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G.R. No. 158891. June 27, 2012.*

PABLO P. GARCIA, petitioner, vs. YOLANDA VALDEZ VILLAR,
respondent.

Civil Law; Mortgages; Pactum Commissorium; Elements of Pactum

Commissorium.—The following are the elements of pactum commissorium:
(1) There should be a property mortgaged by way of security for the
payment of the principal obligation; and (2) There should be a stipulation
for automatic appropriation by the creditor of the thing mortgaged in case of
nonpayment of the principal obligation within the stipulated period.
Same; Same; A mortgage is a real right, which follows the property,
even after subsequent transfers by the mortgagor—“a registered mortgage
lien is considered inseparable from the property inasmuch as it is a right in
rem.”—The real nature of a mortgage is described in Article 2126 of the
Civil Code, to wit: Art. 2126. The mortgage directly and immediately
subjects the property upon which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was constituted.
Simply put, a mortgage is a real right, which follows the property, even after
subsequent transfers by the mortgagor. “A registered mortgage lien is
considered inseparable from the property inasmuch as it is a right in rem.”
Same; Same; The sale or transfer of the mortgaged property cannot
affect or release the mortgage; thus the purchaser or transferee is
necessarily bound to acknowledge and respect the encumbrance.—The sale
or transfer of the mortgaged property cannot affect or release the mortgage;
thus the purchaser or transferee is necessarily bound to acknowledge and
respect the encumbrance. In fact, under Article 2129 of the Civil Code, the
mortgage on the property may still be foreclosed despite the transfer, viz.:
Art. 2129. 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

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* FIRST DIVISION.

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which said third person possesses, in terms and with the formalities which
the law establishes.

PETITION for review on certiorari of the decision and resolution of

the Court of Appeals.
   The facts are stated in the opinion of the Court.
  Renato U. Galimba for petitioner.
  Wilfredo D. Tafalla for respondent.

LEONARDO-DE CASTRO,** J.:

This is a petition for review on certiorari1 of the February 27,
2003 Decision2 and July 2, 2003 Resolution3 of the Court of
Appeals in CA-G.R. SP No. 72714, which reversed the May 27,
2002 Decision4 of the Regional Trial Court (RTC), Branch 92 of
Quezon City in Civil Case No. Q-99-39139.
Lourdes V. Galas (Galas) was the original owner of a piece of
property (subject property) located at Malindang St., Quezon City,
covered by Transfer Certificate of Title (TCT) No. RT-
67970(253279).5
On July 6, 1993, Galas, with her daughter, Ophelia G. Pingol
(Pingol), as co-maker, mortgaged the subject property to Yolanda
Valdez Villar (Villar) as security for a loan in the amount of Two
Million Two Hundred Thousand Pesos (P2,200,000.00).6

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**   Acting Chairperson, Per Special Order No. 1226 dated May 30, 2012.
1 1997 Rules of Court, Rule 45.
2 Rollo, pp. 9-17; penned by Associate Justice Marina L. Buzon with Associate
Justices Josefina Guevara-Salonga and Danilo B. Pine, concurring.
3 Id., at pp. 23-24.
4 Records, pp. 93-96.
5 Id., at pp. 9-10.
6 Id., at pp. 11-15.

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On October 10, 1994, Galas, again with Pingol as her co-maker,

mortgaged the same subject property to Pablo P. Garcia (Garcia) to
secure her loan of One Million Eight Hundred Thousand Pesos
(P1,800,000.00).7
Both mortgages were annotated at the back of TCT No. RT-
67970(253279), to wit:

REAL ESTATE MORTGAGE

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Entry No. 6537/T-RT-67970(253279) MORTGAGE – In favor of

Yolanda Valdez Villar m/to Jaime Villar to guarantee a principal obligation
in the sum of P2,200,000- mortgagee’s consent necessary in case of
subsequent encumbrance or alienation of the property; Other conditions set
forth in Doc. No. 97, Book No. VI, Page No. 20 of the Not. Pub. of Diana P.
Magpantay
Date of Instrument: 7-6-93
      Date of Inscription: 7-7-93
SECOND REAL ESTATE MORTGAGE
Entry No. 821/T-RT-67970(253279) MORTGAGE – In favor of Pablo
Garcia m/to Isabela Garcia to guarantee a principal obligation in the sum of
P1,800,000.00 mortgagee’s consent necessary in case of subsequent
encumbrance or alienation of the property; Other conditions set forth in
Doc. No. 08, Book No. VII, Page No. 03 of the Not. Pub. of Azucena
Espejo Lozada
Date of Instrument: 10/10/94
       Date of Inscription: 10/11/94
       LRC Consulta No. 1698

