Philippine National Bank vs. Abello

A complaint for cancellation of mortgage encumbrances on the ground of prescription must allege and prove the date of maturity of the loan or the date of demand, as the prescriptive period for a real estate mortgage action runs not from the date of annotation on the title but from the time the principal obligation became due and demandable or from the date of judicial or extrajudicial demand.

The Spouses Manuel and Elenita Abello were registered owners of parcels of land in Bacolod City and Binalbagan, Negros Occidental, covered by TCT Nos. T-127632, T-82974, and T-58311. Over the years from 1963 to 1975, they constituted several real estate mortgages over these properties in favor of Philippine National Bank (PNB) to secure various loans. Manuel died on October 14, 1998, and his heirs executed a Declaration of Heirship on June 5, 2003 authorizing Elenita to act as administrator of the estate.

On November 21, 2008, respondents — Elenita V. Abello, Ma. Elena Elizabeth A. Fider, Jonathan V. Abello, Manuel V. Abello, and Vincent Edward V. Abello — filed a Complaint for Cancellation/Discharge of Mortgage/Mortgage Liens against PNB before the RTC of Bacolod City, Branch 49. The complaint involved three parcels of land covered by TCT Nos. T-127632, T-82974, and T-58311, all registered under the names of the Spouses Manuel and Elenita Abello. Inscribed on these titles were various real estate mortgages, all in favor of PNB.

On TCT No. T-127632, located in Binalbagan, Negros Occidental, several mortgages were entered: one dated September 18, 1963 for ₱5,890.00 inscribed on August 9, 1968; another dated February 21, 1968 for ₱6,600.00 inscribed on February 22, 1968; one dated August 14, 1973 for ₱50,000.00 inscribed on August 23, 1973; an amendment dated October 8, 1973 increasing the ₱50,000.00 to ₱94,200.00 inscribed on October 11, 1973; and a Deed of Agreement dated March 18, 1974 increasing Manuel Abello's credit limit accommodations to ₱75,000.00, inscribed on March 18, 1974. No further entries in favor of PNB appeared after March 18, 1974 on this title. On TCT Nos. T-82974 and T-58311, both located in Bacolod City, a real estate mortgage was obtained by the Spouses Abello from PNB on October 30, 1975 for ₱227,000.00, inscribed as Entry No. 80024 on November 4, 1975. No further entries appeared on these titles thereafter.

Manuel died on October 14, 1998. His heirs executed a Declaration of Heirship on June 5, 2003, authorizing Elenita to act as administrator of the estate. In their complaint, respondents sought cancellation of the inscriptions, claiming that since PNB had taken no action against them since 1975, the action had already prescribed. They argued that they should be discharged as a matter of right and the encumbrances cancelled.

The RTC rendered judgment in favor of respondents on August 26, 2014, ordering the cancellation of all the subject encumbrances. The RTC found that prescription had set in, reckoning the prescriptive period from the date of inscription on the TCTs — March 19, 1984 for TCT No. T-127632 and November 5, 1985 for TCT Nos. T-82974 and T-58311. The CA affirmed this decision in toto on January 31, 2018, additionally finding that prescription began to run from December 31, 1985, when Manuel stopped paying the mortgage debt, whereas PNB sent a demand only on January 8, 2002. PNB's Motion for Reconsideration was denied on September 4, 2018.

• Failure to State Cause of Action: Petitioner argued that the respondents' complaint should have been dismissed for failure to state a cause of action, as it failed to allege the particulars of the mortgage, particularly the date of maturity of the loan, which is crucial in determining when the prescriptive period for foreclosure begins to run.
• Waiver of Prescription: Petitioner argued that, even assuming the existence of a cause of action, the action cannot prosper because the respondents, by their admission of liability, in effect waived the right to raise the defense of prescription.

• Sufficiency of Allegations: Respondents argued that the petitioner's own admissions as to the particulars of the loan and real estate mortgage could be relied upon in determining the period of prescription and, ultimately, the existence of a cause of action.

• Cause of Action: Whether the respondents' complaint states a cause of action for the cancellation of mortgage encumbrances.
• Prescription: Whether the prescriptive period for an action to foreclose a real estate mortgage runs from the date of inscription on the title or from the date of maturity of the loan or date of demand.

• Cause of Action: No. The complaint failed to state a cause of action because it did not allege the date of maturity of the loan or the date of demand, which are essential to establish when the right to foreclose accrued and when prescription began to run. The respondents also failed to adduce evidence of these crucial dates during trial, rendering the complaint dismissible for lack of cause of action.
• Prescription: No. The prescriptive period for a real estate mortgage action does not run from the date of inscription on the title but from the date the loan became due and demandable, or from the date of demand, pursuant to Article 1169 of the Civil Code and the nature of a mortgage as an accessory contract.

• Cause of Action: The distinction between "failure to state a cause of action" and "lack of cause of action" is critical. The former refers to insufficiency of allegation in the pleading and is determined by examining the complaint alone; the latter refers to insufficiency of evidence and is determined after trial. A complaint must aver the three essential elements of a cause of action: (a) a right in favor of the plaintiff; (b) an obligation on the part of the defendant to respect that right; and (c) an act or omission by the defendant violative of that right. In this case, the respondents' complaint alleged only the existence of the mortgages and the dates of inscription but omitted the date of maturity of the loan or the date of demand. Because the prescriptive period for a real estate mortgage begins to run only when the loan becomes due and demandable or upon demand, the absence of these allegations rendered the complaint insufficient to state a cause of action. Although the ground of "failure to state a cause of action" could no longer be raised after the parties had gone to trial, the respondents likewise failed during trial to adduce evidence establishing when the loan became due or when demand was made. The contracts evidencing the loan and mortgage were necessary to prove the respondents' cause of action, yet these were not presented. Accordingly, the complaint was dismissible for lack of cause of action, as the respondents failed to substantiate their claim by preponderance of evidence.

