Heirs of the late Spouses Maglasang v Manila Banking Corporation

FACTS:

Spouses Maglasang obtained a credit line from the respondent bank in the amount of P350,000.00 which
was secured by a real estate mortgage executed over seven of their properties. They availed of their
credit line in the amounts of P209,790.5 and P139,805.83, both of which became due and demandable
within a period of one year. Further, the parties agreed that the said loans would earn interest at 12% per
annum and an additional 4% would be charged upon default.

Spouse Flaviano died intestate. His widow, Spouse Salud, and their surviving children appointed her son
Edgar as attorney-in-fact. Edgar filed a verified petition for letters of administration of the intestate estate
of Flaviano before the CFI. The probate court granted the petition. The probate court then issued a notice
to creditors for the filing of money claims against Flaviano’s estate. The respondent notified the probate
court of its claim in the amount of P382,753.19. During the pendency of the intestate proceedings, Edgar
was able to obtain several loans from the respondent, secured by promissory notes.

In an order, the probate court terminated the proceedings with the surviving heirs executing an
extra-judicial partition of the properties of Flaviano’s estate. The loan obligations owed by the estate,
however, remained unsatisfied due to respondent's certification that Flaviano’s account was undergoing a
restructuring. Nonetheless, the probate court expressly recognized the rights of the respondent under the
mortgage and promissory note. The respondent proceeded to extra-judicially foreclose the mortgage and
emerged as the highest bidder at the public auction. There, however, remained a deficiency. The
respondent filed a suit to recover the deficiency against the estate of Flaviano.

The RTC directed the petitioners to pay the respondent, jointly and severally. It found that the petitioners
still have an outstanding obligation. Dissatisfied, the petitioners elevated the case to the CA on appeal,
contending that the remedies available to the respondent under Sec. 7, Rule 86 of the Rules of Court are
alternative and exclusive.

The CA denied the petitioner’s appeal and affirmed the RTC’s decision. It pointed out that the probate
court erred when it closed and terminated the proceedings without first satisfying the claims of the
creditors of the estate, in violation of Sec. 1, Rule 90 of the Rules. Further, the CA held that Sec. 7, Rule
86 of the Rules does not apply to the present case since the same does not involve a mortgage made by
the administrator over any property belonging to the estate of the decedent. Petitioners’ motion for
reconsideration was subsequently denied.

ISSUE:

Whether the CA erred in affirming the RTC’s award for the deficiency amount in favor of the respondent.

RULING:

Yes.

Claims against deceased persons should be filed during the settlement proceedings of their estate. Such
proceedings are primarily governed by special rules found under Rules 73 to 90 of the Rules, although
rules governing ordinary actions may, as far as practicable, apply suppletorily. Among these special rules,
Section 7, Rule 86 of the Rules (Section 7, Rule 86) provides the rule in dealing with secured claims
against the estate:

SEC. 7. Mortgage debt due from estate. – A creditor holding a claim against the
deceased secured by a mortgage or other collateral security, may abandon the security and
prosecute his claim in the manner provided in this rule, and share in the general distribution of the
assets of the estate; or he may foreclose his mortgage or realize upon his security, by action in
court, making the executor or administrator a party defendant, and if there is a judgment for a
deficiency, after the sale of the mortgaged premises, or the property pledged, in the foreclosure or
other proceeding to realize upon the security, he may claim his deficiency judgment in the manner
provided in the preceding section; or he may rely upon his mortgage or other security alone, and
foreclose the same at any time within the period of the statute of limitations, and in that event he
shall not be admitted as a creditor, and shall receive no share in the distribution of the other
assets of the estate; but nothing herein contained shall prohibit the executor or administrator from
redeeming the property mortgaged or pledged, by paying the debt for which it is held as security,
under the direction of the court, if the court shall adjudged it to be for the best interest of the
estate that such redemption shall be made.

