Deficiency after extrajudicial foreclosure sale

Settled is the rule that a creditor is not precluded from recovering any unpaid balance on the principal obligation if the extrajudicial foreclosure sale of the property subject of the real estate mortgage results in a deficiency.

In Spouses Rabat v. Philippine National Bank, [17] the Supreme Court held:

x x x [I]t is settled that if the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of the mortgage, the mortgagee is entitled to claim the deficiency from the debtor. For when the legislature intends to deny the right of a creditor to sue for any deficiency resulting from foreclosure of security given to guarantee an obligation it expressly provides as in the case of pledges [Civil Code, Art. 2115] and in chattel mortgages of a thing sold on installment basis [Civil Code, Art. 1484(3)]. Act No. 3135, which governs the extrajudicial foreclosure of mortgages, while silent as to the mortgagee's right to recover, does not, on the other hand, prohibit recovery of deficiency. Accordingly, it has been held that a deficiency claim arising from the extrajudicial foreclosure is allowed.

NOTE: The rule is that deficiency can no longer be collected after foreclosure of pledges or foreclosure of chattel mortgages sold on installment. Act No. 3135 is silent on the right to collect deficiency but does not prohibit it.

Indeed, the fact that the mortgaged property was sold at an amount less than its actual market value should not militate against the right to such recovery. The Court has likewise ruled that in deference to the rule that a mortgage is simply a security and cannot be considered payment of an outstanding obligation, the creditor is not barred from recovering the deficiency even if it bought the mortgaged property at the extrajudicial foreclosure sale at a lower price than its market value notwithstanding the fact that said value is more than or equal to the total amount of the debtor's obligation. Thus, in the case of Suico Rattan & Buri Interiors, Inc. v. Court of Appeals, the Supreme Court explained that:

Hence, it is wrong for petitioners to conclude that when respondent bank supposedly bought the foreclosed properties at a very low price, the latter effectively prevented the former from satisfying their whole obligation. Petitioners still had the option of either redeeming the properties and, thereafter, selling the same for a price which corresponds to what they claim as the properties' actual market value or by simply selling their right to redeem for a price which is equivalent to the difference between the supposed market value of the said properties and the price obtained during the foreclosure sale. In either case, petitioners will be able to recoup the loss they claim to have suffered by reason of the inadequate price obtained at the auction sale and, thus, enable them to settle their obligation with respondent bank. Moreover, petitioners are not justified in concluding that they should be considered as having paid their obligations in full since respondent bank was the one who acquired the mortgaged properties and that the price it paid was very inadequate. The fact that it is respondent bank, as the mortgagee, which eventually acquired the mortgaged properties and that the bid price was low is not a valid reason for petitioners to refuse to pay the remaining balance of their obligation. Settled is the rule that a mortgage is simply a security and not a satisfaction of indebtedness.

In G.R. No. 202176, as to petitioner's entitlement to the amount sought to be recovered, respondents never disputed the amount and computation of the deficiency sought to be recovered by petitioner. What respondents are insisting is that petitioner is barred from recovering any deficiency because the bid price is considerably inadequate as compared to the alleged actual value of the foreclosed property. However, as discussed above, the settled rule is that when there is right to redeem, the inadequacy of the price becomes immaterial since the judgment debtor may reacquire the property or sell his right to redeem.

THE CASE: [ G.R. No. 202176, August 01, 2016 ] METROPOLITAN BANK & TRUST COMPANY, PETITIONER, VS. CHUY LU TAN, MR. ROMEO TANCO, DR. SY SE HIONG, AND TAN CHU HSIU YEN, RESPONDENTS.