Sps. Antonio & Leticia Vega vs. Social Security System (SSS) & Pilar Development Corporation

A mortgagor-owner may validly sell mortgaged property to a third person even without the mortgagee's consent, although such sale does not affect the mortgagee's right to foreclose on the property. A contractual stipulation requiring the mortgagee's consent before sale cannot be interpreted as absolutely forbidding the owner from selling the property, as such an interpretation contravenes public policy by unduly impeding the transmission of property. A court's power to enforce its judgment applies only to properties that are indisputably owned by the judgment obligor, and a sheriff cannot validly execute upon property that the judgment obligor had long sold to another, even if the registered title remained in the judgment obligor's name.

Magdalena V. Reyes owned a titled piece of land in Pilar Village, Las Piñas City, which she mortgaged to the Social Security System (SSS) as collateral for a housing loan obtained on August 17, 1979. The petitioner spouses Antonio and Leticia Vega sought to purchase the property from Reyes, who intended to emigrate. An SSS employee informed the Vegas that while the SSS did not approve of members transferring their mortgaged homes, the Vegas could make a private arrangement with Reyes provided they paid the monthly amortizations on time, a practice the employee described as commonplace. Respondent Pilar Development Corporation (PDC) later acquired a credit against Reyes from Apex Mortgage and Loans Corporation, which had lent Reyes funds to buy the lot and construct a house.

Magdalena V. Reyes owned a titled piece of land in Pilar Village, Las Piñas City. On August 17, 1979, she obtained a housing loan from the Social Security System (SSS) and mortgaged her land as collateral. In late 1979, Reyes asked the petitioner spouses Antonio and Leticia Vega to assume the loan and buy her house and lot, as she wanted to emigrate. Upon inquiry with the SSS, an employee told the Vegas that the SSS did not approve of members transferring their mortgaged homes, but the Vegas could make a private arrangement with Reyes provided they paid the monthly amortizations on time, a practice the employee said was commonplace.

The Vegas agreed for Reyes to execute in their favor a deed of assignment of real property with assumption of mortgage, and paid Reyes ₱20,000.00 after she undertook to update the amortizations before leaving the country. The Vegas took possession of the house in January 1981. Reyes did not readily execute the deed of assignment; she left the country and gave her sister, Julieta Reyes Ofilada, a special power of attorney to convey ownership of the property. Sometime between 1983 and 1984, Ofilada executed the deed promised by her sister to the Vegas. Ofilada kept the original and gave the Vegas two copies, one of which was given to the Home Development Mortgage Fund and the other kept by the Vegas. Unfortunately, a storm in 1984 resulted in a flood that destroyed the copy left with them.

In 1992, the Vegas learned that Reyes did not update the amortizations when they received a notice to Reyes from the SSS concerning it. They told the SSS that they had already given the payment to Reyes, but since the SSS appeared indifferent, on January 6, 1992, the Vegas updated the amortization themselves and paid ₱115,738.48 to the SSS through Antonio Vega's personal check. They negotiated seven additional remittances, and the SSS accepted ₱8,681.00 more from the Vegas.

Meanwhile, on April 16, 1993, respondent Pilar Development Corporation (PDC) filed an action for sum of money against Reyes before the Regional Trial Court (RTC) of Manila in Civil Case 93-6551. PDC claimed that Reyes borrowed ₱46,500.00 from Apex Mortgage and Loans Corporation to buy the lot and construct a house on it, and that Apex assigned Reyes' credit to PDC on December 29, 1992. On August 26, 1993, the RTC rendered judgment ordering Reyes to pay PDC the loan of ₱46,398.00 plus interest and penalties, attorney's fees, and costs. Unable to pay, on January 5, 1994, the RTC issued a writ of execution against Reyes, and its sheriff levied on the property in Pilar Village.

On February 16, 1994, the Vegas requested the SSS to acknowledge their status as subrogees and to give them an update of the account so they could settle it in full; the SSS did not reply. The RTC sheriff published a notice for the auction sale of the property on February 24, March 3, and March 10, 1994, and served notice of the sale on the Vegas on or about March 20, 1994. On April 5, 1994, the Vegas filed an affidavit of third party claimant and a motion for leave to admit a motion in intervention to quash the levy on the property. The RTC directed the sheriff to proceed with the execution, stating that the Vegas' remedy lay elsewhere.

The Vegas received a telegram dated August 29, 1994, informing them that the SSS intended to foreclose on the property to satisfy the unpaid housing debt of ₱38,789.58. On October 19, 1994, the Vegas requested the SSS in writing for the exact computation of the indebtedness and for assurance that they would be entitled to the discharge of the mortgage and delivery of the proper subrogation documents upon payment; they also sent a ₱37,521.95 manager's check that the SSS refused to accept. On November 8, 1994, the Vegas filed an action for consignation, damages, and injunction with application for preliminary injunction and temporary restraining order against the SSS, the PDC, the sheriff of RTC Branch 19, and the Register of Deeds before the RTC of Las Piñas in Civil Case 94-2943. While the case was pending, on December 27, 1994, the SSS released the mortgage to the PDC, and on August 22, 1996, the Register of Deeds issued TCT T-56657 to the PDC. A writ of possession subsequently evicted the Vegas from the property.

