Introduction

In the realm of Philippine real estate and secured transactions, the promissory note serves as a critical instrument evidencing the borrower's obligation to repay a loan, often secured by a mortgage on real property. When this note is lost, destroyed, or otherwise missing, it poses significant challenges to the enforcement of the security interest through foreclosure. The Affidavit of Loss emerges as a pivotal legal tool in such scenarios, allowing the mortgagee (lender) to proceed with foreclosure proceedings despite the absence of the original document. This article delves comprehensively into the concept, legal foundations, procedural requirements, practical implications, and related considerations of the Foreclosure Affidavit of Loss for a Missing Promissory Note within the Philippine legal framework. It draws from established civil law principles, procedural rules, and jurisprudential doctrines to provide a thorough understanding for legal practitioners, lenders, borrowers, and stakeholders in the financial sector.

Legal Basis and Rationale

The Philippine legal system, rooted in the Civil Code of the Philippines (Republic Act No. 386) and supplemented by special laws and court rules, recognizes the negotiable nature of promissory notes under the Negotiable Instruments Law (Act No. 2031). A promissory note is defined as an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer (Section 184, Negotiable Instruments Law).

In foreclosure contexts, particularly for real estate mortgages under Act No. 3135 (An Act to Regulate the Sale of Property Under Special Powers Inserted in or Annexed to Real Estate Mortgages), the original promissory note is typically required as evidence of the debt. However, its loss does not extinguish the underlying obligation. Article 1504 of the Civil Code provides for the reconstitution or replacement of lost instruments, while Rule 132, Section 5 of the Revised Rules of Evidence allows secondary evidence when the original is lost.

The Supreme Court has consistently held that the absence of the original promissory note does not bar foreclosure if adequately explained and substituted with secondary evidence, such as an Affidavit of Loss (e.g., in cases like Union Bank of the Philippines v. Spouses Rodriquez, G.R. No. 170689, where the Court emphasized the admissibility of affidavits to prove loss). The rationale is to prevent unjust enrichment of the debtor while protecting the creditor's rights, ensuring that technicalities do not defeat substantive justice. This aligns with the principle in Article 1231 of the Civil Code that obligations are extinguished by payment, loss of the thing due, or other modes, but loss of the note itself does not equate to loss of the obligation unless proven otherwise.

When an Affidavit of Loss is Required

An Affidavit of Loss becomes necessary in foreclosure proceedings when the original promissory note cannot be produced due to:

Loss or Misplacement: Accidental disappearance without trace.
Destruction: Due to fire, flood, or other calamities.
Theft: Unauthorized taking, requiring police reports as supporting evidence.
Other Causes: Such as deterioration rendering it unusable.

This is particularly relevant in extrajudicial foreclosures under Act No. 3135, where the mortgagee petitions the notary public or sheriff for sale, and in judicial foreclosures under Rule 68 of the Rules of Court, where the complaint must attach evidence of the debt. Without the note, the foreclosure may be challenged for lack of cause of action, as seen in PNB v. CA (G.R. No. 108630), where the Court required proof of loss to admit copies.

In practice, banks and financial institutions often encounter this issue due to voluminous records or mergers, necessitating standardized procedures for affidavits.

Contents and Form of the Affidavit of Loss

The Affidavit of Loss must be a sworn statement executed by the mortgagee or an authorized representative with personal knowledge of the facts. Key elements include:

Identification of the Parties: Names, addresses, and capacities of the mortgagor (borrower) and mortgagee (lender).
Description of the Promissory Note: Date of execution, principal amount, interest rate, maturity date, and any endorsements or assignments.
Circumstances of Loss: Detailed narrative of how, when, and where the note was lost, including diligent search efforts (e.g., checking vaults, offices, or archives).
Non-Recovery Statement: Affirmation that despite reasonable efforts, the note remains unfound.
Indemnity Clause: Undertaking to indemnify the mortgagor or any third party against claims arising from the lost note, often backed by a bond under Section 803 of the Civil Code for lost negotiable instruments.
Attachments: Copies of the note (if available), mortgage deed, demand letters, and supporting documents like police blotters for theft.

