PHILIPPINE NATIONAL BANK, PETITIONER, VS. HON. RUSTICO DE LOS REYES, AMANDO ARANA AND JULIA REYES, RESPONDENTS.

Assailed in this petition for review on certiorari are (1)
the decision^[1]
of the then Court of First Instance of Sorsogon,
Branch I, dated May 11, 1976 in Civil Case No. 2677, entitled “Amando Arana, et al. vs.
Philippine National Bank,” and Special Proceeding No. 2679, entitled
“Philippine National Bank, Petitioner-Appellant, Re:  Properties of Spouses Amando
Arana and Julia Reyes;” and (2) the resolution^[2]
of the same court, dated January 17, 1977, denying petitioner’s motion for
reconsideration of said decision.

The records show that on August
30, 1966, respondent spouses mortgaged six (6) parcels of land
located at Cantilla, Sorsogon
to petitioner bank (PNB) to secure the payment of a loan of P10,000.00.  Two (2) of
the six (6) parcels of land are covered by free patent titles while the other
four (4) are untitled and covered only by tax declarations.

For failure of respondent spouses to pay the loan after its
maturity, petitioner bank, pursuant to a special power of attorney in the
mortgage deed, effected the extrajudicial foreclosure of the mortgage under Act
No. 3135, as amended, and purchased the same at public auction for P12,735.30 which amount included the expenses of sale, interest
and attorney’s fees.  The certificate of
sale, dated July 1, 1969,
was duly registered with the Register of Deeds on July 8, 1970.^[3]

After the one-year redemption period provided in said law expired
without respondent spouses having exercised their right of redemption,
petitioner executed and registered an affidavit of consolidation of ownership
over the six (6) parcels of land on July 9, 1970 and new titles were issued in
its name for the two (2) parcels covered by free patent titles and the
corresponding tax declarations for the four (4) parcels were placed in its
name.^[4]

On May 12, 1971,
Jose Barrameda, then the manager of petitioner’s Sorsogon Branch, sent a letter to respondent spouses
informing them of the consolidation of title and inviting them to repurchase
the lands not later than June 15, 1971.  Respondent spouses replied on October 28, 1971 through a letter
written and signed by Alejandro Liadones, Municipal
Mayor of Castilla, Sorsogon,
requesting petitioner to extend the period of
repurchase to November 5, 1971.  On December
19, 1971, petitioner sent another letter to respondent spouses
reminding them of the projected repurchase and informing them that petitioner
would take actual possession of the lands unless the repurchase would be
effected on or before November 30,
1971.^[5]

On May 9, 1972,
petitioner entered into a contract to sell the six (6) parcels of land to one
Gerardo Badong for P27,000.00,
with P5,400.00 as down payment upon the execution of the contract.  Petitioner informed respondent spouses of the
transaction in a letter dated May 31,
1972.^[6]

On July 12, 1972,
respondent spouses instituted Civil Case No. 2677 for legal redemption of the
six (6) parcels of land, invoking Section 119 of the Public Land Act, with
damages.^[7]
Petitioner filed its answer on August
15, 1972, conceding to respondent spouses the right to repurchase
the two (2) parcels of land covered by free patent titles, but refused the
redemption of the other four (4) lots covered by tax declarations.^[8]

Gerardo Badong, on the other hand,
could not take possession of the two lots covered by Tax Declarations Nos. 7245
and 7246 (formerly Tax Declarations Nos. 5824 and 5825) as respondent spouses
refused to surrender possession of the premises, and he forthwith informed
petitioner of such fact in a letter dated July 3, 1972.  On July
24, 1972, petitioner filed an ex parte
petition in Special Proceeding No. 2679 for the issuance of a writ of
possession over the aforesaid two (2) lots, which writ was granted by the court
in its order of July 27, 1972.^[9]

The trial court noted in its decision in Civil Case No. 2677 that
when the aforesaid order was issued, said case had already been filed on July
12, 1972 by Amando Arana
and his wife, Julia Reyes.

