Mercene vs. Government Service Insurance System

The prescriptive period for the right to foreclose a real estate mortgage commences from the time the cause of action accrues — specifically, when the obligation becomes due and demandable, or upon demand by the creditor if demand is necessary — and not from the date of execution of the mortgage contract; consequently, a complaint for quieting of title premised on the extinction of the mortgagee's right through prescription fails to state a cause of action where it omits allegations regarding the maturity date of the loan and the necessity or occurrence of demand for payment.

Floro Mercene obtained two loans from the Government Service Insurance System (GSIS) in 1965 and 1968, respectively secured by real estate mortgages over his property in Quezon City. Despite the mortgages remaining annotated on his title for over thirty-five years, GSIS never instituted foreclosure proceedings. Mercene subsequently filed an action to quiet title, asserting that GSIS's right to foreclose had prescribed under Article 1142 of the Civil Code.

• The Loans and Mortgages: On 19 January 1965, Floro Mercene obtained a loan of ₱29,500.00 from GSIS, secured by a real estate mortgage over his property in Quezon City, registered under Transfer Certificate of Title No. 90535. The mortgage was annotated on 24 March 1965. On 14 May 1968, Mercene contracted a second loan for ₱14,500.00, likewise secured by a real estate mortgage on the same property, annotated on 15 May 1968.
• The Quieting of Title Action: On 11 June 2004, Mercene filed a complaint for Quieting of Title against GSIS. He alleged that from 1968 until the filing of the complaint, GSIS had never exercised its rights as mortgagee; that the mortgage annotations constituted a cloud on his title; and that GSIS's right to foreclose had prescribed under Article 1142 of the Civil Code, more than ten years having elapsed since 15 May 1968 without GSIS instituting any foreclosure action.
• Defenses Raised: GSIS filed an answer contending that the complaint failed to state a cause of action and that prescription does not run against it as a government entity. During pre-trial, Mercene manifested his intent to file a motion for judgment on the pleadings, which the RTC granted without objection.
• RTC Findings: The RTC ruled that the mortgage annotations constituted a cloud on the title because they appeared valid but were ineffective and prejudicial. It held that GSIS's right as mortgagee had prescribed because more than ten years had lapsed from the time the cause of action accrued, noting that prescription runs against GSIS because it is a juridical person with a separate legal personality.
• CA Findings: The CA reversed, ruling that the complaint failed to state a cause of action because it neither alleged the maturity dates of the loans nor the fact that a demand for payment was made. It explained that prescription commences only upon the accrual of the cause of action, which in written contracts occurs only upon actual breach or violation, and that no prescription had set in because GSIS had not made a demand upon Mercene.

• Issues Raised for the First Time on Appeal: Mercene contended that the CA erred in entertaining issues not addressed by the trial court, specifically GSIS's argument regarding the effectiveness of the loans in view of his nonpayment, which was allegedly raised for the first time on appeal.
• Judicial Admission: Petitioner argued that GSIS had judicially admitted that its right to foreclose had prescribed by failing to specifically deny paragraphs 11.1 and 11.2 of the complaint, which alleged that more than ten years had elapsed without GSIS instituting foreclosure actions and that the right had prescribed under Article 1142 of the Civil Code.
• Prescription: Mercene maintained that the CA erred in ruling that the mortgages had yet to prescribe, asserting that the ten-year prescriptive period under Article 1142 had long expired from the date of the last mortgage annotation in 1968.

• Failure to State a Cause of Action: GSIS countered that the complaint failed to state a cause of action because it omitted essential allegations regarding the maturity dates of the loans and whether demand for payment was made, elements necessary to determine when the prescriptive period commenced.
• Conclusion of Law: Respondent argued that the allegation of prescription constituted a mere conclusion of law that was not deemed admitted by a general denial, citing the distinction between ultimate facts and conclusions of law in pleadings.
• Commencement of Prescription: GSIS maintained that prescription does not run from the date of execution of the mortgage contracts but from the accrual of the cause of action, which requires either the maturity date of the obligation or an actual demand for payment, absent circumstances under Article 1169 of the Civil Code making demand unnecessary.

• Consideration of New Issues: Whether the Court of Appeals erred in considering issues not raised before the trial court.
• Judicial Admission: Whether the Court of Appeals erred in disregarding the alleged judicial admission made by GSIS regarding prescription.
• Prescription of Mortgage Rights: Whether the Court of Appeals erred in ruling that the real estate mortgages had yet to prescribe.

