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The concept of a real estate mortgage is not new to Pinoy Entrepreneurs, as this is generally required by lending institutions to secure a loan or debt. Let's say the Pinoy Entrepreneur takes out a loan that is secured by a real estate mortgage (usually shortened to "REM") and, unfortunately, business is not doing well. The person who executes the real estate mortgage (known as the "mortgagor") can't pay the debt, the and so the mortgagee-creditor proceeds to foreclose the property. Anyone, including the debtor and the creditor, could make a bid during the foreclosure. Now, if the mortgagee-creditor makes a bid in excess of the debt, will the mortgagee-creditor be liable to pay the excess amount?
Take for instance, the situation wherein LCK obtained a loan from the Planters Development Bank in the amount of P3,000,000. The loan is secured by a REM over two parcels of land. 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 also 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 occasions.
The theory is that the parcels of land were considered as dacion payment and, accordingly, the entire value is considered as payment of the loan obligation. There should be no reimbursement of the excess bid. However, the application of the proceeds from the sale of the mortgaged property to the mortgagor's obligation is an act of payment, not ayment 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. Also, under the principle of unjust enrichment, no person shall be allowed to enrich himself unjustly at the expense of others. In the end, the bank was ordered 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. (Source: LCK Industries, Inc. vs. Planters Development Bank, GR No. 170606, 23 November 2007)
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