DEVELOPMENT BANK OF THE PHILIPPINES, PLAINTIFF-APPELLANT, VS. SPOUSES LORENZO YU AND VENGIE YU, DEFENDANTS-APPELLEES.

Development Bank of the Philippines versus Yu

The Case

This is a deficiency claim. The Development Bank of the Philippines, a government banking corporation, lent money to the spouses Lorenzo Yu and Vengie Yu, secured by a real estate mortgage. When the spouses defaulted, the bank extrajudicially foreclosed the mortgage, but the property sold at public auction for less than the debt, leaving a deficiency. The bank sued to recover that deficiency. The spouses resisted, arguing that the bank had forfeited its right because its representative failed to attend the auction and because the bank had withdrawn its appeal in an earlier case challenging the foreclosure. The case matters because it settles a question every secured-creditor problem turns on: does a mortgagee lose its right to sue for the unpaid balance simply because it did not bid at the auction sale? The Supreme Court answers no.

Procedural History

The bank filed its complaint for a deficiency claim before the Regional Trial Court, Branch 28 of Catbalogan, Samar. On May 31, 2007, the trial court ruled in favor of the bank, ordering the spouses to pay the deficiency of 757,026.69 pesos, exclusive of accrued interest and other charges, plus attorney's fees. The spouses moved for reconsideration. On September 12, 2007, the trial court granted the motion, reversed and set aside its own decision, and declared that the bank was not entitled to any deficiency claim. The bank then appealed directly to the Supreme Court, raising as errors the trial court's reconsideration and its denial of the deficiency claim.

Facts

In July 1997, the spouses Yu applied for and obtained a loan from the bank in the total amount of 900,000 pesos, evidenced by three promissory notes dated July 30, August 14, and August 21, 1997, and secured by a real estate mortgage over a parcel of land with improvements, covered by a transfer certificate of title.

The spouses failed to pay. Their obligation, including interests and penalties, reached 1,457,026.69 pesos. The bank applied for extrajudicial foreclosure on June 21, 1999. The public auction was scheduled for September 15, 1999, from nine in the morning to two in the afternoon. A single bidder, Mila Jardeleza, won, and the property was sold to her for 700,000 pesos, as shown by a sheriff's certificate of sale dated September 17, 1999. The bank's representative arrived only at 3:40 in the afternoon, well after the auction had closed, so the bank did not participate in the bidding.

Deducting the 700,000 pesos from the 1,457,026.69 pesos left a deficiency of 757,026.69 pesos. The bank demanded payment, and the spouses refused. Earlier, the bank had filed a separate complaint to annul the foreclosure and auction sale, but that case was dismissed on September 5, 2001, the trial court holding that the foreclosure was regular and that the bank's own representative's late arrival caused it to forfeit its right to take part. The bank appealed, then withdrew its appeal on October 8, 2002, making the dismissal final. The bank then filed this deficiency claim on August 13, 2003.

Issues

• Whether or not the bank may recover the deficiency of the spouses' outstanding obligation despite the extrajudicial foreclosure of the mortgaged property.
• Whether or not the bank's failure to participate in the public auction sale bars it from claiming the deficiency.
• Whether or not the bank's withdrawal of its appeal in the annulment of foreclosure case amounts to a waiver of its right to file a deficiency claim.

Applicable Provisions

Section 1 of Act Number 3135, as amended, provides:

SECTION 1. When a sale is made under a special power inserted in or attached to any real-estate mortgage hereafter made as security for the payment of money or the fulfillment of any other obligation, the provisions of the following election shall govern as to the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power.

This is the governing law on extrajudicial foreclosure, and the Court reads it as recognizing the creditor's right to foreclose and, on a deficiency, to recover the unpaid balance, since it contains no provision forbidding that recovery.

Ruling

The Court granted the appeal. On the first issue, it held that when the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure, the mortgagee is entitled to claim the deficiency from the debtor. Act Number 3135 does not discuss the right to recover a deficiency, but neither does it contain any provision expressly or impliedly prohibiting recovery. The Court reasoned that if the legislature had intended to deny the creditor that right, the law would expressly so provide. Absent such a provision, the creditor is not precluded from recovering the unpaid balance simply because it chose to extrajudicially foreclose.

On the second issue, the Court held that no condition or prohibition is set by law for a creditor to be entitled to file a deficiency claim. Nowhere does the law require the mortgagee to participate in the public auction, and non-participation in the bidding does not deny it the right to claim any deficiency. The law is permissive, not compulsory. The bank's representative's failure to attend the auction did not bar the claim, especially since the proceeds were significantly lower than the amount owed.

On the third issue, the Court held that while the bank could no longer pursue the validity of the foreclosure, since that had become final, this did not mean it had waived its right to file a deficiency claim on the difference. The withdrawal of the appeal did not extinguish the claim. The Court found the trial court seriously erred in granting the motion for reconsideration and denying the bank its right to claim the deficiency.

Doctrine

A Bar candidate should retain these rules. First, in an extrajudicial foreclosure under Act Number 3135, where the proceeds of the sale are insufficient to cover the debt, the mortgagee has the right to recover the deficiency from the debtor. Second, Act Number 3135 contains no provision, express or implied, prohibiting that recovery; had the legislature intended to deny it, the law would expressly so provide. Third, the creditor is not required to participate in the public auction, and its failure to bid does not waive its right to claim the deficiency. Fourth, the finality of a ruling upholding the regularity of the foreclosure does not bar a later deficiency claim, because the two are distinct matters.

Disposition

The Supreme Court granted the appeal, reversed and set aside the trial court's order of September 12, 2007, and reinstated its decision of May 31, 2007 awarding the bank the deficiency of 757,026.69 pesos.

Remember This

The one line to memorize: a mortgagee who does not bid at the auction sale does not lose the right to recover the deficiency, because Act Number 3135 neither requires participation nor prohibits recovery. Examiners use this case to test the distinction between the finality of a foreclosure's validity and the separate right to sue for the unpaid balance.