Fortune Motors (Phils.) Inc. vs. Court of Appeals

An action to annul an extrajudicial foreclosure sale of real property is a real action affecting title to real property, and must therefore be filed in the court with jurisdiction over the location of the property.

Fortune Motors (Phils.) Inc. obtained various loans from Metropolitan Bank & Trust Company, secured by a real estate mortgage over its building and lot in Makati, Rizal. Upon Fortune Motors' failure to pay, Metrobank extrajudicially foreclosed the mortgage.

On March 29, 1982, up to January 6, 1984, Metropolitan Bank extended various loans to Fortune Motors in the total sum of P32,500,000.00 (or P34,150,000.00 according to the Bank), secured by a real estate mortgage on the Fortune building and lot in Makati, Rizal. Due to financial difficulties and economic recession, Fortune Motors failed to pay the loan upon maturity.

Because of the default, Metropolitan Bank initiated extrajudicial foreclosure proceedings. After notices were served, posted, and published, the mortgaged property was sold at public auction to the Bank as the highest bidder for P47,899,264.91. The sheriff's certificate of sale was registered on October 24, 1984, with the one-year redemption period expiring on October 24, 1985.

Three days before the expiration of the redemption period, on October 21, 1985, Fortune Motors filed a complaint for annulment of the extrajudicial foreclosure sale in the Regional Trial Court of Manila, Branch IV. The complaint alleged that the foreclosure was premature, the publication of the notice of sale was incomplete, there was no public auction, and the sale price was "shockingly low." Before summons could be served, Metropolitan Bank filed a motion to dismiss on the ground of improper venue, arguing that since the mortgaged property was in Makati, the action should be filed in the RTC of Makati. Fortune Motors opposed the motion, claiming its action was a personal action seeking to annul the foreclosure proceedings to obtain a new redemption period.

The lower court issued an order on January 8, 1986, reserving the resolution of the motion to dismiss until after trial on the merits, finding the grounds not clear and indubitable. The Bank's motion for reconsideration was denied on May 28, 1986. The Bank then elevated the matter to the Court of Appeals via a petition for certiorari and prohibition.

• Nature of the Action: Petitioner argued that its action for annulment of the extrajudicial foreclosure sale is a personal action, not a real action, because the issue is the validity of the foreclosure proceedings and it seeks a new one-year period to redeem.

• Improper Venue: Respondent Bank argued that the venue was improperly laid in Manila because the realty covered by the mortgage is situated in Makati, and an action to annul the foreclosure sale should be filed in the Regional Trial Court of Makati.

• Venue of Action: Whether an action for annulment of an extrajudicial foreclosure sale of real property is a personal action or a real action for purposes of venue.

• Venue of Action: No. The action is a real action. An action to annul a real estate mortgage foreclosure sale is necessarily an action affecting the title of the property sold, which must be commenced and tried in the province where the property lies.

• Venue of Action: Under Section 2(a) of Rule 4 of the Revised Rules of Court, a real action is an action affecting title to real property, or for the recovery of possession, or for the partition or condemnation of, or foreclosure of a mortgage on real property. Such actions must be instituted in the Court of First Instance (now RTC) of the province where the property lies. A prayer for annulment or rescission of a contract does not efface the true objective and nature of the action, which is to recover real property. An action to annul a real estate mortgage foreclosure sale is no different from an action to annul a private sale of real property. Although petitioner does not directly seek recovery of title or possession, its action for annulment and claim for damages are closely intertwined with the issue of ownership of the building, which is considered immovable property. Since an extrajudicial foreclosure results in the conveyance of title to the highest bidder, an action to annul it necessarily affects title to the property. Thus, it is a real action, and the Court of Appeals correctly dismissed the case for improper venue.

• Classification of Actions for Venue (Real vs. Personal) — An action is classified as real or personal based on the nature of the subject matter and the primary objective of the plaintiff. An action for the annulment or rescission of a sale of real property is a real action because its prime objective is to recover the real property. An action to annul a real estate mortgage foreclosure sale is similarly a real action, as it necessarily affects the title to the property sold, given that an extrajudicial foreclosure conveys title to the highest bidder. Consequently, it must be filed in the court of the province where the property is located.

• "A prayer for annulment or rescission of contract does not operate to efface the true objectives and nature of the action which is to recover real property." — This passage articulates the ratio decidendi that the form of the prayer does not alter the substantive nature of the action involving real property.
• "Since an extrajudicial foreclosure of real property results in a conveyance of the title of the property sold to the highest bidder at the sale, an action to annul the foreclosure sale is necessarily an action affecting the title of the property sold. It is therefore a real action which should be commenced and tried in the province where the property or part thereof lies." — Quoted from the Court of Appeals decision, this passage provides the controlling rationale for classifying an annulment of foreclosure sale as a real action.

• Enriquez vs. Macadaeg, 84 Phil. 674 (1949) — Cited to support the rule that real actions must be instituted in the court of the province where the property lies.
• Inton, et al. vs. Quintan, 81 Phil. 97 (1948) — Cited for the doctrine that a prayer for annulment or rescission does not efface the true objective of recovering real property.
• Gavieres vs. Sanchez, 94 Phil. 760 (1954) — Cited to establish that an action for annulment or rescission of a sale of real property is a real action.
• Munoz vs. Llamas, 87 Phil. 737 (1950) — Cited to equate an action to annul a real estate mortgage foreclosure sale with an action to annul a private sale of real property.
• Punzalan, Jr. vs. Vda. de Lacsamana, 121 SCRA 336 (1983) — Cited to affirm that the Court of Appeals did not err in dismissing the case for improper venue under Sec. 2, Rule 4.

• Section 2(a), Rule 4, Revised Rules of Court — Defines a real action as an action affecting title to real property, or for the recovery of possession, or for the partition or condemnation of, or foreclosure of a mortgage on real property, and mandates that it be filed where the property lies. Applied to classify the annulment of foreclosure sale as a real action.
• Section 1, Rule 4, Revised Rules of Court — Defines personal actions and their venue, which petitioner invoked but was found inapplicable.
• Section 1, Rule 16, Revised Rules of Court — Cited to note that the ground of improper venue was timely raised in the motion to dismiss.

Melencio-Herrera (Chairperson), Padilla, Sarmiento, and Regalado, JJ., concur.