FLORO MERCENE, PETITIONER, V. GOVERNMENT SERVICE INSURANCE SYSTEM, RESPONDENT.

Mercene versus Government Service Insurance System

The Case

This is a petition for review on certiorari filed by Floro Mercene against the Government Service Insurance System, or GSIS. Mercene sued to quiet title over his Quezon City land, asking the courts to cancel two real estate mortgages annotated on his certificate of title on the theory that GSIS had lost its right to foreclose by prescription. The case matters because it fixes the starting point of the prescriptive period for a mortgage action: not the date the loan or mortgage was executed, but the date the cause of action accrues, that is, when the obligation becomes due and demandable or when the creditor demands payment. It also teaches the pleading rule that a bare allegation of prescription is a conclusion of law, not an ultimate fact, and is not admitted by a failure to specifically deny.

Procedural History

Mercene filed a complaint for quieting of title before the Regional Trial Court of Quezon City. During pre-trial he manifested that he would move for judgment on the pleadings, and with no objection from GSIS the trial court granted the motion. The trial court ruled for Mercene, declared the two mortgages ineffective, and ordered the Registry of Deeds to cancel the annotations, holding that the right of GSIS as mortgagee had prescribed because more than ten years had lapsed from the accrual of the cause of action, and that prescription runs even against a juridical person with a separate personality and the power to sue and be sued.

GSIS appealed to the Court of Appeals, which reversed the trial court and dismissed the complaint. The appellate court held that prescription had not begun because the complaint alleged neither the maturity date of the loans nor any demand for payment, and that a cause of action on a written contract accrues only upon actual breach. Mercene moved for reconsideration, which was denied. He then elevated the matter to the Supreme Court by petition for review on certiorari.

Facts

On 19 January 1965, Floro Mercene obtained a loan from GSIS in the amount of 29,500 pesos. As security, he executed a real estate mortgage over his property in Quezon City, covered by Transfer Certificate of Title No. 90535. The mortgage was registered and annotated on the title on 24 March 1965.

On 14 May 1968, Mercene contracted a second loan with GSIS in the amount of 14,500 pesos, again secured by a real estate mortgage on the same parcel of land. The following day, the second loan was registered and duly annotated on the title.

On 11 June 2004, Mercene filed a complaint for quieting of title against GSIS. He alleged that from 1968 until the filing of the complaint, GSIS never exercised its rights as mortgagee; that the mortgages constituted a cloud on his title; and that the right of GSIS to foreclose had prescribed. GSIS answered that the complaint failed to state a cause of action and that prescription does not run against it because it is a government entity.

Issues

• Whether or not the Court of Appeals erred in considering issues not raised before the trial court.
• Whether or not the Court of Appeals erred in disregarding the judicial admission allegedly made by GSIS.
• Whether or not the Court of Appeals erred in ruling that the real estate mortgages had yet to prescribe.

Applicable Provisions

Article 1169 of the Civil Code provides:

Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: 1) When the obligation or the law expressly so declare; or 2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or 3) When the demand would be useless, as when the obligor has rendered it beyond his power to perform.

This provision supplies the test for when the mortgagor is in default, and therefore when the mortgagee's cause of action, and with it the prescriptive period, begins to run.

Rule 8, Sections 1 and 10 of the Rules of Court are invoked by the Court for the rule that only ultimate facts must be alleged in a pleading and only material allegations of fact need be specifically denied. The Court states the rule thus:

A pleading should state the ultimate facts essential to the rights of action or defense asserted, as distinguished from mere conclusions of fact, or conclusions of law. General allegations that a contract is valid or legal, or is just, fair and reasonable, are mere conclusions of law. Likewise, allegations that a contract is void, voidable, invalid, illegal, ultra vires, or against public policy, without stating facts showing its invalidity, are mere conclusions of law.

This bears on the second issue, because Mercene's allegation of prescription is a conclusion of law that GSIS was not bound to deny specifically.

Ruling

On the first issue, the Court held that the Court of Appeals did not err. The appellate court did not dwell on the question of nonpayment, which GSIS raised for the first time on appeal; it ruled instead that prescription had not commenced because the cause of action had not yet accrued, and that the complaint therefore failed to state a cause of action. That defense had been raised in the answer as an affirmative defense.

On the second issue, the Court agreed that material averments not specifically denied are deemed admitted, but held that Mercene's conclusion that GSIS judicially admitted prescription was erroneous. Conclusions of fact and law stated in a complaint are not deemed admitted by a failure to make a specific denial. The allegation of prescription is a mere conclusion of law. At the most, only the fact that GSIS had not commenced any action would be deemed admitted, and the circumstances to establish prescription against GSIS were not alleged with particularity.

On the third issue, the Court held that the Court of Appeals correctly ruled that the complaint failed to state a cause of action. Prescription of the right to foreclose is not reckoned from the date of execution of the contract. It commences from the time the cause of action accrues, that is, from the time the obligation becomes due and demandable, or upon demand by the creditor, as the case may be. The Court quoted its earlier ruling:

The prescriptive period neither runs from the date of the execution of a contract nor does the prescriptive period necessarily run on the date when the loan becomes due and demandable. Prescriptive period runs from the date of demand, subject to certain exceptions.

And further:

An action to enforce a right arising from a mortgage should be enforced within ten (10) years from the time the right of action accrues, i.e., when the mortgagor defaults in the payment of his obligation to the mortgagee; otherwise, it will be barred by prescription and the mortgagee will lose his rights under the mortgage.

Mercene's complaint stated only the dates when the loans were contracted and when the mortgages were annotated. It alleged neither the maturity date of the loans nor whether demand was necessary under their terms. The allegations were therefore insufficient to establish prescription, and the trial court erred in ruling that the right of GSIS to foreclose had prescribed.

Doctrine

First, the prescriptive period for an action to foreclose a real estate mortgage is ten years, counted not from the execution of the contract but from the accrual of the cause of action, that is, from the time the obligation becomes due and demandable, or from the time demand is made where demand is required under Article 1169 of the Civil Code.

Second, the mortgagor is in default only when the obligation is demandable and liquidated, the debtor delays performance, and the creditor demands performance judicially or extrajudicially, unless demand is unnecessary under the exceptions in Article 1169.

Third, a complaint for quieting of title based on prescription must allege the maturity date of the loan and whether demand was necessary; absent these ultimate facts, the complaint fails to state a cause of action.

Fourth, an allegation that an obligation has prescribed is a conclusion of law, not an ultimate fact, and is not deemed admitted by the failure to make a specific denial under Rule 8, Sections 1 and 10 of the Rules of Court.

Disposition

The petition was denied, and the decision and resolution of the Court of Appeals were affirmed in toto, so GSIS prevailed and the complaint for quieting of title was dismissed.

Remember This

The one line to memorize: the right to foreclose a mortgage prescribes in ten years from the accrual of the cause of action, not from the execution of the contract, and accrual means default, which requires that the obligation be due and demandable and that demand be made unless demand is unnecessary. Examiners use this case on the commencement of the prescriptive period for mortgage actions and on the pleading rule that prescription, alleged without supporting facts, is a mere conclusion of law that need not be specifically denied.