The Supreme Court’s decision clarifies that a property owner can sell their mortgaged property even without the mortgagee’s consent. While the mortgagee retains the right to foreclose if the loan remains unpaid, an unapproved sale does not invalidate the transfer of ownership. This ruling protects the rights of buyers who acquire mortgaged properties, provided the mortgage debt is eventually settled, ensuring they can claim ownership against third-party creditors of the original owner.
From Housing Hope to Legal Hurdles: Can a Property Sale Override Mortgage Restrictions?
This case revolves around spouses Antonio and Leticia Vega (the Vegas) who purchased a property from Magdalena Reyes (Reyes), which was mortgaged to the Social Security System (SSS). Reyes obtained a housing loan from SSS in 1979, mortgaging her land as collateral. Later that year, Reyes sought to transfer the property to the Vegas, who agreed to assume the mortgage. Upon consulting with SSS, the Vegas were informed that while formal transfers were discouraged, private arrangements coupled with timely amortization payments were common practice. The Vegas then paid Reyes P20,000 and took possession of the property in January 1981, with Reyes promising to execute a formal deed of assignment.
However, Reyes emigrated and delegated the execution of the deed to her sister, Julieta Reyes Ofilada (Ofilada), via a special power of attorney. Ofilada executed the deed between 1983 and 1984, but the Vegas lost their copy in a flood. In 1992, the Vegas discovered that Reyes had not updated the amortizations, prompting them to make payments directly to SSS, totaling P124,419.48. Meanwhile, in 1993, Pilar Development Corporation (PDC) sued Reyes for an unpaid loan originally obtained from Apex Mortgage and Loans Corporation (Apex), which Apex later assigned to PDC. The court ruled in favor of PDC, leading to a writ of execution on Reyes’ property in Pilar Village.
The Vegas, asserting their rights as property owners, filed an affidavit of third-party claimant and a motion to intervene to quash the levy. Despite this, the RTC directed the sheriff to proceed with the execution. Simultaneously, SSS notified the Vegas of its intent to foreclose on the property due to Reyes’ unpaid debt. The Vegas attempted to settle the outstanding balance with a manager’s check, which SSS refused. Consequently, the Vegas filed an action for consignation, damages, and injunction against SSS, PDC, and other relevant parties. While the case was pending, SSS released the mortgage to PDC, and the Register of Deeds issued a title to PDC, leading to the Vegas’ eviction.
The RTC initially ruled in favor of the Vegas, recognizing their subrogation to Reyes’ rights and ordering PDC to transfer the property title. However, the Court of Appeals (CA) reversed this decision, citing the Vegas’ failure to produce the deed of assignment and the invalidity of the assignment against PDC. This led the Vegas to petition the Supreme Court, raising the core issues of whether they adequately proved the sale, whether the sale was valid given the SSS mortgage, and whether the sheriff validly sold the property to satisfy Reyes’ debt to PDC.
The Supreme Court addressed the issue of proving the sale, noting that secondary evidence is admissible when the original document is lost without bad faith. The Court found that the Vegas provided ample evidence, including their possession of the property for 13 years, direct payments to SSS, and the absence of claims from Reyes or her relatives. Regarding the validity of the sale despite the mortgage, the Court acknowledged the mortgage agreement’s clause requiring SSS’s consent for any sale. However, it clarified that such a stipulation cannot absolutely prohibit the sale, as this would unduly impede property transmission. Citing Cinco v. Court of Appeals, G.R. No. 151903, October 9, 2009, 603 SCRA 108, 118, the Court emphasized that such restrictions contravene public policy.
Building on this principle, the Court stated that the creditor retains the right to demand payment from the third-party buyer, as the mortgage credit is a real right that follows the property, as specified in Article 2129 of the Civil Code.
Article 2129 of the Civil Code states: “The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formalities which the law establishes.”
This ensures the mortgagee’s security while allowing the transfer of property ownership. Once the mortgage debt is settled, the mortgagee’s justification for withholding the title ceases, and the buyer is entitled to the title conveyance.
Addressing the binding effect of the sale on PDC, the Court clarified that Article 1625 of the Civil Code, which requires assignments of credit to be in a public instrument to affect third parties, does not apply here.
Article 1625 of the Civil Code states: “An assignment of a credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property.”
The transaction between Reyes and the Vegas was a sale of property, not an assignment of credit. The Vegas became the owners upon the execution of the deed of assignment. Since PDC’s judgment was against Reyes, it could only be enforced on properties indisputably owned by her, which the property in question was not.
The Court found that PDC was not a buyer in good faith, as it had notice of the Vegas’ claim before the sheriff’s sale. The Supreme Court emphasized that a court’s power to enforce its judgment extends only to properties definitively owned by the judgment debtor, citing Special Services Corporation v. Centro La Paz, 206 Phil. 643, 651 (1983). Consequently, the Court directed PDC to reconvey the property to the Vegas or, if impossible, to pay its current market value, along with damages for the unlawful levy and eviction.
FAQs
| What was the key issue in this case? | The key issue was whether a property owner could validly sell a property mortgaged to SSS without the latter’s consent, and the implications of such a sale on third-party creditors of the original owner. |
| Did the Vegas have a valid claim to the property despite the lack of a formal deed? | Yes, the Supreme Court ruled that the Vegas provided sufficient evidence of the sale, including their long-term possession, direct payments to SSS, and the absence of competing claims. Secondary evidence was admissible due to the loss of the original deed. |
| Was Reyes’ sale of the property valid despite the mortgage agreement? | The sale was deemed valid, as the Court held that a clause requiring SSS’s consent could not absolutely prohibit the sale of the property, as this would unduly restrict property rights. |
| What rights did SSS have after Reyes sold the property to the Vegas? | SSS retained the right to demand payment from the Vegas as the new owners, since the mortgage credit is a real right that follows the property. Once the debt was paid, SSS was obligated to release the title to the Vegas. |
| Was PDC bound by the sale between Reyes and the Vegas? | Yes, the Court held that PDC was not a buyer in good faith, as it had notice of the Vegas’ claim before the sheriff’s sale. Therefore, PDC’s claim was subordinate to the Vegas’ ownership. |
| What was the basis for the Supreme Court’s decision regarding PDC’s actions? | The Supreme Court emphasized that a court’s power to enforce its judgment extends only to properties definitively owned by the judgment debtor, which Reyes was not at the time of the levy. |
| What remedies were granted to the Vegas by the Supreme Court? | The Supreme Court directed PDC to reconvey the property to the Vegas or, if impossible, to pay its current market value, along with moral and exemplary damages, and attorney’s fees. |
| Who was liable for the damages awarded to the Vegas? | PDC was solely liable for the damages, as SSS had no direct involvement in the sheriff’s levy on the property. SSS simply released the title to PDC following the sheriff’s sale. |
In conclusion, the Supreme Court’s decision reinforces the principle that property ownership can be transferred even when a mortgage exists, provided the mortgagee’s rights are respected and the debt is eventually settled. It protects the rights of buyers who acquire such properties in good faith, safeguarding them against claims from creditors of the original owner. This ruling provides clarity and security for property transactions involving mortgaged assets.
For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.
Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: SPS. ANTONIO & LETICIA VEGA VS. SOCIAL SECURITY SYSTEM (SSS) & PILAR DEVELOPMENT CORPORATION, G.R. No. 181672, September 20, 2010