As the foregoing generally speaks of "a creditor holding a claim against the deceased secured by a
mortgage or other collateral security" as above-highlighted, it may be reasonably concluded that the
aforementioned section covers all secured claims, whether by mortgage or any other form of collateral,
which a creditor may enforce against the estate of the deceased debtor. On the contrary, nowhere from its
language can it be fairly deducible that the said section would – as the CA interpreted – narrowly apply
only to mortgages made by the administrator over any property belonging to the estate of the decedent.
To note, mortgages of estate property executed by the administrator, are also governed by Rule 89 of the
Rules, captioned as "Sales, Mortgages, and Other Encumbrances of Property of Decedent."

Jurisprudence breaks down the rule under Section 7, Rule 86 and explains that the secured creditor has
three remedies/options that he may alternatively adopt for the satisfaction of his indebtedness. In
particular, he may choose to: (a) waive the mortgage and claim the entire debt from the estate of the
mortgagor as an ordinary claim; (b) foreclose the mortgage judicially and prove the deficiency as an
ordinary claim; and (c) rely on the mortgage exclusively, or other security and foreclose the same before it
is barred by prescription, without the right to file a claim for any deficiency. It must, however, be
emphasized that these remedies are distinct, independent and mutually exclusive from each other; thus,
the election of one effectively bars the exercise of the others.

The remedies available to the mortgage creditor are deemed alternative and not cumulative. Notably, an
election of one remedy operates as a waiver of the other. For this purpose, a remedy is deemed chosen
upon the filing of the suit for collection or upon the filing of the complaint in an action for foreclosure of
mortgage, pursuant to the provision of Rule 68 of the 1997 Rules of Civil Procedure. As to extrajudicial
foreclosure, such remedy is deemed elected by the mortgage creditor upon filing of the petition not with
any court of justice but with the Office of the Sheriff of the province where the sale is to be made, in
accordance with the provisions of Act No. 3135, as amended by Act No.4118.

Case law now holds that this rule grants to the mortgagee three distinct, independent and mutually
exclusive remedies that can be alternatively pursued by the mortgage creditor for the satisfaction of his
credit in case the mortgagor dies, among them: (1) to waive the mortgage and claim the entire debt from
the estate of the mortgagor as an ordinary claim; (2) to foreclose the mortgage judicially and prove any
deficiency as an ordinary claim; and (3) to rely on the mortgage exclusively, foreclosing the same at
anytime before it is barred by prescription without right to file a claim for any deficiency.

To obviate any confusion, the Court observes that the operation of Act No. 3135 does not entirely
discount the application of Section 7, Rule 86, or vice-versa. Rather, the two complement each other
within their respective spheres of operation. On the one hand, Section 7, Rule 86 lays down the options
for the secured creditor to claim against the estate and, according to jurisprudence, the availment of the
third option bars him from claiming any deficiency amount. On the other hand, after the third option is
chosen, the procedure governing the manner in which the extra-judicial foreclosure should proceed would
still be governed by the provisions of Act No. 3135.Simply put, Section 7, Rule 86 governs the parameters
and the extent to which a claim may be advanced against the estate, whereas Act No. 3135 sets out the
specific procedure to be followed when the creditor subsequently chooses the third option – specifically,
that of extra-judicially foreclosing real property belonging to the estate. The application of the procedure
under Act No. 3135 must be concordant with Section 7, Rule 86 as the latter is a special rule applicable to
claims against the estate, and at the same time, since Section 7, Rule 86 does not detail the procedure
for extra-judicial foreclosures, the formalities governing the manner of availing of the third option – such
as the place where the application for extra-judicial foreclosure is filed, the requirements of publication
and posting and the place of sale – must be governed by Act No. 3135.

In this case, respondent sought to extra-judicially foreclose the mortgage of the properties previously
belonging to Sps. Maglasang (and now, their estates) and, therefore, availed of the third option. Lest it be
misunderstood, it did not exercise the first option of directly filing a claim against the estate, as petitioners
assert, since it merely notified the probate court of the outstanding amount of its claim against the estate
of Flaviano and that it was currently restructuring the account. Thus, having unequivocally opted to
exercise the third option of extra-judicial foreclosure under Section 7, Rule 86, respondent is now
precluded from filing a suit to recover any deficiency amount as earlier discussed.