Ozamis Paper Corporation secured loans from ABC Universal Bank in the aggregate principal amount of P100 million, evidenced by several promissory notes, and secured by a continuing guaranty of its principal stockholder Menandro at P45 million; and a real estate mortgage over certain parcels of land owned by Marquez.
The corporation defaulted and the bank extra-judicially foreclosed on the real estate mortgage. The bank, which was the sole bidder for P75 million, won the award.
a. Can the bank sue Marquez for the deficiency of P25 million? Explain. (2%)
b. If the bank opts to file an action for collection against the corporation, can it afterwards institute a real action to foreclose the mortgage? Explain. (2%)
c. Can the bank foreclose on the pledged shares of Marquez and recover the deficiency from the corporation? Explain. (2%)
Suggested answer only. Not an official answer and not legal advice.
Yes, the bank can sue Marquez for the P25 million deficiency; no, a collection suit waives foreclosure; and foreclosing the pledge bars deficiency recovery.
In extrajudicial mortgage foreclosure, the mortgagee may sue for deficiency. Filing a collection action waives mortgage foreclosure. Under Article 2115 of the Civil Code, foreclosing a pledge extinguishes the principal obligation, barring recovery of any deficiency.
Here, the bank can sue Marquez for the P25 million shortfall. If it sues the corporation for collection, foreclosure is abandoned. If it forecloses the pledged shares, the obligation is extinguished, barring deficiency claims against the corporation.
Therefore, deficiency suits against Marquez prosper, collection waives foreclosure, and pledge foreclosure extinguishes the debt.
This is not an official scoring system and carries no weight with the Supreme Court or any bar review provider. It measures how much of the suggested answer's wording your response covers, not whether your reasoning is correct. For practice only.
Quick check
Can a mortgagee bank sue the mortgagor to recover the unpaid deficiency following an extrajudicial mortgage foreclosure sale?
A mortgagee bank is legally entitled to recover the deficiency when foreclosure proceeds fall short of the full debt.
What is the legal effect if a creditor bank opts to file an ordinary civil action for collection of sum of money instead of foreclosing the mortgage?
Filing an action for collection of a sum of money constitutes a waiver and abandonment of the mortgage security.
Under Article 2115 of the Civil Code, what happens to the principal loan obligation upon the foreclosure sale of pledged personal property?
Article 2115 explicitly provides that foreclosure of a pledge extinguishes the principal obligation entirely.
In the case of a third-party mortgagor who mortgaged land for another's loan, what is their liability for foreclosure deficiency?
A third-party mortgagor who secures a debt with real estate may be sued for deficiency resulting from foreclosure.
Which statute governs the extrajudicial foreclosure of real estate mortgages in the Philippines?
Act Number 3135 as amended governs extrajudicial foreclosure of real estate mortgages.
Learn more about these topics
1. Mortgage Deficiency Recovery
Under Act Number 3135 and Philippine mortgage jurisprudence, when an extrajudicial foreclosure sale of mortgaged property fetches a purchase price that is insufficient to fully satisfy the outstanding principal loan obligation, the mortgagee bank is legally entitled to institute an independent civil action against the debtor or third-party mortgagor to recover the remaining unpaid balance as a deficiency.
2. Alternative Remedies Waiver
Under Philippine credit transaction law, the remedies of filing an ordinary civil action for collection of a sum of money and initiating extrajudicial foreclosure of a real estate mortgage are alternative, not cumulative. Choosing to file a collection suit constitutes an express waiver and abandonment of the mortgage security, barring any subsequent foreclosure proceedings.
3. Pledge Foreclosure Extinguishment
Under Article 2115 of the Civil Code of the Philippines, the extrajudicial foreclosure or sale of a pledged asset at public auction completely extinguishes the principal loan obligation, regardless of whether the foreclosure proceeds equal, exceed, or fall short of the total debt amount. Consequently, the creditor-pledgee is strictly barred from recovering any deficiency.