Who owns the foreclosed property during the redemption period: The mortgagor or the successful bidder?

A recurring question is often asked: after foreclosure proceedings and during the redemption period, who owns the foreclosed property? Is it the mortgagor or the successful bidder? The question is asked because a view is expressed to the effect that the successful bidder acquires ownership of the property subject to a resolutory condition, i.e., the right of the mortgagor or other redemptioner to extinguish the bidder’s ownership by redeeming the property.

This may not be known to many but the Supreme Court has resolved this question way back in 1992. In Medida vs. Court of Appeals, 208 SCRA 887 (1992), spouses Dolino failed to pay their mortgage loan to the Cebu Development Bank, which foreclosed the piece of land put up by the spouses as security. Juan Gandioncho purchased the property during the foreclosure sale. Alarmed by the prospect of losing the property, spouses Dolino obtained a new loan from the Cebu City Savings and Loan Association and mortgaged the same property. They again defaulted in the payment of the second loan, resulting in the foreclosure of the property for the second time. The Association was the highest bidder in the second foreclosure sale. The spouses filed an action against the Association to nullify the second foreclosure sale as well as the corresponding certificate of sale issued pursuant thereto. The trial court rendered judgment upholding the loan and the real estate mortgage, but annulling the foreclosure sale for having been done in violation of the notice requirements prescribed by law. On appeal, the Court of Appeals affirmed the decision and further declared the real estate mortgage in favor of the Association void and ineffective. The Court of Appeals reasoned out that, at the time the mortgage to the Association was executed, the mortgagor spouses were no longer the owners of the lot, having supposedly lost the same when the lot was sold to a purchaser in the foreclosure sale under the prior mortgage. In so holding, the Court of Appeals relied on a statement of the Supreme Court in Dizon vs. Gaborro, 83 SCRA 688 (1978), to the effect that after the foreclosure sale of a mortgaged land, the mortgagor is divested of his full right as owner to dispose of the land.

The issue before the Supreme Court was whether a mortgagor, whose property had been extrajudically foreclosed, may validly execute a mortgage contract over the same property in favor of a third party during the redemption period?

To resolve the issue, the High Court had to determine who is the owner of property during the period of redemption. For, if as suggested by the Supreme Court in Dizon, the mortgagor is divested of his ownership upon the foreclosure of the property, he can no longer mortgage the property because an essential requisite of a valid mortgage is that the mortgagor is the owner of the property being mortgaged (Art. 2085, Civil Code).

The Supreme Court explained away its obiter dictum in Dizon, by pointing out an inconsistency in the statements of the Court in the said case. According to the Court, "[I]f, as admitted, the purchaser at the foreclosure merely acquired an inchoate right to the property which could ripen into ownership only upon the lapse of the redemption period without his credit being discharged, it is illogical to hold that during the same period . . . the mortgagor is "divested" of his ownership, since the absurd result would be that the land will consequently be without an owner although it remains registered in the name of the mortgagor."

The Supreme Court held that during the redemption period, the mortgagor remains the owner of the foreclosed property and may mortgage it to a third party. The right of the successful bidder is merely inchoate until after the period of redemption has expired without the right being exercised. The title to the land sold under mortgage foreclosure remains in the mortgagor until the expiration of the redemption period and conveyance by a master deed. To hold otherwise would create the inequitable situation wherein the mortgagor would be deprived of the opportunity, which may be his last recourse, to raise funds with which to timely redeem his property through another mortgage thereon.

In legal contemplation, what is actually effected where redemption is seasonably made by the mortgage debtor is not the recovery of ownership of his land, which ownership he never lost, but the elimination from his title of the mortgage lien. The American rule is similarly to the effect that the redemption of property sold under a foreclosure sale defeats the inchoate right of the purchaser and restores the property to the same condition as if no sale had been attempted. Further, it does not give to the mortgagor a new title, but merely restores to him his title freed of the encumbrance of the lien foreclosed.

The Medida case has far-reaching implications. For example, the mortgagor may sell the property during the redemption period as he remains the owner of the property. The foreclosed property cannot also be considered as part of the assets of the successful bidder such that it cannot be levied upon in case a writ of preliminary attachment is issued against him. Only the inchoate right of the bidder to the property can be attached. Neither can the property be considered part of the estate of the deceased in case the successful bidder is a natural person. These are just some of the legal implications and surely, there are other legal implications flowing from the case. Knowing the Medida case is definitely worth one’s while.

(The author is a senior partner of the Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He may be contacted at 830-8000.)