On November 21, 1996, Galas sold the subject property to Villar

for One Million Five Hundred Thousand Pesos (P1,500,000.00), and
declared in the Deed of Sale9 that such

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7 Id., at pp. 16-17.
8 Id., at p. 10 (dorsal side).
9 Id., at pp. 18-20.

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property was “free and clear of all liens and encumbrances of any
kind whatsoever.”10
On December 3, 1996, the Deed of Sale was registered and,
consequently, TCT No. RT-67970(253279) was cancelled and TCT
No. N-16836111 was issued in the name of Villar. Both Villar’s and
Garcia’s mortgages were carried over and annotated at the back of
Villar’s new TCT.12
On October 27, 1999, Garcia filed a Petition for Mandamus with
Damages13 against Villar before the RTC, Branch 92 of Quezon
City. Garcia subsequently amended his petition to a Complaint for
Foreclosure of Real Estate Mortgage with Damages.14 Garcia
alleged that when Villar purchased the subject property, she acted in
bad faith and with malice as she knowingly and willfully
disregarded the provisions on laws on judicial and extrajudicial
foreclosure of mortgaged property. Garcia further claimed that when
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Villar purchased the subject property, Galas was relieved of her

contractual obligation and the characters of creditor and debtor were
merged in the person of Villar. Therefore, Garcia argued, he, as the
second mortgagee, was subrogated to Villar’s original status as first
mortgagee, which is the creditor with the right to foreclose. Garcia
further asserted that he had demanded payment from Villar,15 whose
refusal compelled him to incur expenses in filing an action in
court.16
Villar, in her Answer,17 claimed that the complaint stated no
cause of action and that the second mortgage was done in bad faith
as it was without her consent and knowledge. Villar alleged that she
only discovered the second mortgage when

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10 Id., at p. 19.
11 Id., at p. 21.
12 Id., at p. 21 (dorsal side).
13 Id., at pp. 3-8.
14 Id., at p. 31.
15 Id., at pp. 72-73.
16 Id., at p. 31.
17 Id., at pp. 38-41.

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she had the Deed of Sale registered. Villar blamed Garcia for the
controversy as he accepted the second mortgage without prior
consent from her. She averred that there could be no subrogation as
the assignment of credit was done with neither her knowledge nor
prior consent. Villar added that Garcia should seek recourse against
Galas and Pingol, with whom he had privity insofar as the second
mortgage of property is concerned.
On May 23, 2000, the RTC issued a Pre-Trial Order18 wherein
the parties agreed on the following facts and issue:

STIPULATIONS OF FACTS/ADMISSIONS
The following are admitted:
1. the defendant admits the second mortgage annotated at the back of TCT No.
RT-67970 of Lourdes V. Galas with the qualification that the existence of
said mortgage was discovered only in 1996 after the sale;
2. the defendant admits the existence of the annotation of the second mortgage
at the back of the title despite the transfer of the title in the name of the
defendant;
3. the plaintiff admits that defendant Yolanda Valdez Villar is the first
mortgagee;
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4. the plaintiff admits that the first mortgage was annotated at the back of the
title of the mortgagor Lourdes V. Galas; and
5. the plaintiff admits that by virtue of the deed of sale the title of the property
was transferred from the previous owner in favor of defendant Yolanda
Valdez Villar.
xxxx
ISSUE
Whether or not the plaintiff, at this point in time, could judicially foreclose the
property in question.

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18 Id., at pp. 61-63.

