Villalon vs. Rural Bank of Agoo, Inc.

A mortgage first created and registered over unregistered real property is preferred over a later mortgage; the later second mortgagee/junior encumbrancer, even if it forecloses first and obtains a certificate of sale, acquires at most the right to redeem from the first mortgagee by paying the bid price, interest, and assessments or taxes. Registration is the operative act that binds third persons and constitutes notice to the whole world, so a later mortgagee cannot claim good faith where the prior mortgage was already registered.

Spouses George and Zenaida Alviar owned an unregistered residential lot and house in Barangay I, San Fernando, La Union, which they used as collateral for loans from Rural Bank of Agoo, Inc. (RBAI) and Roma Fe C. Villalon. RBAI’s real estate mortgage was constituted and registered earlier, while Villalon’s was later. Because the property was unregistered, registration of transactions was governed by Act No. 3344, later amended by Section 113 of Presidential Decree No. 1529, and extrajudicial foreclosure was governed by Act No. 3135, as amended by Act No. 4118. The case concerns the priority between those mortgages and the redemption rights of the junior encumbrancer after separate extrajudicial foreclosures.

On May 18, 1998, the Spouses George and Zenaida Alviar obtained a loan from Rural Bank of Agoo, Inc. (RBAI) in the amount of ₱145,000.00, secured by a real estate mortgage over their residential lot and house covered by Tax Declaration Nos. 93-001-43749 and 93-001-52100 located at Barangay I, San Fernando, La Union. The mortgage was registered with the Register of Deeds of La Union on the same date. The loan became due and payable on February 10, 1999 and was renewed four times, with due dates of August 9, 1999, February 4, 2000, August 2, 2000, and January 26, 2001, all evidenced by a promissory note.

On July 30, 2000, the Spouses Alviar borrowed ₱400,000.00 from Roma Fe C. Villalon, secured by a real estate mortgage executed on the same date over the same residential lot and house. That mortgage was registered with the Register of Deeds on July 6, 2001. On several dates, the Spouses Alviar also obtained additional loans from RBAI in the amounts of ₱50,000.00 and ₱30,000.00, both secured by a real estate mortgage over the same property. Because the Spouses Alviar failed to pay their RBAI loan, RBAI resorted to extrajudicial foreclosure, and the foreclosure sale was reset to several dates.

The Spouses Alviar likewise failed to pay their loan to Villalon. Villalon therefore applied for extrajudicial foreclosure of the mortgaged realties. The foreclosure sale was conducted on June 26, 2002, and Villalon was declared the highest bidder with a bid of ₱1,050,000.00. A Certificate of Sale of Real Property was issued to Villalon on June 27, 2002 and registered with the Register of Deeds on July 5, 2002. On June 16, 2004, the foreclosure sale initiated by RBAI finally pushed through; RBAI was the highest bidder with a bid of ₱341,830.94, and the corresponding Certificate of Sale was issued to it. On October 14, 2005, RBAI paid the requisite fees, but despite its request, the Certificate of Absolute Deed of Sale was not issued to it. On August 6, 2007, a Certificate of Absolute Definitive Sale was issued to Villalon, who had been in physical possession of the property since its foreclosure in 2002; she had it declared for taxation purposes in her business name “Villalon Lending Investor” and had paid realty taxes for the same.

Upon discovering these events, RBAI filed a Complaint for recovery of sum of money and damages before the Regional Trial Court of Agoo, La Union against Villalon and the Spouses Alviar. RBAI claimed principally from Villalon, and alternatively from the Spouses Alviar, the amount of ₱750,818.34. RBAI alleged that its mortgage over the properties was earlier than Villalon’s, making RBAI the first mortgagee or superior lien holder and Villalon only the second mortgagee or subordinate encumbrancer. While RBAI acknowledged that a second mortgagee can foreclose ahead of the first mortgagee, it claimed that the proceeds of the sale should first satisfy the loan obtained from the first mortgagee; thus, RBAI’s claim of ₱750,818.34 should be satisfied from Villalon’s bid of ₱1,050,000.00. Despite demand for Villalon to remit or deliver that amount, she refused. RBAI averred that if Villalon were not held liable or were unable to pay, the Spouses Alviar should be ordered to pay ₱750,818.34.