Due to the refusal of respondent spouses to relinquish possession
of the two (2) lots in defiance of the writ of possession issued by the court,
petitioner filed in Special Proceeding No. 2679 a motion to have respondent
spouses cited for contempt of court.^[10]

Civil Case No. 2677 and the motion to cite respondent spouses for
contempt of court in Special Proceeding No. 2679 were heard jointly by
agreement of the parties.  At the pre­-trial
thereof on December 27,1973, the parties stipulated as follows:

“1.  That parcels 1 and 2 in the complaint
are titled lands and bear Free Patent Titles P-123 and P-130;

“2.  That parcels 3, 4, 5, and 6 are not
titled but plaintiffs have filed the proper application for the issuance of
free patent titles to the lands;

“3.  That the Philippine National Bank
instituted extrajudicial foreclosure proceedings against the lands upon failure
of the plaintiffs to redeem the original mortgage in the sum of P10,000.00 and
that at the time of foreclosure the claim of the bank was P12,735.30;

“4.  That there was no judicial
confirmation of the consolidation of title in favor of the bank;

“5.  That the plaintiffs deposited the sum
of P12,500.00 on account of the redemption with the Legaspi
Branch of the Philippine National Bank which deposit is intended for the Sorsogon Branch;

“6.  That the Philippine National Bank is
willing to have the two parcels of titled land redeemed but not the untitled
parcels.  Plaintiff’s counsel advanced
the view that the mortgage is indivisible and therefore the plaintiffs have the
right to redeem all the parcels, the titled as well as the untitled.”^[11]

It further appears that during the pendency
of the suit, private respondents deposited the sum of P12,500.00
with the clerk of court of the trial court.^[12]

After trial on the merits, the lower court rendered its aforesaid
decision of May 11, 1976
holding that respondent spouses are entitled to redeem the six (6) parcels of
land on the theory of “indivisibility of mortgage” and dismissing the
petition in Special Proceeding No. 2679 to declare the respondent spouses in
contempt of court.  The dispositive portion of said decision reads as follows:

“WHEREFORE, in view of the foregoing considerations, judgment
is hereby rendered as follows:

“a- In CIVIL CASE NO. 2677 the Court
finds that the plaintiff (sic) have the right to redeem the six (6) parcels of
land which are the subject of the original contract of mortgage for the sum of
TWELVE THOUSAND SEVEN HUNDRED THIRTY FIVE PESOS AND THIRTY CENTAVOS
(P12,735.30).  The plaintiffs having
already deposited the sum of TWELVE THOUSAND FIVE HUNDRED PESOS (P12,500.00) with the Legaspi Branch
of the Bank on account of the redemption, the deficiency shall be paid and upon
receipt of payment, the Bank is directed to execute a release of mortgage in
favor of the plaintiffs;

“b- The contract of promise to sell executed between the Bank
and Gerardo Badong is rescinded and cancelled and the
Bank is directed to return the amount paid by Badong
on the contract without interest.  Both
defendants are also ordered to turn over the possession of the parcels of land
of about four (4) hectares now in their possession to the plaintiffs;

“c- In SPECIAL PROCEEDING NO. 2679,
the petition to declare the respondents in contempt of court is dismissed;

“d- Without pronouncement as to costs in
both instances.”^[13]

Acting on petitioner’s motion of May 27, 1976 for the
reconsideration of said decision, the lower court issued its challenged
resolution of January 17, 1977 modifying the ratio decidendi
of its decision by ruling that the applicability of the doctrine of
“indivisibility of mortgage” was deemed to have been waived by
petitioner when it agreed to the redemption of the two (2) titled lots, and
holding that the period of redemption for the four (4) untitled parcels of land
is one (1) year, not five (5) years. 
However, it allowed the redemption of said four (4) lots for reasons of
equity.^[14]

Considering that the disputed issues raised by the parties
involve only questions of law, a direct appeal by certiorari was made to
this Court.  Thereafter, in a resolution
dated March 24, 1980, the
Court considered the case submitted for decision without respondents’ brief for
failure of the latter to file the same within the required period.^[15]

On its part, petitioner’s assignment of errors faults the court a
quo for holding that respondent spouses are entitled to redeem the four
(4) parcels of land not covered by free patent upon a so-called “equitable
ground,” that in the foreclosure of mortgage under Act No. 3135, as
amended, judicial confirmation of the sale is necessary to vest in the
purchaser absolute ownership and the corollary right to take actual possession
of the foreclosed property; and that the issuance of a writ of possession ex
parte is null and void as violative
of due process.^[16]

Petitioner accedes to the redemption by respondents of the two
(2) parcels covered by free patent titles, pursuant to the provisions of the
Public Land Act, the period of five (5) years after the grant of the patents
not having expired.  This is correct
since pursuant to Section 119 of Commonwealth Act No. 141, the Public Land Act
which is the applicable law in this case, the mortgagor had five (5) years from
the date of conveyance within which to redeem the property.^[17]
It is not even necessary for the preservation of such right to repurchase to
make an offer to redeem, or tender payment of the purchase price within said
period of five (5) years.  The filing of
an action to redeem within that period is equivalent to a formal offer to
redeem.  There is not even a need for the
consignation of the redemption price.^[18]

Petitioner, however, denies such right to redeem in the case of
the four (4) untitled parcels due to the failure of private respondents to effect the redemption within the period of one (1) year
after the auction sale.  This contention
is premised on the theory that private respondents had only one (1) year from
the foreclosure sale to redeem the untitled properties, pursuant to Section 6
of Act No. 3135, as amended by Act No. 4118, and Section 20 of the PNB charter,
Republic Act No. 4300, as amended.