• Proof of Sale: The Vegas argued that they adequately proved Reyes' sale of the property to them through secondary evidence of the lost deed of assignment, which was admissible under Rule 130, Section 3 of the Rules of Court when the original has been lost without bad faith.
• Validity of Sale Despite Mortgage Restriction: The Vegas maintained that Reyes validly sold the mortgaged property to them notwithstanding the mortgage provision requiring SSS consent, as such a restriction could not absolutely forbid the owner from selling the property.
• Invalidity of Levy: The Vegas contended that the sheriff's levy and auction sale of the property to satisfy Reyes' debt to PDC was invalid because the property no longer belonged to Reyes at the time of execution.

• Failure to Prove Assignment: PDC argued that the Vegas failed to prove Reyes' assignment of the property to them because they did not present the deed of assignment, claiming it was lost.
• Invalidity of Assignment as to Third Persons: PDC maintained that Reyes' assignment of the property did not bind it because the assignment neither appeared in a public document nor was registered with the register of deeds, as required by Article 1625 of the Civil Code.
• No Subrogation Without Consent: The SSS argued, as the CA held, that under Article 1237 of the Civil Code, the Vegas who paid the SSS amortizations on behalf of Reyes without the latter's knowledge or against her consent could not compel the SSS to subrogate them in her rights arising from the mortgage, and that the Vegas' claim of subrogation was invalid because it was done without the knowledge and consent of the SSS as required under the mortgage agreement.

• Proof of Sale: Whether the Vegas presented adequate proof of Reyes' sale of the subject property to them.
• Validity of Sale: Whether Reyes validly sold her SSS-mortgaged property to the Vegas.
• Validity of Sheriff's Sale: Whether the sheriff validly sold the property at public auction to satisfy Reyes' debt to PDC.

• Proof of Sale: Yes. The Vegas adequately proved the sale through secondary evidence of the lost deed of assignment, corroborated by their possession of the property for 13 years, their payment of amortizations to the SSS, and the absence of any claim by Reyes or her relatives.
• Validity of Sale: Yes. Reyes validly sold the mortgaged property to the Vegas despite the mortgage provision requiring SSS consent, as such a stipulation cannot be interpreted as absolutely forbidding the owner from selling the property, and the mortgagee's right to foreclose remains unaffected.
• Validity of Sheriff's Sale: No. The sheriff's sale was invalid because the property had long ceased to belong to Reyes when PDC executed on it, and a court's power to enforce its judgment applies only to properties indisputably owned by the judgment obligor.

• Proof of Sale: The rule requiring presentation of the original deed of assignment is not absolute; secondary evidence of its contents can be adduced when the original has been lost without bad faith on the part of the party offering it. The Vegas proved the loss of the deed and what it contained, and offered strong corroboration: they took possession of the house and lot and lived on it in the concept of an owner for 13 years before PDC came into the picture; they paid all the amortizations to the SSS with Antonio Vega's personal check, even those Reyes promised to settle but did not; and when the SSS wanted to foreclose, the Vegas sent a manager's check for the balance of the loan. Neither Reyes nor any of her relatives came forward to claim the property.

• Validity of Sale: Article 1237 of the Civil Code cannot apply because Reyes consented to the transfer of ownership of the mortgaged property to the Vegas and agreed for them to assume the mortgage and pay the balance of her obligation to SSS. Although paragraph 4 of the mortgage contract required Reyes to secure SSS' consent before selling the property, such a stipulation, while valid and binding in the sense that the SSS cannot be compelled while the loan was unpaid to recognize the sale, cannot be interpreted as absolutely forbidding her, as owner of the mortgaged property, from selling the same while her loan remained unpaid. Such stipulation contravenes public policy, being an undue impediment or interference on the transmission of property. When a mortgagor sells the mortgaged property to a third person, the creditor may demand from such third person the payment of the principal obligation, because the mortgage credit is a real right that follows the property wherever it goes. Article 2129 of the Civil Code gives the mortgagee the option of collecting from the third person in possession of the mortgaged property in the concept of owner. The mortgagor-owner's sale does not affect the right of the registered mortgagee to foreclose on the property even if its ownership had been transferred to another person. After the mortgage debt to SSS had been paid, however, the SSS had no further justification for withholding the release of the collateral and the registered title to the party to whom Reyes had transferred her right as owner.

• Validity of Sheriff's Sale: Article 1625 of the Civil Code, which requires that an assignment of a credit, right, or action appear in a public instrument or be recorded in the Registry of Property to be effective against third persons, refers to assignment of credits and other incorporeal rights, not to the sale of real property. Reyes sold the Vegas her house and lot; they became owners of the property from the time she executed the deed of assignment covering the same in their favor. PDC had a judgment for money against Reyes only, and a court's power to enforce its judgment applies only to properties that are indisputably owned by the judgment obligor. The property had long ceased to belong to Reyes when she sold it to the Vegas in 1981. PDC cannot take comfort in the fact that the property remained in Reyes' name when it bought the same at the sheriff sale, nor can it assert that it was a buyer in good faith since it had notice of the Vegas' claim on the property prior to such sale.