The Spouses Alviar did not file their Answer despite due summons by publication. Villalon countered that RBAI had no cause of action against her because she was not a party to the contract between RBAI and the Spouses Alviar and had no obligation to pay RBAI’s loan to them. She maintained that she had been in lawful and absolute ownership of the properties since June 27, 2002, and that her ownership was confirmed and approved by Judge Carbonell when the latter issued in her favor the Certificate of Absolute Definitive Sale of Real Property on August 6, 2007. She therefore argued that RBAI could not assert any right over the properties.

• Priority of Mortgages: Petitioner argued that the Court of Appeals gravely erred in pronouncing that RBAI’s first mortgage prevailed over her mortgage.
• Payment of Bid Price, Interest, and Taxes: Petitioner maintained that the Court of Appeals committed grave error in ordering her to pay RBAI the bid price, interest, and assessments or taxes, if any.
• Good Faith: Petitioner claimed good faith because she was not aware of the mortgage or mortgages between RBAI and the Spouses Alviar, and no protest was received during the foreclosure proceedings she initiated.
• Constructive Notice and Waiver: Petitioner contended that since the foreclosure she initiated was published several times in a newspaper, which is constructive notice to RBAI, RBAI’s non-action was tantamount to a waiver to protest the same.
• No Contractual Relationship: Petitioner maintained that she had no contractual relationship with RBAI and that RBAI’s recourse was against the Spouses Alviar, who did not appeal the RTC decision.

• Priority of First Mortgage: RBAI argued that it was legally entitled to recover from Villalon the amount of ₱750,818.34 plus interest because, as first mortgagee with a real estate mortgage registered ahead of Villalon’s, it had a priority or preferred right that Villalon, as second mortgagee, was legally obligated to acknowledge and respect.
• Application of Foreclosure Proceeds: RBAI contended that the proceeds of the foreclosure sale initiated by Villalon in the amount of ₱1,050,000.00 should be used first to satisfy the Spouses Alviar’s loan obligation to RBAI in the amount of ₱750,818.34 plus interest until fully paid, with any excess going to Villalon.
• Redemption Price and Affirmance: RBAI stated in its Comment that the Court of Appeals was correct in setting aside the RTC decision and in ordering Villalon to pay RBAI the redemption price, together with assessments or taxes, if any, plus interest; it prayed that Villalon’s petition be denied and the CA ruling affirmed in toto.

• Priority of Mortgages: Whether RBAI’s mortgage, created and registered earlier over the unregistered property, prevails over Villalon’s later mortgage.
• Cause of Action and Liability of Second Mortgagee: Whether RBAI has a cause of action against Villalon, a second mortgagee with no contractual relationship with RBAI, and whether Villalon must pay RBAI the bid price, interest, and assessments or taxes.
• Good Faith: Whether Villalon can claim good faith when RBAI’s prior mortgage was already registered at the time she registered her own mortgage.
• Waiver: Whether RBAI’s non-action after the publication of Villalon’s foreclosure sale amounted to a waiver to protest the foreclosure.

• Priority of Mortgages: Yes. RBAI’s mortgage, created and registered on May 18, 1998, is preferred over Villalon’s mortgage, executed on July 30, 2000 and registered on July 6, 2001, because it was created and registered much ahead over the unregistered property.
• Cause of Action and Liability of Second Mortgagee: Yes. RBAI has a cause of action against Villalon as superior lienholder; Villalon, as second mortgagee/junior encumbrancer, has at most the right to redeem by paying RBAI’s bid price of ₱341,830.94, interest at one percent per month, and assessments or taxes paid by RBAI, with the same interest rate.
• Good Faith: No. Registration is the operative act that binds third persons and constitutes notice to the whole world; because RBAI’s lien was already registered when Villalon registered her mortgage, she is presumed aware of it and cannot claim good faith.
• Waiver: No. Notwithstanding that Villalon was first to foreclose, was issued a Certificate of Absolute Definitive Sale, and possessed the property with the tax declaration in her name, these circumstances did not defeat RBAI’s prior registered mortgage; Villalon remained a junior encumbrancer with only redemption rights.

