Should surplus of foreclosure sale be returned or applied to other debts?

In PBC v. Yeung (G.R. No. 179691, December 04, 2013), petitioner contends that there was no excess or surplus that needs to be returned to the respondent because her other outstanding obligations and those of her attorney-in-fact were paid out of the proceeds.

The relevant provision, Section 4 of Rule 68 of the Rules of Civil Procedure, mandates that:

Section 4. Disposition of proceeds of sale. – The amount realized from the foreclosure sale of the mortgaged property shall, after deducting the costs of the sale, be paid to the person foreclosing the mortgage, and when there shall be any balance or residue, after paying off the mortgage debt due, the same shall be paid to junior encumbrancers in the order of their priority, to be ascertained by the court, or if there be no such encumbrancers or there be a balance or residue after payment to them, then to the mortgagor or his duly authorized agent, or to the person entitled to it.

Thus, in the absence of any evidence showing that the mortgage also covers the other obligations of the mortgagor, the proceeds from the sale should not be applied to them.

In PBC v. Yeung (G.R. No. 179691, December 04, 2013), while the petitioner claims that it was not obliged to pay any surplus because the balance from the proceeds was applied to the respondent’s other obligations and to those of her attorney-in-fact, it failed, however, to show any supporting evidence showing that the mortgage extended to those obligations. The petitioner, as mortgagee and/or purchaser, cannot just simply apply the proceeds of the sale in its favor and deduct from the balance the respondent’s outstanding obligations not secured by the mortgage. Understood from this perspective, the High Court ruled that there was no reason to depart from the ruling that the balance or excess, after deducting the mortgage debt plus the stipulated interest and the expenses of the foreclosure sale, must be returned to the respondent-mortgagor.