PRUDENTIAL BANK V.

ALVIAR & ALVIAR (2005)

Obligation Secured

A “blanket mortgage clause,” also known as a “dragnet clause” is one which is specifically
phrased to subsume all debts of past or future origins. Mortgages of this character enable the
parties to provide continuous dealings, the nature or extent of which may not be known or
anticipated at the time, and they avoid the expense and inconvenience of executing a new
security on each new transaction.

A “dragnet clause” operates as a convenience and accommodation to the borrowers as it

makes available additional funds without their having to execute additional security
documents, thereby saving time, travel, loan closing costs, costs of extra legal services,
recording fees, et cetera.

The “blanket mortgage clause” in the instant case states:

…to secure the payment of the same and those that may hereafter be obtained, the principal
or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine
Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR,
including interest and expenses or any other obligation owing to the Mortgagee, whether
direct or indirect, principal or secondary…

Facts: Thus, contrary to the finding of the Court of Appeals, petitioner and respondents
intended the real estate mortgage to secure not only theP250,000.00 loan from the petitioner,
but also future credit facilities and advancements that may be obtained by the
respondents. The terms of the above provision being clear and unambiguous, there is neither
need nor excuse to construe it otherwise. In the case at bar, the subsequent loans obtained by
respondents were secured by other securities.

Issue: Whether the “blanket mortgage” clause applies even to subsequent advancements for
which other securities were intended (PNs). NO.

Reliance on the security test

The parties having conformed to the “blanket mortgage clause” or “dragnet clause,” it is
reasonable to conclude that they also agreed to an implied understanding that subsequent
loans need not be secured by other securities, as the subsequent loans will be secured by the
first mortgage. In other words, the sufficiency of the first security is a corollary component of
the “dragnet clause.” But of course, there is no prohibition, as in the mortgage contract in
issue, against contractually requiring other securities for the subsequent loans. Thus, when the
mortgagor takes another loan for which another security was given it could not be inferred that
such loan was made in reliance solely on the original security with the “dragnet clause,” but
rather, on the new security given. This is the “reliance on the security test.”
Ratio: The “dragnet clause” in the first security instrument constituted a continuing offer by the
borrower to secure further loans under the security of the first security instrument, and that
when the lender accepted a different security he did not accept the offer.
Ø In another case, it was held that a mortgage with a “dragnet clause” is an “offer” by the
mortgagor to the bank to provide the security of the mortgage for advances of and when they
were made. Thus, it was concluded that the “offer” was not accepted by the bank when a
subsequent advance was made because (1) the second note was secured by a chattel mortgage
on certain vehicles, and the clause therein stated that the note was secured by such chattel
mortgage; (2) there was no reference in the second note or chattel mortgage indicating a
connection between the real estate mortgage and the advance; (3) the mortgagor signed the
real estate mortgage by her name alone, whereas the second note and chattel mortgage were
signed by the mortgagor doing business under an assumed name; and (4) there was no
allegation by the bank, and apparently no proof, that it relied on the security of the real estate
mortgage in making the advance.

A mortgage containing a “dragnet clause” will not be extended to cover future advances unless
the document evidencing the subsequent advance refers to the mortgage as providing security
therefor.

Held: It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged
property because of non-payment of all the 3 promissory notes. While the existence and
validity of the “dragnet clause” cannot be denied, there is a need to respect the existence of
the other security given (PN). The foreclosure of the mortgaged property should only be for
the P250,000.00 loan and for any amount not covered by the security for the second
promissory note. This is recognition that while the “dragnet clause” subsists, the security
specifically executed for subsequent loans must first be exhausted before the mortgaged
property can be resorted to.

PRUDENTIAL BANK VS ALVIAR Doctrine:

