G.R. No. 20482. October 25, 1923

The parties submitted this case to the trial court for decision upon a
stipulation of facts, which is inserted in the judgment appealed from, and from
which it appears that the defendant Salvador Vallejo executed a mortgage in
favor of his codefendant, El Hogar Filipino, upon a certain real estate
belonging to him, registered in the registry of property under the Torrens law.
This mortgage contains a stipulation that the mortgagor cannot create any legal
light upon the realty in favor of a third person, nor make, with regard to said
realty, any contract of lease registerable under the law, or whereby a rental
for more than one month is to be paid in advance, without obtaining the previous
consent in writing of the association El Hogar Filipino. That same mortgage,
moreover, contains a stipulation that in case the debt falls due for
non-compliance, on the part of the debtor, with any of the obligations mentioned
in the contract, the manager of the association El Hogar Filipino is authorized
to proceed to the extrajudicial sale of the mortgaged property at public auction
before a notary, or an auctioneer to be designated by the board of directors of
the association, after publication of notice thereof in a newspaper of general
circulation in this city, once a week for three consecutive weeks; the manager
of the association being likewise authorized to execute, as agent of the
borrower, the corresponding deed of sale in favor of the highest bidder who may
present himself at the auction at the time and in the manner prescribed in the
tenth clause of said contract.

After said mortgage was noted as a lien and encumbrance on the certificate of
title of the property mortgaged, a document was presented to the register of
deeds whereby the debtor made a second mortgage in favor of the plaintiff
corporation, the herein appellee. The register of deeds refused to register said
second mortgage on the ground that it did not appear therein that the first
mortgagee, El Hogar Filipino, ever consented to the registration, in accordance
with the prohibiting clause of the mortgage previously recorded; and an
administrative proceeding having been instituted against the action of the
register of deeds, the trial court ruled that the validity or nullity of the
prohibiting clause in question must be litigated in an ordinary action.

The first mortgage having fallen due, according to the terms thereof, El
Hogar Filipino advertised the sale at public auction of the property mortgaged
and the plaintiff then brought this action, wherein it is prayed that the
prohibiting clause above mentioned be declared void, and a preliminary
injunction issued against the defendants, El Hogar Filipino and Salvador
Vallejo, their attorneys, agents and representatives and other persons acting on
their behalf, commanding them to abstain from carrying out the advertised sale
of the land in question.

The trial court, in view of the stipulation of facts, held that the
prohibition to register the second mortgage executed by the defendant Salvador
Vallejo is of no effect, and ordered the register of deeds of this city to
register the same, and declared, furthermore, the preliminary injunction
previously issued to be final.

From this judgment the defendant corporation, El Hogar Filipino, took an
appeal and assigned in its brief, as errors of the trial court, the following:
(1) The holding that the clause of the contract of mortgage wherein the debtor
binds himself not to create any subsequent real right in favor of a third person
is of no effect; (2) the finding as to the value of the property twice mortgaged
when no evidence was introduced as to what its value was; (3) the pronouncement
declaring the preliminary injunction final, whereby the foreclosure of the first
mortgage is prevented, notwithstanding the fact that it was due; and (4) the
failure to dismiss the complaint with the costs against the plaintiff.

In an old decision dated September 6, 1863, the supreme court of Spain held
that when a contract, whereby a thing is specially mortgaged, contains the
additional stipulation that the same should not be mortgaged for the second
time, a stipulation which is not contrary to law, the new encumbrance being
otherwise void, any other mortgage that may have been made upon the same
property can have no effect. This doctrine, however, was modified by the
Mortgage Law, which took effect in the Philippines on December 1, 1889, article
107, No. 4, of which provides:

“Art. 107. The following are mortgageable, but with such restrictions as are
hereinafter expressed:

*             *             *             *             *       
     *             *

“4. Property already mortgaged, even if it was agreed not to mortgage it
again, provided the preference is reserved which the creditors in whose favor
the prior mortgages are created have in the collection of their
loans.”

Galindo and Escosura,^[1] commenting on
this provision of the Mortgage Law which is the same as that in force in the
Peninsula, say:

“Doubt may be entertained as to whether or not subsection 2 of paragraph 4 of
article 107 is in force, which authorizes the mortgaging of a property already
mortgaged, although the previous mortgage was executed with the stipulation that
no subsequent mortgages should be made.

