Sun Life Assurance Company of Canada vs. Gonzalez Diez

A first mortgagee may maintain an independent foreclosure proceeding against a second mortgagee whose equity of redemption was not foreclosed in the original foreclosure suit, because a foreclosure decree to which the second mortgagee was not a party leaves the second mortgagee's equity of redemption unforeclosed and unaffected.

Sun Life Assurance Company of Canada was the assignee of the original first mortgagee under a first mortgage executed by Joaquin Serna, while Florencio Gonzalez Diez held a second mortgage on the same property. The first mortgage secured a P20,000 promissory note originally payable to Shanghai Life Insurance Company, Ltd.; the second secured a P6,000 debt. Section 225 of the Code of Civil Procedure required persons claiming interests in mortgaged premises subordinate to the foreclosing mortgage creditor to be made defendants in a foreclosure proceeding.

On May 17, 1920, Joaquin Serna mortgaged the property which is the subject of this action to the Shanghai Life Insurance Company, Ltd., to secure a promissory note payable to said corporation in the amount of P20,000. On the same day, Serna executed a second mortgage on the same property in favor of Florencio Gonzalez Diez to secure a debt in the amount of P6,000. The promissory note secured by the first mortgage, together with the rights of the original first mortgagee, was afterwards transferred to Sun Life Assurance Company of Canada. After mortgaging the property, Serna transferred the mortgaged property for a valuable consideration to Paulino Francisco.

The note secured by the first mortgage was not paid at maturity. Sun Life, as holder, therefore instituted a proceeding, No. 28009 in the Court of First Instance of Manila, to foreclose the first mortgage. In this proceeding only Joaquin Serna and Paulino Francisco were named as defendants; no account was taken of Gonzalez Diez, the holder of the second mortgage. The action proceeded to finality, and the property was ultimately sold in regular course and bought in by Sun Life as mortgage creditor.

After foreclosure had been effected, Sun Life instituted the present proceeding against Gonzalez Diez for the purpose of foreclosing the mortgage as against him in his character as second mortgagee. This proceeding appears to have been started by a supplemental motion in the original foreclosure case, but upon objection by the adverse party, the court required Sun Life to pay the filing fee, and the proceeding was thus given the status of an independent proceeding.

Upon hearing the cause, the trial court declared the indebtedness under the first mortgage to be in the total amount stated in its original decree of foreclosure, with interest and costs added. The trial court fixed the amount necessary to redeem as that which was found to be the amount due to the creditor in the original foreclosure decree.

• Right to Maintain Action: Appellant (defendant) maintained that the first mortgage creditor had no right to maintain the present proceeding against him after the first mortgage had already been foreclosed.

• Maintenance of Independent Foreclosure: Whether the first mortgage creditor may maintain an independent foreclosure proceeding against the second mortgagee after the first mortgage was foreclosed without joining the second mortgagee as a defendant.
• Indispensable Party: Whether the second mortgagee was an indispensable party to the original foreclosure proceeding.

• Maintenance of Independent Foreclosure: Yes. A first mortgagee may maintain an independent foreclosure proceeding against a second mortgagee whose equity of redemption was not foreclosed in the original suit; a foreclosure decree to which the second mortgagee was not a party leaves that equity of redemption unforeclosed and unaffected.
• Indispensable Party: No. The second mortgagee was not indispensable because appropriate relief could be granted to the first mortgagee without affecting the second mortgagee's rights; he was, however, a proper and in a sense necessary party under section 225 of the Code of Civil Procedure.

• Maintenance of Independent Foreclosure: A second mortgagee acquires only a mortgage lien upon the equity of redemption vested in the mortgagor, and his rights are strictly subordinate to the superior lien of the first mortgagee. Although section 225 of the Code of Civil Procedure required all persons having or claiming an interest in the mortgaged premises subordinate in right to the holder of the foreclosing mortgage creditor to be made defendants, the failure to join the second mortgagee did not deprive him of his right of redemption. It is a well-recognized doctrine that a decree of foreclosure in a suit to which the holders of a second lien are not parties leaves the equity of redemption in favor of such lien holders unforeclosed and unaffected. From this circumstance arose the necessity of bringing an independent foreclosure proceeding against the second mortgagee. The fact that the first mortgagee had already foreclosed as against the original debtor and his transferee was no obstacle to maintaining the action against the second mortgagee, because the purpose of the second proceeding was not to obtain a second decree for the same relief covered by the first decree but to secure the foreclosure of an equity of redemption which was not touched by the first suit. The trial court properly allowed the second mortgagee the same period of three months within which to redeem as is allowed to any mortgage debtor, and fixed the amount necessary to redeem as that found due to the creditor in the original foreclosure decree.
• Indispensable Party: The second mortgagee was not an indispensable party to the proceeding to foreclose the first mortgage, because appropriate relief could be granted by the court to the first mortgagee in the original foreclosure proceeding without affecting the rights of the second mortgagee. Nevertheless, the second mortgagee was a proper and in a sense even a necessary party to a foreclosure proceeding brought by the first mortgagee, for section 225 of the Code of Civil Procedure expressly provided that all persons having or claiming an interest in the mortgaged premises subordinate in right to that of the holder of the foreclosing mortgage creditor shall be made defendants. Had the attention of the court in the original foreclosure proceeding been directed to the second mortgage, it would have peremptorily required that the second mortgagee be made a party. The omission, however, did not invalidate the first foreclosure; it merely left the second mortgagee's equity of redemption unforeclosed and unaffected.