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On June 8, 2000, upon Garcia’s manifestation, in open court, of

his intention to file a Motion for Summary Judgment,19 the RTC
issued an Order20 directing the parties to simultaneously file their
respective memoranda within 20 days.
On June 26, 2000, Garcia filed a Motion for Summary Judgment
with Affidavit of Merit21 on the grounds that there was no genuine
issue as to any of the material facts of the case and that he was
entitled to a judgment as a matter of law.
On June 28, 2000, Garcia filed his Memorandum22 in support of
his Motion for Summary Judgment and in compliance with the
RTC’s June 8, 2000 Order. Garcia alleged that his equity of
redemption had not yet been claimed since Villar did not foreclose
the mortgaged property to satisfy her claim.
On August 13, 2000, Villar filed an Urgent Ex-Parte Motion for
Extension of Time to File Her Memorandum.23 This, however, was
denied24 by the RTC in view of Garcia’s Opposition.25
On May 27, 2002, the RTC rendered its Decision,the dispositive
portion of which reads:

“WHEREFORE, the foregoing premises considered, judgment is hereby

rendered in favor of the plaintiff Pablo P. Garcia and against the defendant
Yolanda V. Villar, who is ordered to pay to the former within a period of not
less than ninety (90) days nor more than one hundred twenty (120) days
from entry of judgment, the sum of P1,800,000.00 plus legal interest from
October 27, 1999 and upon failure of the defendant to pay the said amount
within the prescribed period, the property subject matter of the 2nd Real
Estate

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19 Id., at p. 65.

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20 Id., at p. 66.
21 Id., at pp. 67-68.
22 Id., at pp. 75-80.
23 Id., at p. 84.
24 Id., at p. 85.
25 Id., at pp. 81-83.

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Mortgage dated October 10, 1994 shall, upon motion of the plaintiff, be sold
at public auction in the manner and under the provisions of Rules 39 and 68
of the 1997 Revised Rules of Civil Procedure and other regulations
governing sale of real estate under execution in order to satisfy the judgment
in this case. The defendant is further ordered to pay costs.”26

The RTC declared that the direct sale of the subject property to
Villar, the first mortgagee, could not operate to deprive Garcia of his
right as a second mortgagee. The RTC said that upon Galas’s failure
to pay her obligation, Villar should have foreclosed the subject
property pursuant to Act No. 3135 as amended, to provide junior
mortgagees like Garcia, the opportunity to satisfy their claims from
the residue, if any, of the foreclosure sale proceeds. This, the RTC
added, would have resulted in the extinguishment of the
mortgages.27
The RTC held that the second mortgage constituted in Garcia’s
favor had not been discharged, and that Villar, as the new registered
owner of the subject property with a subsisting mortgage, was liable
for it.28
Villar appealed29 this Decision to the Court of Appeals based on
the arguments that Garcia had no valid cause of action against her;
that he was in bad faith when he entered into a contract of mortgage
with Galas, in light of the restriction imposed by the first mortgage;
and that Garcia, as the one who gave the occasion for the
commission of fraud, should suffer. Villar further asseverated that
the second mortgage is a void and inexistent contract considering
that its cause or object is contrary to law, moral, good customs, and
public order or public policy, insofar as she was concerned.30

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26 Id., at pp. 95-96.
27 Id., at p. 94.
28 Id., at p. 95.
29 Id., at p. 98.
30 CA Rollo, pp. 17-18.

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Garcia, in his Memorandum,31 reiterated his position that his

equity of redemption remained “unforeclosed” since Villar did not
institute foreclosure proceedings. Garcia added that “the mortgage,
until discharged, follows the property to whomever it may be
transferred no matter how many times over it changes hands as long
as the annotation is carried over.”32
The Court of Appeals reversed the RTC in a Decision dated
February 27, 2003, to wit:

“WHEREFORE, the decision appealed from is REVERSED and

another one entered DISMISSING the complaint for judicial foreclosure of
real estate mortgage with damages.”33

The Court of Appeals declared that Galas was free to mortgage

the subject property even without Villar’s consent as the restriction
that the mortgagee’s consent was necessary in case of a subsequent
encumbrance was absent in the Deed of Real Estate Mortgage. In the
same vein, the Court of Appeals said that the sale of the subject
property to Villar was valid as it found nothing in the records that
would show that Galas violated the Deed of Real Estate Mortgage
prior to the sale.34
In dismissing the complaint for judicial foreclosure of real estate
mortgage with damages, the Court of Appeals held that Garcia had
no cause of action against Villar “in the absence of evidence
showing that the second mortgage executed in his favor by Lourdes
V. Galas [had] been violated and that he [had] made a demand on the
latter for the payment of the obligation secured by said mortgage
prior to the institution of his complaint against Villar.”35

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31 Id., at pp. 10-14.
32 Id., at pp. 12-13.
33 Rollo, p. 17.
34 Id., at p. 14.
35 Id., at p. 17.

