ii. Deficiency Judgment; Recovery of Deficiency

Causes of Action of Mortgage-Creditor

Mortgage-creditor has a single cause of action against the mortgage debtor, which is to recover the debt, but he has the option to either:

• File a personal action for the collection of a sum of money; or
• Institute a real action to foreclose on the mortgaged property.

NOTE: If he elects to foreclose, he waives the action for the collection of the unpaid debt, except only for the recovery of whatever deficiency may remain in the outstanding obligation of the debtor-mortgagor after deducting the proceeds of the public auction sale. The remedies are alternative, not cumulative, each remedy is complete by itself.

Remedies of the mortgagee in case of death of the debtor

• To waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim;
• To foreclose the mortgage judicially and prove any deficiency as an ordinary claim; or
• To rely on the mortgage exclusively, foreclosing the same at any time before it is barred by prescription, without right to file claim for any deficiency. (Maglaque v. Planters Development Bank, G.R. No. 109472, May 18, 1999)

Right to recover the deficiency

GR: In judicial foreclosure, the mortgagee may seek a deficiency judgment by motion under Rule 68, Sec. 6, against a defendant personally liable for the balance. After an extrajudicial foreclosure under Act No. 3135, a recoverable deficiency must be pursued in a separate action; a mere motion is insufficient.

XPN: When the mortgage was executed by a third person to secure the obligation of a debtor, such third person not having assumed personal liability for the payment of the debt, the third person’s liability is limited to the mortgaged property; no deficiency judgment may be rendered against that third person absent personal liability. The remedy of the mortgagee in such a case is to proceed against the debtor in an ordinary action for a sum of money to recover the balance of debt due.

Judicial foreclosure

The mortgagee is specifically given the right to claim for the deficiency. (Rules of Court, Sec. 6, Rule 68)

Extrajudicial Foreclosure

Ordinarily, extrajudicial foreclosure under Act No. 3135 does not bar a separate action to recover a deficiency. Where the debtor has died, however, a secured creditor that elects to rely exclusively on the mortgage under Rule 86, Sec. 7 cannot claim a deficiency from the estate. (Heirs of Sps. Flaviano v. Manila Banking Corporation, G.R. No. 171206, September 23, 2013)

While Act No. 3135 governing extrajudicial foreclosures of mortgage does not give a mortgagee the right to recover deficiency after the public auction sale, neither does it expressly or impliedly prohibit such recovery.

NOTE: In both judicial and extrajudicial foreclosure, when a third person is the mortgagor, he is not liable for any deficiency in the absence of a contrary stipulation.

Options in case of death of debtor

A secured creditor holding a real estate mortgage has three distinct, independent, and mutually exclusive remedies that can be alternatively pursued in case the mortgagor dies:

• To waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim;
• To foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and
• To rely on the mortgage exclusively, foreclosing the same at any time before it is barred by prescription without a right to file a claim for any deficiency. (Rule 86, Section 7, Rules of Court)