• Priority of Mortgages: The Court applied Hidalgo vs. La Tondeña. In the main Hidalgo decision, a mortgage created much ahead in point of time but registered later than a levy of execution similarly registered was preferred over the levy. On reconsideration, however, the Court held that Hidalgo’s levy and lien had the better right because it was recorded earlier; when La Tondeña caused its unregistered mortgage to be entered in the Registry, it was presumed to have become aware of and taken its mortgage subject to the prior execution levy. In the present case, RBAI’s mortgage was constituted over the unregistered real properties on May 18, 1998 and registered on the same day, while Villalon’s mortgage was executed on July 30, 2000 and registered on July 6, 2001. Because RBAI’s mortgage was created and registered much ahead of Villalon’s, RBAI’s mortgage should be preferred. The proper foreclosure of the first mortgage by RBAI gave not only the first mortgagee but also subsequent lienholders like Villalon the right to redeem within the statutory period. Villalon cannot be deemed a third party with a better right under Act No. 3344, as amended by Section 113 of Presidential Decree No. 1529, because she is a second mortgagee whose rights are strictly subordinate to RBAI’s superior lien. A second mortgagee of unregistered land must wait until the debtor’s obligation to the first mortgagee has been fully satisfied. Even though Villalon was first to foreclose, was issued a Certificate of Absolute Definitive Sale, and possessed the property with the tax declaration in her name, these circumstances do not defeat RBAI’s rights; at most, Villalon has only the right to redeem from RBAI.
• Cause of Action and Liability of Second Mortgagee: Extrajudicial foreclosure of real estate mortgage is governed by Act No. 3135, as amended by Act No. 4118. Section 6 thereof provides that in all cases of extrajudicial sale, the debtor, his successors in interest, any judicial creditor or judgment creditor, or any person having a lien on the property subsequent to the mortgage under which the property is sold may redeem the same within one year from and after the date of the sale; redemption is governed by Sections 464 to 466 of the Code of Civil Procedure insofar as not inconsistent. Section 28 of Rule 39 of the 1997 Rules of Civil Procedure provides that the judgment obligor or redemptioner may redeem the property from the purchaser within one year from the date of registration of the certificate of sale by paying the purchaser the amount of his purchase, with the per centum per month interest thereon in addition up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such last-named amount at the same rate; if the purchaser is also a creditor having a prior lien to that of the redemptioner, other than the judgment under which such purchase was made, the amount of such other lien, with interest. Thus, for Villalon to acquire full rights over the properties, she must first redeem them by paying off (1) RBAI’s bid price in the auction sale, ₱341,830.94; (2) interest on the bid price at one percent (1%) per month; and (3) assessments or taxes, if any, paid by the purchaser, with the same interest rate.
• Good Faith: When Villalon caused her mortgage to be entered in the Registry, RBAI’s lien over the property had already been registered as early as May 18, 1998. She cannot claim to have acted in good faith because, when she caused her mortgage to be entered in the Registry, she was presumed to have become aware of and to have taken her mortgage subject to RBAI’s lien. Registration is the operative act that binds or affects the land insofar as third persons are concerned, and it is upon registration that there is notice to the whole world. The Court cited Egao vs. Court of Appeals and Calalang vs. Register of Deeds of Quezon City for these principles.
• Waiver: The Court did not sustain the claim that RBAI’s non-action after the publication of Villalon’s foreclosure sale amounted to waiver. It held that notwithstanding Villalon’s prior foreclosure, the Certificate of Absolute Definitive Sale issued to her, her possession of the property, and the tax declaration in her name, these circumstances would not defeat RBAI’s rights as first mortgagee whose mortgage was created and registered much ahead. Villalon, as second mortgagee/junior encumbrancer, retained only the right to redeem the property from RBAI.

• Priority of Registered Mortgage over Unregistered Land — A mortgage first created and registered over unregistered real property is preferred over a later mortgage, even if the later mortgagee forecloses first and obtains a certificate of sale. The later mortgagee is a second mortgagee/junior encumbrancer whose rights are subordinate to the first mortgagee’s superior lien. Applied: RBAI’s May 18, 1998 mortgage was preferred over Villalon’s July 30, 2000/July 6, 2001 mortgage.
• Redemption by Junior Encumbrancer in Extrajudicial Foreclosure — Under Act No. 3135, as amended, and Section 28, Rule 39, a person having a lien subsequent to the mortgage under which property is sold may redeem within one year from the date of sale or registration of the certificate of sale by paying the purchaser the purchase price with interest, plus assessments or taxes paid by the purchaser with the same interest, and if the purchaser is also a creditor with a prior lien, the amount of such other lien with interest. Applied: Villalon must pay RBAI’s bid price of ₱341,830.94, interest at one percent per month, and assessments or taxes.
• Registration as Operative Act and Notice to the Whole World — Registration binds third persons and constitutes notice to the whole world; a subsequent mortgagee who registers after a prior lien cannot claim good faith. Applied: Villalon was presumed aware of RBAI’s registered mortgage when she registered her own mortgage.
• Second Mortgagee Must Wait for First Mortgagee’s Satisfaction — A second mortgagee of unregistered land has to wait until after the debtor’s obligation to the first mortgagee has been fully satisfied; at most, the second mortgagee has the right to redeem. Applied: Villalon, as second mortgagee/junior encumbrancer, could not defeat RBAI’s superior lien despite her prior foreclosure and certificate of sale.

