Heirs of Maglasang vs. Manila Banking Corporation

A creditor holding a claim against a deceased debtor secured by a mortgage who elects to extra-judicially foreclose the mortgage under Act No. 3135, as the third option under Section 7, Rule 86 of the Rules of Court, waives the right to recover any deficiency from the estate. The three remedies under Section 7, Rule 86 are distinct, independent, and mutually exclusive; the election of one bars the exercise of the others.

Spouses Flaviano and Salud Maglasang obtained a credit line from respondent Manila Banking Corporation in 1975, secured by a real estate mortgage over seven properties in Ormoc City and the Municipality of Kananga, Province of Leyte. After Flaviano died intestate in 1977, intestate estate proceedings were commenced before the then Court of First Instance of Leyte, and Edgar Maglasang was appointed administrator. The settlement of the estate is governed by the special rules under Rules 73 to 90 of the Rules of Court, which include Section 7, Rule 86, addressing the remedies of a secured creditor against the estate of a deceased debtor.

On June 16, 1975, spouses Flaviano and Salud Maglasang obtained a credit line from respondent Manila Banking Corporation in the amount of ₱350,000.00, secured by a real estate mortgage over seven of their properties located in Ormoc City and the Municipality of Kananga, Province of Leyte. They availed of the credit line by securing loans of ₱209,790.50 and ₱139,805.83 on October 24, 1975 and March 15, 1976, respectively, both due and demandable within one year, with interest at 12% per annum and an additional 4% penalty upon default.

After Flaviano died intestate on February 14, 1977, his widow Salud and their surviving children appointed their brother Edgar Maglasang as attorney-in-fact. On March 30, 1977, Edgar filed a verified petition for letters of administration of Flaviano's intestate estate before the then Court of First Instance of Leyte, Ormoc City, Branch 5, docketed as Sp. Proc. No. 1604-0. On August 9, 1977, the probate court granted the petition and appointed Edgar as administrator. On August 30, 1977, the probate court issued a Notice to Creditors for the filing of money claims against the estate. Respondent notified the probate court of its claim in the amount of ₱382,753.19 as of October 11, 1978, exclusive of interests and charges. During the pendency of the intestate proceedings, Edgar and Oscar Maglasang obtained several loans from respondent, secured by promissory notes they signed.

In an Order dated December 14, 1978, the probate court terminated the proceedings with the surviving heirs executing an extra-judicial partition of the properties of Flaviano's estate. The loan obligations owed by the estate to respondent remained unsatisfied due to respondent's certification that Flaviano's account was undergoing restructuring. The probate court expressly recognized respondent's rights under the mortgage and promissory notes, specifically its "right to foreclose the same within the statutory period." Respondent proceeded to extra-judicially foreclose the mortgage and emerged as the highest bidder at the public auction for ₱350,000.00. A deficiency remained on the obligation, and on June 24, 1981, respondent filed a suit to recover the deficiency amount of ₱250,601.05 as of May 31, 1981 against the estate of Flaviano, his widow Salud, and petitioners, docketed as Civil Case No. 1998-0.

The RTC rendered a Decision on April 6, 1987 directing petitioners to pay respondent, jointly and severally, ₱434,742.36 with interest at 12% p.a. plus a 4% penalty charge from September 5, 1984, and attorney's fees equivalent to 10% of the outstanding obligation. Petitioners appealed to the CA, contending that the remedies under Section 7, Rule 86 are alternative and exclusive, such that respondent's filing of its claim against the estate operated as a waiver of its right to foreclose, and that it was barred from filing any claim for a deficiency. During the pendency of the appeal, Salud Maglasang passed away on July 25, 1997. The CA denied the appeal and affirmed the RTC Decision, holding that the probate court erred in closing the proceedings without first satisfying creditors' claims, that Section 7, Rule 86 does not apply because the case does not involve a mortgage made by the administrator, and that Act No. 3135 entitles respondent to claim the deficiency amount.