• Second Mortgagee's Lien on the Equity of Redemption — A second mortgagee acquires only a mortgage lien upon what is called the equity of redemption vested in the mortgagor, and his rights are strictly subordinate to the superior lien of the first mortgagee. In this case, Gonzalez Diez's second mortgage attached only to the equity of redemption remaining after the first mortgage, so his rights could not prevail over Sun Life's first mortgage.
• Joinder of Subordinate Lienholders in Foreclosure — Under section 225 of the Code of Civil Procedure, all persons having or claiming an interest in the mortgaged premises subordinate in right to that of the holder of the foreclosing mortgage creditor shall be made defendants in the foreclosure proceeding. The second mortgagee is a proper and in a sense necessary party, though not an indispensable party. The Court applied this by holding that the first mortgagee's failure to join Gonzalez Diez did not invalidate the first foreclosure but left his equity of redemption unaffected.
• Effect of Foreclosure Decree on Absent Junior Lienholder — A decree of foreclosure in a suit to which the holders of a second lien are not parties leaves the equity of redemption in favor of such lien holders unforeclosed and unaffected. This doctrine required Sun Life to bring an independent foreclosure proceeding against Gonzalez Diez to reach the equity of redemption not touched by the first suit.
• Independent Foreclosure Against Junior Encumbrancer After Senior Foreclosure — After completed foreclosure under a senior mortgage, a junior encumbrancer may be given by the court the right to redeem the senior mortgage and protect his own lien; he must exercise that right within the time limited or be barred. The trial court applied this by allowing Gonzalez Diez three months to redeem and providing that failure to do so would debar him from all right as second mortgagee.

• "A second mortgage acquires only a mortgag e lien upon what is called the equity of redemption vested in the mortgagor, and his rights are strictly subordinate to the superior lien on the first mortgagee." — This defines the nature and rank of a second mortgagee's right, which is the foundation for holding that Gonzalez Diez's second mortgage attached only to the equity of redemption remaining after the first mortgage.
• "It is well recognized doctrine that a decree of foreclosure in a suit to which the holders of a second lien are not parties leaves the equity of redemption in favor of such lien holders unforeclosed and unaffected." — This is the ratio decidendi for allowing Sun Life to maintain a separate foreclosure proceeding against Gonzalez Diez despite the earlier first mortgage foreclosure.
• "The purpose of the second proceeding is not to obtain a second decree against the second mortgagee for the same relief covered by the first decree but to secure the foreclosure of an equity of redemption which was not touched by the first suit." — This explains why the independent action was not a redundant or improper second foreclosure but a necessary step to reach the second mortgagee's untouched equity of redemption.
• "After completed foreclosure under a senior mortgage, a junior encumbrancer may be given, by the court, the right to redeem the senior mortgage and protect his own lien. Where a junior encumbrancer has been given, by the court, the right to redeem after the completed foreclosure under a senior mortgage, he must exercise his right within the time limited or be barred thereof." — This supports the trial court's order granting Gonzalez Diez three months to redeem or be debarred from his rights as second mortgagee.

• Sioux City etc. R. Co. vs. Trust Co., 82 Fed., 124; 173 U.S., 99; 43 Law. ed., 628 — Cited for the doctrine that a decree of foreclosure in a suit to which the holders of a second lien are not parties leaves the equity of redemption in favor of such lien holders unforeclosed and unaffected.
• Curtis vs. Gooding, 99 Ind., 45 — Cited for the proposition that the purpose of the second proceeding is not to obtain a second decree against the second mortgagee for the same relief covered by the first decree but to secure the foreclosure of an equity of redemption not touched by the first suit.
• Shirk vs. Andrews, 92 Ind., 509 — Cited with Curtis vs. Gooding for the same proposition regarding the purpose of the second foreclosure proceeding.
• Morey vs. City of Duluth, 69 Minn., 5 — Cited with Curtis vs. Gooding and Shirk vs. Andrews for the same proposition regarding the purpose of the second foreclosure proceeding.

• Section 225, Code of Civil Procedure — Provides that all persons having or claiming an interest in the mortgaged premises subordinate in right to that of the holder of the foreclosing mortgage creditor shall be made defendants in the foreclosure proceeding. The Court applied this provision to hold that the second mortgagee was a proper and in a sense necessary party, though not indispensable, and that the first mortgagee's failure to join him left his equity of redemption unforeclosed and unaffected.

Avanceña, C.J., Johnson, Malcolm, Villamor, Ostrand, and Villa-Real, JJ., concurred.