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On March 20, 2003, Garcia filed a Motion for Reconsideration36

on the ground that the Court of Appeals failed to resolve the main
issue of the case, which was whether or not Garcia, as the second
mortgagee, could still foreclose the mortgage after the subject
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property had been sold by Galas, the mortgage debtor, to Villar, the
mortgage creditor.
This motion was denied for lack of merit by the Court of Appeals
in its July 2, 2003 Resolution.
Garcia is now before this Court, with the same arguments he
posited before the lower courts. In his Memorandum,37 he added that
the Deed of Real Estate Mortgage contained a stipulation, which is
violative of the prohibition on pactum commissorium.
Issues
The crux of the controversy before us boils down to the propriety
of Garcia’s demand upon Villar to either pay Galas’s debt of
P1,800,000.00, or to judicially foreclose the subject property to
satisfy the aforesaid debt. This Court will, however, address the
following issues in seriatim:
1. Whether or not the second mortgage to Garcia was valid;
2. Whether or not the sale of the subject property to Villar was
valid;
3. Whether or not the sale of the subject property to Villar was
in violation of the prohibition on pactum commissorium;
4. Whether or not Garcia’s action for foreclosure of mortgage
on the subject property can prosper.

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36 Id., at pp. 18-21.
37 Id., at pp. 99-102.

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Discussion
Validity of second mortgage to Garcia
and sale of subject property to Villar
At the onset, this Court would like to address the validity of the
second mortgage to Garcia and the sale of the subject property to
Villar. We agree with the Court of Appeals that both are valid under
the terms and conditions of the Deed of Real Estate Mortgage
executed by Galas and Villar.
While it is true that the annotation of the first mortgage to Villar
on Galas’s TCT contained a restriction on further encumbrances
without the mortgagee’s prior consent, this restriction was nowhere
to be found in the Deed of Real Estate Mortgage. As this Deed
became the basis for the annotation on Galas’s title, its terms and
conditions take precedence over the standard, stamped annotation
placed on her title. If it were the intention of the parties to impose
such restriction, they would have and should have stipulated such in
the Deed of Real Estate Mortgage itself.
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Neither did this Deed proscribe the sale or alienation of the

subject property during the life of the mortgages. Garcia’s insistence
that Villar should have judicially or extrajudicially foreclosed the
mortgage to satisfy Galas’s debt is misplaced. The Deed of Real
Estate Mortgage merely provided for the options Villar may
undertake in case Galas or Pingol fail to pay their loan. Nowhere
was it stated in the Deed that Galas could not opt to sell the subject
property to Villar, or to any other person. Such stipulation would
have been void anyway, as it is not allowed under Article 2130 of
the Civil Code, to wit:

“Art. 2130. A stipulation forbidding the owner from alienating the

immovable mortgaged shall be void.”

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Prohibition on pactum commissorium

Garcia claims that the stipulation appointing Villar, the
mortgagee, as the mortgagor’s attorney-in-fact, to sell the property
in case of default in the payment of the loan, is in violation of the
prohibition on pactum commissorium, as stated under Article 2088
of the Civil Code, viz.:

“Art. 2088. The creditor cannot appropriate the things given by way
of pledge or mortgage, or dispose of them. Any stipulation to the contrary is
null and void.”

