Ganzon vs. Inserto

A mortgage lien, being a right in rem inseparable from the mortgaged property, cannot be substituted by a surety bond, which is a right in personam, as such substitution would abridge the mortgagee's rights under the mortgage contract and violate the non-impairment of contracts clause.

Petitioner Rodolfo Ganzon sold Lot No. 1900 of the Cadastral Survey of Iloilo to respondent Esteban Tajanlangit under a deed of absolute sale containing a warranty that Ganzon would cause the occupants to vacate within 120 days of execution. Separately, respondents Esteban and Randolph Tajanlangit executed a real estate mortgage over Lot No. 1901-E-61-B-1-F in favor of Ganzon to secure a P40,000.00 promissory note. The parties disputed whether the mortgage secured the unpaid balance of the purchase price of Lot No. 1900 or arose from an entirely different transaction, a question that remained unresolved at the pre-trial stage.

On March 19, 1979, respondents Esteban Tajanlangit and Randolph Tajanlangit executed a deed of real estate mortgage over Lot No. 1901-E-61-B-1-F, a parcel of residential land in the District of Molo, Iloilo City covered by Transfer Certificate of Title No. T-50324, in favor of petitioner Rodolfo Ganzon. The mortgage secured the payment of a P40,000.00 promissory note, payable in two installments of P20,000.00 due on May 25, 1979 and August 25, 1979, respectively, bearing no interest. Petitioner Ganzon maintained that this mortgage arose from an entirely separate transaction from any sale of property.

On August 28, 1979, Ganzon initiated extrajudicial foreclosure proceedings on the mortgage. Petitioner Gregorio Lira, as ex-officio provincial sheriff of Iloilo, served personal notice of the foreclosure on the respondents and caused the publication of a Notice of Extra-Judicial Sale, scheduling the public auction for September 28, 1979 at the Provincial Capitol. A day before the scheduled auction, on September 27, 1979, the respondents filed a civil action for specific performance, damages, and prohibition with preliminary injunction against the petitioners before the Court of First Instance of Iloilo, Branch I, docketed as CFI Case No. 13053. The action sought to nullify the extrajudicial foreclosure proceedings. Acting on the respondents' urgent ex-parte motion, the trial court issued an order enjoining the sheriff from proceeding with the auction sale.

On October 31, 1979, the respondents filed an amended complaint alleging that on August 25, 1978, Ganzon had executed a deed of absolute sale of Lot No. 1900 in favor of Esteban Tajanlangit, and that the P40,000.00 secured by the real estate mortgage formed part of the purchase price of that lot. The deed of sale contained a proviso whereby Ganzon warranted peaceful possession and guaranteed that all occupants would vacate within 120 days from execution. The respondents alleged that Ganzon violated this guaranty, as the occupants remained on the premises, and that the extrajudicial foreclosure was illegal because of that breach and because the mortgage deed contained no stipulation authorizing extrajudicial foreclosure.

The petitioners filed their answer on March 28, 1980, admitting the existence and due execution of the deed of absolute sale covering Lot No. 1900 but denying that the real estate mortgage over Lot No. 1901 was executed to secure the balance of the purchase price. They maintained that the mortgage was an entirely different transaction and that the foreclosure was in accordance with the mortgage's terms and conditions. After the issues were joined but before trial, the respondents filed a motion for release of the real estate mortgage and for the clerk of court to accept a bond in lieu thereof. The petitioners opposed the motion.

On November 20, 1980, the trial court granted the respondents' motion, finding that Ganzon had not yet cleared the premises he sold of tenants and that the respondents were willing and able to pay the P40,000.00. The court ordered the Register of Deeds to cancel the mortgage lien on TCT No. T-50324 upon the respondents' posting of an P80,000.00 surety bond. On January 28, 1981, the respondents posted a surety bond with Summa Insurance Corporation as surety. On February 24, 1981, the trial court approved the bond and ordered Ganzon to surrender the owner's copy of TCT No. T-50324 so the mortgage could be cancelled. The petitioners' motion for reconsideration was denied. The pre-trial order, however, reflected that the parties had admitted only the existence and due execution of the documents, and that the issues were whether the documents expressed the true intention of the parties and whether they had complied with the provisions of the documents.

• Grave Abuse of Discretion: Petitioner maintained that the lower court acted with grave abuse of discretion and in excess of its jurisdiction in ordering the cancellation of the mortgage lien and its substitution with a surety bond.
• Separate Transaction: Petitioner argued that the real estate mortgage was an entirely different transaction from the sale of Lot No. 1900, and that the extrajudicial foreclosure was in accordance with the terms and conditions of the mortgage.
• Premature Order: Petitioner contended that the trial court's order had no factual basis, as it was issued before trial on the merits and before the court could resolve whether the documents expressed the true intention of the parties.