The “dragnet clause” in the first security instrument constituted a continuing offer by
the borrower to secure further loans under the security of the first security instrument,
and that when the lender accepted a different security he did not accept the first offer.
Facts: Spouses Alviar are the registered owners of a parcel of land in San Juan, Metro Manila
They executed a deed of real estate mortgage of the said property in favor of petitioner
Prudential Bank to secure the payment of a loan worth P250,000.00. (PN BD#75/C-252) was
then issued covering the said loan, which provides that the loan matured on 4 August 1976 at
an interest rate of 12% per annum with a 2% service charge, and that the note is secured by a
real estate mortgage as aforementioned with a
“blanket mortgage clause” or the “dragnet clause”. The spouses thereafter issued other
promissory notes (PN): PN BD#76/C-345 for P2,640,000.00, secured by D/A SFDX #129,
signifying that the loan was secured by a “hold-out” on the mortgagor’s
foreign currency savings account with the bank under Account No. 129. In the name of Donalco
Trading, Inc., PN BD#76/C-430 covering P545,000.000 to be secured by “Clean-Phase out TOD
CA 3923. Bank also mentioned in their approval letter that additional securities for the loan
were the deed of assignment on two PNs executed by Bancom Realty and the chattel mortgage
on various heavy and transportation equipment. Spouses Alviar paid petitioner P2,000,000.00,
to be applied to the obligations of G.B. Alviar Realty and Development, Inc. and for the release
of the real estate mortgage for the P450,000.00 loan covering the two (2) lots in San Juan,
Metro Manila. The payment was acknowledged by petitioner who accordingly released the
mortgage over the two properties. Prudential Bank moved for the extrajudicial foreclosure of
the mortgage on the property since respondents had the total obligation of P1,608,256.68,
covering the three (3) promissory notes. Respondents then filed a complaint for damages with a
prayer for the issuance of a writ of preliminary injunction with the RTC of Pasig claiming that
they have paid their principal loan secured by the mortgaged property, and thus the mortgage
should not be foreclosed. RTC, on its final decision, favored respondents saying that the
extrajudicial foreclosure was improper for the mortgage only covers the first loan of P250,000
CA affirmed the decision of the RTC
Issue: WON real estate mortgage secures only the first loan of P250,000.
Held: Yes. While the existence and validity of the “dragnet clause” cannot be denied, there is a
need to respect the existence of the other securities given for the two other promissory
notes. The foreclosure of the mortgaged property should only then be for theP250,000.00 loan
covered by PN BD#75/C-252, and for any amount not covered by the security for the second
promissory note. Petitioner and respondents intended the real estate mortgage to secure not
only the P250,000.00 loan from the petitioner, but also future credit facilities
and advancements that may be obtained by the respondents. However, the subsequent loans
obtained by respondents were secured by other securities. When the mortgagor takes another
loan for which another security was given it could not be inferred that such loan was made in
reliance solely on the original security with the “dragnet clause,” but rather, on the new
security given. This is the “reliance on the security test.” If the parties intended that the
“blanket mortgage clause” shall cover subsequent advancement secured by separate securities,
then the same should have been indicated in the mortgage contract. This ambiguity shall be
interpreted strictly against petitioner for having drafted the same. Petitioner, however, is not
without recourse. Both the lower courts found that respondents have not yet paid
the P250,000.00. Thus, the mortgaged property could still be properly subjected to
foreclosure proceedings for the unpaid P250,000.00 loan

PEOPLE’S BANK & TRUST COMPANY & ATLANTIC GULF AND PACIFIC CO. OF MANILA V.
DAHICAN LUMBER COMPANY, ET AL., (1967)
After Acquired Properties

Facts: On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia
corporation licensed to do business in the Philippines sold and assigned all its rights in the
Dahican Lumber concession to Dahican Lumber Company - hereinafter referred to as DALCO -
for the total sum of $500,000.00, of which only the amount of $50,000.00 was paid. Thereafter,
to develop the concession, DALCO obtained various loans from the People's Bank & Trust
Company amounting, as of July 13, 1950, to P200,000.00. In addition, DALCO obtained, through
the BANK, a loan of $250,000.00 from the Export-Import Bank of Washington D.C., evidenced
by five promissory notes of $50,000.00 each, maturing on different dates, executed by both
DALCO and the Dahican America Lumber Corporation, a foreign corporation and a stockholder
of DALCO, As security for the payment of the abovementioned loans, on July 13, 1950 DALCO
executed in favor of the BANK a deed of mortgage covering five parcels of land situated in the
province of Camarines Norte together with all the buildings and other improvements existing
thereon and all the personal properties of the mortgagor located in its place of business in the
municipalities of Mambulao and Capalonga, Camarines Norte. On the same date, DALCO
executed a second mortgage on the same properties in favor of ATLANTIC to secure payment of
the unpaid balance of the sale price of the lumber concession amounting to the sum of
$450,000.00. Both deeds contained a provision extending the mortgage lien to properties to be
subsequently acquired by the mortgagor.

Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In
addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and
9,286 shares of DAMCO to secure the same obligation. Upon DALCO's and DAMCO's failure to
pay the fifth promissory note upon its maturity, the BANK paid the same to the Export-Import
Bank of Washington D.C., and the latter assigned to the former its credit and the first mortgage
securing it. Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953 to pay the
overdue promissory note.c

After July 13, 1950 - the date of execution of the mortgages mentioned above - DALCO
purchased various machineries, equipment, spare parts and supplies in addition to, or in
replacement of some of those already owned and used by it on the date aforesaid. Pursuant to
the provision of the mortgage deeds quoted theretofore regarding "after acquired properties,"
the BANK requested DALCO to submit complete lists of said properties but the latter failed to
do so. In connection with these purchases, there appeared in the books of DALCO as due to
Connell Bros. Company (Philippines) - a domestic corporation who was acting as the general
purchasing agent of DALCO -the sum of P452,860.55 and to DAMCO, the sum of
P2,151,678.34.chan

On December 16, 1952, the Board of Directors of DALCO, in a special meeting called for the
purpose, passed a resolution agreeing to rescind the alleged sales of equipment, spare parts
and supplies by CONNELL and DAMCO to it. On January 13, 1953, the BANK, in its own behalf
and that of ATLANTIC, demanded that said agreements be cancelled but CONNELL and DAMCO
refused to do so. As a result, on February 12, 1953; ATLANTIC and the BANK, commenced
foreclosure proceedings in the Court of First Instance of Camarines Norte against DALCO and
DAMCO. Upon motion of the parties the Court, on September 30, 1953, issued an order
transferring the venue of the action to the Court of First Instance of Manila.

On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the
machineries, equipment and supplies of DALCO, and the same were subsequently sold for a
total consideration of P175,000.00 which was deposited in court pending final determination of
the action. By a similar agreement one-half (P87,500.00) of this amount was considered as
representing the proceeds obtained from the sale of the "undebated properties" (those not
claimed by DAMCO and CONNELL), and the other half as representing those obtained from the
sale of the "after acquired properties".
ISSUE: WON the "after acquired properties" were subject to the deeds of mortgage mentioned
heretofore. Assuming that they are subject thereto, WON the mortgages are valid and binding
on the properties aforesaid inspite of the fact that they were not registered in accordance with
the provisions of the Chattel Mortgage Law.
HELD: Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property
of every nature and description taken in exchange or replacement, as well as all buildings,
machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire,
construct, install, attach; or use in, to upon, or in connection with the premises - that is, its
lumber concession - "shall immediately be and become subject to the lien" of both mortgages
in the same manner and to the same extent as if already included therein at the time of their
execution. Such stipulation is neither unlawful nor immoral, its obvious purpose being to
maintain, to the extent allowed by circumstances, the original value of the properties given as
security. Article 415 does not define real property but enumerates what are considered as such,
among them being machinery, receptacles, instruments or replacements intended by owner of
the tenement for an industry or works which may be carried on in a building or on a piece of
land, and shall tend directly to meet the needs of the said industry or works. On the strength of
the above-quoted legal provisions, the lower court held that inasmuch as "the chattels were
placed in the real properties mortgaged to plaintiffs, they came within the operation of Art.
415, paragraph 5 and Art. 2127 of the New Civil Code". In the present case, the characterization
of the "after acquired properties" as real property was made not only by one but by both
interested parties. There is, therefore, more reason to hold that such consensus impresses
upon the properties the character determined by the parties who must now be held in estoppel
to question it.

Facts: As security for the payment of the loans, DALCO executed in favor of the BANK a deed of
mortgage covering 5 parcels of land together with all the buildings and other improvements
existing thereon and all the personal properties of the mortgagor located in its place of
business. DALCO executed a second mortgage on the same properties in favor of ATLANTIC to
secure payment of the unpaid balance of the sale price of the lumber concession. Both deeds
contained the following provision extending the mortgage lien to properties to be subsequently
acquired — referred to hereafter as "after acquired properties" — by the mortgagor:

DALCO failed to pay. After the date of execution of the mortgages, DALCO purchased various
machineries, equipment, spare parts and supplies. Pursuant to the provision of the mortgage
deeds quoted theretofore regarding "after acquired properties," the BANK requested DALCO to
submit complete lists of said properties but the latter failed to do so. ATLANTIC and the BANK,
commenced foreclosure proceedings against DALCO and DAMCO.