• "Considering that RBAI's mortgage was created and registered much ahead of time than that of Villalon, RBAI's mortgage should be preferred." — This states the ratio decidendi on priority of mortgages over the unregistered property.
• "A second mortgagee of an unregistered land has to wait until after the debtor's obligation to the first mortgagee has been fully satisfied." — This defines the subordinate status of a second mortgagee and supports the ruling that Villalon acquired only redemption rights.
• "Thus, in order for Villalon to acquire full rights over the properties subject of the mortgage, she must first redeem them by paying off: (1) the bid price of RBAI in the auction sale, which is ₱341,830.94; (2) the interest on the bid price, computed at one percent (1%) per month; and (3) the assessments or taxes, if any, paid by the purchaser, with the same interest rate." — This sets out the exact redemption amounts Villalon must pay to acquire full rights.
• "Petitioner cannot escape the fact that when she caused the mortgage to be entered in the Registry, RBAI's lien over the property was already registered as early as May 18, 1998. Thus, she cannot claim to have acted in good faith as when she caused its mortgage to be entered in the Registry, it was presumed to have become aware of and taken its mortgage subject to RBAI's lien over the property." — This rejects Villalon’s good-faith defense based on the prior registration of RBAI’s lien.

• Hidalgo vs. La Tondeña, 123 Phil. 445, 448-449 (1966) — Cited in the main decision for the rule that a mortgage created much ahead in point of time but registered later than a levy of execution similarly registered is preferred over the levy.
• Hidalgo vs. La Tondeña, Inc., et al., 150-B Phil. 227, 231 (1972) — Cited on reconsideration, where the Court modified its ruling and held that Hidalgo’s levy and lien had the better right because it was recorded earlier; when La Tondeña registered its unregistered mortgage, it was presumed aware of and took subject to the prior levy.
• Egao vs. Court of Appeals (Ninth Division), 256 Phil. 243, 252 (1989) — Cited for the principle that registration is the operative act that binds or affects the land insofar as third persons are concerned.
• Calalang vs. Register of Deeds of Quezon City, 284 Phil. 343, 358 (1992) — Cited for the principle that it is upon registration that there is notice to the whole world.

• Section 6, Act No. 3135, as amended by Act No. 4118 — Provides the right of redemption in extrajudicial sale for the debtor, his successors in interest, any judicial creditor or judgment creditor, or any person having a lien on the property subsequent to the mortgage under which the property is sold, within one year from the date of the sale; redemption is governed by Sections 464 to 466 of the Code of Civil Procedure insofar as not inconsistent. Applied: Villalon, as a subsequent lienholder, had the right to redeem from RBAI.
• Section 28, Rule 39, 1997 Rules of Civil Procedure — Sets the time and manner of, and amounts payable on, successive redemptions: redemption within one year from the date of registration of the certificate of sale by paying the purchaser the amount of purchase with per centum per month interest, plus assessments or taxes paid by the purchaser after purchase with the same interest; if the purchaser is also a creditor having a prior lien to that of the redemptioner, the amount of such other lien with interest. Applied: Villalon must pay RBAI’s bid price of ₱341,830.94, interest at one percent per month, and assessments or taxes.
• Act No. 3344, as amended by Section 113 of Presidential Decree No. 1529 — Governs registration of transactions over unregistered property. The Court held that Villalon cannot be deemed a third party with a better right under this provision because she is a second mortgagee whose rights are strictly subordinate to the superior lien of the first mortgagee, RBAI.

Justice Leonen, Justice A. Reyes, Jr., Justice Hernando, and Justice Inting concurred.