Philippine National Bank vs. Court of Appeals

A mortgagee who elects to extrajudicially foreclose a mortgage on a deceased mortgagor's property waives the right to recover any deficiency from the estate, as extrajudicial foreclosure falls under the third alternative remedy under Section 7, Rule 86 of the Rules of Court, which precludes a deficiency claim.

Spouses Antonio and Asuncion Chua owned a parcel of land registered in their names. Upon Antonio's death, the probate court appointed his son, Allan, as special administrator of his intestate estate and authorized him to obtain a loan from petitioner PNB, secured by a real estate mortgage over the property.

• The Loan and Mortgage: On June 29, 1989, Allan obtained a P450,000 loan from PNB, evidenced by a promissory note payable on June 29, 1990, with 18.8% interest. To secure the loan, he executed a deed of real estate mortgage over the property, pursuant to the probate court's authorization.
• Extrajudicial Foreclosure: Upon failure to pay the loan, PNB extrajudicially foreclosed the mortgage on December 27, 1990. The Ex-Officio Sheriff conducted a public auction where PNB was the highest bidder at P306,360.00.
• Deficiency Claim: PNB's total claim was P679,185.63, leaving a deficiency of P372,825.63. PNB filed Civil Case No. 1988 against Asuncion Chua and Allan Chua as special administrator to recover the balance.
• Default and Dismissal: Despite valid summons, respondents did not answer. They were declared in default, and the RTC received evidence ex parte. Nonetheless, the RTC dismissed PNB's complaint.

• Right to Deficiency Claim: Petitioner argued that prevailing jurisprudence grants the mortgagee the right to recover the deficiency from the debtor when auction proceeds are insufficient.
• Applicability of Act 3135: Petitioner maintained that Act No. 3135, which regulates extrajudicial foreclosure sales and allows recourse for a deficiency claim, applies instead of Section 7, Rule 86 of the Rules of Court.

• Waiver of Deficiency Claim: Respondents countered that by electing to extrajudicially foreclose the mortgaged property of the deceased, petitioner is precluded from pursuing a deficiency claim against the estate pursuant to Section 7, Rule 86 of the Rules of Court.

• Deficiency Claim: Whether a mortgagee can pursue a deficiency claim against a deceased mortgagor's estate after electing to extrajudicially foreclose the mortgaged property.
• Liability of Estate and Heirs: Whether the estate, the special administrator, and the heirs remain liable for the debt after the mortgagee's extrajudicial foreclosure.

• Deficiency Claim: The deficiency claim was properly dismissed. Section 7, Rule 86 of the Rules of Court governs because the mortgage arose from the settlement of an estate, where the administrator mortgaged property pursuant to probate court authority. Under this rule, a mortgage creditor has three distinct, independent, and mutually exclusive remedies: (1) waive the mortgage and claim the entire debt from the estate as an ordinary claim; (2) foreclose judicially and prove any deficiency as an ordinary claim; and (3) rely on the mortgage exclusively, foreclosing the same at any time before prescription, without right to file a claim for any deficiency. Extrajudicial foreclosure falls under the third remedy; thus, electing it waives the right to a deficiency claim.
• Liability of Estate and Heirs: No further liability attaches to the respondents or the decedent's estate because the chosen remedy expressly precludes a claim for any deficiency.

• Three Alternative Remedies of a Mortgage Creditor against a Decedent's Estate — Under Section 7, Rule 86 of the Rules of Court, a creditor holding a claim against a deceased secured by mortgage has three distinct, independent, and mutually exclusive remedies: (1) to waive the mortgage and claim the entire debt from the estate as an ordinary claim; (2) to foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and (3) to rely on the mortgage exclusively, foreclosing the same at any time before it is barred by prescription, without right to file a claim for any deficiency. The election of one remedy bars the pursuit of the others.

• "The plain result of adopting the last mode of foreclosure is that the creditor waives his right to recover any deficiency from the estate."
• "When account is further taken of the fact that a creditor who elects to foreclose by extrajudicial sale waives all right to recover against the estate of the deceased debtor for any deficiency remaining unpaid after the sale it will be readily seen that the decision in this case will impose a burden upon the estates of deceased persons who have mortgaged real property for the security of debts, without any compensatory advantage."

• Perez v. Philippine National Bank, 124 Phil. 260 (1966) — Controlling precedent. Established that the third alternative remedy under Section 7, Rule 86 includes extrajudicial foreclosure, and choosing it waives the right to a deficiency claim. Reversed Pasno v. Ravina.
• Pasno v. Ravina, 54 Phil. 378 (1930) — Overruled/abandoned. Previously required judicial foreclosure to claim a deficiency, which effectively wiped out the third alternative remedy under the Rules.
• Prudential Bank v. Martinez, 189 SCRA 612 (1990) — Distinguished. Cited by petitioner for the general rule allowing deficiency claims after extrajudicial foreclosure, but inapplicable because it involved ordinary debts, not mortgages arising from the settlement of an estate.

• Section 7, Rule 86, Rules of Court — Governs mortgage debts due from an estate. Applied to bar the deficiency claim, as the creditor elected the third alternative remedy (extrajudicial foreclosure), which carries an express waiver of the right to claim any deficiency.
• Section 7, Rule 89, Rules of Court — Governs the authority of an administrator to mortgage estate property. Applied to establish that the mortgage executed by the administrator, upon court authority and properly recorded, is valid as if executed by the deceased, thereby bringing the mortgage within the ambit of Rule 86.
• Act No. 3135 — Governs extrajudicial foreclosure sales. Rejected as the sole governing law; Rule 86 applies decisively because the foreclosure arose out of the settlement of an estate.

Bellosillo, Mendoza, Buena, and De Leon, Jr.