· ATLANTIC and the BANK: that the "after acquired properties" were subject to the deeds of
mortgage.
· DALCO and DAMCO: the mortgages were null and void as regards the "after acquired
properties" of DALCO because they were not registered in accordance with the Chattel
Mortgage Law, hence said properties were subject to the mortgage lien in favor of plaintiffs.

Issues:
1. Are the so-called "after acquired properties" covered by and subject to the deeds of
mortgage subject of foreclosure? YES.
2. Assuming that they are subject thereto, are the mortgages valid and binding on the
properties aforesaid inspite of the fact that they were not registered in accordance with the
provisions of the Chattel Mortgage Law?

Defendants DALCO and DAMCO contend that, granting without admitting, that the deeds of
mortgage in question cover the "after acquired properties" of DALCO, the same are void and
ineffectual because they were not registered in accordance with the Chattel Mortgage Law. In
support of this and of the proposition that, even if said mortgages were valid, they should not
prejudice them, the defendants argue (1) that the deeds do not describe the mortgaged
chattels specifically, nor were they registered in accordance with the Chattel Mortgage Law; (2)
that the stipulation contained in the fourth paragraph thereof constitutes "mere executory
agreements to give a lien" over the "after acquired properties" upon their acquisition; and (3)
that any mortgage stipulation concerning "after acquired properties" should not prejudice
creditors and other third persons such as DAMCO and CONNELL.

Held: The stipulation under consideration strongly belies defendants contention. As adverted to
hereinbefore, it states that all property of every nature, building, machinery etc. taken in
exchange or replacement by the mortgagor "shall immediately be and become subject to the
lien of this mortgage in the same manner and to the same extent as if now included therein".
No clearer language could have been chosen.

Registration of the chattel mortgage

Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third persons, a
chattel mortgage must be registered and must describe the mortgaged chattels or personal
properties sufficiently to enable the parties and any other person to identify them, We say that
such law does not apply to this case.

Article 415 does not define real property but enumerates what are considered as such, among
them being machinery, receptacles, instruments or replacements intended by owner of the
tenement for an industry or works which may be carried on in a building or on a piece of land,
and shall tend directly to meet the needs of the said industry or works.

It is not disputed in the case at bar that the "after acquired properties" were purchased by
DALCO in connection with, and for use in the development of its lumber concession and that
they were purchased in addition to, or in replacement of those already existing in the premises.
In Law, therefore, they must be deemed to have been immobilized, with the result that the
REMs involved herein — which were registered as such — did not have to be registered a
second time as chattel mortgages in order to bind the "after acquired properties" and affect
third parties.

What We have said heretofore sufficiently disposes all the arguments adduced by defendants in
support their contention that the mortgages under foreclosure are void, and, that, even if valid,
are ineffectual as against DAMCO and CONNELL.

Right to rescind the sales

Now to the question of whether or not DAMCO CONNELL have rights over the "after acquired
properties" superior to the mortgage lien constituted thereon in favor of plaintiffs. It is
defendants' contention that in relation to said properties they are "unpaid sellers"; that as such
they had not only a superior lien on the "after acquired properties" but also the right to rescind
the sales thereof to DALCO.

This contention — it is obvious — would have validity only if it were true that DAMCO and
CONNELL were the suppliers or vendors of the "after acquired properties". The most that can
be claimed on the basis of the evidence is that DAMCO and CONNELL probably financed some
of the purchases. But if DALCO still owes them any amount in this connection, it is clear that,
as financiers, they cannot claim any right over the "after acquired properties" superior to the
lien constituted thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the
execution of the rescission of sales mentioned heretofore appears to be but a desperate
attempt to better or improve DAMCO and CONNELL's position by enabling them to assume the
role of "unpaid suppliers" and thus claim a vendor's lien over the "after acquired properties".
The attempt, of course, is utterly ineffectual, not only because they are not the "unpaid sellers"
they claim to be but also because there is abundant evidence in the record showing that both
DAMCO and CONNELL had known and admitted from the beginning that the "after acquired
properties" of DALCO were meant to be included in the first and second mortgages under
foreclosure.