Upon the other hand, the theory of private respondents is that
the mortgage is indivisible, hence the right to redeem
the titled parcels necessarily includes the untitled ones.  They further contend that having applied for
the issuance of free patents on the four (4) untitled parcels of land which
applications were then pending consideration in the Bureau of Lands, the
five-year period in the Public Land Act also applies to these particular
parcels.

The parties were accordingly embroiled in a hermeneutic disparity
on their aforesaid contending positions. 
Yet, the rule on the indivisibility of mortgage finds no application to
the case at bar.  The particular
provision of the Civil Code referred to provides:

“Art. 2089.  A pledge or
mortgage is indivisible, even though the debt may be divided among the
successors in interest of the debtor or of the creditor.

“Therefore, the debtor’s heir who has paid a part of the debt
cannot ask for the proportionate extinguishment of the pledge or mortgage as
long as the debt is not completely satisfied.

“Neither can the creditor’s heir who received his share of the
debt return the pledge or cancel the mortgage, to the prejudice of the other
heirs who have not been paid.

“From these provisions is excepted
the case in which, there being several things given in mortgage or pledge, each
one of these guarantees only a determinate portion of the credit.

“The debtor, in this case, shall have a right to the
extinguishment of the pledge or mortgage as the portion of the debt for which
each thing is specially answerable is satisfied.”

From the foregoing, it is apparent that what the law proscribes
is the foreclosure of only a portion of the property or a number of the several
properties mortgaged corresponding to the unpaid portion of the debt where
before foreclosure proceedings partial payment was made by the debtor on his
total outstanding loan or obligation. 
This also means that the debtor cannot ask for the release of any
portion of the mortgaged property or of one or some of the several lots
mortgaged unless and until the loan thus secured has been fully paid,
notwithstanding the fact that there has been a partial fulfillment of the
obligation.  Hence, it is provided that
the debtor who has paid a part of the debt cannot ask for the proportionate
extinguishment of the mortgage as long as the debt is not completely satisfied.^[19]

That the situation obtaining in the case at bar is not within the
purview of the aforesaid rule on indivisibility is obvious since the aggregate
number of the lots which comprise the collaterals for the mortgage had already
been foreclosed and sold at public auction. 
There is no partial payment nor partial
extinguishment of the obligation to speak of. 
The aforesaid doctrine, which is actually intended for the protection of
the mortgagee, specifically refers to the release of the mortgage which secures
the satisfaction of the indebtedness and naturally presupposes that the
mortgage is existing. 
Once the mortgage is extinguished by a complete foreclosure thereof,
said doctrine of indivisibility ceases to apply since, with the full payment of
the debt, there is nothing more to secure.

Neither does the instant case fall within the exception
contemplated in the last two paragraphs of Article 2089 in which, there being
several things given in mortgage, each of them guarantees only a determinate
portion of the account.  There is no
proof or any averment to that effect.

Noteworthy, however, is an overriding consideration that should
not be overlooked in the solution of this dispute.  It is admitted that applications for free
patent covering the four (4) unregistered parcels of land had been filed by
respondent spouses, and were then still pending action, which thus gives rise
to the admission that said properties involved in the aforestated
cases were public lands.^[20]
This presumption was never rebutted by petitioner.  Hence, the right of petitioner to foreclose
its mortgage on the subject properties virtually depends on whether the deed of
mortgage is at all valid and enforceable since the four (4) lots mortgaged
apparently still formed part of the public domain when the mortgage thereon was
constituted.

