispute arose regarding the exact amount due, leading the creditor to extrajudicially foreclose the properties.

• Original Filing: RTC Quezon City, Civil Case No. Q-02-46788 (Complaint for Declaration of Nullity of Extrajudicial Foreclosure & Sheriff's Sale)
• Lower Court Decision: August 27, 2007 — RTC dismissed the complaint for lack of merit and lifted the preliminary injunction.
• Appeal: Edgardo, Rosie, and their children appealed to the CA.
• CA Decision: April 28, 2010 — CA reversed the RTC, declaring the REM, its amendment, and all foreclosure proceedings null and void.
• SC Action: Petition for Review on Certiorari filed by Boston Equity after the CA denied their motion for reconsideration.

• The Mortgage Transaction: On April 12, 1999, Edgardo Del Rosario executed a REM over six parcels of land in favor of Boston Equity for a PHP 17M loan, representing himself as single. The properties were conjugal, registered only in Edgardo's name, and had a fair market value of PHP 113,345,000.00.
• The Amendment: On September 8, 1999, the REM was amended to include an additional PHP 15M loan.
• Payments and Further Loans: Edgardo made payments totaling PHP 3,178,667.00 and PHP 25,000,000.00, resulting in an excess payment voucher of PHP 7,257,200.00 for the initial loan. However, in the year 2000, he took out further loans totaling PHP 34,400,000.00 (netting PHP 22,739,653.00 after advance interest deductions).
• Demand and Dispute: On February 21, 2001, Boston demanded PHP 52,900,000.00. Edgardo requested an accurate statement of account, noting the inclusion of a third party's commission. Boston issued a second demand for PHP 51,400,000.00 and refused Edgardo's request for more time to settle.
• Foreclosure: Boston proceeded with extrajudicial foreclosure, publishing the notice in Maharlika Pilipinas. At the June 27, 2001 auction, Boston was the sole bidder at PHP 75,000,000.00.
• Intervention: Edgardo filed suit to nullify the foreclosure. His wife Rosie and their children intervened, asserting co-ownership of the conjugal properties and seeking nullification of the REM.

• The REM and its amendment were valid because Rosie consented by signing as an instrumental witness, and the loan proceeds redounded to the benefit of the family, making the conjugal properties liable.
• The extrajudicial foreclosure sale was valid despite having only one bidder, arguing against the application of the two-bidder rule.
• Edgardo was properly in default; the discrepancy in the demand letters was reconcilable, and an accounting was unnecessary as the obligation was liquidated based on the promissory notes and REM.

• The REM and its amendment were null and void for lacking the written consent of Rosie, the spouse, as required by the Family Code.
• The extrajudicial foreclosure sale was void for failing to comply with A.M. No. 99-10-05-0, which allegedly required at least two bidders.
• The publication 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 before being declared in default due to discrepancies in the demanded amounts.

• Procedural Issues: Whether the petitioners can raise a new theory on appeal—specifically, that Rosie consented to the mortgage by signing as a witness and that the loan benefited the family.
• Substantive Issues:
  • Whether the REM is void for lack of the spouse's written consent.
  • Whether the extrajudicial foreclosure sale is void for failing to comply with the two-bidder rule under A.M. No. 99-10-05-0.
  • Whether the publication in Maharlika Pilipinas was valid.
  • Whether an accounting of the obligation was a prerequisite to declaring the debtor in default.

• Procedural: The SC held that petitioners cannot raise the issue of Rosie's consent as a witness or the benefit to the family for the first time on appeal. Issues not raised in the trial court cannot be considered by a reviewing court because it violates the adverse party's right to due process. The exception—allowing a change of theory if no additional evidence is needed—does not apply because the respondents would still need to present additional evidence to refute the new claim.
• Substantive:
  • The REM and its amendment are void for lacking the written consent of Rosie. Under Article 124 of the Family Code, the disposition or encumbrance of conjugal property without the written consent of the other spouse is void. This nullity applies to the entire mortgage, including the share of the consenting spouse.
  • The extrajudicial foreclosure sale is not void for having only one bidder. The two-bidder rule does not apply to extrajudicial foreclosures under Act No. 3135. Private interest predominates in these foreclosures, unlike in government infrastructure projects.
  • The publication in Maharlika Pilipinas was valid. The respondents bore the burden of proving the newspaper was not of general circulation in Quezon City. Metropolitan Bank v. Peñafiel only established that Maharlika Pilipinas was not of general circulation in Mandaluyong City, not Quezon City.
  • No accounting was necessary before declaring default. The obligation was liquidated because the amounts were determinable from the terms of the promissory notes and the REM. Discrepancies in demand letters did not render the debt unliquidated.

• Two-Bidder Rule in Extrajudicial Foreclosure — The requirement of at least two participating bidders does not apply to extrajudicial foreclosures under Act No. 3135. Act No. 3135 does not require it, and while there is a public interest in the regularity of foreclosures, the private interest is predominant, making the two-bidder rule impractical and unnecessary.
• Spousal Consent in Conjugal Property — Under Article 124 of the Family Code, any disposition or encumbrance of conjugal partnership property without the written consent of the other spouse is void. The nullity applies to the entire mortgage, even to the portion corresponding to the share of the mortgagor spouse.
• Change of Theory on Appeal — A party cannot change their legal theory on appeal. The exception—where the factual bases of the new theory would not require the presentation of additional evidence by the adverse party—is strictly construed. If the adverse party must present new evidence to meet the new issue, the change is impermissible.
• Accessory Nature of Mortgage — A mortgage is an accessory contract. The nullity of the mortgage does not extinguish the principal obligation (loan). The creditor loses the right to foreclose but retains the right to enforce the personal obligation in an ordinary action.

• Article 124, Family Code — Governs the administration and enjoyment of conjugal partnership property. Applied to nullify the REM because the husband encumbered conjugal property without the written consent of the wife.
• Act No. 3135, Sections 3-6 — Governs extrajudicial foreclosure of mortgages. Applied to determine the statutory requirements for publication and auction, confirming that the two-bidder rule is absent from the law.
• A.M. No. 99-10-05-0 — Procedure in Extra-Judicial Foreclosure of Mortgage. The SC clarified that the two-bidder rule initially proposed in this circular was dispensed with due to impracticality and lack of statutory basis in Act No. 3135.