As regard the proceeds obtained from the sale of the of after acquired properties" and the
"undebated properties", it is clear, in view of our opinion sustaining the validity of the
mortgages in relation thereto, that said proceeds should be awarded exclusively to the plaintiffs
in payment of the money obligations secured by the mortgages under foreclosure.

STAR TWO (SPV-AMC), INC. V. PAPER CITY CORP. OF THE PHIL., 2013
Effect and Extent, Art. 2126, Art. 2127, Art. 2129

FACTS

 Respondent Paper City is a domestic corporation engaged in the manufacture of paper

products. Paper City applied for and was granted loans and credit accommodations in
peso and dollar denominations by RCBC secured by 4 Deeds of Continuing Chattel
Mortgages on its machineries and equipments found inside its paper plants.
  However, a unilateral Cancellation of Deed of Continuing Chattel Mortgage on Inventory
of Merchandise/Stocks-in-Trade was executed by RCBC over the merchandise and
stocks-in-trade covered by the continuing chattel mortgages.
 RCBC, Metrobank and Union Bank (creditor banks with RCBC instituted as the trustee
bank) entered into a Mortgage Trust Indenture (MTI) with Paper City. In the said MTI,
Paper City acquired an additional P170, 000,000.00 from the creditor banks in addition
to the previous loan from RCBC amounting to P110, 000,000.00.
 The old loan of P110,000,000.00 was partly secured by various parcels of land situated
in Valenzuela City. The new loan obligation of P170,000,000.00 would be secured by the
same five (5) Deeds of Real Estate Mortgage and additional real and personal properties
described in an annex to MTI, Annex "B" which covered the machineries and
equipments of Paper City.
 The MTI was later amended to increase the contributions of the RCBC and Union Bank.
As a consequence, they executed a Deed of Amendment to MTI but still included as part
of the mortgaged properties by way of a first mortgage the various machineries and
equipments located in and bolted to and/or forming part of buildings.
 A Second Supplemental Indenture to the MTI was executed to increase the amount of
the loan secured against the existing properties composed of land, building, machineries
and equipments and inventories described in Annexes "A" and "B."
 Finally, a Third Supplemental Indenture to the MTI was executed to increase the existing
loan obligation with an additional security composed of a newly constructed two-storey
building and other improvements, machineries and equipments located in the existing
plant site.
 Paper City was able to comply with its loan obligations but economic crisis ensued which
made it difficult for Paper City to meet the terms of its obligations leading to payment
defaults. Consequently, RCBC filed a Petition for Extrajudicial Foreclosure.
 The petition was for the extra-judicial foreclosure of eight parcels of land including all
improvements thereon which were sold in favor of the creditor banks RCBC, Union Bank
and Metrobank as the highest bidders.
This foreclosure sale prompted Paper City to file a Complaint against the creditor banks alleging
that the extra-judicial sale of the properties and plants was null and void due to lack of prior
notice and attendance of gross and evident bad faith on the part of the creditor banks. Acting
on the said motion, the trial court issued an Order denying the prayer and ruled that the
machineries and equipments were included in the annexes and form part of the MTI. Paper City
filed its Motion for Reconsideration which was favorably granted by the trial court with
justification that the disputed machineries and equipments are chattels by agreement of the
parties through their inclusion in the four Deeds of Chattel Mortgage and the deed of
cancellation executed by RCBC was not valid because it was done unilaterally and without the
consent of Paper City. The CA affirmed the Order.