• Applicability of Section 7, Rule 86: Petitioners argued that it is not Act No. 3135 but Section 7, Rule 86 of the Rules of Court which applies, and that the latter provision provides alternative and exclusive remedies for the satisfaction of respondent's claim against the estate of Flaviano.
• Waiver of Foreclosure Remedy: Petitioners argued that having filed its claim against the estate during the intestate proceedings, respondent had effectively waived the remedy of foreclosure and, even assuming it still had the right to foreclose, it was precluded from filing a suit for the recovery of the deficiency obligation.
• Nullity of Foreclosure: Petitioners maintained that the extra-judicial foreclosure of the subject properties was null and void, not having been conducted in the capital of the Province of Leyte in violation of the stipulations in the real estate mortgage contract.
• Denial of Personal Liability: Petitioners denied any personal liability for the loans taken by their deceased parents.

N/A — The decision does not recount respondent's arguments in detail beyond its procedural position that it was entitled to claim the deficiency amount under Act No. 3135, as affirmed by the CA.

• Applicability of Section 7, Rule 86: Whether the CA erred in holding that Section 7, Rule 86 of the Rules of Court does not apply to the present case because it does not involve a mortgage made by the administrator over estate property.
• Waiver of Deficiency Claim: Whether respondent, having availed of extra-judicial foreclosure under Act No. 3135, is precluded from filing a suit to recover the deficiency amount.
• Validity of the Foreclosure Sale: Whether the extra-judicial foreclosure of the subject properties was null and void for having been conducted in violation of the stipulation in the real estate mortgage contract fixing the place of sale at the capital of the province.

• Applicability of Section 7, Rule 86: No. Section 7, Rule 86 of the Rules of Court applies to all secured claims against the estate, whether by mortgage or any other form of collateral, and is not limited to mortgages made by the administrator over estate property. The CA's reliance on Philippine National Bank vs. CA was misplaced, as that case was a ruling of inclusion, not one creating a distinction.
• Waiver of Deficiency Claim: Yes. Respondent, having elected the third remedy under Section 7, Rule 86—extra-judicial foreclosure—waived its right to recover any deficiency from the estate. The three remedies under Section 7, Rule 86 are distinct, independent, and mutually exclusive; the election of one bars the exercise of the others.
• Validity of the Foreclosure Sale: No. The extra-judicial foreclosure was valid. The stipulation fixing the place of sale at Tacloban City lacked words of exclusivity, and since the auction sale was conducted in Ormoc City, which is within the territorial jurisdiction of the Province of Leyte, there was sufficient compliance with Section 2 of Act No. 3135.

• Applicability of Section 7, Rule 86: The Court held that Section 7, Rule 86 speaks generally of "a creditor holding a claim against the deceased secured by a mortgage or other collateral security," and thus covers all secured claims enforceable against the estate of the deceased debtor. Nowhere from its language can it be fairly deduced that the section applies only to mortgages made by the administrator over estate property. Mortgages of estate property executed by the administrator are separately governed by Rule 89 of the Rules. The Court clarified that Philippine National Bank vs. CA did not limit the scope of Section 7, Rule 86; it only stated that the section equally applies to cases where the administrator mortgages estate property, a ruling of inclusion rather than one creating a distinction.

• Waiver of Deficiency Claim: The Court explained that jurisprudence breaks down Section 7, Rule 86 into three alternative remedies for a secured creditor: (a) waive the mortgage and claim the entire debt from the estate as an ordinary claim; (b) foreclose the mortgage judicially and prove the deficiency as an ordinary claim; and (c) rely on the mortgage exclusively and foreclose the same before it is barred by prescription, without the right to file a claim for any deficiency. These remedies are distinct, independent, and mutually exclusive; the election of one effectively bars the exercise of the others. Citing Bank of America vs. American Realty Corporation, the Court noted that a remedy is deemed chosen upon the filing of the suit for collection or foreclosure complaint, or, for extra-judicial foreclosure, upon the filing of the petition with the Office of the Sheriff. The third remedy includes extra-judicial foreclosure under Act No. 3135, and the plain result of adopting this mode is that the creditor waives his right to recover any deficiency from the estate. The Court observed that Act No. 3135 and Section 7, Rule 86 complement each other: Section 7, Rule 86 governs the parameters and extent of a claim against the estate, while Act No. 3135 sets out the procedure for extra-judicial foreclosure. In this case, respondent's mere notification to the probate court of its claim did not constitute the first option of filing a claim against the estate, as it deviated from the proper characterization under Section 9, Rule 86. Having unequivocally opted for the third option of extra-judicial foreclosure, respondent was precluded from filing a suit to recover any deficiency amount.