• Consideration of New Issues: The CA did not err because it did not dwell on the issue of nonpayment raised for the first time on appeal; rather, it focused on the affirmative defense raised in GSIS's answer that the complaint failed to state a cause of action, an issue properly addressed by the appellate court.
• Judicial Admission: No judicial admission was made by GSIS. While material averments not specifically denied are deemed admitted, conclusions of law are not. The allegation that the right to foreclose had prescribed was a mere conclusion of law, not an ultimate fact. Only the fact that GSIS had not commenced any action would be deemed admitted, but not the legal inference that prescription had set in, absent specific factual allegations regarding the maturity date and demand.
• Prescription of Mortgage Rights: The CA correctly ruled that the mortgages had yet to prescribe. Prescription of the right to foreclose a real estate mortgage does not commence from the date of execution of the contract but from the time the cause of action accrues—when the obligation becomes due and demandable, or upon demand by the creditor if demand is necessary. The complaint failed to allege the maturity dates of the loans or whether demand was necessary under the terms of the loan agreements, rendering insufficient the allegations to establish that the prescriptive period had commenced and subsequently expired.

• Ultimate Facts vs. Conclusions of Law in Pleadings — Only ultimate facts need be alleged in pleadings and specifically denied; conclusions of law need not be denied and are not deemed admitted by failure to deny. A conclusion of law is a legal inference on a question of law made as a result of a factual showing where no further evidence is required. Characterizing an obligation as prescribed without specifying the circumstances behind it constitutes a mere conclusion of law.
• Commencement of Prescriptive Period for Real Estate Mortgages — Under Article 1142 of the Civil Code, the right to bring an action to recover principal and interest secured by a mortgage prescribes after ten years. However, this period does not run from the date of execution of the mortgage contract but from the date the cause of action accrues. The cause of action accrues when the mortgagor defaults in payment, which requires: (a) the obligation be demandable and liquidated; (b) the debtor delays performance; and (c) the creditor requires performance judicially or extrajudicially, unless demand is unnecessary under Article 1169 of the Civil Code (when the obligation or law expressly declares it; when the designation of time was a controlling motive; or when demand would be useless). Thus, the prescriptive period runs from the date of demand, or from the date the loan becomes due and demandable in cases where demand is unnecessary.
• Failure to State a Cause of Action — A complaint fails to state a cause of action where it omits essential facts necessary to establish the elements of the cause of action, including facts necessary to determine the accrual of the cause of action for prescription purposes, such as the maturity date of the obligation or the making of demand.

• "It must be remembered that conclusions of fact and law stated in the complaint are not deemed admitted by the failure to make a specific denial. This is true considering that only ultimate facts must be alleged in any pleading and only material allegation of facts need to be specifically denied." — On the distinction between ultimate facts and conclusions of law in determining judicial admissions.
• "The prescriptive period neither runs from the date of the execution of a contract nor does the prescriptive period necessarily run on the date when the loan becomes due and demandable. Prescriptive period runs from the date of demand, subject to certain exceptions." — On the commencement of the prescriptive period for mortgage actions.
• "In order that the debtor may be in default, it is necessary that: (a) the obligation be demandable and already liquidated; (b) the debtor delays performance; and (c) the creditor requires the performance judicially or extrajudicially, unless demand is not necessary..." — On the requisites for default under Article 1169 of the Civil Code.

• University of Mindanao, Inc. v. Bangko Sentral ng Pilipinas, G.R. Nos. 194964-65, January 11, 2016 — Cited for the rule that the prescriptive period for mortgage contracts runs from the time the cause of action arose and not from the time of its execution, and that prescription runs from the date of demand subject to exceptions.
• Maybank Philippines, Inc. v. Spouses Tarrosa, 771 Phil. 423 (2015) — Cited for the definition of default and the requirements under Article 1169 of the Civil Code, explaining that the right to foreclose prescribes ten years from the time the mortgagor defaults, which requires demand unless demand is unnecessary.
• Abad v. Court of First Instance of Pangasinan, 283 Phil. 500 (1992) — Cited for the distinction between ultimate facts and conclusions of law, holding that allegations regarding the validity or invalidity of contracts without stating facts showing invalidity are mere conclusions of law.
• Cua v. Wallem Philippines Shipping, Inc., 690 Phil. 491 (2012) — Cited for the rule that material averments not specifically denied are deemed admitted.

• Article 1142, Civil Code — Provides that the right to bring an action to recover principal and interest secured by a mortgage upon real property prescribes after ten years. Applied to establish the ten-year prescriptive period for foreclosure actions.
• Article 1169, Civil Code — Provides that obligors incur delay from the time the obligee judicially or extrajudicially demands fulfillment, except when demand is unnecessary under specified circumstances (express declaration, controlling motive of time designation, or uselessness of demand). Applied to determine when default commences and when the prescriptive period begins to run.
• Rule 8, Sections 1 and 10, Rules of Court — Provide that only material allegations of fact must be denied specifically, and that material averments not denied are deemed admitted. Applied to distinguish between admissions of fact and conclusions of law.

Presbitero J. Velasco, Jr. (Chairperson), Lucas P. Bersamin, Marvic M.V.F. Leonen, and Alexander G. Gesmundo.