JOSE C. ZULUETA, PETITIONER, VS. HON. ANDRES REYES, JUDGE, COURT OF FIRST INSTANCE OF RIZAL, GOVERNMENT SERVICE INSURANCE SYSTEM (GSIS) AND PROVINCIAL SHERIFF OF RIZAL, RESPONDE…

Zulueta versus Reyes

The Case

This is a petition for certiorari, prohibition, and injunction filed by Jose C. Zulueta against the Court of First Instance of Rizal, the Government Service Insurance System, and the provincial sheriff of Rizal. Zulueta asks the Supreme Court to nullify the proceedings in the trial court and, specifically, the orders denying his application for a preliminary injunction and allowing the sheriff to proceed with the extra-judicial foreclosure of the real estate mortgages he constituted in favor of the Government Service Insurance System. The case matters because it fixes the standard for when a mortgagor in arrears may be foreclosed extra-judicially, and it teaches that a dispute over accounting does not by itself defeat a mortgagee's right to foreclose when the fact of non-payment of amortizations stands uncontested.

Procedural History

Zulueta filed a complaint for damages with preliminary injunction in the Court of First Instance of Rizal against the sheriff and the Government Service Insurance System. The trial court issued a temporary restraining order holding the scheduled auction sale in abeyance, then directed the accountants of both parties to sit together and make an accounting of Zulueta's obligation. The parties later submitted a joint manifestation containing their respective statements of accounts. In its order of July 13, 1963, the trial court denied Zulueta's application for preliminary injunction. Zulueta moved for reconsideration. In its order of August 8, 1963, the trial court denied the motion and directed the sheriff to proceed with the foreclosure, upon the posting of a bond by the Government Service Insurance System. The System posted a bond of 600,000 pesos, which the trial court approved in its order of August 23, 1963. Zulueta then came to the Supreme Court by the present petition for certiorari, prohibition, and injunction.

Facts

Zulueta obtained from the Government Service Insurance System five real estate loans under four separate mortgage contracts, in the total sum of 3,117,000 pesos. As security, he offered parcels of land in Pasig, Rizal, known as the Antonio Subdivision, and a parcel in Ermita, Manila, known as the Antonio Apartments, together with all existing and further improvements. The mortgage contracts uniformly provided that if the mortgagor should fail or refuse to pay any of the amortizations or the interest when due, then all the amortizations and other obligations would become due, payable, and defaulted, and the mortgagee could immediately foreclose judicially or extra-judicially. The contracts also required that all receipts from the sale of houses and lots in the Antonio Subdivision be assigned and made payable to the System, to be applied to the principal and interest until the loan was fully liquidated.

The amounts representing the first four loans were fully released. Of the fifth loan of 1,398,000 pesos, the sum of 960,439.46 pesos was released to Zulueta, and the System asserted that the balance of 437,249.54 pesos was released to his contractor, Llorente O. Yarisantos, pursuant to a resolution of the Board of Trustees adopted on September 25, 1957, which provided that releases on that loan be made in favor of Yarisantos as payment for advances made in payment of the cost of labor and materials used in the construction of houses in the subdivision.

From October 17, 1958 and thereafter up to March 19, 1962, the System made repeated demands upon Zulueta for payment of the arrearages and called his attention to his failure to remit the proceeds of the sale of units of the subdivision. On March 19, 1962, the System filed with the provincial sheriff a petition for extra-judicial foreclosure. To forestall the foreclosure, Zulueta requested a suspension of the sale for fifteen days and asked for another accounting, but the request was denied. He then filed the complaint for damages with preliminary injunction. In the joint manifestation, the System presented a statement of accounts as of December 31, 1962, showing total arrearages of 1,371,088.15 pesos, and Zulueta questioned certain items, namely the interest charged for partial releases before full release of each loan, the alleged arrears on the last loan, and the fire insurance premiums and surcharges.

Issues

• Whether or not the mortgage debt was already due and demandable despite the absence of a final accounting between the parties.
• Whether or not there was a valid demand by the Government Service Insurance System upon Zulueta to pay his mortgage debt, without which extra-judicial foreclosure cannot be had.
• Whether or not the foreclosure would amount to collecting a mortgage debt a large part of which had not yet been released to Zulueta.
• Whether or not the foreclosure would amount to collecting amounts Zulueta never contracted for, namely interest on partial releases, fire insurance premiums, and surcharges on those premiums.

