The Perils of Partial Mortgage Release: Why All Mortgagees Must Sign

In the Philippines, securing a loan often involves mortgaging property. But what happens when multiple lenders are involved, and one decides to release their claim? This Supreme Court case highlights a crucial lesson: a release of mortgage is only effective if signed by all mortgagees, especially in joint or pari-passu mortgage agreements. Ignoring this can lead to unexpected foreclosures and legal battles. This case serves as a stark reminder for borrowers and lenders alike to ensure clarity and completeness in mortgage documentation and release processes.

G.R. No. 127682, April 24, 1998

INTRODUCTION

Imagine a business owner breathing a sigh of relief after settling a loan, only to find their property unexpectedly foreclosed upon. This isn’t a hypothetical nightmare; it’s the reality Komatsu Industries faced in this pivotal Philippine Supreme Court case. At the heart of the dispute lies a seemingly simple error: a Deed of Release for a mortgage signed by only one of two joint mortgagees. This case underscores the critical importance of understanding the nuances of mortgage agreements, particularly when multiple creditors are involved. The central legal question: Can a release of mortgage by one joint mortgagee bind all, effectively preventing foreclosure by the other?

LEGAL CONTEXT: JOINT MORTGAGES AND THE REQUIREMENT OF CONSENT

Philippine law recognizes the concept of a mortgage as indivisible, meaning that even partial payment of debt doesn’t automatically release the entire mortgage. This principle is enshrined in Article 2089 of the Civil Code, stating that “A pledge or mortgage is indivisible.” This indivisibility extends to cases involving multiple creditors or mortgagees. When a property is mortgaged to secure obligations to multiple creditors, often under a ‘pari-passu’ arrangement (meaning they share equal priority), the consent of all mortgagees is generally required for any action affecting the mortgage, including its release.

Article 1311 of the Civil Code further reinforces this, emphasizing the principle of relativity of contracts: “Contracts take effect only between the parties, their assigns and heirs…” This principle dictates that a contract, like a Deed of Release, cannot bind or prejudice someone who is not a party to it. In the context of joint mortgages, this means a release signed by only one mortgagee should not automatically extinguish the rights of the other mortgagee.

The Supreme Court, in numerous cases, has consistently upheld the sanctity of contracts and the principle of relativity. This case provides another illustration of how these fundamental principles apply to real-world scenarios, especially in complex financial transactions like mortgage agreements.

CASE BREAKDOWN: KOMATSU INDUSTRIES VS. PNB & SANTIAGO LAND DEVELOPMENT CORP.

The story begins in 1975 when Komatsu Industries (Philippines) Inc. (KIPI) secured loans from the National Investment and Development Corporation (NIDC) and a guarantee to secure a credit line with the Philippine National Bank (PNB). As security, KIPI mortgaged a parcel of land in favor of NIDC. Later, to secure a deferred letter of credit from PNB, KIPI executed an Amendment of Mortgage Deed in 1978, including PNB as a joint mortgagee on a pari-passu basis with NIDC over the same property.

Years later, in 1981, after KIPI believed it had fully settled its obligations, NIDC executed a Deed of Release and Cancellation of Mortgage. Crucially, PNB was not a signatory to this release. However, PNB later discovered outstanding obligations from deferred letters of credit dating back to the 1970s. Upon realizing the ‘erroneous cancellation’ of their mortgage due to the NIDC release, PNB requested KIPI to return the title for re-annotation of their mortgage. When KIPI didn’t comply, PNB initiated extrajudicial foreclosure proceedings in 1983.

Here’s a breakdown of the procedural journey:

1. **Trial Court (Regional Trial Court):** Ruled in favor of Komatsu, declaring the foreclosure invalid. The trial court reasoned that the Deed of Release by NIDC effectively released the entire mortgage, including PNB’s interest, and that PNB recognized this release.
2. **Court of Appeals:** Reversed the trial court’s decision, upholding the validity of the foreclosure. The CA emphasized that the Deed of Release was only between NIDC and KIPI and did not bind PNB, which was a separate entity and a joint mortgagee. The CA also highlighted the indivisibility of the mortgage.
3. **Supreme Court:** Denied Komatsu’s petition for review, affirming the Court of Appeals’ decision. The Supreme Court, in its resolution, reiterated the principle of relativity of contracts and the indivisibility of mortgages. The Court stated that a release by NIDC alone could not extinguish PNB’s rights as a joint mortgagee.