The power of attorney provision in the Deed of Real Estate

Mortgage reads:

“5. Power of Attorney of MORTGAGEE.—Effective upon the

breach of any condition of this Mortgage, and in addition to the remedies
herein stipulated, the MORTGAGEE is likewise appointed attorney-in-fact
of the MORTGAGOR with full power and authority to take actual
possession of the mortgaged properties, to sell, lease any of the mortgaged
properties, to collect rents, to execute deeds of sale, lease, or agreement that
may be deemed convenient, to make repairs or improvements on the
mortgaged properties and to pay the same, and perform any other act which
the MORTGAGEE may deem convenient for the proper administration of
the mortgaged properties. The payment of any expenses advanced by the
MORTGAGEE in connection with the purpose indicated herein is also
secured by this Mortgage. Any amount received from the sale, disposal or
administration abovementioned maybe applied by assessments and other
incidental expenses and obligations and to the payment of original
indebtedness including interest and penalties thereon. The power herein
granted shall not be revoked during the life of this Mortgage and all acts
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which may be executed by the MORTGAGEE by virtue of said power are

hereby ratified.”38

The following are the elements of pactum commissorium:

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38 Records, pp. 13-14.

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(1) There should be a property mortgaged by way of security

for the payment of the principal obligation; and
(2) There should be a stipulation for automatic appropriation by
the creditor of the thing mortgaged in case of non-payment of the
principal obligation within the stipulated period.39
Villar’s purchase of the subject property did not violate the
prohibition on pactum commissorium. The power of attorney
provision above did not provide that the ownership over the subject
property would automatically pass to Villar upon Galas’s failure to
pay the loan on time. What it granted was the mere appointment of
Villar as attorney-in-fact, with authority to sell or otherwise dispose
of the subject property, and to apply the proceeds to the payment of
the loan.40 This provision is customary in mortgage contracts, and is
in conformity with Article 2087 of the Civil Code, which reads:

“Art. 2087. It is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor.”

Galas’s decision to eventually sell the subject property to Villar

for an additional P1,500,000.00 was well within the scope of her
rights as the owner of the subject property. The subject property was
transferred to Villar by virtue of another and separate contract,
which is the Deed of Sale. Garcia never alleged that the transfer of
the subject property to Villar was automatic upon Galas’s failure to
discharge her debt, or that the sale was simulated to cover up such
automatic transfer.

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39 Development Bank of the Philippines v. Court of Appeals, 348 Phil. 15, 31; 284
SCRA 14, 26 (1998).
40 Id., at p. 29; pp. 26-27.

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Propriety of Garcia’s action

for foreclosure of mortgage
The real nature of a mortgage is described in Article 2126 of the
Civil Code, to wit:

“Art. 2126. The mortgage directly and immediately subjects the

property upon which it is imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it was constituted.”

Simply put, a mortgage is a real right, which follows the

property, even after subsequent transfers by the mortgagor. “A
registered mortgage lien is considered inseparable from the property
inasmuch as it is a right in rem.”41
The sale or transfer of the mortgaged property cannot affect or
release the mortgage; thus the purchaser or transferee is necessarily
bound to acknowledge and respect the encumbrance.42 In fact, under
Article 2129 of the Civil Code, the mortgage on the property may
still be foreclosed despite the transfer, viz.:

“Art. 2129. 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 terms and with the
formalities which the law establishes.”

While we agree with Garcia that since the second mortgage, of

which he is the mortgagee, has not yet been discharged, we find that
said mortgage subsists and is still enforceable. However, Villar, in
buying the subject property with notice that it was mortgaged, only
undertook to pay such mortgage or allow the subject property to be
sold upon failure

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41 Philippine National Bank v. RBL Enterprises, Inc., G.R. No. 149569, May 28,
2004, 430 SCRA 299, 307.
42 Ganzon v. Inserto, 208 Phil. 630, 637; 123 SCRA 713, 720 (1983).

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of the mortgage creditor to obtain payment from the principal debtor

once the debt matures. Villar did not obligate herself to replace the
debtor in the principal obligation, and could not do so in law without
the creditor’s consent.43 Article 1293 of the Civil Code provides:
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“Art. 1293. Novation which consists in substituting a new debtor in

the place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights mentioned in articles 1236
and 1237.”

