Understanding the Limits of Third-Party Claims in Foreclosure Proceedings

Lourdes C. Akiapat, et al. vs. Summit Bank (G.R. No. 222505 and G.R. No. 222776, June 28, 2021)

Imagine waking up to find that your share in a family property has been foreclosed upon without your knowledge or consent. This scenario became a reality for some co-owners in a recent Supreme Court case in the Philippines, highlighting the complexities of third-party claims in property foreclosure. The case involved a dispute over a parcel of land that was mortgaged to secure loans, and the subsequent foreclosure proceedings that entangled non-borrowing co-owners in a legal battle with the bank.

The central legal question revolved around whether non-borrowing co-owners, who had signed the mortgage as security for their co-owners’ loans, could claim exclusion from the foreclosure sale. The Supreme Court’s decision in this case offers crucial insights into the rights of third parties in such situations and the procedural steps necessary to protect their interests.

Legal Context: Third-Party Claims and Foreclosure

In the Philippines, foreclosure is a legal process by which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments by forcing the sale of the asset used as the collateral for the loan. The process can be judicial or extrajudicial, with the latter governed by Act No. 3135, as amended.

A third-party claim, or terceria, is a legal remedy available to a person who claims ownership or a right to possession of property that has been levied upon or attached in an execution process. Under Section 16, Rule 39 of the Rules of Court, such a claim can be made by any person other than the judgment obligor or their agent, provided they file an affidavit of their title or right to possession.

The concept of pro indiviso shares is also relevant here. This term refers to the undivided interest that co-owners have in a property. When a property is mortgaged by co-owners, the mortgage is considered indivisible, meaning the entire property is subject to the mortgage, regardless of individual shares.

For example, if a family owns a piece of land together and one member takes out a loan using the land as collateral, all co-owners might be affected by a foreclosure if they signed the mortgage. This scenario underscores the importance of understanding the implications of co-signing a mortgage, even if one does not directly benefit from the loan.

Case Breakdown: From Mortgage to Foreclosure

The case began when several co-owners of a property in Benguet, including Domacia Galipen, Renato Cachero, Richard Cachero, Teresita Mainem, Jeanette Gamboa, and others, executed promissory notes and a real estate mortgage with Summit Bank to secure their individual loans. Non-borrowing co-owners, such as Lourdes Akiapat, Billy Cachero, and Noel Cachero, also signed the mortgage.

When the borrowing co-owners defaulted on their loans, Summit Bank initiated an extrajudicial foreclosure in 1999, which was nullified by the Regional Trial Court (RTC) in 2007 due to excessive interest rates. The RTC upheld the validity of the mortgage but ordered a new accounting of the loans with reduced rates.

Following the RTC’s decision, Summit Bank demanded payment again, and upon non-payment, proceeded with a second foreclosure in 2010. The non-borrowing co-owners, unaware of the proceedings, only learned of the foreclosure when a demand to vacate was issued. They filed a third-party claim, arguing that their shares should be excluded from the foreclosure.

The RTC initially sided with the non-borrowing co-owners, ordering Summit Bank to reapply for foreclosure but to exclude their shares. However, Summit Bank appealed to the Court of Appeals (CA), which reversed the RTC’s decision, finding that the non-borrowing co-owners were not third parties but parties to the mortgage.

The Supreme Court upheld the CA’s decision, emphasizing that:

“As mortgagors, the petitioners already lost all interests over the foreclosed property after the expiration of the redemption period. On the other hand, Summit Bank, as purchaser, became the absolute owner thereof when no redemption was made.”

The Court further clarified that:

“The property of third persons like Lourdes, et al. which has been expressly mortgaged to guarantee an obligation to which they are foreign, is directly and jointly liable for the fulfillment thereof.”

Practical Implications: Lessons for Property Owners and Lenders

This ruling underscores the importance of understanding the implications of signing a mortgage, especially in co-owned properties. Non-borrowing co-owners who sign as mortgagors are bound by the mortgage and cannot claim exclusion from foreclosure proceedings based solely on their non-borrower status.

For property owners, it is crucial to:

• Seek legal advice before signing any mortgage agreement, especially if the property is co-owned.
• Understand that signing a mortgage makes one’s share in the property liable for the loan, regardless of personal benefit from the loan.
• Monitor any legal proceedings involving the mortgaged property to protect one’s interests.

For lenders, the case reinforces the legal standing to proceed with foreclosure on the entire mortgaged property, even if some co-owners did not directly benefit from the loan.

Key Lessons

• Co-owners should be cautious about signing as mortgagors for loans they do not benefit from.
• Third-party claims are not applicable to parties to the mortgage agreement.
• Legal advice is essential before entering into mortgage agreements to understand the full scope of liability.

Frequently Asked Questions

What is a third-party claim in the context of foreclosure?

A third-party claim, or terceria, is a legal remedy for someone who claims ownership or a right to possession of property that is being foreclosed upon, provided they are not the judgment obligor or their agent.

Can a co-owner who did not take out a loan be excluded from a foreclosure?

No, if a co-owner signed the mortgage as a mortgagor, their share in the property is subject to foreclosure, regardless of whether they benefited from the loan.

What should co-owners do to protect their interests in a mortgaged property?

Co-owners should consult with a lawyer before signing any mortgage agreement and stay informed about any legal proceedings related to the property.

What happens if a foreclosure sale is nullified?

If a foreclosure sale is nullified, the parties revert to their original positions, and the lender may proceed with a new foreclosure or pursue other legal remedies for debt recovery.

How can a lender ensure a valid foreclosure?

Lenders should ensure compliance with all legal requirements, including proper notification and adherence to interest rate regulations, to avoid nullification of the foreclosure sale.

ASG Law specializes in real estate and mortgage law. Contact us or email hello@asglawpartners.com to schedule a consultation and ensure your property rights are protected.