• Prescription: A real estate mortgage is an accessory contract constituted to protect the creditor's interest in the principal contract of loan. Its enforcement is dependent on whether there has been a violation of the principal obligation — it is the debtor's failure to pay that sets the mortgage contract into operation. Prior to that, the creditor-mortgagee has no right to speak of under the REM, as it remains contingent upon the debtor's default. Prescription in a mortgage contract runs not from the time of its execution or inscription but from when the loan became due and demandable (in instances covered by the exceptions under Article 1169 of the Civil Code) or from the date of demand. The date of annotation on the title is irrelevant to the issue of prescription. Because the respondents neither alleged nor proved the date of maturity or the date of demand, they could not establish that the prescriptive period had lapsed, and consequently could not establish their right to cancellation of the encumbrances.

• Distinction Between Failure to State Cause of Action and Lack of Cause of Action — "Failure to state a cause of action" refers to the insufficiency of allegation in the pleading, examined by the court solely on the basis of the complaint's averments, and may be raised in a Motion to Dismiss under Rule 16 at the earliest stages of an action. "Lack of cause of action" refers to the insufficiency of factual basis or evidence for the action, involving questions of fact, and is usually determined after trial when the parties have presented their evidence. The test for failure to state a cause of action is whether, admitting hypothetically the allegations of fact in the complaint, a judge may validly grant the relief demanded.

• Commencement of Prescriptive Period for Real Estate Mortgages — The prescriptive period for an action to foreclose a real estate mortgage runs not from the date of execution or inscription of the mortgage but from (a) the time the loan became due and demandable, in instances covered by the exceptions under Article 1169 of the Civil Code, or (b) the date of demand. A real estate mortgage is an accessory contract whose enforcement depends on a violation of the principal obligation; the creditor-mortgagee's right to foreclose arises only upon the debtor's default.

• Essential Elements of a Cause of Action — A cause of action requires: (a) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (b) an obligation on the part of the named defendant to respect or not to violate such right; and (c) an act or omission on the part of the named defendant violative of the right of the plaintiff or constituting a breach of the obligation of defendant to the plaintiff for which the latter may maintain an action for recovery.

• "Prescription, in turn, runs in a mortgage contract not from the time of its execution, but rather a) when the loan became due and demandable, for instances covered under the exceptions set forth under Article 1169 of the New Civil Code, or b) from the date of demand." — This passage articulates the controlling rule on when the prescriptive period for a real estate mortgage begins to run, which is the central legal question in the case.

• "A REM is an accessory contract constituted to protect the creditor's interest to ensure the fulfillment of the principal contract of loan. By its nature, therefore, the enforcement of a mortgage contract is dependent on whether or not there has been a violation of the principal obligation." — This passage defines the accessory nature of a real estate mortgage and explains why prescription cannot be reckoned from the date of inscription but must await the debtor's default.

• "the mortgagor would be unable to establish his or her right to pray for the cancellation of the encumbrances without first establishing that the debt has already become due, as it is only at that time that the debtor's right to foreclose the property arise and the prescriptive period begins to run." — This passage states the ratio decidendi connecting the rule on prescription to the requirement that a complaint for cancellation must allege and prove the date of maturity or demand.

• Dabuco vs. CA, 379 Phil. 939 (2000) — Cited as controlling authority for the distinction between "failure to state a cause of action" (insufficiency of allegation) and "lack of cause of action" (insufficiency of evidence or factual basis).
• Mercene vs. Government Service Insurance System, G.R. No. 192971, January 10, 2018, 850 SCRA 209 — Cited as the recent controlling case establishing that the commencement of the prescriptive period for real estate mortgages is crucial in determining the existence of a cause of action, and that prescription runs from the date the loan became due and demandable or from the date of demand.
• Aquino, et al. vs. Quiazon, et al., 755 Phil. 793 (2015) — Cited for the definition of the three essential elements of a cause of action and the test for failure to state a cause of action.
• Development Bank of the Philippines vs. Guariña Agricultural and Realty Development Corp., 724 Phil. 209 (2014) — Cited for the principle that a real estate mortgage is an accessory contract whose enforcement depends on a violation of the principal obligation.
• University of Mindanao, Inc. vs. Bangko Sentral ng Pilipinas, et al., 776 Phil. 401 (2016) — Cited in Mercene for the proposition that prescription in a mortgage contract runs from the date of demand.

• Article 1169, Civil Code of the Philippines — Provides that those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands fulfillment, with exceptions when demand is not necessary. Applied to determine when the prescriptive period for foreclosure of a real estate mortgage begins to run.
• Section 7, Rule 8, Rules of Court — Provides that whenever an action or defense is based on a written instrument or document, the substance of such instrument shall be set forth in the pleading and the original or copy attached as an exhibit. Applied to underscore the necessity of presenting the contracts evidencing the loan and mortgage.
• Section 34, Rule 132, Rules of Court — Requires parties to formally offer their evidence for the court's consideration after trial. Referenced in explaining why the court could still consider the insufficiency of evidence even after the period for dismissal on the ground of failure to state a cause of action had lapsed.
• Rule 16, 1997 Rules of Civil Procedure — Governs motions to dismiss, including dismissal for failure to state a cause of action. Referenced in distinguishing the procedural remedy of dismissal for failure to state a cause of action from dismissal for lack of cause of action.

Peralta (Chairperson), Leonen, and Inting, JJ., concurred. Hernando, J., was on leave.