ISSUE: Whether the subject machineries and equipments were included in the mortgage,
extrajudicial foreclosure and in the consequent sale.
RULING: Yes. By contracts, all uncontested in this case, machineries and equipments are
included in the mortgage in favor of RCBC, in the foreclosure of the mortgage and in the
consequent sale on foreclosure also in favor of petitioner. Repeatedly, the parties stipulated
that the properties mortgaged by Paper City to RCBC are various parcels of land including the
buildings and existing improvements thereon as well as the machineries and equipments, which
as stated in the granting clause of the original mortgage, are "more particularly described and
listed that is to say, the real and personal properties listed in Annexes ‘A’ and ‘B’.” The plain
language and literal interpretation of the MTIs must be applied. The petitioner, other creditor
banks and Paper City intended from the very first execution of the indentures that the
machineries and equipments enumerated in Annexes "A" and "B" are included. Obviously, with
the continued increase in the amount of the loan, totaling hundreds of millions of pesos, Paper
City had to offer all valuable properties acceptable to the creditor banks.
The MTIs did not describe the equipments and machineries as personal property. Notably,
while "personal" appeared in the granting clause of the original MTI, the subsequent Deed of
Amendment specifically stated that:
x x x The machineries and equipment listed in Annexes "A" and "B" form part of the
improvements listed above and located on the parcels of land subject of the Mortgage Trust
Indenture and the Real Estate Mortgage.
Considering that the Indenture which is the instrument of the mortgage that was foreclosed
exactly states through the Deed of Amendment that the machineries and equipments listed in
Annexes "A" and "B" form part of the improvements listed and located on the parcels of land
subject of the mortgage, such machineries and equipments are surely part of the foreclosure of
the "real estate properties, including all improvements thereon" as prayed for in the petition.
The real estate mortgage over the machineries and equipments is even in full accord with the
classification of such properties by the Civil Code of the Philippines as immovable property.
Thus:
Article 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
xxxx
(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement
for an industry or works which may be carried on in a building or on a piece of land, and which
tend directly to meet the needs of the said industry or works;

Law and jurisprudence provide and guide that even if not expressly so stated, the
mortgage extends to the improvements. Article 2127 of the Civil Code provides:
Art. 2127. The mortgage extends:
1. to the natural accessions,
2. to the improvements,
3. growing fruits, and
4. the rents or income not yet received when the obligation becomes due, and
5. to the amount of the indemnity granted or owing to the proprietor from the insurers of
the property mortgaged, or
6. in virtue of expropriation for public use, with the declarations, amplifications and
limitations established by law, whether the estate remains in the possession of the mortgagor,
or it passes into the hands of a third person.

In the early case of Bischoff v. Pomar and Cia. General de Tabacos, the Court ruled that even if
the machinery in question was not included in the mortgage expressly, Article 111 of the old
Mortgage Law provides that chattels permanently located in a building, either useful or
ornamental, or for the service of some industry even though they were placed there after the
creation of the mortgage shall be considered as mortgaged with the estate, provided they
belong to the owner of said estate.

The case of Cu Unjieng e Hijos v. Mabalacat Sugar Co. relied on this provision. The issue was
whether the machineries and accessories were included in the mortgage and the subsequent
sale during public auction. This was answered in the affirmative by the Court when it ruled that
the machineries were integral parts of said sugar central hence included following the principle
of law that the accessory follows the principal.

Further, in the case of Manahan v. Hon. Cruz, this Court denied the prayer of Manahan to
nullify the order of the trial court including the building in question in the writ of possession
following the public auction of the parcels of land mortgaged to the bank. It upheld the
inclusion by relying on the principles laid upon in Bischoff v. Pomar and Cia. General de
Tabacos and Cu Unjieng e Hijos v. Mabalacat Sugar Co.