The Supreme Court’s resolution succinctly captured the core issue:

“Said “Deed of Release” is not binding upon the appellant Philippine National Bank which was not a signatory to it and has not ratified the same.“

Further emphasizing the indivisibility of the mortgage, the Court quoted the Court of Appeals’ decision:

“A mortgage is indivisible in nature, so that payment of a part of the secured debt does not extinguish the entire mortgage… The mortgage instrument contemplated not only obligations existing on the date thereof, but also future obligations or accommodations appearing in the respective Books of Account of NIDC and PNB, thus rendering it unlikely and impractical for the parties to have intended a division of the mortgaged property in accordance with the proportionate credits of the two joint mortgagors.“

Ultimately, the Supreme Court upheld the extrajudicial foreclosure, emphasizing that KIPI’s obligation to PNB remained unpaid and the Deed of Release from NIDC was ineffective against PNB.

PRACTICAL IMPLICATIONS: LESSONS FOR BORROWERS AND LENDERS

This case offers several crucial takeaways for anyone involved in mortgage transactions in the Philippines:

• **Due Diligence in Mortgage Agreements:** Borrowers must meticulously review mortgage documents to understand all obligations and the parties involved, especially in cases of joint mortgages. Clearly identify all mortgagees and the extent of their security interest.
• **Complete Release is Key:** When settling debts secured by a joint mortgage, ensure that a Deed of Release is executed and signed by *all* mortgagees. A release from only one mortgagee, even if affiliated with another, is insufficient to fully release the mortgage, especially against non-signing mortgagees.
• **Indivisibility of Mortgage:** Understand that mortgages in the Philippines are generally indivisible. Partial payment may not release the mortgage, and a release affecting only one mortgagee’s share may not prevent foreclosure by another mortgagee for outstanding obligations.
• **Importance of Legal Counsel:** Seek legal advice when entering into complex mortgage agreements or when seeking to release a mortgage, particularly when multiple parties are involved. A lawyer can ensure all necessary steps are taken and documents are correctly executed to protect your interests.

Key Lessons:

• **All Mortgagees Must Sign Release:** For a complete release of a joint mortgage, every mortgagee must sign the Deed of Release.
• **Deed of Release is Contractual:** Deeds of Release are contracts and are governed by the principle of relativity – they only bind the parties who sign them.
• **Mortgage Indivisibility:** Philippine mortgages are indivisible; partial releases or payments may not prevent foreclosure for remaining obligations.

FREQUENTLY ASKED QUESTIONS (FAQs)

Q: What is a joint mortgage or pari-passu mortgage?

A: It’s a mortgage where the same property is used as security for loans from two or more lenders. ‘Pari-passu’ means the lenders have equal priority in claiming the property in case of default.

Q: If I pay off one of the lenders in a joint mortgage, is my property automatically released from the mortgage?

A: Not necessarily. Philippine mortgages are indivisible. You need a Deed of Release signed by *all* mortgagees to fully release the property, even if you’ve paid one lender their share.

Q: What happens if only one mortgagee signs a Deed of Release in a joint mortgage?

A: The release is likely only effective for the mortgagee who signed it. It won’t automatically release the mortgage in favor of the other mortgagees, as illustrated in the Komatsu case.

Q: Can a subsidiary company release a mortgage on behalf of its parent company in a joint mortgage?

A: Generally, no. Companies are separate legal entities. Unless the parent company explicitly authorizes or ratifies the subsidiary’s release, it’s unlikely to be binding on the parent company, especially if the parent company is a joint mortgagee.

Q: What should I do if I am unsure about the release of my mortgage, especially if there are multiple mortgagees?

A: Consult with a lawyer specializing in real estate or banking law. They can review your mortgage documents, advise you on the necessary steps for a valid release, and ensure your rights are protected.

Q: Is a “minute resolution” from the Supreme Court a valid decision?

A: Yes. The Supreme Court uses minute resolutions to dispose of many cases. These resolutions are considered adjudications on the merits and are legally binding, especially when they deny a petition for review, effectively affirming the lower court’s decision.

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