The concept of a real estate mortgage is not new to Pinoy Entrepreneurs, as this is generally required by lending institutions as a security for a loan or debt. In the unfortunate event that the person (known as the “mortgagor”) who executes the real estate mortgage (popularly known as “REM” by lawyers and business people) can’t pay the loan or debt and the property is foreclosed, is the mortgagor entitled to the bid amount in excess of the load?

Yes, as reiterated by the Supreme Court in a recent case. In that case, LCK obtained a loan — secured by a REM over two parcels of land — from the Planters Development Bank in the amount of P3,000,000. When the debtor defaulted in its payment, the bank caused the extrajudicial foreclosure of the first property, which was sold at the public auction for P2,625,000. Since the proceeds were not enough to satisfy the entire loan obligation, the bank extrajudicially foreclosed the other property, which was sold at a public auction for P2,231,416.67. The bank was the highest bidder on both foreclosure sales.

According to the court, the application of the proceeds from the sale of the mortgaged property to the mortgagor’s obligation is an act of payment, not payment by dation. Therefore, it is the duty of the entity in whose favor the mortgage was executed (technically called the “mortgagee”) to return any surplus in the selling price to the mortgagor. A mortgagee who exercises the power of sale contained in a mortgage is considered a custodian of the fund, and, being bound to apply it properly, is liable to the persons entitled thereto if he fails to do so.

The debtor’s obligation with the bank was already fully satisfied after the mortgaged properties were sold at the public auction for more than the amount of the remaining debt. As the custodian of the proceeds from the foreclosure sale, the bank has no legal right whatsoever to retain the excess of the bid price and is under clear obligation to return the same to the debtor-mortgagor.

In any case, refusing to return the excess of the bid price constitutes a violation of the principle of unjust enrichment in human relations. No person shall be allowed to enrich himself unjustly at the expense of others, a principle of equity is enshrined in the Civil Code:

Art. 22. Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him.

In the end, the court ordered the bank to return the excess of the bid price or the surplus money in the sum of P1,893,916.67, plus interest at the rate of 6% per annum from the time of the filing of the complaint until finality of judgment. Once the judgment becomes final and executory, the interest of 12% per annum should be imposed, to be computed from the time the judgment becomes final and executory until fully satisfied. (Source: LCK Industries, Inc. vs. Planters Development Bank, GR No. 170606, 23 November 2007.)

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