Therefore, the obligation to pay the mortgage indebtedness

remains with the original debtors Galas and Pingol.44 The case of
E.C. McCullough & Co. v. Veloso and Serna45 is square on this
point:

“The effects of a transfer of a mortgaged property to a third person are well

determined by the Civil Code. According to article 187946 of this Code, the
creditor may demand of the third person in possession of the property
mortgaged payment of such part of the debt, as is secured by the property in
his possession, in the manner and form established by the law. The
Mortgage Law in force at the promulgation of the Civil Code and referred to
in the latter, provided, among other things, that the debtor should not pay the
debt upon its maturity after judicial or notarial demand, for payment has
been made by the creditor upon him. (Art. 135 of the Mortgage Law of the
Philippines of 1889.) According to this, the obligation of the new possessor
to pay the debt originated only from the right of the creditor to demand
payment of him, it being necessary that a demand for payment should have
previously been made upon the debtor and the latter should have failed to
pay. And even if these requirements were complied with, still the third
possessor might abandon the property

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43 Rodriguez v. Reyes, 147 Phil. 176, 183; 37 SCRA 195, 202 (1971).
44 Id.
45 46 Phil. 1 (1924).
46 NEW CIVIL CODE, now Art. 2129.

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mortgaged, and in that case it is considered to be in the possession of the

debtor. (Art. 136 of the same law.) This clearly shows that the spirit of the
Civil Code is to let the obligation of the debtor to pay the debt stand
although the property mortgaged to secure the payment of said debt may
have been transferred to a third person. While the Mortgage Law of 1893
eliminated these provisions, it contained nothing indicating any change in
the spirit of the law in this respect. Article 129 of this law, which provides
the substitution of the debtor by the third person in possession of the
property, for the purposes of the giving of notice, does not show this change
and has reference to a case where the action is directed only against the
property burdened with the mortgage. (Art. 168 of the Regulation.)”47
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This pronouncement was reiterated in Rodriguez v. Reyes48

wherein this Court, even before quoting the same above portion in
E.C. McCullough & Co. v. Veloso and Serna, held:

“We find the stand of petitioners-appellants to be unmeritorious and

untenable. The maxim “caveat emptor” applies only to execution sales, and
this was not one such. The mere fact that the purchaser of an immovable has
notice that the acquired realty is encumbered with a mortgage does not
render him liable for the payment of the debt guaranteed by the mortgage, in
the absence of stipulation or condition that he is to assume payment of the
mortgage debt. The reason is plain: the mortgage is merely an encumbrance
on the property, entitling the mortgagee to have the property foreclosed, i.e.,
sold, in case the principal obligor does not pay the mortgage debt, and apply
the proceeds of the sale to the satisfaction of his credit. Mortgage is merely
an accessory undertaking for the convenience and security of the mortgage
creditor, and exists independently of the obligation to pay the debt secured
by it. The mortgagee, if he is so minded, can waive the mortgage security
and proceed to collect the principal debt by personal action against the
original mortgagor.”49

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47 E.C. McCullough & Co. v. Veloso and Serna, supra note 45 at pp. 4-5.
48 Supra note 43.
49 Id., at pp. 182-183; pp. 201-202.

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Garcia vs. Villar

In view of the foregoing, Garcia has no cause of action against

Villar in the absence of evidence to show that the second mortgage
executed in favor of Garcia has been violated by his debtors, Galas
and Pingol, i.e., specifically that Garcia has made a demand on said
debtors for the payment of the obligation secured by the second
mortgage and they have failed to pay.
WHEREFORE, this Court hereby AFFIRMS the February 27,
2003 Decision and March 8, 2003 Resolution of the Court of
Appeals in CA-G.R. SP No. 72714.
SO ORDERED.

Bersamin, Del Castillo, Villarama, Jr. and Perlas-Bernabe,***

JJ., concur.

Judgment and resolution affirmed.

Notes.—The creditor cannot appropriate the things given by way

of pledge or mortgage, or dispose of them, and any stipulation to the

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10/10/2020 SUPREME COURT REPORTS ANNOTATED VOLUME 675

contrary is null and void. (Heirs of Jose Reyes, Jr. vs. Reyes, 626
SCRA 758 [2010])
The provisions of the Civil Code governing equitable mortgages
disguised as sale contracts are primarily designed to curtail the evils
brought about by contracts of sale with right to repurchase,
particularly the circumvention of the usury law and pactum
commissorium. (Id.)
——o0o—— 

_______________
***  Per Special Order No. 1227 dated May 30, 2012.

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