• Mortgage as Security for Purchase Price: Respondent countered that the real estate mortgage was executed to secure the payment of the P40,000.00 which formed part of the purchase price of Lot No. 1900 sold by Ganzon to Esteban Tajanlangit.
• Breach of Warranty: Respondent argued that Ganzon committed a breach of his warranty to clear the lot of occupants within 120 days, justifying the withholding of payment and rendering the extrajudicial foreclosure illegal.
• No Foreclosure Stipulation: Respondent maintained that the deed of real estate mortgage did not contain any stipulation authorizing the mortgagee to extrajudicially foreclose the mortgaged property.

• Substitution of Mortgage with Surety Bond: Whether the trial court may order the cancellation of a mortgage lien annotated on a Torrens Certificate of Title to secure the payment of a promissory note and substitute such mortgage lien with a surety bond approved by the same court, especially before trial on the merits.

• Substitution of Mortgage with Surety Bond: No. The trial court gravely abused its discretion in ordering the substitution, a mortgage lien being a right in rem inseparable from the mortgaged property that cannot be converted to a right in personam without abridging the mortgagee's contractual rights and violating the non-impairment of contracts clause.

• Substitution of Mortgage with Surety Bond: The trial court issued the questioned orders before trial on the merits, assuming that the mortgage secured the balance of the purchase price of Lot No. 1900 and that Ganzon violated his warranty to clear the property of occupants. This assumption was unfounded, as the pre-trial order showed the issues were whether the documents expressed the true intention of the parties and whether they complied with the documents' provisions. The factual basis for the orders was therefore absent. Even assuming the factual bases were justified, the substitution would still be improper. A mortgage is an accessory contract whose consideration is the same as the principal contract; it cannot exist independently. Under Article 2126 of the Civil Code, a mortgage directly and immediately subjects the property to the fulfillment of the obligation for whose security it was constituted. Sale or transfer cannot affect or release the mortgage; it is a right in rem, a lien on the property whoever its owner may be, and is inseparable from the mortgaged property, following the property until discharged. Substituting the mortgage with a surety bond would convert the lien from a right in rem to a right in personam, abridging the mortgagee's rights under the mortgage contract. Moreover, the substitution would change the terms and conditions of the mortgage contract, diminishing its efficiency and dispensing with a primary condition, in violation of the non-impairment of contracts clause guaranteed under the Constitution.

• Nature of Mortgage as a Right in Rem — A mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. It is a right in rem, a lien on the property inseparable from the mortgaged property, and follows the property until discharged. All subsequent purchasers must respect the mortgage, whether the transfer was with or without the consent of the mortgagee. Because of this character, a mortgage lien cannot be substituted by a surety bond, which is merely a right in personam, as such substitution would abridge the mortgagee's contractual rights.

• Non-Impairment of Contracts — The constitutional guarantee against impairment of contracts prohibits judicial orders that change the terms and conditions of a mortgage contract, diminish its efficiency, or dispense with a primary condition. Substituting a mortgage with a surety bond before trial on the merits effectively deviates from the mortgage's terms and violates this guarantee.

• "A mortgage lien is inseparable from the property mortgaged. All subsequent purchasers thereof must respect the mortgage, whether the transfer to them be with or without the consent of the mortgagee. For, the mortgage, until discharge, follows the property." — This passage articulates the in rem character of a mortgage lien and its inseparability from the property, forming the doctrinal basis for the ruling that a mortgage cannot be substituted by a surety bond.

• "To substitute the mortgage with a surety bond would convert such lien from a right in rem, to a right in personam. This conversion can not be ordered for it would abridge the rights of the mortgagee under the mortgage contract." — This passage states the ratio decidendi: the conversion from in rem to in personam is impermissible because it abridges the mortgagee's rights.

• "Even before trial on the very issues affecting the contract, the respondent court has directed a deviation from its terms, diminished its efficiency, and dispensed with a primary condition." — This passage links the premature nature of the trial court's order to the constitutional violation of the non-impairment clause.

• Banco de Oro vs. Bayuga, 93 SCRA 443 — Cited for the principle that the consideration of the mortgage is the same as that of the principal contract, without which it cannot exist as an independent contract; itself citing China Banking Corporation vs. Lichauco, 46 Phil. 460.
• Philippine National Bank vs. Mallorca, 21 SCRA 694 — Cited for the doctrine that a mortgage directly and immediately subjects the property to the fulfillment of the obligation, that sale or transfer cannot affect or release the mortgage, and that a mortgage lien is a right in rem inseparable from the property.
• Bischoff vs. Pomar, 12 Phil. 690 — Cited within the PNB vs. Mallorca quotation for the proposition that a purchaser is bound to acknowledge and respect the encumbrance on the purchased thing.

• Article 2126, Civil Code of the Philippines — Provides that a mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. Applied to establish the in rem character of the mortgage lien and its inseparability from the property.
• Non-Impairment of Contracts Clause, Constitution — Guarantees that no law impairing the obligation of contracts shall be passed. Applied to invalidate the trial court's order substituting the mortgage with a surety bond, as such substitution changed the terms and conditions of the mortgage contract, diminished its efficiency, and dispensed with a primary condition.

Teehankee (Chairman), Melencio-Herrera, Plana, Escolin, and Relova, JJ., concurred. Vasquez, J., was on leave.