MOBIL OIL PHILIPPINES, INC., PLAINTIFF-APPELLANT, VS. RUTH R. DIOCARES, ET AL., DEFENDANTS-APPELLEES.

Mobil Oil Philippines versus Diocares

The Case

This is a civil action for the collection of a loan and for the foreclosure of a real estate mortgage, brought by Mobil Oil Philippines against the spouses Ruth R. Diocares and Lope T. Diocares. The borrowers admitted the debt but the trial court refused to order foreclosure on the sole ground that the mortgage instrument had never been recorded in the Registry of Property. The case matters because the Supreme Court, speaking through Justice Fernando, resolves for the first time the effect of an unregistered mortgage as between the contracting parties themselves, and holds that the mortgage survives and may be foreclosed even without registration.

Procedural History

Mobil Oil sued the Diocares spouses in the Court of First Instance, attaching to its complaint the loan and real estate mortgage contract. The defendants filed an answer that admitted the material allegations of the complaint, and on motion of the plaintiff the trial court rendered judgment on the pleadings. In its order of February 25, 1966, the trial court ordered the defendants to pay the unpaid balance with interest, attorney's fees, and costs, but refused to decree foreclosure because the mortgage had not been registered. Mobil Oil appealed from that refusal, assigning as errors the holding that no real estate mortgage was established and the consequent denial of foreclosure. The appeal went directly to the Supreme Court, which reversed the trial court on the point of law raised.

Facts

On February 9, 1965, Ruth R. Diocares and Lope T. Diocares entered into a contract of loan and real estate mortgage with Mobil Oil Philippines. Under the contract, Mobil Oil extended a loan of 45,000 pesos, and the spouses bound themselves to buy their petroleum requirements from Mobil Oil on a cash basis in an amount of not less than 50,000 liters per month. They agreed to pay interest at nine and one half percent per annum on the diminishing balance of the loan, and to repay the loan in monthly installments of 950 pesos and 88 centavos over five years.

To secure these obligations, the spouses executed a first mortgage on two parcels of land covered by Transfer Certificates of Title issued by the Register of Deeds of Bacolod City. The agreement provided that upon failure to pay any installment or to purchase the minimum petroleum requirements, Mobil Oil could foreclose the mortgage or recover the entire obligation or its remaining unpaid balance, and that in case of foreclosure it would be entitled to twelve percent of the indebtedness as damages and attorney's fees.

The spouses paid only 1,901 pesos and 76 centavos, leaving a balance of 43,098 pesos and 24 centavos, exclusive of interest, and they failed to buy the minimum petroleum required. In their answer they admitted the indebtedness, denied any refusal to pay, and explained that they had sought an extension of time and a statement of accounts so they could pay on installment, which Mobil Oil declined. The mortgage instrument was admittedly never registered, and only the parties were involved in the suit.

Issues

• Whether or not a real estate mortgage that has not been recorded in the Registry of Property is nevertheless binding between the parties who executed it.
• Whether or not the mortgagee may validly foreclose such an unregistered mortgage when only the contracting parties are involved in the suit.

Applicable Provisions

Article 2125 of the New Civil Code provides:

In addition to the requisites stated in article 2085, it is indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties.

The second sentence is the very provision the trial court disregarded, and it is the textual basis for allowing foreclosure between the parties.

Article 1305 of the New Civil Code provides:

A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.

The Court invokes this definition to stress that the binding force of a promise underlies the mortgage even without the formality of registration.

Ruling

On the first issue, the Court held that the unregistered mortgage is binding between the parties. The codal provision, it said, is clear and explicit: even if the instrument were not recorded, the mortgage is nevertheless binding between the parties. The law cannot be any clearer, and effect must be given to it as written. The mortgage subsists and the parties are bound.

On the second issue, the Court held that foreclosure may be decreed. As between the parties, the mere fact that there is as yet no compliance with the requirement of recording cannot be a bar to foreclosure. A contrary conclusion would render the provision nugatory, which the Court is not allowed to do. The Court also drew on the Report of the Code Commission, which explained that an additional provision was made that if the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the parties, and it refused to adopt an interpretation that would frustrate that legislative objective. Equity demands the result, for there is full acknowledgment of the binding effect of a promise, which must be lived up to, otherwise the freedom of a contracting party becomes meaningless. The Court conceded that to allow foreclosure without the formality may seem to offend logic, since what is indispensable may be dispensed with, but answered that this would not be the first time logic yields to what is fair and just.

Doctrine

An unregistered real estate mortgage is still valid and binding between the parties who executed it, and may be foreclosed as between them. Registration is indispensable for the mortgage to be validly constituted against third persons, but its absence does not reduce the contract to a mere personal obligation. The rule is drawn directly from the second sentence of Article 2125, which the Court treats as clear and needing only application, not interpretation. The doctrine rests on the binding force of a promise recognized in Article 1305, and on the legislative purpose recorded in the Report of the Code Commission.

Disposition

The trial court's order was affirmed with modification: in default of payment of the amount due with interest, the mortgage is to be foreclosed, the mortgaged properties sold, and the proceeds applied to the amounts due the plaintiff, with costs against the defendants.

Remember This

Memorize the second sentence of Article 2125: if the instrument is not recorded, the mortgage is nevertheless binding between the parties. Examiners use this case to test the distinction between an unregistered mortgage as a personal obligation between the parties, which may be foreclosed, and its effect against third persons, which requires registration.