GSIS vs CA

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Government Service Insurance System v. Court of Appeals
170 SCRA 533,
February 23, 1989

Facts:

Private respondents, Mr. and Mrs. Isabelo R. Racho, together with spouses Mr. and Mrs Flaviano Lagasca, executed a deed of mortgage, dated November 13, 1957, in favor of petitioner GSIS and subsequently, another deed of mortgage, dated April 14, 1958, in connection with two loans granted by the latter in the sums of P 11,500.00 and P 3,000.00, respectively. A parcel of land covered by Transfer Certificate of Title No. 38989 of the Register of Deed of Quezon City, co-owned by said mortgagor spouses, was given as security under the two deeds. They also executed a 'promissory note".

On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of Mortgage," obligating themselves to assume the said obligation to the GSIS and to secure the release of the mortgage covering that portion of the land belonging to spouses Racho and which was mortgaged to the GSIS. This undertaking was not fulfilled. Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the payment of the amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the mortgaged property to be sold at public auction on December 3, 1962.

For more than two years, the spouses Racho filed a complaint against the spouses Lagasca praying that the extrajudicial foreclosure "made on, their property and all other documents executed in relation thereto in favor of the Government Service Insurance System" be declared null and void.

The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to establish a cause of action. However, said decision was reversed by the respondent Court of Appeals, stating that, although formally they are co-mortgagors, the GSIS required their consent to the mortgage of the entire parcel of land which was covered with only one certificate of title, with full knowledge that the loans secured were solely for the benefit of the appellant Lagasca spouses who alone applied for the loan.

Issues:

Whether the respondent court erred in annulling the mortgage as it affected the share of private respondents in the reconveyance of their property?

Whether private respondents benefited from the loan, the mortgage and the extrajudicial foreclosure proceedings are valid?

Held:

Both parties relied on the provisions of Section 29 of Act No. 2031, otherwise known as the Negotiable Instruments Law, which provide that an accommodation party is one who has signed an instrument as maker, drawer, acceptor of indorser without receiving value therefor, but is held liable on the instrument to a holder for value although the latter knew him to be only an accommodation party.

The promissory note, as well as the mortgage deeds subject of this case, are clearly not negotiable instruments. These documents do not comply with the fourth requisite to be considered as such under Section 1 of Act No. 2031 because they are neither payable to order nor to bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply; governance shall be afforded, instead, by the provisions of the Civil Code and special laws on mortgages.

As earlier indicated, the factual findings of respondent court are that private respondents signed the documents "only to give their consent to the mortgage as required by GSIS", with the latter having full knowledge that the loans secured thereby were solely for the benefit of the Lagasca spouses.

Contrary to the holding of the respondent court, it cannot be said that private respondents are without liability under the aforesaid mortgage contracts. The factual context of this case is precisely what is contemplated in the last paragraph of Article 2085 of the Civil Code to the effect that third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca spouses would not invalidate the mortgage with respect to private respondents' share in the property.

The respondent court, erred in annulling the mortgage insofar as it affected the share of private respondents or in directing reconveyance of their property or the payment of the value.