• Validity of the Foreclosure Sale: The Court found that the stipulation in the real estate mortgage fixing the place of the foreclosure sale at Tacloban City lacked words of exclusivity that would bar other acceptable venues. Citing case law, the Court held that absent qualifying or restrictive words indicating the exclusivity of the agreed forum, the stipulated place should be treated as an additional, not a limiting, venue. Section 2 of Act No. 3135 allows the foreclosure sale to be conducted within the province where the property is situated. Since the auction sale was conducted in Ormoc City, which is within the territorial jurisdiction of the Province of Leyte, there was sufficient compliance with the requirement. The Court upheld the extra-judicial foreclosure as a valid exercise of respondent's third option under Section 7, Rule 86, but reiterated that respondent cannot file any suit to recover the deficiency amount.

• Alternative and Exclusive Remedies of a Secured Creditor Against the Estate (Section 7, Rule 86) — A creditor holding a claim against a deceased debtor secured by a mortgage or other collateral security has three distinct, independent, and mutually exclusive remedies: (a) waive the mortgage and claim the entire debt from the estate as an ordinary claim; (b) foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and (c) rely on the mortgage exclusively and foreclose the same at any time before it is barred by prescription, without the right to file a claim for any deficiency. The election of one remedy operates as a waiver of the others. The Court applied this doctrine to hold that respondent, having elected extra-judicial foreclosure, waived its right to recover any deficiency from the estate.

• Election of Remedy in Extra-Judicial Foreclosure — A remedy is deemed chosen upon the filing of the suit for collection or upon the filing of the complaint in an action for foreclosure of mortgage; as to extra-judicial foreclosure, the remedy is deemed elected upon the filing of the petition with the Office of the Sheriff of the province where the sale is to be made, in accordance with Act No. 3135. The Court applied this doctrine to determine that respondent had elected the third remedy under Section 7, Rule 86.

• Complementarity of Section 7, Rule 86 and Act No. 3135 — Section 7, Rule 86 governs the parameters and extent to which a claim may be advanced against the estate, whereas Act No. 3135 sets out the specific procedure to be followed when the creditor chooses the third option of extra-judicially foreclosing real property belonging to the estate. The application of Act No. 3135 must be concordant with Section 7, Rule 86. The Court applied this doctrine to reconcile the two legal frameworks.

• Venue Stipulation in Extra-Judicial Foreclosure — Absent qualifying or restrictive words indicating the exclusivity of the agreed forum, the stipulated place of sale should be treated as an additional, not a limiting, venue; the stipulated venue and that provided under Act No. 3135 can be applied alternatively. The Court applied this doctrine to uphold the validity of the foreclosure sale conducted in Ormoc City.

• "SEC. 7. Mortgage debt due from estate. – A creditor holding a claim against the deceased secured by a mortgage or other collateral security, may abandon the security and prosecute his claim in the manner provided in this rule, and share in the general distribution of the assets of the estate; or he may foreclose his mortgage or realize upon his security, by action in court, making the executor or administrator a party defendant, and if there is a judgment for a deficiency, after the sale of the mortgaged premises, or the property pledged, in the foreclosure or other proceeding to realize upon the security, he may claim his deficiency judgment in the manner provided in the preceding section; or he may rely upon his mortgage or other security alone, and foreclose the same at any time within the period of the statute of limitations, and in that event he shall not be admitted as a creditor, and shall receive no share in the distribution of the other assets of the estate." — This is the canonical text of Section 7, Rule 86, which the Court interpreted to cover all secured claims against the estate and to provide three alternative and mutually exclusive remedies.