• Sale of Mortgaged Property Without Mortgagee's Consent — A stipulation in a mortgage contract requiring the mortgagee's consent before the mortgagor sells the property is valid and binding in the sense that the mortgagee cannot be compelled while the loan is unpaid to recognize the sale, but it cannot be interpreted as absolutely forbidding the owner from selling the property, as such an interpretation contravenes public policy by unduly impeding the transmission of property. The sale does not affect the mortgagee's right to foreclose, as the mortgage credit is a real right that follows the property wherever it goes.

• Subrogation Under Article 1237 of the Civil Code — Article 1237, which provides that whoever pays on behalf of the debtor without the knowledge or against the will of the latter cannot compel the creditor to subrogate him in his rights, does not apply where the debtor consented to the transfer of ownership and agreed for the transferee to assume the mortgage and pay the balance of the obligation.

• Scope of Execution of Judgments — A court's power to enforce its judgment applies only to properties that are indisputably owned by the judgment obligor. A sheriff cannot validly execute upon property that the judgment obligor had long sold to another, even if the registered title to the property remained in the name of the judgment obligor.

• Article 1625 of the Civil Code Distinguished — Article 1625, requiring that an assignment of a credit, right, or action appear in a public instrument or be recorded in the Registry of Property to be effective against third persons, applies to assignment of credits and other incorporeal rights, not to the sale of real property.

• "But, although such a stipulation is valid and binding, in the sense that the SSS cannot be compelled while the loan was unpaid to recognize the sale, it cannot be interpreted as absolutely forbidding her, as owner of the mortgaged property, from selling the same while her loan remained unpaid. Such stipulation contravenes public policy, being an undue impediment or interference on the transmission of property." — This passage articulates the Court's holding that mortgage consent stipulations do not absolutely bar the mortgagor from selling the property, a canonical formulation on the limits of contractual restrictions on property transmission.

• "But Article 1625 referred to assignment of credits and other incorporeal rights. Reyes did not assign any credit or incorporeal right to the Vegas. She sold the Vegas her house and lot. They became owner of the property from the time she executed the deed of assignment covering the same in their favor. PDC had a judgment for money against Reyes only. A court's power to enforce its judgment applies only to the properties that are indisputably owned by the judgment obligor." — This passage distinguishes Article 1625 from the sale of real property and states the principle limiting execution to properties owned by the judgment obligor.

• "The PDC cannot take comfort in the fact that the property remained in Reyes' name when it bought the same at the sheriff sale. The PDC cannot assert that it was a buyer in good faith since it had notice of the Vegas' claim on the property prior to such sale." — This passage rejects PDC's claim of good faith, establishing that notice of a third party's claim defeats the defense of buyer in good faith.

• Cinco vs. Court of Appeals, G.R. No. 151903, October 9, 2009, 603 SCRA 108, 118 — Cited as authority for the proposition that a stipulation requiring the mortgagee's consent before sale contravenes public policy as an undue impediment or interference on the transmission of property.
• Teoco vs. Metropolitan Bank and Trust Company, G.R. No. 162333, December 23, 2008, 575 SCRA 82, 93 — Cited for the principle that Article 2129 of the Civil Code gives the mortgagee the option of collecting from the third person in possession of the mortgaged property in the concept of owner.
• Special Services Corporation vs. Centro La Paz, 206 Phil. 643, 651 (1983) — Cited for the rule that a court's power to enforce its judgment applies only to properties that are indisputably owned by the judgment obligor.

• Article 1237, Civil Code — Provides that whoever pays on behalf of the debtor without the knowledge or against the will of the latter cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. The Court held this provision inapplicable because Reyes consented to the transfer of ownership and the Vegas' assumption of the mortgage.
• Article 1625, Civil Code — Provides that an assignment of a credit, right, or action shall produce no effect as against third persons unless it appears in a public instrument or the instrument is recorded in the Registry of Property in case the assignment involves real property. The Court held this provision inapplicable because it refers to assignment of credits and incorporeal rights, not the sale of real property.
• Article 2129, Civil Code — Provides that the creditor may claim from a third person in possession of the mortgaged property the payment of the part of the credit secured by the property. The Court cited this provision to explain that the mortgage credit is a real right that follows the property wherever it goes.
• Rule 130, Section 3, Rules of Court — Allows secondary evidence of the contents of an original document when the original has been lost without bad faith on the part of the party offering it. The Court applied this rule to admit the Vegas' secondary evidence of the lost deed of assignment.

Antonio T. Carpio, Diosdado M. Peralta, Lucas P. Bersamin, and Jose Portugal Perez concurred with the decision of Justice Abad.