The affidavit must be subscribed and sworn to before a notary public, complying with the 2004 Rules on Notarial Practice (A.M. No. 02-8-13-SC). It should be in clear, concise language, avoiding ambiguities that could lead to perjury charges under Article 183 of the Revised Penal Code.

Procedure for Foreclosure with a Missing Promissory Note

Extrajudicial Foreclosure

Execution of Affidavit: The mortgagee prepares and notarizes the Affidavit of Loss.
Publication and Notice: Under Section 3 of Act No. 3135, the affidavit may need publication in a newspaper of general circulation if the note's negotiability raises third-party claim risks, though not always mandatory.
Petition for Sale: File with the Executive Judge or Clerk of Court, attaching the affidavit, mortgage contract, and evidence of default.
Auction Sale: Proceed with public auction by the sheriff or notary, where the affidavit serves as prima facie evidence of the debt.
Confirmation and Redemption: Post-sale, the mortgagor has one year to redeem under Section 6, during which challenges to the affidavit's validity may arise.

Judicial Foreclosure

Filing of Complaint: Under Rule 68, the complaint includes the affidavit as an annex, alleging the loss and attaching secondary evidence.
Service and Answer: Defendant may contest the affidavit's sufficiency, leading to pre-trial issues.
Trial and Judgment: Court determines if the affidavit adequately proves the obligation; if yes, orders foreclosure.
Execution Sale: Similar to extrajudicial, but under court supervision.

In both modes, the affidavit must be registered with the Register of Deeds if the mortgage is annotated on the title, per Section 113 of Presidential Decree No. 1529 (Property Registration Decree).

Evidentiary Considerations

Under the Best Evidence Rule (Rule 130, Section 3, Rules of Court), the original note is preferred, but loss allows secondary evidence like affidavits, duplicates, or witness testimony. The affidavit must establish:

Due execution and existence of the note.
Genuineness of the copy (if presented).
Loss without bad faith.

Jurisprudence, such as Sps. Ong v. CA (G.R. No. 117103), underscores that mere allegation of loss is insufficient; proof of diligent search is required. Parol evidence may supplement if the note's terms are disputed (Rule 130, Section 9).

Implications and Risks

For the Mortgagee

Validity Challenges: Mortgagors may file annulment suits claiming the affidavit is fraudulent, potentially delaying foreclosure.
Liability: If the original note resurfaces with a holder in due course, the mortgagee may face double payment risks, mitigated by indemnity bonds.
Costs: Additional expenses for notarization, publication, and legal fees.

For the Mortgagor

Defense Opportunities: Can question the affidavit's veracity, e.g., via motion to dismiss for lack of evidence.
Protection Against Abuse: Ensures lenders cannot fabricate losses to accelerate foreclosure.
Redemption Rights: Remain intact, but loss of note might complicate payoff calculations.

Broader Implications

In the context of the Philippine banking system, regulated by the Bangko Sentral ng Pilipinas (BSP) under Republic Act No. 7653, lenders must maintain robust record-keeping to minimize such incidents. The affidavit process promotes transparency but can prolong resolutions in a country where foreclosure timelines average 1-2 years.

Special Considerations

Assignment of Mortgage: If the mortgage is assigned, the assignee must execute the affidavit, proving chain of title.
Corporate Lenders: Board resolutions authorize signatories.
Digital Notes: With e-commerce growth under Republic Act No. 8792, electronic promissory notes (if qualified) may not require physical affidavits but digital loss certifications.
Statute of Limitations: Actions on written contracts prescribe in 10 years (Article 1144, Civil Code), unaffected by note loss.
Tax Aspects: Foreclosure sales involve documentary stamp taxes and capital gains taxes, with the affidavit not altering these.

Conclusion

The Foreclosure Affidavit of Loss for a Missing Promissory Note stands as an indispensable mechanism in Philippine law, bridging the gap between document loss and debt enforcement. By adhering to stringent procedural and evidentiary standards, it upholds the integrity of secured transactions while balancing creditor and debtor rights. Stakeholders are advised to consult legal experts for case-specific applications, ensuring compliance with evolving jurisprudence and regulations to mitigate risks in real estate financing.