• "In our jurisdiction, the remedies available to the mortgage creditor are deemed alternative and not cumulative. Notably, an election of one remedy operates as a waiver of the other." — This passage from Bank of America v. American Realty Corporation, quoted by the Court, articulates the controlling principle that the remedies under Section 7, Rule 86 are alternative and mutually exclusive.

• "The plain result of adopting the last mode of foreclosure is that the creditor waives his right to recover any deficiency from the estate." — This passage, quoted from Philippine National Bank v. CA citing Perez v. Philippine National Bank, states the direct consequence of electing the third remedy of extra-judicial foreclosure, which is the basis for dismissing respondent's deficiency claim.

• "Case law states that absent such qualifying or restrictive words to indicate the exclusivity of the agreed forum, the stipulated place should only be as an additional, not a limiting venue." — This passage articulates the doctrine on venue stipulations in extra-judicial foreclosure, applied by the Court to uphold the validity of the foreclosure sale conducted in Ormoc City.

• Philippine National Bank vs. Court of Appeals, 412 Phil. 807 (2001) — Cited by the CA but found by the Court to be misplaced; the Court clarified that this case did not limit the scope of Section 7, Rule 86 to mortgages made by the administrator, but was a ruling of inclusion that the section equally applies to such mortgages.
• Bank of America vs. American Realty Corporation, 378 Phil. 1279 (1999) — Quoted by the Court for the doctrine that the remedies available to a mortgage creditor are alternative and not cumulative, and that an election of one remedy operates as a waiver of the other; also cited for the rule on when a remedy is deemed chosen.
• Perez vs. Philippine National Bank, 124 Phil. 260 (1966) — Cited as the case that overturned Pasno vs. Ravina and established that the third remedy under Section 7, Rule 86 includes extra-judicial foreclosure, with the result that the creditor waives any further deficiency claim.
• Pasno vs. Ravina, 54 Phil. 378 (1990) — Overturned by Perez vs. Philippine National Bank; the Court noted that the majority opinion in Pasno, in requiring judicial foreclosure, virtually wiped out the third alternative conceded by the Rules to the mortgage creditor.
• Auction in Malinta, Inc. vs. Luyaben, 544 Phil. 500 (2007) — Cited in the Court's footnote for the doctrine that absent qualifying or restrictive words, the venue shall either be that stated in the law or rule governing the action or the one agreed in the contract, applied to an extra-judicial foreclosure sale under Act No. 3135.

• Section 7, Rule 86, Rules of Court — The provision governing mortgage debts due from the estate, providing three alternative and mutually exclusive remedies for a secured creditor against the estate of a deceased debtor. The Court applied this provision to hold that respondent, having elected extra-judicial foreclosure, waived its right to recover any deficiency.
• Section 9, Rule 86, Rules of Court — The provision setting forth the manner through which a claim against the estate may be filed. The Court noted that respondent's mere notification to the probate court deviated from the proper characterization under this section, and thus did not constitute the first option of filing a claim against the estate.
• Section 1, Rule 90, Rules of Court — The provision requiring that claims of creditors be satisfied before the estate is closed. The CA cited this provision in finding that the probate court erred in closing the proceedings without first satisfying respondent's claim.
• Section 2, Rule 72, Rules of Court — The provision on the applicability of rules of civil actions in special proceedings, cited by the Court to note that special rules under Rules 73 to 90 primarily govern settlement proceedings.
• Section 2, Act No. 3135 — The provision allowing the foreclosure sale to be conducted within the province where the property is situated, and providing that if the place within the province is subject to stipulation, the sale shall be made in said place or in the municipal building of the municipality where the property is situated. The Court applied this provision to uphold the validity of the foreclosure sale conducted in Ormoc City.

Carpio, J. (Chairperson), Brion, J., Del Castillo, J., and Perez, J. concurred in the decision.

N/A — No dissenting opinion is provided in the case text.