“In order to repeal our old civil law on this point which allowed said
stipulation (decision of February 6, 1863), the committee took into account that
‘it is an onerous condition that should not have any binding civil effect,
because it is devoid of any object, and unnecessarily, unjustly and without any
possible reason whatsoever diminishes the territorial credit, and rather than a
guaranty, it seems to be an exorbitant exaction made thru the painful situation
in which the owner may be found in certain cases.’ “

After the promulgation of the Civil Code, which recognizes in its article
1255 the absolute liberty of the contracting parties to make such stipulations
as they may deem fit, provided that they are not contrary to law, morals and
public order, there being no statute whatsoever prohibiting the stipulation in
question and the same not being immoral nor contrary to public order, it seems
that it must be given effect; but as article 1880 of the same Code provides that
the form, operation and effect of mortgages, as well as all matters relating to
their creation, modification and extinction and all other matters which
have not been included in Chapter 3, Title 15, Book 4, wherein nothing is said
as to said article 107, shall be subject to the provisions of the Mortgage Law,
it seems clear that as article 107, No. 4, of the Mortgage Law in effect,
restricts, to a certain extent, the liberty of the contracting parties to make
such stipulations as they may deem fit, said stipulation not to make any second
mortgage has no effect whatsoever under said article. It should be noted that
the Mortgage Law does not declare void the stipulation prohibiting a second
mortgage, but simply limits itself to permitting the registration of a second
mortgage upon the mortgaged property, where the first mortgage contains such a
stipulation. And it is for the purpose of giving effect to this legal provision
that article 1880 of the same Code’ declares that the form, operation and effect
of mortgages are subject to the provisions of the Mortgage Law.

But in the instant case, said article 107 of the Mortgage Law has no
application because this is a case of a property registered in accordance with
the Torrens system prescribed by Act No. 496, section 124 of which provides that
the system of registration established by the laws in force on the matter in the
Philippine Islands should continue to be applicable to properties not registered
in accordance with this law, with the modifications established therein. Nor can
said article 1880 of the Civil Code, giving effect to the provisions of the
Mortgage Law, be invoked. Therefore, the provision of article 1255 of the Civil
Code remains in force, which gives the contracting parties absolute liberty to
make such stipulations as they may deem fit, provided they are not contrary to
law, morals and public order; and there being no, law whatsoever prohibiting the
stipulation that no other mortgage should be made, and said stipulation not
being immoral, nor contrary to public order, we are of the opinion that such a
stipulation is valid and binding between the parties.

It is evident that the mortgagor may obtain subsequent loans by means of
subsequent and successive mortgages of his property, but when the debtor
voluntarily binds himself not to make any second mortgage without the consent of
the mortgagee, we see no reason whatsoever why said debtor should not be bound
to comply with all the conditions of the contract. As has been stated, article
107, No. 4, of the Mortgage Law not being applicable, which expressly permits
the registration of subsequent mortgages executed upon a real estate previously
mortgaged under the Mortgage Law, even if there is a stipulation that no other
mortgage should be made, there exists no law prohibiting such a stipulation and
the debtor, having agreed not to make any second mortgage without the consent of
the creditor, is bound thereby.

For all of the foregoing, the judgment appealed from must be, as is hereby,
reversed, the complaint herein is dismissed and the preliminary injunction
issued in this case is dissolved, without special finding as to costs in this
instance. So ordered.

Araullo, C.J., Johnson, Avanceña, and
Romualdez, JJ., concur.

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^[1] Legislacion Hipotecaria, vol. 3, p.
166.

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STREET, J.:

I dissent and am of the opinion that the
judgment should be affirmed.

