Case no.

2
GOVERNMENT SERVICE INSURANCE SYSTEM vs. COURT OF APPEALS & MR.
AND MRS. ISABELO R. RACHO
(G.R. No. L-40824, Feb. 23, 1989)

FACTS:
Spouses Racho, along with Spouses Lagasca, executed 2 deeds of mortgages on Nov. 13,
1957 & April 14, 1958 over the co-owned property. Spouses Racho provided GSIS with the TCT
of their land as security under the 2 deeds and also executed a promissory note. The first deed
was executed in favor of GSIS and the other was in connection with 2 loans that were granted
by the petitioner (P11,500 & P3000).

Spouses Lagasca thereafter executed an instrument wherein they obligated themselves to

“assume the obligation towards GSIS and to secure the release of the mortgaged land” of
Spouses Racho. Spouses Lagasca however failed to fulfill their undertaking. Said failure gave
rise to GSIS to extraordinarily foreclose the mortgage and cause the property to be sold at a
public auction on Dec. 3, 1962.

Two years later, Spouses Racho filed a complaint at the CFI of QC, praying that the extrajudicial
foreclosure be declared null & void, and that they be able to recover their property, and if no
longer recoverable, to be paid for the value thereof. Spouses Racho alleged that they signed
the mortgage contracts not as sureties/guarantors pf Spouses Lagasca but that they merely
gave their share of the common property to spouses Lagasca as their co-owners. Spouses
Racho likewise contended that only spouses Lagasco benefitted from the loan.

The RTY dismissed the case. The CA however reversed the decision ruling that spouses
Racho, although they are co-mortgagors, have only signed the deed in accommodation wherein
the GSIS required their consent to the mortgage of the entire parcel of land which was covered
with only 1 certificate of title, with full knowledge that the loans secured thereby were solely for
the benefit of appellant spouses, who, applied alone for the loan. The CA thus declared void the
extrajudicial foreclosure affecting the share of spouses Racho.

Both parties relied on sec. 29 of Act no. 2031 which provides that an “accommodation party” is
one who has signed an instrument as maker, drawer, acceptor, of indorser without receiving
value thereof but is held liable on the instrument to a holder for value, although holder for value
knew him to be only an accommodation party,

ISSUE:
Whether or not the mortgage deeds are negotiable instruments.

HELD:
No.. the deeds do not comply with the 4th requisite mandated by sec. 1 of Act no. 2041. The
deeds are neither payable to order or to bearer. In reality, the note is payable to a specified
party (GSIS). This case is governed by the provision of the Civil Code and special laws on
mortgages.

The execution of spouses Lagasca of Assumption of Mortgage promised to exclude moreover

spouses Racho from liability, including their share of the mortgaged property. This is evinced by
the lack of payment of consideration to spouses Racho.
However, it may still not be said that spouses Racho cannot be held to some liability over the
failure of spouses Lagasca to fulfill their undertaking. It is provided for by art. 2085 of the Civil
Code that 3rd persons who are not parties to the principal obligation may still secure the
obligation by pledging/mortgaging their own property.

The mortgage therefore may not be invalidated as long as valid consent was given by the
spouses Racho with respect to their share in the property. Otherwise, if it were really the
agreement of the parties to only include a portion of the litigated property as security, the
consent of Spouses Racho wouldn’t have been required in the first place.