It is an essential requisite to the validity of a mortgage that
the mortgagor be the absolute owner of the property mortgaged.^[21]
Consequently, private respondents, not being owners as yet of the subject lots
when the same were supposedly mortgaged, they could not have validly made any
disposition of or created an encumbrance on said four (4) lots to which they
had neither title nor any vested right. 
At most, what they had was a mere right of expectancy dependent on the
continuance of the circumstances then existing or a contingent right dependent
on the performance of some conditions,^[22]
but which could not be the proper object of a valid mortgage contract.  Since the mortgage is absolutely null and
void and ineffective from its inception, petitioner, as mortgagee, acquires no
better rights, the registration of the mortgage notwithstanding.^[23]
Nor would the subsequent acquisition by the mortgagor of title over said
properties through the issuance of free patents thereover
validate and legalize the mortgage thereon under the doctrine of estoppel,^[24]
since upon the issuance of said patents, the lots in question are thereby
brought under the operation of the Public Land Act which prohibits the taking
of said properties for the satisfaction of debts contracted prior to the
expiration of five (5) years from the date of the issuance of the patents.^[25]

Consequently, there was no need for private respondents to
repurchase the four (4) parcels from petitioner.  That aspect of the case actually calls for
mutual restitution as an equitable remedy, especially since the records before
us are barren of the factual background, or the mode of acquisition by
petitioners, of their possession of said lots and the circumstances under which
the mortgage in question was arranged between the parties.  Therefore, incident to the nullity ab initio of the
mortgage,^[26]
mutual restitution by the parties of what they had respectively received from
each other under the contract in connection with the four (4) lots must be made
and is hereby ordered to be effected by them.

While the law bars recovery in a case where the object of the
contract is contrary to law and one or both parties acted in bad faith, we
cannot here apply the doctrine of in pari
delicto^[27]
which admits of an exception, namely, that when the contract is merely
prohibited by law, not illegal per se, and the prohibition is
designed for the protection of the party seeking to recover, he is entitled to
the relief prayed for whenever public policy is enhanced thereby.^[28]
Under the Public Land Act, the prohibition to alienate is predicated on the
fundamental policy of the State to preserve and keep in the family of the
homesteader that portion of public land which the State has gratuitously given
to him,^[29]
and recovery is allowed even where the land acquired under the Public Land Act
was sold and not merely encumbered, within the prohibited period.^[30]
This is without prejudice to such appropriate action as the Government may take
should it find that violations of the public land laws were committed or
involved in said transaction and sanctions are in order.

WHEREFORE, under the considerations as amplified above and
with the modification with respect to the four (4) parcels of land not covered
by free patent titles, the proper disposition whereof we have hereinbefore
directed, the judgment appealed from is AFFIRMED.

SO ORDERED.

Paras, Padilla, and Sarmiento, JJ., concur.

Melencio-Herrera, J., (Chairman), on leave.

^[1] Penned by Judge Feliciano S. Gonzales; Annex E, Petition; Rollo, 83.

^[2]
Penned by Judge Rustico de los
Reyes; Annex G, id.; ibid.,
103.

^[3] Rollo, 51-52.

^[4] Ibid., 84.

^[5] Ibid., 84-85.

^[6] Ibid., id.

^[7]
Annex A, Petition; Rollo, 71.

^[8] Annex
B, id.; ibid., 76.

^[9] Rollo,
85.

^[10]
Annex C, Petition; Rollo, 79.

^[11] Rollo, 85-86.

^[12] Ibid., 90.

^[13] Ibid., 91-92.

^[14]
Annex F, Petition; Rollo 93-102.

^[15] Rollo,
173.

^[16] Brief for Petitioner, 1-2.

^[17] Cassion, et al. vs.
Banco Nacional Filipino, et
al., 89 Phil. 560 (1951); Manuel vs. Philippine National Bank, et al.,
101 Phil. 968 (1957).

^[18] Rosales vs. Reyes, et al., 25 Phil. 495 (1913); Gonzaga vs. Go, 69 Phil. 678 (1940); Torio vs. Rosario, 93 Phil. 801 (1953).

^[19]
See Gonzales, et al. vs. Government Service Insurance Systems, et al.,
107 SCRA 492 (1981); Philippine National Bank vs. Amores,
et al., 155 SCRA 445 (1987).

^[20] Arnido vs.
Francisco, 95 Phil. 371 (1954).

^[21]
Art. 2085 (2), Civil Code.

^[22] Balboa vs. Farrales, 51 Phil. 498
(1928).

^[23] Parqui vs.
Philippine National Bank, 96 Phil. 157 (1954).

^[24]
Art. 1434, Civil Code.

^[25]
Sec. 118, Commonwealth Act No. 141.

^[26] Vda. de Bautista vs. Marcos, et al., 3 SCRA 434 (1961).

^[27]
Art. 1412, Civil Code.

^[28]
Art. 1416, id.

^[29] Pascua vs.
Talens, 80 Phil. 792 (1949).

^[30] De los Santos vs.
Roman Catholic Church of Midsayap, et al., 94 Phil.
405 (1954); Ras vs. Sua,
et al., 25 SCRA 153 (1968).