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MALCOLM, J., with whom concurs JOHNS,
J.:

The court has heretofore gone far, and I say it with regret, in sanctioning
laws, pacts and clauses in documents intended to authorize unconscionable
advantages for creditors in their dealings with debtors, the latter many times
of the most ignorant class. It has reluctantly validated the iniquitous pacto
de retro. (Cuyugan vs. Santos [1916], 34 Phil., 100.) It has, against
the dissent of Justices Ostrand, Johns, and Malcolm, approved of private sales
at the option of the Philippine National Bank. (National Bank vs. De Poli
and Wise & Co., 44 Phil., 763.) It has, against the dissent of Justices
Johns and Malcolm, legalized, unconditionally, the power of sale in mortgages.
(El Hogar Filipino vs. Paredes, R. G. No. 19843.^[1]) It has, against the dissent of Justices
Street and Malcolm, permitted usurers to recover the principal of their loans.
(Go Chioco vs. Martinez, R. G. No. 19684, and Ortiga Hermanos vs.
Go Chioco, R. G. No. 19685.^[1]) And now,
carried along on the same current of authority, against the views of competent
judges of First Instance and to the detriment of the poorer strata of the
community, the court confirms clauses in a mortgage permitting of a private sale
by the mortgagor and denying to the mortgagee the right further to mortgage his
property. Although my dissent in similar cases has been of little avail, and wiH
again be of little weight, I feel it my duty to register my nonconformity.

The senior mortgage accomplished by Salvador Vallejo, running in favor of El
Hogar Filipino, contains two clauses reading as follows:

“Thirteenth.—It is agreed and stipulated that the borrower cannot
create any real right upon the mortgaged property in favor of a third party, nor
make, with regard to said realty, any contract of lease registerable in
accordance with law, or that the amount of rents for more than one month be paid
in advance, without previously obtaining the written consent of the partnership;
provided that any breach of the agreement contained in this clause will cause
the debt to become due at once and the partnership will have the right to
proceed with the collection thereof in the manner provided in the tenth clause
hereof.

“Tenth.—The borrower does hereby give and grant the manager of the
partnership sufficient and irrevocable power in case the debt hereby
acknowledged becomes due by reason of the borrower having failed to fulfill any
of the obligations mentioned in the second, fourth, fifth, eleventh, twelfth,
thirteenth, sixteenth, seventeenth and twentieth clauses hereof, and upon
a resolution being adopted by the Board of Directors declaring that the
partnership has elected to exercise its right to consider the debt of the
borrower to. have fallen due, and after publication of notices in a newspaper of
general circulation in this city, once a week during three successive weeks, to
proceed to sell extrajudicially and at public auction before a notary or an
auctioneer to be designated by the Board of Directors the realty hereby
mortgaged and the manager of the partnership acting at the time is likewise
authorized and given the irrevocable power to execute, as agent of the borrower,
the proper deed of sale in favor of the highest bidder, provided, however, that
said deed of sale shall not be executed except after the expiration of the
period of thirty days from the date of the auction and, provided further, that
if within the said period of thirty days from the date of the auction, the
borrower shall pay to the partnership the total amount of his debt at that time,
plus the interest due and the expenses occasioned by the auction sale, less the
withdrawing value of the shares, the auction sale shall become of no effect and
the corresponding deed of cancellation of the mortgage hereby made shall be
executed by the representative of the partnership, the expenses of the execution
of the document of cancellation to be for the account of the
borrower.”

The trial judge, the Honorable Simplicio del Rosario, held the clauses above
quoted invalid, and it is this decision which the court would now reverse.

Any contract which is contrary to law, morals or public policy is void. Any
contract which takes property without due process of law is likewise void. The
rights of the original mortgagee cannot be bartered away through an
extrajudicial sale. The rights of subsequent mortgagees cannot legally be
defeated by any arrangement between a prior mortgagee and the mortgagor, or by
any adjudication of their respective rights. A junior mortgagee cannot be
prejudiced in respect to. his security by an agreement of the debtor with the
senior lienor to which he is no party. Such undue interference with the rights
of ownership, such undue interference with the rights of creditors, such undue
interference with the rights of third parties cannot be countenanced without
violation of the most elementary principles of law and justice. (Civil Code,
arts. 4, 1115, 1255; 8 Manresa, Comentarios al Codigo Civil, p. 574; 3
Sanchez Roman, p. 807; 2 Jones on Mortgages, p. 125.)

I think sufficient has
been said to show the legal and ethical utenability of the stand of the court,
not alone in the instant case, but in a series of similar cases. I vote for the
affirmance of the judgment.

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^[1] Page 178, ante.

^[1] Page 256, ante.