SPOUSES EPIFANIO PEDARSE & ELINA PEDARSE, PLAINTIFFS-APPELLEES, VS. MARILOU B. YU, DEFENDANT-APPELLANT.

Pedarse versus Yu

The Case

This is a case about a mortgage that was foreclosed when, by the creditor's own receipt, nothing remained to be collected. Spouses Epifanio and Elina Pedarse borrowed money from Marilou Yu and signed a Kasulatan ng Pagkakautang na may Sanla, a promissory note with mortgage, over their land in Plaridel, Bulacan. When Yu later moved to sell the land at public auction, the spouses sued in the Regional Trial Court of Malolos to annul the foreclosure, claiming they had already paid. The case matters for three reasons a reviewee should carry into the examination room: it shows that a real estate mortgage is a mere accessory contract that rises or falls with the principal obligation; it shows that a notarized document does not enjoy an irrebuttable presumption of regularity; and it shows that the statutory requirement of a special power to foreclose extrajudicially cannot be supplied by general words.

Procedural History

The spouses filed a complaint for nullification of the extrajudicial foreclosure of real estate mortgage, with damages and injunction, before the Regional Trial Court of Malolos, Bulacan, Branch 22. They asked that the auction sale scheduled for March 21, 2006 be restrained. The court set a summary hearing on the temporary restraining order, but the matter became moot when the auction proceeded and the property was sold to Yu. After trial, the Regional Trial Court ruled for the spouses. It held that the foreclosure had no basis in law and in fact, that the mortgage contract contained no special power of attorney authorizing foreclosure, and that the secured obligation had already been paid. It annulled the foreclosure, awarded 100,000 pesos in moral damages, and awarded 30,000 pesos in attorney's fees. Yu appealed, assigning four errors: the imposition of five percent monthly interest, the finding of payment, the validity of the extrajudicial foreclosure, and the propriety of the damages and attorney's fees. The appeal reached the Supreme Court, which denied it and affirmed the trial court with modification.

Facts

On November 19, 2003, the Pedarse spouses obtained a loan of 100,000 pesos from Marilou Yu, evidenced by the Kasulatan ng Pagkakautang na may Sanla. By that instrument they mortgaged a parcel of land covered by a transfer certificate of title in Tabang, Plaridel, Bulacan, to secure the loan.

On March 13, 2004, Yu signed an acknowledgment receipt showing that she had received 103,785 pesos from the spouses on February 26, 2004. When shown the receipt at trial, she admitted receiving the amount, but claimed it was applied to other loans of the spouses.

On March 13, 2006, the spouses were notified of an auction sale of the mortgaged property. Three days later they filed their complaint, alleging payment and alleging that Yu had no authority to foreclose extrajudicially. The auction nonetheless went forward on March 21, 2006, and the property was sold to Yu. At trial, Yu's testimony on how the 103,785 pesos was applied shifted repeatedly: at first to three debts of 60,000, 30,000, and 10,000 pesos, then to a single debt contracted back in 2002, and at another point she treated the amount as owing under the very Kasulatan being foreclosed. She produced no payment records, although she was engaged in the lending business.

Issues

• Whether or not the loan obligation covered by the Kasulatan is subject to five percent interest per month.
• Whether or not the debt secured by the mortgaged property has already been paid.
• Whether or not the extrajudicial foreclosure of the mortgaged property is valid and proper.
• Whether or not the award of moral damages and attorney's fees is proper and reasonable.

Applicable Provisions

The decision quotes the stipulation of the Kasulatan on which Yu relied as her authority to foreclose:

Na ang nasabing pagkakautang ay babayaran sa loob ng 6 na buwan simula sa pagkagawa ng kasulatang ito at pawawalan ng bisa ang nasabing pagkakautang kung ito ay mababayaran sa loob ng takdang panahon, ngunit kung hindi ang kasulatang ito ay patutupad sangayon sa umiiral na batas ng sanlaan.

This is the clause Yu invoked as a special power to sell the property on default, and the Court held it insufficient for that purpose.

On attorney's fees, the decision refers to the exceptions in Article 2208 of the Civil Code, which the trial court had invoked:

When the defendant's act or omission has compelled plaintiff to litigate with third persons or to incur expenses to protect his interest.

The Court held that a bare recital of this ground, without factual basis, cannot justify an award.

Ruling

On the first issue, the Court held that the five percent monthly interest provision is not binding. Comparing the Kasulatan with the other loan documents between the same parties, it found the interest clause set in a different font and placed at the very end of the substantive provisions, whereas in the other instruments interest appeared immediately after the principal amount. From these discrepancies the Court concluded that the clause was superimposed, inserted by Yu as an afterthought without being mutually agreed upon. Yu's reliance on the notarial character of the Kasulatan failed: a public document enjoys a presumption of regularity, but its probative weight must be weighed with the rest of the evidence, and the irregularities here were too overwhelming to be brushed aside.

On the second issue, the Court held that the obligation had been paid. A mortgage is an ancillary contract, so the threshold question is whether the principal obligation survives. Once the debtor introduces evidence of extinguishment, the burden shifts to the creditor to explain why payment did not extinguish the debt. Yu admitted receiving 103,785 pesos, yet her testimony on its application was riddled with inconsistencies, and as a person in the lending business she could easily have produced records. She failed to establish her defense.

On the third issue, the Court held the foreclosure improper. The clause quoted above does not constitute the special power authorizing the mortgagee to foreclose extrajudicially upon non-payment. Foreclosure is proper only if the debtor is in default, and here there was no default because the debt had been paid.

On the fourth issue, the Court sustained moral damages but reduced them to 60,000 pesos as more commensurate with the trouble the spouses endured in defending their property, finding Epifanio Pedarse's testimony that the foreclosure affected his work and his feelings sufficient. It deleted the attorney's fees, because such an award is the exception rather than the general rule and requires a compelling legal reason within the exceptions of Article 2208, which the trial court's mere repetition of the statutory words did not supply.

Doctrine

• A real estate mortgage is an accessory contract; when the principal obligation is extinguished by payment, the mortgage falls with it, and no foreclosure can validly proceed.
• Foreclosure is proper only if the debtor is in default in the payment of the obligation.
• When the debtor presents evidence that the obligation has been extinguished, the burden shifts to the creditor to produce evidence showing why payment did not extinguish it.
• A notarized document enjoys a presumption of regularity, but that presumption is rebuttable and must be evaluated together with the other evidence; a superimposed or intercalated clause is not binding on the debtor.
• General words in a mortgage instrument, such as a promise to enforce it under the existing law on pledges, do not amount to the special power required to authorize extrajudicial foreclosure.
• Moral damages require pleading and proof of moral suffering, mental anguish, or fright; attorney's fees are the exception, not the rule, and must be justified by a compelling legal reason within the exceptions of Article 2208 of the Civil Code.

Disposition

The appeal was denied; the trial court's decision was affirmed with modification, reducing the moral damages to 60,000 pesos and deleting the award of attorney's fees.

Remember This

Memorize this line: a mortgage is an accessory contract, so payment of the principal obligation extinguishes the mortgage and forecloses the foreclosure. Examiners use this case to test the burden of proof on payment, the rebuttability of the presumption favoring notarized documents, the special power needed for extrajudicial foreclosure, and the strict standards for awarding attorney's fees.