Applicable Provisions

The mortgage contracts uniformly provided on the acceleration of the obligation and the right to foreclose:

That if the Mortgagor shall at any time fail or refuse to pay any of the amortizations on the indebtedness, or the interest when due, then all the amortizations and other obligations of the Mortgagor shall become due, payable, and defaulted and the Mortgagee may immediately foreclose this mortgage judicially or extra-judicially.

This clause is the contractual source of the System's right to foreclose extra-judicially upon Zulueta's failure to pay his amortizations.

The mortgage contracts also provided on the assignment of the proceeds of sales in the subdivision:

That all receipts from sale of houses and lots in the Antonio Subdivision shall be assigned in favor of and made payable to the System, to be applied in payment of the principal and interest on this loan until the same is fully liquidated which condition shall be embodied in all contracts to sell absolutely or otherwise of any of the houses and lots in said subdivision.

This condition explains why Zulueta's failure to remit the proceeds of sales was itself a breach of the mortgage contracts.

The promissory notes executed in connection with the loans provided on the acceleration of the unpaid balance:

In case of non-payment of any installment of the note and/or other notes executed by JOSE C. ZULUETA and SOLEDAD D. RAMOS in favor of the Government Service Insurance System when the same becomes due and payable, then the unpaid balance of this promissory note shall, at the option of the Government Service Insurance System, immediately become due and demandable, and if for the enforcement of the payment thereof the Government Service Insurance System shall bring an action in court and/or resort to extra-judicial foreclosure of the mortgage given as a security for the payment of this obligation, then we, JOSE C. ZULUETA and SOLEDAD D. RAMOS bind ourselves, JOINTLY, SEVERALLY, and SOLIDARILY, to pay attorney's fees as provided for in the mortgage contract in addition to the legal fees and other incidental expenses incurred thereof.

This stipulation confirms that upon non-payment, the unpaid balance became due and demandable at the option of the System, which could then resort to extra-judicial foreclosure.

Ruling

On the first issue, the Court held that the trial court did not err in deeming it unnecessary to resolve the issue of accounting. The trial court had directed the sheriff to proceed with the extra-judicial foreclosure based on violation of the mortgage contract resulting from non-payment of the amortization, which it found had not been contested. The Court agreed, because the fact of non-payment of amortizations stood uncontested, and the dispute over the correctness of certain items in the statement of accounts did not prevent the mortgagee from exercising its contractual right to foreclose.

On the second issue, the Court found that the System had made repeated demands upon Zulueta from October 17, 1958 up to March 19, 1962, warning him that his failure to settle his arrearages would be construed as the right of the System to proceed immediately with foreclosure in accordance with the terms and conditions of the mortgage contract. There was therefore a valid demand.

On the third issue, the Court held that the releases made to Yarisantos were above board. The releases were made and paid to suppliers of materials used in the construction of Zulueta's houses in the Antonio Subdivision, pursuant to the resolution of the Board of Trustees. Moreover, having charged them to the credit of his contractor Yarisantos, as evidenced by a statement of payments dated January 23, 1959, which significantly antedated his first letter of complaint dated April 23, 1959, Zulueta must be deemed to have ratified them, and is estopped from questioning their validity and regularity.

On the fourth issue, the Court likewise rejected Zulueta's objections to the interest on partial releases, the fire insurance premiums, and the surcharges, holding that these items did not defeat the System's right to foreclose.

Doctrine

A mortgagor's failure to pay the amortizations stipulated in the mortgage contract entitles the mortgagee to foreclose the mortgage judicially or extra-judicially, pursuant to the acceleration clause in the contract. A dispute over the correctness of an accounting does not by itself bar extra-judicial foreclosure when the fact of non-payment of amortizations is uncontested. A valid demand upon the mortgagor to pay the arrearages is a condition for extra-judicial foreclosure, and repeated demands warning of foreclosure satisfy this requirement. A mortgagor who charges to the credit of his contractor the releases made by the mortgagee is deemed to have ratified those releases and is estopped from questioning their validity and regularity.

Disposition

The Supreme Court denied the petition, thereby sustaining the orders of the trial court denying the preliminary injunction and allowing the extra-judicial foreclosure to proceed.

Remember This

The single line worth memorizing is that a dispute over accounting does not defeat the mortgagee's right to foreclose when the fact of non-payment of amortizations is uncontested. Examiners like to use this case to test the requisites of extra-judicial foreclosure, the effect of an acceleration clause, and the doctrine of estoppel by ratification of unauthorized releases.