Held: Contrary to the finding of the CA, the Extra-Judicial Foreclosure of Mortgage includes the
machineries and equipments of respondent. While captioned as a "Petition for Extra-Judicial
Foreclosure of Real Estate Mortgage Under Act No. 3135 As Amended," the averments state
that the petition is based on the Indenture duly notarized and entered. The petition for
foreclosure prayed that a foreclosure proceedings on the aforesaid real properties, including all
improvements thereon covered by the real estate mortgage be undertaken and the appropriate
auction sale be conducted. Considering that the Indenture which is the instrument of the
mortgage that was foreclosed exactly states through the Deed of Amendment that the
machineries and equipments listed in Annexes "A" and "B" form part of the improvements
listed and located on the parcels of land subject of the mortgage, such machineries and
equipments are surely part of the foreclosure of the "real estate properties, including all
improvements thereon" as prayed for in the petition. The real estate mortgage over the
machineries and equipments is even in full accord with the classification of such properties by
the Civil Code of the Philippines as immovable property. Thus:
Article 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
xxxx
(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement
for an industry or works which may be carried on in a building or on a piece of land, and which
tend directly to meet the needs of the said industry or works;
GARCIA vs. VILLAR (Right to alienate collateral)
Facts: Galas is the owner of a piece of property, She, with her daughter Pingol, later mortgaged
such property, to secure a loan borrowed from Villar. Thereafter, they again mortgaged the
same property to secure a loan borrowed from Garcia. Both mortgages were annotated at the
back of the certificate of title.Then, Galas sold the property to Villar and the title transferred in
the name of Villar. Both mortgages were still carried over and annotated at the back of the new
certificate of title. Afterwards, Garcia filed a complaint for foreclosure of real estate mortgage
with damages against Villar before the RTC. The RTC ruled in favor of Garcia, Villar appealed.
The CA reversed the decision of the RTC. Hence, this petition for review on certiorari.
Garcia contends that Villar violated the provisions on laws on judicial and extrajudicial
foreclosure of mortgaged property and that, as first mortgagee, he should have foreclosed the
property to provide him (as junior mortgagee) the opportunity to satisfy his claims from the
residue of the sale proceeds. He also added that Galas was relieved of her contractual obligation
and the character s of creditor and debtor were merged in the person of Villar. Therefore, Garcia
argued that he , as the second mortgagee, was subrogated to Villar’s original
status as first mortgagee, which is the creditor with the right to foreclose. Further, Garcia
argued that the mortgage followed the property when it was sold to Villar. Lastly, he added that
the sale to Villar was void being in the nature of a pactum commissorium. Villar , on the other
hand, contends that Garcia has no cause of action against her and that Garcia acted in bad faith
when he entered into a contract of mortgage with Galas in view of the restriction imposed by
the first mortgage.
ISSUES:
1)Whether the second mortgage to Garcia is valid
2)Whether the sale made to Villar is valid
3)Whether Garcia’s action for foreclosure of the mortgage of the property is proper.
HELD:
(1) YES. The second mortgage to Garcia was valid. 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
Gala’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 imposed such
restriction, they would have and should have stipulated such in the Deed of Real Estate
Mortgage. Neither did this Deed proscribe the sale of alienation of the subject property
during the life of the mortgage. Garcia’s insistence that Villar should have judicially or
extra judicially 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 of Galas could not opt
to sell the subject property to Villar, or to any other persons. Such stipulation would have
been void anyway as it is not allowed under Article 2130 of the Civil Code to wit: A
stipulation forbidding the owner from alienating the immovable mortgaged shall be
void.
 (2) YES. The sale was valid. The stipulation appointing Villar, the mortgagee, as the
mortgagers attorney-in-fact, to sell the property in case of default in the payment of the
load did not violate the prohibition on pactum commissorium. The power of attorney
provision 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 disposed of the subject property,and to apply the proceeds to the payment of
the loan. The provision is customary in mortgage contracts, and is in conformity with
Article 2087 of the Civil Code, which read: It is also of the essence of these ‘contracts that
when the principal obligation becomes due, the things in which the pledge consists may
be alienated for the payment to the creditor. Galas’s decision to eventually sell the
subject property to Villar 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.

(3) NO, the action on foreclosure cannot prosper. 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 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. Article 1293 of the Civil Code provides :Novation, which consist 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. Therefore,
the obligation to pay the mortgage indebtedness remains with the original debtors Galas
and Pingol. 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 the said debt
may have been transferred to a third person (E.C. McCullough & Co. vs Veloso and Serna,
46 Phil, 1924) 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.

FACTS: Galas mortgaged the subject property to Villar, and the same property was also
subsequently mortgaged by the same mortgagor to Garcia. Both REMs provided that the
mortgagee’s consent is necessary in case of subsequent encumbrance or alienation of the
property. Galas sold said property to Villar. Upon default of Galas, Garcia sought to foreclose
the property. Villar opposed saying that the second REM made in favour of Garcia was without
her knowledge and consent, hence void.

Issue: WON Garcia could judicially foreclose the subject property.

Held:
1. Second REM to Garcia and the sale of the subject property to Villar are valid. While it is
true that the annotation of the first REM to Villar on contained a restriction on further
encumbrances without the mortgagee’s prior consent, this restriction was nowhere to be found
in the Deed of REM. If it were the intention of the parties to impose such restriction, they
would have and should have stipulated such in the Deed of REM itself. Neither did this Deed
proscribe the sale or alienation of the subject property during the life of the
mortgages. 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.

2. Garcia’s action of foreclosure of mortgage cannot prosper

Real nature of a mortgage:
( Article 2126 of the Civil Code)
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.

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 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 Art. 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 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. Therefore, the obligation to pay the mortgage indebtedness remains with
the original debtors Galas and Pingol.

Effects of a transfer of a mortgaged property to a third person

According to Art. 1879 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 provided
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 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.)

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.

Reason: 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